Important message to AA employees

[Bob H]

Good evening-
This is my first time writing to USA. As I''ve read through some of the older messages, I recognize many of the old names from PB & Yahoo as well as the old TW boards.
For those who do not know me, I was a frequent participant on those other boards and hope that most found my messages informative and accurate.
I am now an AA MD80 captain based in STL. I started with OZ in 1974 so like many of the older TW employees, this is looking like my 4th bankruptcy.
I wrote some merger articles, a financial newsletter and provided analysis, primarily for the airline industry. The requests came from ALPA, APA, some internal TWA management, etc. I am currently the STL/APA Chairman for the Supp CC education & compliance committee.
In all communications, I only use my real name in the public profile and post under the names Bob H or numbersbob. Unfortunately there are many hard feelings resulting from the TW acquisition. It is my intent to stay away from the emotional politics as I attempt to provide accurate unemotional information.
As most employees are now aware, our airline is dangerously close to making it''s first chapter 11 filing.
For some, the outlook is only bleak and many seem to have given up on the future.
My reason for writing here is to hopefully encourage each of you to NOT give up on the future of AA and the career that so many of you have dreamed and worked so hard for.
As I get time, I will be posting information that will (should it occur), hopefully get each AA employee to look at an option AFTER bankruptcy.
Captain Bill Haug (SFO based) has been working with ESOP experts for over three years. Before you jump to the conclusion that an ESOP is what UAL had.. Let me be be quite clear.. There are various forms of ESOP''s. Bill, myself and all others involved have ZERO interest in a UAL type ESOP/Employee ownership.
Since UAL''s poorly planned ESOP in 1994 (based on long-term and employee gains), MANY changes have occurred and as noted above, there are different types of employee ownership plans possible that are a combination of SWA''s option/equity ownership, UPS''s highly employee leveraged ownership etc.
In closing for now I am copying a recent post I made on the pilot''s MB.

Perhaps an easier way to look at it would be that Carty is demanding $1.8 Billion in labor concessions from all **AA** employees.
Last year (2002), AA paid ~$7.9 billion in labor salary/benefits. (note: AA has not filed the 10K report. As such, the $7.9 billion is an estimate from AMR''s 2002 earnings report.)
The $1.8 billion *demanded concession* equates to 22.8% of the total (est.) 2002 salaries/benefits package to ALL AA employees.
BOTTOM LINE-
Employee ownership equivalent to all employees SHOULD/would be as a PERCENTAGE of employee compensation and not as a factor divided by employee count.
In other words.. IF each AA employee provided **~23%** (not the flat rate of $16,000) of their 2002 individual compensation package toward the ESOP, which is at or less than what AA is NOW demanding anyway ($1.8 billion)?? THEN.. The total amount available would be FOUR TIMES AA''s market value based on last Fridays closing stock price.
A few comments-
Any reorganized AA after bankruptcy will zero out the value of all existing AMR stock. This is typical in nearly ALL chapter 11 filings.
Any re-organized AA, either through normal 1120 corporate filing or 1120S (Sub-S) would issue *NEW* shares of stock no different than any NEW company does. I.e., The more invested dollars, the more shares of stock owned.
Two things MUST not be ignored in any re-organized PROCESS:
1. For various reasons, not all employees are going to be personally eager or even willing to be a part owner in the company they work for. There are (some) ways to work around at least PART of that issue. I.e., As a part of the NEW corporate governance, ALL employees will receive (some) portion of stock (or options) to be considered as annual compensation or/and LTIP compensation (similar to what does happen at the executive level).
In addition, it is very possible to provide a NEW stock distribution of something LIKE; ~55% of the new issued stock is divided between each different labor group based on some formula and the remaining stock is offered to those employees who WANT to purchase additional shares of ownership.
2. A re-structured AA MUST be able to compete in the current industry going forward. In other words, many of the same cost/revenue issues being worked on today must find solutions for the future.
Respectfully-
Bob H

I want to make it very clear that the ABSOLUTE FIRST choice should be to avoid bankruptcy.. HOWEVER.. Should a bankruptcy occur, the concessions will be AT LEAST $1.8 billion from labor.. That $1.8 billion is NOT a one time shot, it is an annual cut EVERY YEAR for the foreseeable future.
I believe there are better alternatives. Time may be very short and nothing positive can happen unless all labor groups can quickly work together to have a very comprehensive plan to present to the creditor''s committee AFTER a (potential) bankruptcy.
Please post your questions and comments. I will try to provide additional information over the next few days.
Respectfully-
Bob Herbst

 

[twaokc]

Bob H.
Glad to hear something from you. I have been wondering what you were up to. Hopefully, you will not see your 4th bankruptcy.
Carl

 

[JBLU007]

Aloha Bob H,

Hey Bob, is TWA recovery "still," just around the corner? Good to see you again my friend. I just crunch some numbers and decided to work for a real PROFITABLE airline for a change. AA & UAL and the rest dont have a chance. If you want a future the future is here at JETBLUE. If you want an application let me know. You can make Capt in less than a year! My good friends David & David run the place I can put in a good word for you. Let me know.

ALOHA JBLU007, aka TWAFA007

 

[WXGuesser]

Bob H.:

Ask the folks over at UAL about how well employee stock ownership worked.

Welcome to the boards!

TANSTAFFL.

 

[rampguy]

BobH, I remember you well and regret not meeting you at the STL party we had a few years back. I always enjoyed your number crunching and analytical skills. Welcome back to the game. I look forward to your posts.

 

[nwa400]

Bob, I enjoyed your post. Could you speculate on fact which carriers are in good shape to survive? Meaning, can you see, if any, which major airlines making it through this period of turmoil. There are some that are better off than others but just how long can anyone last in this environment? Do all employees have to take massive pay cuts to make it while mgmnt. still fills their pockets? Does every airline have to operate like JB or SWA? Just wanted to get an educated guess. Thank you for your reply.

 

[NewHampshire Black Bears]

WELCOME BACK BOB H.

NH/BB's

 

[FWAAA]

AA is running out of money. No matter what you think of AA's management or AA's labor groups, this is a fact.

Because AA is running out of money, it is running out of time.

Rather than take a 22% paycut (which would suck no matter how much or little you make), here's another option:

Pay each employee the same they are receiving now. The catch? Only 78% is in cash and 22% is in convertible preferred stock (with a generous conversion rate). BTW, with a very low dividend rate (AA can't pay very much).

If AA prospers, employees share in the upside. Essentially, you'd control the airline.

And since Carty has said that a 22% cut will work, there is no "If AA fails" alternative.

Since AA can't borrow thru the traditional credit markets, maybe it's time for the employees to step up and loan AA the dough.

Or you can just wait to see how big a reaming the Bankruptcy Court gives you. Ouch.

 

[Hopeful]

Yea, I'll loan AA the money! 20% over prime!

 

[AAmech]

[blockquote]
----------------
On 3/12/2003 11:44:17 PM JBLU007 wrote:

Aloha Bob H,

Hey Bob, is TWA recovery "still," just around the corner? Good to see you again my friend. I just crunch some numbers and decided to work for a real PROFITABLE airline for a change. AA & UAL and the rest dont have a chance. If you want a future the future is here at JETBLUE. If you want an application let me know. You can make Capt in less than a year! My good friends David & David run the place I can put in a good word for you. Let me know.

ALOHA JBLU007, aka TWAFA007
----------------
[/blockquote]
I'm glad your happy at your new job but don't fall completly for all the Rah Rah stuff they're feeding you. It sounds like you've never had a small company experience before where you "rub shoulders" with the CEO and big wigs in the hallways and lunchroom. Enjoy it, it is fun and "Fresh". Especially coming from a big anonomous Co. I used to love being able to corner a VP and ask him questions and having them know my name. But you know it gets old after a while looking at those puny paychecks and listening to their promises of how things are going to be better in the future. At least for me it did. I would love to work for a Co like JB if I was unemployed. But even with these concessions we're probably going to take I'll still be WAY ahead of what I could get at JB. It just wouldn't make sense for me to walk. Not to mention the fact that I LOVE my job at AA and couldnt' imagine that the other side of the fence is so much better. [img src='http://www.usaviation.com/idealbb/images/smilies/2.gif']

 

[will fix for food]

[blockquote]
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On 3/12/2003 9:55:02 PM Bob H wrote:



A few comments-

Any reorganized AA after bankruptcy will zero out the value of all existing AMR stock. This is typical in nearly ALL chapter 11 filings.


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[/blockquote]


Could you elaborate? It seems to me that UAL is still trading even though they are Chapter 11. Are they the exception to the rule?

Carty and company have a lot to lose by going C 11 if all their stock holdings will end up liquidated.

 

[FWAAA]

[blockquote]
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On 3/13/2003 5:07:11 PM will fix for food wrote:

Could you elaborate? It seems to me that UAL is still trading even though they are Chapter 11. Are they the exception to the rule?

Carty and company have a lot to lose by going C 11 if all their stock holdings will end up liquidated.
----------------
[/blockquote]

The UA stock is still trading and will until UA's plan for exiting bankruptcy is confirmed. At that time, it is very likely that the current UA stock will be canceled (as in poof) and will be replaced by new stock. The employees of UA may be given some of the new stock (but not much).

The rest of the new stock will go to those who put in fresh money (and some will go to current creditors who have their debts converted to equity in the restructured UA).

The old stock which is currently trading for about a dollar is not going to have any value once the UA plan is confirmed.

AA's management (especially Carty) want to avoid Bankruptcy for many reasons besides having their current stock wiped out.

Bankruptcy is hard on everybody - just ask the CO employees who have been thru it twice.

 

[Bob H]

[blockquote]
----------------
On 3/13/2003 5:07:11 PM will fix for food wrote:

[blockquote]
----------------
On 3/12/2003 9:55:02 PM Bob H wrote:

A few comments-

Any reorganized AA after bankruptcy will zero out the value of all existing AMR stock. This is typical in nearly ALL chapter 11 filings.
----------------
[/blockquote]


Could you elaborate? It seems to me that UAL is still trading even though they are Chapter 11. Are they the exception to the rule?

Carty and company have a lot to lose by going C 11 if all their stock holdings will end up liquidated.
----------------
[/blockquote]

Nearly every time a publicly traded company files chapter 11, this question comes up so you're not alone.

Common stock-holders are considered "un-secured" creditors. In other words, if there is ANY asset value/cash left after the "secured" creditors are made whole... THEN the "un-secured" groups get in line.

"Shareholder Equity" is the nearest thing on a corporate financial statement to indicate "net-worth".

Specifically to AMR here are the ugly numbers:

(year ending)

Long-Term Debt

2000 - $4.15 billion
2002 - $11.5 billion (estimated until 10K is filed)

---------

Shareholder Equity

2000 - $7.18 billion
2002 - $ 1.3 billion (estimated until 10K is filed)

Note: LT Debt does not include "Capital Leases" or "Off balance sheet debt". The estimate per S&P is now ~$20 billion for on & off balance sheet debt.

The bottom line in all of this is that by the time any bankruptcy is filed, there will be no equity left and therefore nothing left for the un-secured creditors, i.e., common stock-holders.

Most are surprised to know that TWA stock still trades, at least it was last time I looked, albeit at 1-2 cents.

As noted in the post above, companies in bankruptcy generally continue trading common stock until the reorganization is complete. In the best case scenarios, there may be a reverse split of ~50 or ~100 to one but usually the old common stock is wiped off the books and a "New Issue" comes out in various forms to new creditors, DIP's, note holders, common etc.

=====

Regarding executive stock-holdings and specifically Carty-

You are correct that their common stock is treated no differently than anyone else's.

What most employees get upset about is that it is very common for the current management to stay in their positions at least through any restructuring. In fact, in nearly all BK's, large monetary incentives are provided to upper management to remain in control throughout the BK restructuring.

While many/most AA employees look at AA's management in disgust and as being inept.. The outside World of investment bankers, creditors etc. see a very different picture. Compared to the UAL's, Usair, and even some of the others, AA has remained in a "relatively" much stronger position.

Presuming an AA BK does happen, without some large change (ESOP/EO). There is no doubt that Carty would remain as CEO and through the process, recover a considerable amount of his "old" stock/options in "new" stock/options.

Thanks for your questions-

Bob H

 

[Bob H]

[blockquote]
----------------
On 3/13/2003 8:35:13 AM nwa400 wrote:

Bob, I enjoyed your post. Could you speculate on fact which carriers are in good shape to survive? Meaning, can you see, if any, which major airlines making it through this period of turmoil. There are some that are better off than others but just how long can anyone last in this environment? Do all employees have to take massive pay cuts to make it while mgmnt. still fills their pockets? Does every airline have to operate like JB or SWA? Just wanted to get an educated guess. Thank you for your reply.

----------------
[/blockquote]

That's a very broad question but I'll throw out my "opinion".

After 9/11, I was QUICKLY convinced that ANYTHING is possible.

In this current weak economic environment it is nearly impossible to project anything regarding this industry with confidence.

To some extent, the airline industry is very dependant on the overall strength or weakness of our economy. In most economic cycles the airlines have led the cycle by ~one to ~two years.

I'm still optimistic that when the public stops seeing WAR & TERRORIST across the front of EVERY newspaper & EVERY TV station, EVERY day & ALL day, that our economic recovery will have a chance to proceed. I am also mindful that Japan is still in a 22 year economic "down-cycle".

IMO, five years from now the airline industry will look as completely different as it did 5 years after the first jets arrived and 5 years after the 1978 deregulation.

Through the political and public efforts, the US airline industry appears headed for nothing more than a "mass transit" system.

The growth of LCC's can no longer be ignored. In ~3 years, SWA will operate more acft than any other US carrier. While JBLU still leaves many LONG-TERM questions, each month they continue without any "REAL" competition puts them in a much stronger and competitive place going forward.

I could give you all of the boring numbers but here are just a couple that you may find interesting.

Specific to AA but similar to the other Major carriers.. Most employees believe the airlines have been profitable.

Most employees (and politicians) frequently refer to the later 90's when AMR went 7 years and $5.51 billion in net income.

It only took the last two years to lose that much and 2003 will add a couple more $billion in losses.

We can look at 9/11, mis-management etc. etc. as the reasons for the massive losses BUT we can also look at the later 90's and the unprecedented bubble in equity markets and the dot.com era as being largely responsible for the record billions in profits. It's not likely we will see either extreme for many more years.

From 1978 (first year of de-regulation) through 1993 (16 years)..

The average annual operating revenue for AMR was $7.58 billion.

The average annual profit was only $69 million.

The average annual profit margin was just 1.87%.

In other words, the airline industry can hardly be considered as very profitable. No doubt an argument can be made for SWA and at least for now, possibly JBLU.

As for your question- For the Long-Term, I wouldn't bet on any of the airlines until the government wants to either FULLY de-regulate the airlines or regulate them.. Right now we have neither. The only thing de-regulated is "fare price".. The government imposes so many restrictions and rules on airlines there is just no way to effectively compete with profit.

As the big guys like UAL and AA etc. are forced to lower costs to compete with the LCC's there will be considerable pressure on them and the cycle will continue going up and down.

LCC's are up to ~20-25% of the US market share. Obviously, ~75% of the US market is still using the Major carriers but presuming UAL & Usair restructure, you will then have ~50% of the US market using LOWER cost carriers. The "premium" fare for primarily AA & DAL will see considerable pressure and in one way or another, AA's long-term costs must go down.

To become just like SWA would require a loss of 30+% of employees and additional cuts in both pay and work rules. There will always be some "premium" fare travelers who will choose the International airline and larger network but not anywhere near what it use to be. Business travel is more and more reduced just due to advanced electronic communication/net meetings that weren't available a few years ago.

Excluding SWA, ALL Major airlines NOW have at or near negative "shareholder equity", considerable "LT debt" and little "asset value" to draw from.

Thanks for your comment & question.

Sorry for the rambling answer.

Bob H

 

[Hopeful]

BOB H:

Two issues:

1)What do you think of Carty & Co. getting their country club dues paid for by AMR?


2)AA's ranks are loaded with former Eastern Airlines, PanAM, and TWA employees. Ask them if pay cuts and concessions work.

Nothing will change unless AA fundamentally changes the way it does business. As of yet, I see no changes in management's plan. They want to be the same AA they always were but at JetBlue costs. They want to be able to say "HEY, FLYING PUBLIC, OUR FARES ARE CHEAPER THAN JETBLUE AND SOUTHWEST, BUT WE OFFER YOU MEALS AND FREQUENT FLYER MILES."

Bob, the company speaks out of both sides of its mouth. They are constantly telling us that JetBlue and Southwest are kicking our asses because the customer has proved he or she just will not pay alot for a ticket. Well, you can't have your cake and eat it too, as AA desires.

One thing AA management continually fails to say in all their speeches and correspondence is that employees at JetBlue and Southwest have a diiferent place in the priority rankings. They are HAPPY and treated better than we are at AA. At AA, it's the stockholder, the passenger, upper mangagement, than everyone else.