Analyst Jamie Baker says AA won't cut labor costs as much as Horton would like

[WorldTraveler]

Tell us all which other network carrier has the expense of ongoing DB pension plans then. That is an expense that AA has - funding ongoing plans - and I know of no other network carrier that does. You yourself have agreed that ongoing plans are more expensive long-term than frozen plans, so which other network carriers have ongoing plans?

Instead you talk about how much liability DL has from it's frozen plans. Maybe it and NW should have funded them better before they were frozen, I don't know but they're not ongoing plans. You talk about most anything except the fact that AA is the only network carrier with ongoing DB plans with the current and future as far as the eye can see task of funding them.

Jim

and yet you can't seem to accept the fact that the costs are higher for DL than they are for AA. Who cares if they are active plans or not. They are still costs - and that is the basis the creditors, analysts, lenders, etc care about.
I don't disagree that DL and NW allowed their plans to become less well funded - but they still have the expense of maintaining those plans.
And once again DL ALSO has costs to provide DC plans to its current employees. What they pay is in that black box that is unseen by the rest of the world - including us.

The point remains though that AA could very well continue to survive with DB plans even on a frozen basis - and that AA is NOT the only network airline that has DB costs, even if they are for frozen plans.
UA has DB costs for active plans for CO employees and DL is paying more for DB plan expenses and will have be paying more for its DB plans than AA - since it is almost certain that AA won't emerge with its current DB plans intact.

 

[BoeingBoy]

and yet you can't seem to accept the fact that the costs are higher for DL than they are for AA. Who cares if they are active plans or not. They are still costs - and that is the basis the creditors, analysts, lenders, etc care about.

Eventually that cost will go to zero - can you say the same about an ongoing DB plan?

And once again DL ALSO has costs to provide DC plans to its current employees.

Where did I say that AA wouldn't replace the DB plans with DC plans if the DB plans were frozen/terminated? I fully expect AA will do that.

The point remains though that AA could very well continue to survive with DB plans even on a frozen basis - and that AA is NOT the only network airline that has DB costs, even if they are for frozen plans.

I never said that AA needed to freeze/terminate it's DB plans but apparently even mighty DL though it was worth doing so. I also never said that AA was the only network carrier that had DB costs - you somehow read that into what I did say, which was that AA has a cost that other carriers do not and that is the cost of ongoing DB plans. If freezing/terminating DB plans has no advantage, why oh why did the wonderful DL do exactly that in it's bankruptcy. Did the glorious DL screw up since it's so costly to have frozen DB plans and replacement DC plans?

Let's look at the CO plans UA inherited (UA terminated it's own DB plans and has zero obligation for those). Through 2015 the obligation averages about $140-150 million a year (that's from their 2010 10K) - a far cry from the nearly $600 million and growing obligation that AA has. Can you say "cost disadvantage"? $400+ million/year is about half what AA claims it's cost disadvantage is - should AA ignore that just because DL screwed up twice - underfunding their plans so much then only freezing them?

Tell the truth - you're worried that AA will eliminate a lot of it's pension cost and that that, along with other cost savings, will give AA a competitive advantage over DL aren't you. Would that be the "Whole Truth"?

Jim

 

[chris perry]

yet, somehow those DL mechanics seem happy enough w/ the terms of their work to not want a union.... when you factor in that they are getting profit sharing and pay raises while their colleagues down I-20 are, well, not, then perhaps DL's ability to keep maintenance costs down while also keeping qualty is not the issue you want to make it. But you can keep trying.
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There is no doubt that the growth of aviation worldwide IS making it harder to reduce maintenance costs by outsourcing to levels that once were obtained... but it still doesn't mean that it still is not cheaper to do SOME things on an outsourced basis and it also is possible for companies to work to create their own foreign MROs.... that is what the DL/AM maintenance JV is all about. DL will create its own MRO in partnership with AM to enable it to keep costs at levels DL needs while also managing the quality of work far better than can be done in non-company controlled MROs in Asia.
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AA will gain a tremendous amount of labor savings esp in maintenance w/ its new fleet... the question remains whether it is in the long-term best interest of the company to take on $25B to reduce costs to levels that are companies are achieving w/ a much smaller investment in fleet.
BTW, when labor cost cuts are discussed, it doesn't matter whether they come from pay cuts or productivity improvements or reduced staffing. Analysts know the difference between each group but still roll it up into one line item - exactly as it appears on the income statements.
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And it still doesn't change the fact that AA's revenues continue to be pressured by competitors from all sides... given that AMR THIS YEAR has about a $2B difference in its profitability/losses compared to DL and UA and even analysts are saying that $1B in labor cost reductions may be on the upper end, AA has a huge gap to close and it can't be done off the backs of employees or by loading up the balance sheet with debt at levels that will leave AMR even after BK w/ 3X the level of debt of its peers, who will also have matched most of the strategic advantages that are part of AA's franchise today.
I'm glad to hear that the possibility of deeper pay cuts might not happen - but there is no doubt there will be job losses and if AA doesn't close the revenue gap as fast or faster than the cost gap, then AA's long-term viability still remains at risk.

Yes Delta is doing a joint venture with AM right in the Heart of Cartel controlled areas...How's that for safety of the aircraft? It gives them full access.

 

[WorldTraveler]

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Eventually that cost will go to zero - can you say the same about an ongoing DB plan?



Where did I say that AA wouldn't replace the DB plans with DC plans if the DB plans were frozen/terminated? I fully expect AA will do that.



I never said that AA needed to freeze/terminate it's DB plans but apparently even mighty DL though it was worth doing so. I also never said that AA was the only network carrier that had DB costs - you somehow read that into what I did say, which was that AA has a cost that other carriers do not and that is the cost of ongoing DB plans. If freezing/terminating DB plans has no advantage, why oh why did the wonderful DL do exactly that in it's bankruptcy. Did the glorious DL screw up since it's so costly to have frozen DB plans and replacement DC plans?

Let's look at the CO plans UA inherited (UA terminated it's own DB plans and has zero obligation for those). Through 2015 the obligation averages about $140-150 million a year (that's from their 2010 10K) - a far cry from the nearly $600 million and growing obligation that AA has. Can you say "cost disadvantage"? $400+ million/year is about half what AA claims it's cost disadvantage is - should AA ignore that just because DL screwed up twice - underfunding their plans so much then only freezing them?

Tell the truth - you're worried that AA will eliminate a lot of it's pension cost and that that, along with other cost savings, will give AA a competitive advantage over DL aren't you. Would that be the "Whole Truth"?

Jim

but it's a given that AA's pension costs are going to change... there is NO WAY that their current plans will continue on the other side of BK... the question is whether they are frozen or terminated.
Again, UA's DB pension costs relative to AA are minimal... but they are still ACTIVE pensions - which negates part of what you said... and DL has higher funding costs which negates yet another part of what you said.
So, in reality, there is another carrier that likely will STILL BE funding active pensions even after AA stops and yet another competitor will have pension costs greater than AA - so I'm still looking for this great disadvantage that AA has.
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No, I am not the least bit worried that AA will gain a cost advantage... remember the whole basis of the article we are discussing?.... that at least one analyst ALREADY believes AA will not gain a cost advantage coming out of BK compared to DL and UA.
Remember that I have said that for weeks... that there is a limit to what AA can accomplish in BK... and I still believe that will be the case.
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Chris,
before you worry about what MIGHT happen with a maintenance facility that isn't even operating as it will, you might consider the drug rings which have been operating between Latin America and AA's US gateways... that is not exactly a testimony to the security of US aviation.

 

[chris perry]

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but it's a given that AA's pension costs are going to change... there is NO WAY that their current plans will continue on the other side of BK... the question is whether they are frozen or terminated.
Again, UA's DB pension costs relative to AA are minimal... but they are still ACTIVE pensions - which negates part of what you said... and DL has higher funding costs which negates yet another part of what you said.
So, in reality, there is another carrier that likely will STILL BE funding active pensions even after AA stops and yet another competitor will have pension costs greater than AA - so I'm still looking for this great disadvantage that AA has.
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No, I am not the least bit worried that AA will gain a cost advantage... remember the whole basis of the article we are discussing?.... that at least one analyst ALREADY believes AA will not gain a cost advantage coming out of BK compared to DL and UA.
Remember that I have said that for weeks... that there is a limit to what AA can accomplish in BK... and I still believe that will be the case.
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Chris,
before you worry about what MIGHT happen with a maintenance facility that isn't even operating as it will, you might consider the drug rings which have been operating between Latin America and AA's US gateways... that is not exactly a testimony to the security of US aviation.

Why worsen the security issue and further degrade safety? I thought The FAA was here to promote safety not the company bonus pool... Thats right
it's all about cash I forgot....

 

[chris perry]

Merry Christmas and Happy new year!!!

 

[WorldTraveler]

Why worsen the security issue and further degrade safety? I thought The FAA was here to promote safety not the company bonus pool... Thats right
it's all about cash I forgot....

Chris,
I hope you and yours had a great Christmas and the New Year will be very good for you!
the simple difference is that you are hypothesizing about a POTENTIAL risk but I noted a REAL and EXISTING one.
Just because a company operates in a high risk area doesn't mean they can't do so safely.

 

[MCI transplant]

Chris,
I hope you and yours had a great Christmas and the New Year will be very good for you!
the simple difference is that you are hypothesizing about a POTENTIAL risk but I noted a REAL and EXISTING one.
Just because a company operates in a high risk area doesn't mean they can't do so safely.

<_< ----- But Traveler! That's what this is all about! Being "fairly" compansated for doing so!

 

[BoeingBoy]

and yet you can't seem to accept the fact that the costs are higher for DL than they are for AA.
UA has DB costs for active plans for CO employees and DL is paying more for DB plan expenses and will have be paying more for its DB plans than AA

You're right - I did omit CO's DB pension. Actually, their last bankruptcy has been so long ago that I completely forgot that they have any DB plans after Lorenzo finished with them. So I'll amend my original statement and say that AA currently has ongoing DB pensions that no one besides UA has and that UA's cost for them is pretty low compared to AA.

You have yet to answer the simple question I asked. Did DL freezing it's pensions decrease it's long term funding obligations? I don't really care if DL has to contribute billions/year to their plans - is whatever the amount less than it would have been if it's plans hadn't been frozen? That is the point of my original comment - AA has ongoing DB plan costs that no other carrier (besides UA to a relatively small degree) has. As long as AA maintains it's ongoing plans, it will continue to have higher pension costs that it would have if it froze those plans and a lot more than if it terminated those plans. In other words, AA could reduce costs by freezing/terminating it's DB plans.

The bottom line is that companies freeze/terminate their DB plans in bankruptcy because it does save them money plus give them some certainty of plan costs going forward because DC plans eliminate the company's ROI risk. US did it, UA did it, DL did it, and NW did it.

If you want to continue to argue that that isn't true "because DL already has higher obligations than AA", you'll be arguing with yourself because that has nothing to do with whether AA would save money by freezing/terminating it's plans.

Jim

 

[WorldTraveler]

You're right - I did omit CO's DB pension. Actually, their last bankruptcy has been so long ago that I completely forgot that they have any DB plans after Lorenzo finished with them. So I'll amend my original statement and say that AA currently has ongoing DB pensions that no one besides UA has and that UA's cost for them is pretty low compared to AA.

You have yet to answer the simple question I asked. Did DL freezing it's pensions decrease it's long term funding obligations? I don't really care if DL has to contribute billions/year to their plans - is whatever the amount less than it would have been if it's plans hadn't been frozen? That is the point of my original comment - AA has ongoing DB plan costs that no other carrier (besides UA to a relatively small degree) has. As long as AA maintains it's ongoing plans, it will continue to have higher pension costs that it would have if it froze those plans and a lot more than if it terminated those plans. In other words, AA could reduce costs by freezing/terminating it's DB plans.

The bottom line is that companies freeze/terminate their DB plans in bankruptcy because it does save them money plus give them some certainty of plan costs going forward because DC plans eliminate the company's ROI risk. US did it, UA did it, DL did it, and NW did it.

If you want to continue to argue that that isn't true "because DL already has higher obligations than AA", you'll be arguing with yourself because that has nothing to do with whether AA would save money by freezing/terminating it's plans.

Jim

I believe I have responded before but I'll make it clear in saying that yes, DL's pension costs will diminish than they would have been if they had never been frozen. But I will strongly bet that five years from now, we will find that DL's pension costs are still the highest in the industry .
The biggest reason for freezing pension plans is to reduce the uncertainty of pension funding and to give the creditors some sense of what the pension costs will be - without that "known" the creditors face enormous risks. I would strongly be that right now, DL's retirement costs - frozen DB plans - plus DC costs for current employees - is more than what they would be paying had they not frozen the plans.
And if you factor in the billions in equity they gave up, it will be years before the total costs of the transition have moved in favor of the DC plan.
Freezing a pension is not a short-term reduction in costs - and probably costs more for several years.
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The simple fact is that you have created this artificial category that you want to put AA in to justify your argument that AA has higher pension costs when anybody can see that in fact AA doesn't have the highest pension costs or liabilities at all - and I am quite certain that when they move within the next couple months to freeze or terminate their plans, it will be clear that AA's pension costs (whether for AA as a standalone or for any company other than DL w/ which they merge/acquire) will be less than DL's.
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Hope you had a great Christmas, Jim.

 

[700UW]

Making things up again?

When a company freezes a pension, they stop contributing to it, so please explain to us all how if they stop paying contributions, how is it an increase in costs?

Oh wait you wont, because its not an increase.

 

[WorldTraveler]

Making things up again?

When a company freezes a pension, they stop contributing to it, so please explain to us all how if they stop paying contributions, how is it an increase in costs?

Oh wait you wont, because its not an increase.

because the rate of return on investments still determines how well funded the plans are... and it is indeed entirely possible that the funding requirement might increase even if no future benefits are being accrued. Remember that many DB plans went from fully funded by investment returns in the late 90s to requiring hundreds of millions of dollars in cash in the early 2000s.
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THAT was indeed an increase in funding cash required and it happened far faster than the falloff in additional benefits accrued.

 

[FWAAA]

Making things up again?

When a company freezes a pension, they stop contributing to it, so please explain to us all how if they stop paying contributions, how is it an increase in costs?

Oh wait you wont, because its not an increase.

Looks like you're making things up again. The bolded portion is not accurate. When pensions are frozen, no additional benefits are accrued (hard freeze) or additional benefits are accrued solely for wage increases (soft freeze). Employer contributions continue unless the plans are fully funded. Here are two articles written by the PBGC that might help educate you on this topic:

http://www.pbgc.gov/docs/frozen_plans_1205.pdf
http://www.pbgc.gov/docs/Frozen_Plans_0808.pdf

In Delta's case, their plans are underfunded by just over $9 billion on 12/31/10. On a GAAP basis, Delta paid $1.0 billion in benefits in 2010 to participants in its defined benefit plans.

In the 2010 10-K, Delta estimated that its plans would require contributions of $600 million in 2011. If frozen plans don't require contributions, why would Delta waste over half a billion dollars?

You're confusing frozen plans with terminated plans. Terminated plans don't require contributions. Frozen plans require contributions unless they're fully funded. And DL's plans are $9 billion underfunded.

 

[BoeingBoy]

But I will strongly bet that five years from now, we will find that DL's pension costs are still the highest in the industry .

The cost DL bears of having the biggest unfunded liability for DB pensions by far in the industry. AA, to it's credit, didn't put themselves nearly as deeply in that position. To AA's credit, they've paid more than required into their plans.

Remember, all I said was that AA was the only carrier that had the cost of ongoing pensions (mistakenly omitting CO's plans). It was you that made it about who had to pay what into their plans, even bringing in DC plan costs. Not a word of all that bandwidth you've consumed changes the truthfulness of what I originally said (except the omission of CO). All you've accomplished is highlighting how unfunded DL/NW let their plans get.

Jim

 

[WorldTraveler]

The cost DL bears of having the biggest unfunded liability for DB pensions by far in the industry. AA, to it's credit, didn't put themselves nearly as deeply in that position. To AA's credit, they've paid more than required into their plans.

Remember, all I said was that AA was the only carrier that had the cost of ongoing pensions (mistakenly omitting CO's plans). It was you that made it about who had to pay what into their plans, even bringing in DC plan costs. Not a word of all that bandwidth you've consumed changes the truthfulness of what I originally said (except the omission of CO). All you've accomplished is highlighting how unfunded DL/NW let their plans get.

Jim

Jim,
I jumped into this conversation to correct the notion you and others have had that AA is the only carrier that has pension costs... you qualified it to include active plans - noted that you didn't include CO - but it doesn't change the fact that DL still has the highest pension costs in the industry.... doesn't really matter why but they do.

Given that AA's losses are far larger than what they pay in pension costs and even if you took the total cost of their pension contributions, it amounts to the majority of AA's stated labor cost disadvantage (which would mean that aside from pensions, there really aren't any other labor cost items which really matter), then there are clearly non-labor cost items which are bigger parts of AA's losses - which is what I've said all along.