Is a change in control coming?

[WorldTraveler]

excellent post, OldGuy.
The reason why airlines have not been able to cover the increased cost of fuel is because there was too much capacity in the industry. The whole idea behind the DL/NW, UA/CO, and WN/FL mergers was that capacity would be reduced from the industry, there would be fewer players, and profits for the remaining players would increase. That is still the primary justification for the AA/US merger.

Yet, the issue remains that AA/US will not gain what any of the other 3 mergers obtained in terms of network coverage - WN obviously focusing at this point only on the US domestic market - and thus there is a very real possibility - if not likelihood that AA/US will come nowhere close to delivering the revenue gains that other carriers have seen, even though US wants to build the business case based on the experiences of the other carriers - DL and UA.

The airline business is a business of mass... small players just don't have a history of surviving and thriving long term. The reason why US employees are low paid is because US cannot effectively compete with DL and UA and even AA right now for the premium traffic. AA has already seen an exodus of revenue from NYC to DL and UA since those two mergers... and given that AA/US will take years to merge even if it happens and still won't have the mass to effectively compete globally against DL and UA, AA's only choice is to cut wages similar to what US has done.

Thus, pricing in the airline industry is a function of total capacity in the industry but also the share that each carrier has not just in their overall network but within each global region (including the US). After the inevitable pullbacks in AA/US hubs, AA/US would not be #1 as they tout nor would they have the size necessary in continental Europe (which is a far larger part of the European market than the UK) or Asia. Thus, the chances are very high that with or without a US merger, AA will not have the revenue strength necessary to compete with DL and UA - and even WN in many doemstic markets.
The only alternative to not being able to generate sufficient revenues is to cut costs - and as you well know, the easiest place to cut is from employees.

AA's cuts to employee cuts indicate that it has doubts that it can generate the revenues it says it will and thus needs to keep costs low enough to ensure their survival.

 

[eolesen]

Now I am sure Mr. E. will say I am entirely full of baloney and that prices have gone up. They have but not near as much percentage wise as any other product in this country. Name any other industry or business where the weakest dictate the pricing of the industry.

Your last point first... The weakest don't dictate pricing in the airlines. The lowest cost producer does. Maybe back in the regulated era, because airlines had to make a profit and the guy with the highest costs was able to set the floor (simply letting the other guys make more money).

To wit, WN, B6, and NK have (and have had for some time) far more influence on pricing than DL, UA, or AA do. There are a few exceptions like AS who can price a little higher because of the niche they serve.

Same thing holds true in the international arena -- EK, QR, and EY have far more impact on long-haul pricing than any North American or European carriers does. In Asia, you have the guys like Virgin Australia, Jetstar, and Air Asia-X setting the curve, not the guys like MH, SQ, QF, or JL.

Prices?

For leisure tickets, maybe you probably haven't noticed the prices increasing all that much on an airfare-only basis, but start adding in all the extras ($50 for the checked bag, another $50 for a pre-reserved seat). That's why the DOT has been in such a tizzy over airline pricing the past couple years. It's not seen as entirely transparent.

For refundable tickets and those bought closer into departure, there's no doubt prices are up. Airlines have always managed to take advantage of the inelastic demand that's out there for business travelers, some doing so better than others.

Where else does the weakest producer determine price? You could make an argument that organized labor works that way..

In commodity products, there are probably other examples where a distressed producer can drive the prices down for everyone.

Go back a couple years, and GM and Chrysler certainly drove down prices on automobiles -- Ford and the non-US builders were able to keep premiums on their higher end vehicles, but they had to be a bit more aggressive in discounting at the lower and middle product lines.

The problem with this is that it's not sustainable.

But in general, the guy who is the most efficient ultimately owns pricing, because he knows the competition isn't making as much when prices drop, and his margins can only go up when they let pricing rise up a bit.

 

[johnny kat]

WT,

Your logic would dictate that AA should just give up and throw in the towel because they are just not ever going to have enough of what DL has. And in your world US just needs to go away never to be heard from again unless serving in the capacity of an old goat herder in rags coming down the mountain. In one breath you claim there is just no way a merge with US should even be considered un less you are replying to AAviator at which time you suggest that a merger might help a little because of US strengths but could never be better than DL. Well then, what exactly would you recommend?

Eolesen, same question to you. You say AA should remain a stand alone and be a great airline. Efficiency and productivity will always produce a winner. But as WT points out low wages are the only thing in AA's employees future, and same with US. How will AA and US ever be able to have comparable industry wages absent a merger?

IMHO, I think the plan would be to merge and still have lower labor costs than UA or DL. The new AA would most certainly have the cost advantage over the other two. And we all know how that works out when the higher cost airlines have to start cutting because they can't make as much money due to labor costs. So what is the solution? I don't know. But I think a merger makes about as much sense as any other scenario.

 

[eolesen]

If you have the right cost structure, being the #3 isn't necessarily a bad thing. Played correctly, there is money to be made, especially when your two larger competitors have higher costs.

Merging? Yes, all the pundits seem to think it is a foregone conclusion. I see it as a mistake. It will create a whole lot of distraction and disruption, regardless of how many times the AA unions have sung kumbayah with Parker -- they still haven't got an agreement with the existing unions. It will require a reworking of all the internal IT systems. And regardless of how well it is planned out, mixing of the two brands and cultures will wind up being very disruptive to customers.

I'm still of the opinion AA would be better off getting their own house in order before playing Brady Bunch. If there is a recession, they're going to be better positioned as a standalone if they don't have all those other distractions and integration expenses...

If standalone indeed doesn't work, AA can always seek out a merger partner.

What I do know is that you can't un-merge if it starts to go bad.

 

[TWU informer]

Just make the truth simple.
GREED will kill us all while everyome justifies the greed. The love of money is the root of all evil and our current existence.

 

[Bob Owens]

I have never claimed to be a business expert but I do know that with any business if your cost of doing business or providing a service increase, like fuel to airlines, you pass that on to your customers. Every service industry known to us and every retailer or provider of anything from insurance to food has increased their price for their product. Have you not noticed the prices at the grocery store going up with the price of gas? But the airline industry has refused to pass these fuel increases on to the public. AA has instead taken the money from us to keep prices low.

We keep hearing that airlines have not passed increased costs onto consumers but whats the explanation for the fact that they get more revenue per passenger than ever before? If the fare stays the same but they add fees then the passenger paid more for the same service, their costs went up as the airline charged them more. If you go yo the gas station and the price of fuel stays the same but they charge you a fee to pump it into your tank is it really fair to say that the cost of gas has not gone up? No.

$25 billion, with 40,000 less employees.

 

[WorldTraveler]

Bob,
do you INTENTIONALLY ignore facts or do are incapable of grasping that 90% of those increased revenues you talk about went to increased fuel costs over which AA had no choice to pay or to quit flying. Add in other soaring costs like health care and all of that extra revenue does not translate into money in anyone's pocket at AA, including the execs no matter how much you want to believe they are.
Maybe they are but they certainly aren't because they increased revenues only to pay out most of it for increased costs to other suppliers.

Kat,
E is pretty spot on.... it is possible to be #3 or 4 but with the distance between either AA or US and DL or UA, neither AA or US can expect to be on par with the two larger carriers.
AA hasn't thrown in the towel on its expectations that it can compete with DL and UA - but there is a point at which AA will come to the realization that they do not have the network mass - with or without US - to compete against DL and UA.
AA does have the advantage of being able to form joint ventures with other airlines to help fill in the gaps and is pushing for extensive domestic codesharing on other carriers to fill in the gaps in its network... and in reality, AA could come very close to being able to play in the same league as DL and UA -IF they can hold their own in the markets they already have and if they develop a couple more deep partnerships in Europe and Asia. BA and JL simply do not provide AA with the mass necessary to compete against DL and UA on the continent and outside of Japan. People continually criticize DL for being so focused on Japan to the exclusion of the rest of Asia but somehow find it acceptable that AA can form a partnership with JL that doesn't get them to the size in Japan combined that DL has ... and AA is still smaller than DL in the rest of Asia; UA has a larger presence in Japan and the rest of Asia.
It is very much possible for AA to compete but it largely depends on AA not giving up another inch to competitors, using codesharing like crazy domestically (and keeping their codeshare partners from finding better partners elsewhere), and developing the deepest int'l partnerships possible to make up for what AA doesn't have.

US has actually functioned quite well as something of a niche network carrier - outside of joint ventures and by exploiting the one strength it does have - a presence in the SE alongside DL - to fill holes in their network.

I would have no problem in recommending that US jump to oneworld and AA and US do everything possible from a revenue standpoint to help each other - not unlike what CO and NW did successfully for years. UA is so much larger than US that they control the relationship while AA really needs what US can offer WRT revenue more than UA does.

Working in a revenue relationship as partners in the same alliance would provide most of the benefits but w/ few of the risks.

I am sure that AA and oneworld would gladly take US on as partners if they would dump UA.

 

[Bob Owens]

Bob,
do you INTENTIONALLY ignore facts or do are incapable of grasping that 90% of those increased revenues you talk about went to increased fuel costs over which AA had no choice to pay or to quit flying. Add in other soaring costs like health care and all of that extra revenue does not translate into money in anyone's pocket at AA, including the execs no matter how much you want to believe they are.
Maybe they are but they certainly aren't because they increased revenues only to pay out most of it for increased costs to other suppliers.

No but you like to ignore the fact that in addition to the increased revenues, that exceeded increased fuel costs according to you by at least 10% they shed over 30% of the workers and slashed the pay of those who remained. So in addition to increased revenues they saw decreased labor expenses.


Soaring medical costs? I doubt what they pay went up by as high of a percentage of what they charged me, plus they got rid of over 30% of the workers. Less workers less medical expenses.

 

[Kev3188]

Just make the truth simple.
GREED will kill us all while everyome justifies the greed. The love of money is the root of all evil and our current existence.

+1

...And there you have it in a nutshell...

Amazing the lengths some will go to in order to justify their fealty to the gentry.

 

[1AA]

It is amazing that over the term of my career at American there have been many changes.
CEO's
Contractual language.
Benefits
Management personnel
Aircraft configurations
and so on and so on.
BUT the one thing we can not change is the TWU's relationship with the company.
Why is that?

 

[swamt]

It's a joint motion of AA and the unsecured creditors committee. How do you know it's Horton's idea? For all we know, the UCC is pulling the strings and calling the shots.

Never said it was Horton idea. I said he will delay as long as he can to delay the fact if a merger happens with US he will more than likely have to let go of the reins he currently holds.

 

[swamt]

So, absent deregulation, fuel would have stayed lower? Don't think so -- fuel would have still gone up due to global conditions, and airlines would have had to go to the government to get fare increases passed. Keep in mind this is the same government that can't figure out how to do a budget after three years, or how to stop spending more money than it brings in as revenue...



Perhaps, just perhaps, the reason for this is because US and AA have made progress, and want to be able to wrap up the loose ends without a hostile bidder entering the picture?

Y'all are shocked that AA has required more than a year in bankruptcy, yet UA and DL spent considerably longer getting their acts together...

Not shocked at all. Matter fact expect another request to postpone again during the first quarter next year.

 

[WorldTraveler]

No but you like to ignore the fact that in addition to the increased revenues, that exceeded increased fuel costs according to you by at least 10% they shed over 30% of the workers and slashed the pay of those who remained. So in addition to increased revenues they saw decreased labor expenses.


Soaring medical costs? I doubt what they pay went up by as high of a percentage of what they charged me, plus they got rid of over 30% of the workers. Less workers less medical expenses.

AA and every other publishes an income statement that tells where all of the costs went... you can go look at the list and see where the money went since I just mentioned some of the highest.

Since health care costs have doubled in the past decade, cutting 30% of the employees doesn't come close to bringing AA's medical costs under control.

You also fail to note that AA's workforce has not expanded in about a decade which means their workforce is almost entirely top of scale. You may not have seen your paycheck go up but there were indeed AA employees who were moving up the scale during the past ten years.

AA's labor costs at the end for 2011 were just over $7B while in 2000 it was $6.35B. AA also accumulated a pension deficit due to the decline in the stock market that is worth more than what it spends on labor costs in a year.

No, Bob, AA's total compensation for its employees DID NOT go down. Perhaps after they emerge from BK it will but it has not up to this point.

I am not exhonerating AA mgmt for all they have done but it makes your arguments a wholelot more credible if you can accurately quote where the money has gone and where it has not gone.

 

[Bob Owens]

Since health care costs have doubled in the past decade, cutting 30% of the employees doesn't come close to bringing AA's medical costs under control.

No, Bob, AA's total compensation for its employees DID NOT go down. Perhaps after they emerge from BK it will but it has not up to this point.

Yes, total compensation did go down, not as much as it should have because management got raises through the Rise program and other scams. .
You left out TWA, should have used 2002 or 2003 figures for a more accurate comparison.

If you cut 30% of your workers then your total medical costs should roughly follow that. In the past decade my medical costs have gone up by 600%, AA made money off me, and that would help offset what they paid for others who also saw what they pay go up way in excess of what the company saw.

 

[WorldTraveler]

No, Bob. AA's labor costs went up. If you want to keep believing otherwise, go right ahead.

Why would you want to use 2002 or 2003? AA was already laying off by then.

Do you suppose that AA's health care costs didn't go up if yours went up by 600%?

If you can't grasp the concept that health care went up, then you truly don't have a clue about the world you live in.

Your doctor, your hospital, and everyone else made money on you and every other participant in AA's health care plans but I can absolutely assure you that AA didn't make money on its employees because of your increased health care costs.

If you happened to be healthy enough to not have used your health care benefits, then you should be quite happy.

Insurance is spreading the risk for risks that are beyond one's ability to cover if you had to pay them out of your own pocket.

Because your house didn't burn down in the past 12 years while your neighbors did simply means that you were lucky enough to avoid a catastrophe.
congratulations.
Your option is to choose to be uninsured. I'm sure AA offers you that option.
Or you can choose to go get your coverage from somewhere else since they undoubtedliy don't gouge their policyholders.

But you can't say w/ anywhere close to a straight face that AA has made money off its employees as health care costs have doubled in the US over the past decade.