Bankruptcy

[FWAAA]

Sure winglets save fuel, but they also cost money, how long will it take t o recover the expenses related to doing this mod?

This article says that the winglets cost $1.85 million list price per set for a 763 plus installation of another $250k per plane, for a total investment of about $122 million for all 58 763s:

http://www.bizjournals.com/seattle/stories/2007/04/23/daily16.html

That article said that the winglets would save about 17 million gallons of fuel per year, but a later article claims that they were better than earlier thought and that AA estimates up to 29 million gallons per year in savings:

http://aviationblog.dallasnews.com/archives/2009/03/american-flies-boeing-767-300.html

At 2011's fuel prices, AA would save up to $90 million per year in fuel due to the 763 winglets. So they paid for themselves in less than two years. And that's if AA paid likst price for the winglets, which I doubt, especially since AA was first with the 763 winglets. I'd say that was a worthwhile mod, but no doubt you'll disagree. Better to burn fuel than spend some to save a lot of fuel, right?

At a 35% fuel savings per seat mile compared to the old MD-80s, the new 738s showing up right now save enough fuel to practically make the payments. The maintenance holiday (for the first several years) plus the fuel savings cover the payments on the new jets. Unless fuel prices tank, the same will be true about the 460 plane order announced this past summer.

Cabin refurbs sell more seats? Really? So are you claiming we will see an increase in our load factors because of these mods? I doubt it since all the flights I get on are full anyway. If they are full you can't sell any more seats.
If they deferred maintenance because they thought we would be making money then why aren't they deferring refurbishing the cabins that are full anyway?

Cabin refurbs don't necessarily sell more seats; they help keep the corporate accounts that lead to higher revenue per seat. Sure, the seats are full, but at fares barely above the fares that AA attracted in 2000.

How many c checks have they done in DWH? How many shops have they opened?
So tell us how come AA has no problem paying AA mechanics $45/hr in Europe but they wont pay it here?

I've always assumed that they have more effective negotiators. They aren't represented by the worthless union, are they?

That's evidence that AA is not averse to paying market rates for line maintenance.

 

[Overspeed]

Sure winglets save fuel, but they also cost money, how long will it take t o recover the expenses related to doing this mod?
Cabin refurbs sell more seats? Really? So are you claiming we will see an increase in our load factors because of these mods? I doubt it since all the flights I get on are full anyway. If they are full you can't sell any more seats.
If they deferred maintenance because they thought we would be making money then why aren't they deferring refurbishing the cabins that are full anyway?
How many c checks have they done in DWH? How many shops have they opened?
So tell us how come AA has no problem paying AA mechanics $45/hr in Europe but they wont pay it here?
Discipline no, direct yes.
How do you listen to written text? Prove that outsoucing maintenance lowers overall costs.

Boeing states that winglets save 300K gallons per year on average. At $3/gal that is $900K per year so are you saying put off the winglet mods and pay TWU mechanics more now while the aircraft burn the savings. That money won't go in your paycheck but it will be in Big Oil's pocket. So that helps us how?

Cabin refurbs are necessary to keep your product on par with your competitors if you want to even hope of asking for a premium on your product. Full planes but with what kind of yield per seat? If you can't cover your costs with the ticket price, full means nothing.

LLPs are required at some point and having a deteriorating cabin product won't help demand a premium. Hey you like CO and how Bethune turned that company around right. Guess what he did when they were facing BK? Yep, bought new airplanes and refurb'd the old aircraft. Guess what else he did? Outsourced a boat load of maintenance. In 1994 LAX overhaul base was closed. The A300, DC10, 737, and 747 overhaul outsourced. All the CF6 and JT8 overhaul outsourced.

AA pays about 50 mechanics in LHR, CDG, and FRA that much maybe. The cost of living is way more than in than almost everywhere in the US in those cities and the taxes in heavily socialized countries like the UK, France, and Germany takes a lot of that money back. They pay almost two to three times as much per gallon of gas in Europe. You are comparing apples to oranges again.

And when management directs and your guys say, "Pay me the $45/hour Bob says I am worth and then I will put the laptop away," what will you do? You are building the expectation. Now you have to deliver.

When an MRO can charge $55/hour for airframe work and the airline has half the out of service as AA that's called cheaper. Not paying lease payments for aircraft that sit to cover those AA M&E can't fix on time that equates to outsourcing is cheaper unless in-house maintenance does a better job. Blame management all you want but middle management should be just as scared of outsourcing as union labor is. Why? Because labor isn't the only one that gets outsourced. But you could make the argument to be like Southwest but you have to tell the whole story. Southwest has practically no OTS aircraft compared to AA. Yeah they have higher paid line AMTs but they have less than half the airframe overhaul lines as AA and no engine overhaul. Southwest has been making money consistently for how many years? You love Southwest Bob, then let's do it. Let's go the Southwest way and run maintenance like them. Arpey and the shareholders would love that.

 

[Overspeed]

This article says that the winglets cost $1.85 million list price per set for a 763 plus installation of another $250k per plane, for a total investment of about $122 million for all 58 763s:

http://www.bizjournals.com/seattle/stories/2007/04/23/daily16.html

That article said that the winglets would save about 17 million gallons of fuel per year, but a later article claims that they were better than earlier thought and that AA estimates up to 29 million gallons per year in savings:

http://aviationblog.dallasnews.com/archives/2009/03/american-flies-boeing-767-300.html

At 2011's fuel prices, AA would save up to $90 million per year in fuel due to the 763 winglets. So they paid for themselves in less than two years. And that's if AA paid likst price for the winglets, which I doubt, especially since AA was first with the 763 winglets. I'd say that was a worthwhile mod, but no doubt you'll disagree. Better to burn fuel than spend some to save a lot of fuel, right?

At a 35% fuel savings per seat mile compared to the old MD-80s, the new 738s showing up right now save enough fuel to practically make the payments. The maintenance holiday (for the first several years) plus the fuel savings cover the payments on the new jets. Unless fuel prices tank, the same will be true about the 460 plane order announced this past summer.



Cabin refurbs don't necessarily sell more seats; they help keep the corporate accounts that lead to higher revenue per seat. Sure, the seats are full, but at fares barely above the fares that AA attracted in 2000.



I've always assumed that they have more effective negotiators. They aren't represented by the worthless union, are they?

That's evidence that AA is not averse to paying market rates for line maintenance.

Joining a labor union is not mandatory to work at AA in the UK. Not sure about AA in LHR but it is possible that if you have less than 50% people belonging to the union the company does not have to negotiate with the union. No closed shop rule apparently.

 

[FWAAA]

Not really FWAAA.

Please spend a little time here, http://www.airlinefinancials.com/airline_data_comparisons.html and report back to the group

Thanks. I'm very familiar with Bob Herbst's excellent analysis, and I frequently cite to it here.

I'd also ask when is the last time you saw a reference by analysts, Wall Street and Investment Banks regarding "Block Hour" costs in place of ASM/CASM ect. It's a joke comparison to suit AA's needs to sway the ignorant masses.

I agree that it may not be the best measure of costs. Bob Herbst's numbers confirm that AA has the highest FA cost per ASM, confirmed by APFA's own economist. Herbst's numbers also confirm that AA's pilot costs per ASM are also the highest when salary, wage and benefits are taken into account. None of that changes the fact that my statement was correct. Not only has AA repeatedly said that AA's flight crew costs per block hour are the highest, but UAL told its employees in 2009 that AA had the highest costs (.pdf that Bob Owens sent me over the weekend). I can see the distrust in anything AA tells you - but UAL had no reason to lie to its employees by saying that AA's costs were highest.

No matter how you slice it, AA's pilot and FA costs are the highest even though their hourly wages are not the highest. Every analyst and every competitor knows it. Employees of AA are loathe to admit it - after all, they would like more $$$ and admitting that AA's labor costs are already the highest doesn't support their bleating about having suffered the worst concessions of any of the legacy airlines. And anyone who is honest and has looked at the numbers realizes that any claim that AA employees suffered the most in 2003-2011 is simply BS.

For example, Delta's pilots alone gave up $1.3 billion in annual concessions before and during DL's Ch 11 case, and DL had many fewer pilots than AA. Of course, they have recovered some of their concessions. US East pilots of A320s and E190s make less per hour than nonunion B6 pilots. Sully's hourly rate was just $125/hr when he landed his plane in the Hudson. Cordle recently said that AA's costs are $2.2 billion higher than they would be if AA enjoyed the labor costs of US, and $900 million higher than they would be if AA enjoyed DL's labor costs. Those numbers lend some support for AA's claim that its labor cost disadvantage is about $800 million.

Block hour is a bad comparsion if not adjusted for various factors like fleet type, age, engine types, maintenance programs, etc... CASM has problems to as well. Many analysts use things like stage length adjusted seat miles which make assumptions that all airlines have the same seating configuration. Bottom line, unless you do the deep dive on the comparisons most of those numbers are good for directional decisions like lowering costs or generating more revenue.

Agree that block hour cost is perhaps not the best measure. But it is one measure of AA's highest labor costs. Not to worry - AA's pilots and FAs are the most expensive per ASM as well.

I'm not arguing that AA's employees must give concessions - I'm merely attempting to introduce facts into the discussion.

 

[Super FLUF]

This was a base blast sent by the DCA reps. It is a good read on the pros and cons of BK.

***

First, it should be clear to everyone that AMR management could have declared bankruptcy at any time in the last 10 years had they been so inclined.

Why havent they?

It is not in the best interest of the airline or management to do so. Still, a terrorist attack or other event could force the issue at any time, including tomorrow. We should all be prepared for that possibility.

AA, our airline, has problems.

We pilots did not create the problems. In fact, quit the opposite. We led the way in saving the company from bankruptcy in 2003. We sacrificed the most in terms of salary, work rules and benefits. Meanwhile, management and non-union employees pay and benefits have been fully restored and management bonuses have totaled over $350 million.

Whats different today? The problem is not terrorism, it is mismanagement. Management is responsible for our situation. Our airline has fallen from the worlds largest, and one of the best, to fourth in size and near the bottom in most measureable areas. Of the major airlines, AMR is the only one consistently losing money. One example of mismanagement, AA spent 1 billion dollars on the JFK terminal but allowed JetBlue to take our routes and slots.

In our opinion, the company has used every financial technique and tool available to make the financial situation appear worse than it truly is. Why? Poor financial performance is their best defense against our goal of restoring our contract.

Managements goal is complete control of employees and to gain a significant labor cost advantage over the competition. Management wants to have their cake, plus our cake, and they want to eat it too. AA management will do almost anything to achieve this. They will take a considerable amount of short-term losses to make long-term gains.

In our opinion, the company believes the current situation provides their best opportunity to leverage labor into concessionary contracts. Further delay could result in loss of leverage due to improvements in the economy or other events such as new aircraft deliveries.

Those who have observed AMR management for any length of time know that they cultivate adversarial rather than cooperative relationships. AMR management plays hardball with everyone, including it own offspring. Note that AMR management is currently suing its former subsidiary, SABRE. AMR treats its own employees worst of all. It is therefore a given that at some point in contract negotiations, they are going to play hardball with us by threatening to shrink the airline or threatening to declare bankruptcy in order to achieve their goals.

To that end, the chief pilots were called to DFW this week and given the other path sales pitch. Expect the chiefs to begin telling you that if we dont agree to the companys terms, theyll have no choice but to shrink or worse. The or worse part is bankruptcy. Of course, management wont actually say bankruptcy, for obvious reasons.

How then should we respond if the company makes such a threat?

There are options. Unfortunately, discussing them here could give management too much insight into our strategy.

Instead, wed like to provide you with a brief discussion of the pros and cons of bankruptcy for AMR.

AMR has $4.8b in cash at the end of the 3rd quarter 2011. $475m is restricted. AMR is expected to have completed repayment of about $2.5 billion in debt in 2011.

CapEx for the full year 2011 is expected to be about $1.7 billion.

Liquidity requirements (the potential for cash holdbacks) have been significantly lowered and AMR believes they are approximately in line with the industry. AMR has access to approximately $2b in capital, if needed, and will pay down $800m in aircraft loans in 2012.

Bankruptcy pros and cons

Reasons FOR declaring bankruptcy:

Debt relief. This may very be limited. Aircraft, real estate or other assets secure about 98% of AMRs debt. Therefore the percentage of AMR debt that could be shed in bankruptcy is relatively small.

Other labor contracts. While our contract is roughly equivalent to the bankrupt carrier pilot contracts, AMR desires to reduce costs associated with other labor groups that are not in line with the bankrupt carriers.

SCOPE. AMR wants larger jets for AE and codesharing with other airlines such as JetBlue, USAir and Alaska. More 70 seat and larger RJs (90-110 seat) or the Q-400 could be purchased for AE. Hundreds of AA pilot jobs would be eliminated.

Pilot pay rates would probably be cut to UAL or USAir levels.

Supp CC elimination would greatly reduce or close the STL base. This eliminates deadheading costs to/from STL.

Retirement obligations. Some immediate savings would result from a freeze or termination of the A-Fund. Savings could be gained by not having to fully fund the A-Fund. The actual amount of savings here is known only to AMR.

Supp B and the Goetz award, which currently guarantee our lump sum, probably wont be upheld in bankruptcy court. B-Fund plan savings for the company are probably minimal and are discussed in the CONS section.

Retiree and current employee healthcare benefits. Its certain that AMR will try to make significant changes for all employees groups, active and retired.

Access to capital. Lenders that are currently hesitant to or unwilling to lend to AMR may be willing once AMR has eliminated debt and reduced costs. Eliminating the uncertainty of open labor contracts could reduce borrowing costs. This may be of little value to AMR as they have demonstrated the ability to raise significant funds even during difficult times.

Work rules and benefits. While many of our work rules are not far from the LCC and bankrupt carrier standards, there may be cost savings. Many parts of the contract such as Section 21 (discipline) have little dollar value but would be altered to the detriment of the pilot group. The biggest impact could be an increased monthly max and a PBS. Increased productivity could reduce the pilot workforce by several hundred.

Other/ Supplier contracts renegotiated. This is probably the least of the gains for the company as these contracts were renegotiated long ago.

The biggest immediate gains are in lower pay for employees, and elimination of scope restrictions.


Reasons AGAINST declaring bankruptcy

First, bankruptcy is not a panacea. If it were, the carriers that went through bankruptcy would have quickly overtaken the non-bankrupt carriers.

Atititude. AMR management has repeatedly said they want to avoid bankruptcy. AMR president Tom Horton said bankruptcy is un-American. CEO Gerard Arpey said I think our past actions and statements have made it clear that, that has not been our preference or our goal.



Time. Bankruptcy could take many months or even years to complete. AMR is significantly behind our competition and playing catch-up. Time spent in bankruptcy would put AMR further behind.

Uncertainty. Corporations avoid risk and uncertainty. Bankruptcy is risky. Judges, even when well known, might not grant the company what it wants. The recent auto manufacturer bankruptcies have demonstrated the willingness of the federal government to take action in bankruptcy cases.

Pensions and the PBGC. The PBGC will resist a takeover of pensions. Our A-Fund would probably be frozen and converted to another plan. Significant savings going forward depends upon the new retirement plan that would be created during bankruptcy. UALs DC plan is 16%. SWA matches pilot 401k contributions up to 9.3% for a total of 18.6%. Our B Fund is 11% and the average annual cost of the A fund is estimated at 6-7%. However, in some years (2009-10 for example), AMR made no payments into the A-Fund. The ability to defer payments into the A-Fund gives AMR an advantage during lean times.

Reduced borrowing opportunities and higher borrowing costs over the long term. One reason AMR currently has better access to capital is the demonstrated desire and ability to avoid bankruptcy. If economic conditions deteriorate during or after bankruptcy, AMR may have difficulty gaining access to capital. Employee enthusiasm is already low and is already reflected in how much AMR pays to borrow money.

Training Costs. If there are significant reductions in pilot numbers or other employees, the short term training costs would increase dramatically.

Aircraft delivery delays. Buying aircraft for AE would take years. The savings associated with transferring flying to AE or other carriers would take years to realize.

Book away and loss of customer base. Frequent flyer programs could be modified in bankruptcy, which could erode customer loyalty and/or force AMR to improve the program to retain customers. Our corporate clients are already flocking to SKYTEAM and STAR.

Some of our OneWorld partners are already among the most troubled carriers in the world. JAL, BA, Qantas and Iberia have significant labor issues. Adding more labor problems to AMR could cause our business travelers to switch to other networks.

AMR executives might be replaced. Executives avoid risk, especially personal risk. AMRs managers have now been at the helm for over 8 years without positive results for the shareholders. The other airline bankruptcies were due to 9/11. AMR management bears responsibility for the current situation.

AMRs Board of Directors may be replaced.

Acquisition or hostile takeover. AMR employees or some other entity could buy the company. With AMRs market value at approximately $950 million, the pilot pension plans alone could fund a buyout. There is little to stop another carrier or a private equity group from buying AMR. Much of current AMR management could be thrown out.

The Performance Share Plan is based on the price of AMR stock. It is very generous but the return depends on the rebounding of AMRs share price. The company execs would have to rely on the bankruptcy judge to grant a new performance plan for them which might not be as rewarding.

AMR executives currently own about 3% of the company stock. These shares are at risk in bankruptcy. Again, execs dont like taking unnecessary personal risk. Washington will take a dim view of large parachutes for AMR execs if the employees are thrown overboard, again.

Employees head for the exits. Bankruptcy could create another wave of departures. The loss of experienced pilots and other employees would require the hiring and training of thousands of replacements. Hundreds of pilots over 60 could leave.

Labor animosity created by bankruptcy. Animosity is already a drag on AMR. Contrast the potential animosity at AMR to the positive attitude and positive results at SWA.. Bankruptcy would be seen as another betrayal of the employees.

How bad would morale be if AA furloughed 1,000 pilots, pay is cut (again), work rules are gutted (again), benefits reduced (again), pensions terminated and flight hours are increased to 90+ hours a month?

While patriotism was largely responsible for the spirit of cooperation that returned our airline to health after 9/11, that patriotic spirit does not exists today. Management has destroyed any teamwork or spirit with broken and empty promises.

The bottom line.

We know that bankruptcy can occur at any time for our airline or the industry as a result of a terrorist attack or other major events. We live with that possibility every day.

The challenge is calculating the dollar value gained in bankruptcy vs the value lost. There are savings to be had but do the savings outweigh the costs and the risks? Its hard to calculate, even for management.

Given AMRs current profit trend, the airline can operate for at least another year before reaching our highest estimate of what AMR managements minimum cash threshold might be. That does not mean that management cant take AMR into bankruptcy, but does mean they dont have to.

The bottom line; management has chosen to avoid bankruptcy because the gains do not outweigh the costs and the risks.

 

[Bob Owens]

This article says that the winglets cost $1.85 million list price per set for a 763 plus installation of another $250k per plane, for a total investment of about $122 million for all 58 763s:

http://www.bizjournals.com/seattle/stories/2007/04/23/daily16.html

That article said that the winglets would save about 17 million gallons of fuel per year, but a later article claims that they were better than earlier thought and that AA estimates up to 29 million gallons per year in savings:

http://aviationblog.dallasnews.com/archives/2009/03/american-flies-boeing-767-300.html

At 2011's fuel prices, AA would save up to $90 million per year in fuel due to the 763 winglets. So they paid for themselves in less than two years. And that's if AA paid likst price for the winglets, which I doubt, especially since AA was first with the 763 winglets. I'd say that was a worthwhile mod, but no doubt you'll disagree. Better to burn fuel than spend some to save a lot of fuel, right?

The company is complaining about their costs, so if they are laying out hundreds of millions in what they consider to be investments fine, just dont turn around and tell us that we need to do without because AA's costs are not competative.

Cabin refurbs don't necessarily sell more seats; they help keep the corporate accounts that lead to higher revenue per seat. Sure, the seats are full, but at fares barely above the fares that AA attracted in 2000.

Well fares are up only slightly but fees are up dramatically, thats how AA manages to extract a lot more money from them, combine that with fewer ASMs and very high load factors and the picture is much rosier than you make it out to be. Spin away as you like by citing fares but the fact by the time the passenger gets to their destination they will be paying more than they did ten years ago and AA will have brought in more money with fewer polanes and fewer employees.

 

[Hopeful]

Well, it seems the BOD is meeting and will discuss BK as an option...I guess the next step is the courthouse! (or threats of it!)

http://www.bloomberg.com/news/2011-11-16/amr-bankruptcy-risk-rises-as-lack-of-pilot-deal-narrows-options.html?cmpid=yhoo

 

[WorldTraveler]

From the article:

"The cost to protect AMR debt from default for five years soared to the highest since July 2008. Credit-default swaps rose 3.2 percentage points to 68 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $6.8 million initially and $500,000 annually to protect $10 million of debt. "

 

[Frank Szabo]

Well, it seems the BOD is meeting and will discuss BK as an option...I guess the next step is the courthouse! (or threats of it!)

http://www.bloomberg.com/news/2011-11-16/amr-bankruptcy-risk-rises-as-lack-of-pilot-deal-narrows-options.html?cmpid=yhoo

Hide and watch - Centrepork will use the same script.

 

[strikeforce]

From the article:

"The cost to protect AMR debt from default for five years soared to the highest since July 2008. Credit-default swaps rose 3.2 percentage points to 68 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $6.8 million initially and $500,000 annually to protect $10 million of debt. "

And, who's going to buy that protection.....better chance with a loan shark!

 

[TIME FOR CHANGE]

This was a base blast sent by the DCA reps. It is a good read on the pros and cons of BK.

***

First, it should be clear to everyone that AMR management could have declared bankruptcy at any time in the last 10 years had they been so inclined.

Why havent they?

It is not in the best interest of the airline or management to do so. Still, a terrorist attack or other event could force the issue at any time, including tomorrow. We should all be prepared for that possibility.

AA, our airline, has problems.

We pilots did not create the problems. In fact, quit the opposite. We led the way in saving the company from bankruptcy in 2003. We sacrificed the most in terms of salary, work rules and benefits. Meanwhile, management and non-union employees pay and benefits have been fully restored and management bonuses have totaled over $350 million.

Whats different today? The problem is not terrorism, it is mismanagement. Management is responsible for our situation. Our airline has fallen from the worlds largest, and one of the best, to fourth in size and near the bottom in most measureable areas. Of the major airlines, AMR is the only one consistently losing money. One example of mismanagement, AA spent 1 billion dollars on the JFK terminal but allowed JetBlue to take our routes and slots.

In our opinion, the company has used every financial technique and tool available to make the financial situation appear worse than it truly is. Why? Poor financial performance is their best defense against our goal of restoring our contract.

Managements goal is complete control of employees and to gain a significant labor cost advantage over the competition. Management wants to have their cake, plus our cake, and they want to eat it too. AA management will do almost anything to achieve this. They will take a considerable amount of short-term losses to make long-term gains.

In our opinion, the company believes the current situation provides their best opportunity to leverage labor into concessionary contracts. Further delay could result in loss of leverage due to improvements in the economy or other events such as new aircraft deliveries.

Those who have observed AMR management for any length of time know that they cultivate adversarial rather than cooperative relationships. AMR management plays hardball with everyone, including it own offspring. Note that AMR management is currently suing its former subsidiary, SABRE. AMR treats its own employees worst of all. It is therefore a given that at some point in contract negotiations, they are going to play hardball with us by threatening to shrink the airline or threatening to declare bankruptcy in order to achieve their goals.

To that end, the chief pilots were called to DFW this week and given the other path sales pitch. Expect the chiefs to begin telling you that if we dont agree to the companys terms, theyll have no choice but to shrink or worse. The or worse part is bankruptcy. Of course, management wont actually say bankruptcy, for obvious reasons.

How then should we respond if the company makes such a threat?

There are options. Unfortunately, discussing them here could give management too much insight into our strategy.

Instead, wed like to provide you with a brief discussion of the pros and cons of bankruptcy for AMR.

AMR has $4.8b in cash at the end of the 3rd quarter 2011. $475m is restricted. AMR is expected to have completed repayment of about $2.5 billion in debt in 2011.

CapEx for the full year 2011 is expected to be about $1.7 billion.

Liquidity requirements (the potential for cash holdbacks) have been significantly lowered and AMR believes they are approximately in line with the industry. AMR has access to approximately $2b in capital, if needed, and will pay down $800m in aircraft loans in 2012.

Bankruptcy pros and cons

Reasons FOR declaring bankruptcy:

Debt relief. This may very be limited. Aircraft, real estate or other assets secure about 98% of AMRs debt. Therefore the percentage of AMR debt that could be shed in bankruptcy is relatively small.

Other labor contracts. While our contract is roughly equivalent to the bankrupt carrier pilot contracts, AMR desires to reduce costs associated with other labor groups that are not in line with the bankrupt carriers.

SCOPE. AMR wants larger jets for AE and codesharing with other airlines such as JetBlue, USAir and Alaska. More 70 seat and larger RJs (90-110 seat) or the Q-400 could be purchased for AE. Hundreds of AA pilot jobs would be eliminated.

Pilot pay rates would probably be cut to UAL or USAir levels.

Supp CC elimination would greatly reduce or close the STL base. This eliminates deadheading costs to/from STL.

Retirement obligations. Some immediate savings would result from a freeze or termination of the A-Fund. Savings could be gained by not having to fully fund the A-Fund. The actual amount of savings here is known only to AMR.

Supp B and the Goetz award, which currently guarantee our lump sum, probably wont be upheld in bankruptcy court. B-Fund plan savings for the company are probably minimal and are discussed in the CONS section.

Retiree and current employee healthcare benefits. Its certain that AMR will try to make significant changes for all employees groups, active and retired.

Access to capital. Lenders that are currently hesitant to or unwilling to lend to AMR may be willing once AMR has eliminated debt and reduced costs. Eliminating the uncertainty of open labor contracts could reduce borrowing costs. This may be of little value to AMR as they have demonstrated the ability to raise significant funds even during difficult times.

Work rules and benefits. While many of our work rules are not far from the LCC and bankrupt carrier standards, there may be cost savings. Many parts of the contract such as Section 21 (discipline) have little dollar value but would be altered to the detriment of the pilot group. The biggest impact could be an increased monthly max and a PBS. Increased productivity could reduce the pilot workforce by several hundred.

Other/ Supplier contracts renegotiated. This is probably the least of the gains for the company as these contracts were renegotiated long ago.

The biggest immediate gains are in lower pay for employees, and elimination of scope restrictions.

Reasons AGAINST declaring bankruptcy

First, bankruptcy is not a panacea. If it were, the carriers that went through bankruptcy would have quickly overtaken the non-bankrupt carriers.

Atititude. AMR management has repeatedly said they want to avoid bankruptcy. AMR president Tom Horton said bankruptcy is un-American. CEO Gerard Arpey said I think our past actions and statements have made it clear that, that has not been our preference or our goal.


Time. Bankruptcy could take many months or even years to complete. AMR is significantly behind our competition and playing catch-up. Time spent in bankruptcy would put AMR further behind.

Uncertainty. Corporations avoid risk and uncertainty. Bankruptcy is risky. Judges, even when well known, might not grant the company what it wants. The recent auto manufacturer bankruptcies have demonstrated the willingness of the federal government to take action in bankruptcy cases.

Pensions and the PBGC. The PBGC will resist a takeover of pensions. Our A-Fund would probably be frozen and converted to another plan. Significant savings going forward depends upon the new retirement plan that would be created during bankruptcy. UALs DC plan is 16%. SWA matches pilot 401k contributions up to 9.3% for a total of 18.6%. Our B Fund is 11% and the average annual cost of the A fund is estimated at 6-7%. However, in some years (2009-10 for example), AMR made no payments into the A-Fund. The ability to defer payments into the A-Fund gives AMR an advantage during lean times.

Reduced borrowing opportunities and higher borrowing costs over the long term. One reason AMR currently has better access to capital is the demonstrated desire and ability to avoid bankruptcy. If economic conditions deteriorate during or after bankruptcy, AMR may have difficulty gaining access to capital. Employee enthusiasm is already low and is already reflected in how much AMR pays to borrow money.

Training Costs. If there are significant reductions in pilot numbers or other employees, the short term training costs would increase dramatically.

Aircraft delivery delays. Buying aircraft for AE would take years. The savings associated with transferring flying to AE or other carriers would take years to realize.

Book away and loss of customer base. Frequent flyer programs could be modified in bankruptcy, which could erode customer loyalty and/or force AMR to improve the program to retain customers. Our corporate clients are already flocking to SKYTEAM and STAR.

Some of our OneWorld partners are already among the most troubled carriers in the world. JAL, BA, Qantas and Iberia have significant labor issues. Adding more labor problems to AMR could cause our business travelers to switch to other networks.

AMR executives might be replaced. Executives avoid risk, especially personal risk. AMRs managers have now been at the helm for over 8 years without positive results for the shareholders. The other airline bankruptcies were due to 9/11. AMR management bears responsibility for the current situation.

AMRs Board of Directors may be replaced.

Acquisition or hostile takeover. AMR employees or some other entity could buy the company. With AMRs market value at approximately $950 million, the pilot pension plans alone could fund a buyout. There is little to stop another carrier or a private equity group from buying AMR. Much of current AMR management could be thrown out.

The Performance Share Plan is based on the price of AMR stock. It is very generous but the return depends on the rebounding of AMRs share price. The company execs would have to rely on the bankruptcy judge to grant a new performance plan for them which might not be as rewarding.

AMR executives currently own about 3% of the company stock. These shares are at risk in bankruptcy. Again, execs dont like taking unnecessary personal risk. Washington will take a dim view of large parachutes for AMR execs if the employees are thrown overboard, again.

Employees head for the exits. Bankruptcy could create another wave of departures. The loss of experienced pilots and other employees would require the hiring and training of thousands of replacements. Hundreds of pilots over 60 could leave.

Labor animosity created by bankruptcy. Animosity is already a drag on AMR. Contrast the potential animosity at AMR to the positive attitude and positive results at SWA.. Bankruptcy would be seen as another betrayal of the employees.

How bad would morale be if AA furloughed 1,000 pilots, pay is cut (again), work rules are gutted (again), benefits reduced (again), pensions terminated and flight hours are increased to 90+ hours a month?

While patriotism was largely responsible for the spirit of cooperation that returned our airline to health after 9/11, that patriotic spirit does not exists today. Management has destroyed any teamwork or spirit with broken and empty promises.

The bottom line.

We know that bankruptcy can occur at any time for our airline or the industry as a result of a terrorist attack or other major events. We live with that possibility every day.

The challenge is calculating the dollar value gained in bankruptcy vs the value lost. There are savings to be had but do the savings outweigh the costs and the risks? Its hard to calculate, even for management.

Given AMRs current profit trend, the airline can operate for at least another year before reaching our highest estimate of what AMR managements minimum cash threshold might be. That does not mean that management cant take AMR into bankruptcy, but does mean they dont have to.

The bottom line; management has chosen to avoid bankruptcy because the gains do not outweigh the costs and the risks.

 

[chris perry]

I could care less what BS comes from wall street.....We all know they are a bunch of rich brats.... The fact is the market rate for mechanic's is between 35 and 50 dollars an hour...driven in a free market. What makes AA think we should subsidize their failures?
It's really a cabon copy of 2003,fuel,labor,overhaul whatever the reason management failed to run the business in a manner that produces a return for the shareholders and employee's. Now faced with financial failure they look for someone else to blame....

 

[Frank Szabo]

... snip

Now faced with financial failure they look for someone else to blame....

Isn't that quite typical of the "upper crust"?

Screw 'em with a bag of the rusty tire tools and pipe wrenches. It was well within the power of our supposed "management" to right the ship for quite some time and really, it's still an easy fix if the board would grow a set.

 

[nbmcg01]

Isn't that quite typical of the "upper crust"?

Screw 'em with a bag of the rusty tire tools and pipe wrenches. It was well within the power of our supposed "management" to right the ship for quite some time and really, it's still an easy fix if the board would grow a set.

What the report doesn't discuss is a pre-packaged bk. The negotiations with vendors is "done", the employees hold the brunt of the concessions, mangt. pats themselves on the back and it is a quick sign off in court. Deja vu... shrink to profit..hummmm
Karma?

 

[Doc]

Bob one case in point the PBGC uses 55 and 65 as the bench mark for retirement so anyone not age 55 at the time the PBGC takes over would take a 5% hit based on 65 so a person retireing not 55 when the PBGC takes over and then retires at 55 would take a 50% hit and for every year they defered retirement would gain 5% so yes we are loosing something depends on how and when you retire. These are facts I know if you really want to know talk to a former TWA employee, this is nothing new for us. The one thing I think might be a sticking point is the 50-55 boys out there who are on retirement mode I could honestly say I would assume this might not be recognized by the PBGC . The one question I would have if they offered an early out and you qualified for the 50-55 option what does the PBGC recognize?Good luck getting that answer and if it does show up get it in writeing from someone with authority who ever that might be.

PBGC...Im in it and it pays about 60cents on the dollar. Yes the pilot will be harder hit but after 30years my nut will be 480.00
This should have been against the law. I wish all of you the best of luck.