OH vs LM in BK

[FWAAA]

And that $500 million, my friend, is because of labor costs! Just ask AA managment!

Some of it is. But it's nobody's "fault." AA's mainline wages and benefits cost AA a lot more than at its legacy competitors. Wear that proudly.

US paid its mainline employees (wages, salaries, etc) just 24.6% of its 2010 non-express revenues (mainline plus cargo and other fees). AA paid its mainline employees 31.4% of its non-Eagle revenues (mainline plus cargo and other fees). If AA's mainline wages were the same percentage of its revenues as at US, then AA's mainline wages would have been $1.34 billion less than they were. Sure, insourced overhaul at AA accounts for some of that difference, but not all of it. Tulsa and AFW wages don't add up to $1.34 billion (in fact, AA'e entire maintenance operation, line and overhaul, does not cost AA $1.34 billion).

 

[Hopeful]

Some of it is. But it's nobody's "fault." AA's mainline wages and benefits cost AA a lot more than at its legacy competitors. Wear that proudly.

US paid its mainline employees (wages, salaries, etc) just 24.6% of its 2010 non-express revenues (mainline plus cargo and other fees). AA paid its mainline employees 31.4% of its non-Eagle revenues (mainline plus cargo and other fees). If AA's mainline wages were the same percentage of its revenues as at US, then AA's mainline wages would have been $1.34 billion less than they were. Sure, insourced overhaul at AA accounts for some of that difference, but not all of it. Tulsa and AFW wages don't add up to $1.34 billion (in fact, AA'e entire maintenance operation, line and overhaul, does not cost AA $1.34 billion).

Nobody's fault....However, whether you read a business article about AA or listen to some airline analyst, or even read certain posts here, it boils down to the same response.....
"AA's labor costs......etc etc etc..."
Fuel also plays has a pretty big impact on AA"s numbers.

But the conventional wisdom is that the price of fuel cannot be controlled while the cost of labor is controllable...Either threats or even bankruptcy, the pundits believe that AA's MUST get out of it's current agreements. These same pundits also believe that AA should file BK and be done with it.
Kinda like individual governors solely blaming unions for their deficits!

There's a huge wave of anti unionism in this country driven by the right. But what the anti-union citizens of this country don't realize is that whatever benefits they enjoy will be assailed next.

 

[WorldTraveler]

I wouldn't bet on that. I've lived in my home for 4 years now, and I've refinanced twice. End result...same amount of debt, monthly mortgage payment lower by almost $800!

Your interest rate also went down... that's why it was worth you paying the closing costs again and again.
You can look at the interest rates each airline pays in their SEC filings but they pay alot higher interest rate than you do.

???

By my count, Arpey has more experience in the airline industry than most other airline CEOs in America today, and collectively, based on what numbers I've been able to find, AMR management - collectively - has more total years of experience in the airline industry than just about any other major U.S. carrier.

One could argue that AMR management is a failure - but I don't think one could argue that this failure stems from a lack of airline experience. In fact, what is notable about AMR versus many of its competitors is the lack of non-airline experience among executives, which I have heard other union members argue is actually the problem.



... and yet the company's financial performance still continues to under-perform those of network competitors who used bankruptcy to freeze and dump pensions, further reduce pay, further reduce work rule inflexibility, outsource overhauls and outsource more flying to regionals, among others.



Non-"functional" employees didn't seem to slow Delta, Northwest, United, or USAirways (twice) down much in bankruptcy.

I'm not arguing that "functional," motivated employees aren't critical to the success of any company - they of course are - but I don't think one could honestly argue that airlines haven't been able to overcome whatever challenges they might have encountered in this area arising from bankruptcy.

AA has always had a much more aggressive approach to mgmt development than airlines like DL which historically hired from within. AA has been much more open to bring in new hire MBAs and groom the best and spit out the rest as well as take experienced management types from elsewhere in the industry as well as outside of the industry.
There isn't near as much difference in mgmt philosophy on that subject now and the world has moved more torwards AA's philosophy than the "promote from within" philosophy... and other airlines are doing just as well or better than AA.
I'm not sure you can correlate industry experience or not w/ profitability.
What AA mgmt has significantly underperformed its peers within and outside of the airline industry is in the area of labor relations - and that has made what they need
much more difficult to obtain.
.
All four of the formerly BK airlines of the 2000s showed that people would rather get it over with and move on than continue to drag it out for years and years.

Yes, AA has mortgaged just about everything. So has DL. So has UA. So has CO. So has US. Every legacy airline has hocked nearly every available asset. The reason AA has mortgaged everything it owns is to stack up enough cash to try to get thru the crisis of the month/year and right now it's fuel that's almost $3/gal. If you run out of cash, and nobody will loan you more, you have only one option: Ch 11. If you keep a big pile of cash and borrow money when lenders will loan it to you, you might be able to avoid Ch 11. It's not rocket science.

AA ain't a "solid company."

The difference is that other airlines are managing to engage in major business transactions such as mergers and acquisitions because their costs allow them to do so and they aren't allowing other carriers to move into their key markets like AA is doing because they have the costs necessary to fight back.
It is very much true that AA might be able to keep buying new planes and refinancing debt but at what point do you recognize that protecting the revenue generating capabilities of the enterprise have got to be worth more than just shuffling money around in the back room.
That's obviously subjective because several new 773s and the new LAX-PVG route might all provide some forward movement but you also have to look at how much AA has given up in key markets like NYC and LHR as well as the growth of other carriers in other markets through their own growth as well as merger in markets such as LAX and Latin America such that AA"s current position doesn't look a whole different than it did in NYC and LHR a few years ago.

 

[chris perry]

Its Kinda funny listening to all this labor is the problem BS. The bottom line is we have at least 50 % more managers now than in 1998 in aircraft maint. One example ,time and attendance used to be Two guys for the whole station. Now one manager three supervisors, plus assistant. Net cost double or more figuring in benefits etc etc....Labor may be the problem or part of it,but its clearly a mangement decision to add unproductve heads.On the other hand they assign one lone mechanic multible aircraft checks
nightly and spew labor is being unproductive. GET REAL.....

 

[Bob Owens]

Some of it is. But it's nobody's "fault." AA's mainline wages and benefits cost AA a lot more than at its legacy competitors. Wear that proudly.

Thats the dumbest statement from you yet.

US paid its mainline employees (wages, salaries, etc) just 24.6% of its 2010 non-express revenues (mainline plus cargo and other fees). AA paid its mainline employees 31.4% of its non-Eagle revenues (mainline plus cargo and other fees). If AA's mainline wages were the same percentage of its revenues as at US, then AA's mainline wages would have been $1.34 billion less than they were. Sure, insourced overhaul at AA accounts for some of that difference, but not all of it. Tulsa and AFW wages don't add up to $1.34 billion (in fact, AA'e entire maintenance operation, line and overhaul, does not cost AA $1.34 billion).

Now you are trying to spin this up to a $1,34 billion cost disadvantage?
You need to check your math, even AA only claimed a $600 million disadvantage.

What percentage of their costs go to pay for outsourced maintenance? When UAL made their presentation to their mechanics they claimed that 13% of their total costs was for outsourced maintenance services, plus another 22% for the rest of their labor costs. USAIRs costs are probably around the same. That comes out to 35% for UAL. AA's numbers are also inflated because of 3P related labor costs. So every hour that a mechanic in AFW puts into rebuilding an engine for some other airline, that cost gets added to AAs labor costs, every hour a mechanic in Europe earning $45/hr spends working on another airlines airplane gets added to AAs labor costs. TEASEL does a lot of 3P work, all that gets added in. Whats the percentage of labor costs for TIMCO or AAR? I'll bet they are a lot higher than 31.4% and I bet the revenue generated per hour for that labor is much, much less. The fact is you are making statements and implying something without all the facts even though you have them, I'm not saying I have all the facts but I'm adding facts that make your conclusion less acceptable. If USAIR and UAL were structured the same, which they arent then your compasions might have some validity. Should guys at TIMCO wear it proudly that labor costs at Timco are a greater percentage than labor costs at UPS even though they make half as much? No, thats dumb. Time and time again we've debunked the importance of AA's labor cost difference yet you keep pushing the same misinformation. Why not just answer my question from a month ago about where the billions between their lower labor costs , increased revenue and Fuel costs went?

 

[Bob Owens]

Its Kinda funny listening to all this labor is the problem BS. The bottom line is we have at least 50 % more managers now than in 1998 in aircraft maint. One example ,time and attendance used to be Two guys for the whole station. Now one manager three supervisors, plus assistant. Net cost double or more figuring in benefits etc etc....Labor may be the problem or part of it,but its clearly a mangement decision to add unproductve heads.On the other hand they assign one lone mechanic multible aircraft checks
nightly and spew labor is being unproductive. GET REAL.....

AA would rather pay three guys to watch an underpaid mechanic, to make sure he's working, than just pay one mechanic well and stay out of his way.

 

[eolesen]

Now you are trying to spin this up to a $1,34 billion cost disadvantage?
You need to check your math, even AA only claimed a $600 million disadvantage.

Numerators and denominators, Bob...

FWAAA's $1.34B comparison was against USAirways's costs as a percentage of revenue.

The $600M comparison used by AA was probably an average also including DL, UA, and CO, and I have no idea what numerators and denominators they used...

And it wouldn't surprise me if US's margins are better than those at DL or UA/CO. I'm not going to bother checking since we're entering earnings season and will have a whole new bunch of 10-Qs to surf next week...

DL and UA have much higher volumes, but if it's on a margin basis, and US is indeed lower costs/higher margins, that's what AMR should be focused on. They shouldn't be targeting middle of the pack on margin -- they should be targeting best in class for the same relative product.

 

[WorldTraveler]

Thats the dumbest statement from you yet.



Now you are trying to spin this up to a $1,34 billion cost disadvantage?
You need to check your math, even AA only claimed a $600 million disadvantage.

What percentage of their costs go to pay for outsourced maintenance? When UAL made their presentation to their mechanics they claimed that 13% of their total costs was for outsourced maintenance services, plus another 22% for the rest of their labor costs. USAIRs costs are probably around the same. That comes out to 35% for UAL. AA's numbers are also inflated because of 3P related labor costs. So every hour that a mechanic in AFW puts into rebuilding an engine for some other airline, that cost gets added to AAs labor costs, every hour a mechanic in Europe earning $45/hr spends working on another airlines airplane gets added to AAs labor costs. TEASEL does a lot of 3P work, all that gets added in. Whats the percentage of labor costs for TIMCO or AAR? I'll bet they are a lot higher than 31.4% and I bet the revenue generated per hour for that labor is much, much less. The fact is you are making statements and implying something without all the facts even though you have them, I'm not saying I have all the facts but I'm adding facts that make your conclusion less acceptable. If USAIR and UAL were structured the same, which they arent then your compasions might have some validity. Should guys at TIMCO wear it proudly that labor costs at Timco are a greater percentage than labor costs at UPS even though they make half as much? No, thats dumb. Time and time again we've debunked the importance of AA's labor cost difference yet you keep pushing the same misinformation. Why not just answer my question from a month ago about where the billions between their lower labor costs , increased revenue and Fuel costs went?

Bob,
I'm not sure why you can't understand that labor for insourced work is separated... AA doesn't do it because they apparently don't do enough insource maintenance (or else they are intentionally inflating their costs but still couldn't do it by 60%) but DL most certainly does make an adjustment for insourced work which is not part of the cost of producing DL's ASMs. You can see the CASM reconciliation that pulls out 0.31cents for ancillary businesses... they don't disclose what all that entails but even half of it is insourced maintenance, that means 15% of DL's maintenance costs go to served insourced customers - since DL's maintenance CASM is about 1.00 cents.
I'm not sure what question you posed a month ago to FWAAA but if you are referring to 2003, it is clear that AA didn't get their costs down to levels low enough to be able to be able to strategically attack other carriers. I have said repeatedly that part of AMR's problem is that you can't get all of the costs out of labor when you are comparing them to carriers that used BK which also reduces finance and leasing costs, which AA barely changed in their out of court process. Bottom line is that AA did look financially better after the first round of concessions but they didn't improve things enough to be able to start growing, and as labor costs went back up - they always do in the airline business if you don't grow- AA's costs became uncompetitive again.
AA didn't succeed then at a restructuring because it didn't bring in all parties and they won't succeed this time around w/o having debtholders and leasing companies and everyone else contribute their part. Labor alone cannot turn the ship around and should not bear the full brunt of the restructuring costs.

 

[eolesen]

Apparently you missed the details about the 2003 concessions, WT. It wasn't just employees being brought to the table. From the 2Q03 10-Q:

In addition, subsequent to the ratification of the Modified Labor Agreements, the Company and American have reached concessionary agreements with certain vendors, lessors, lenders and suppliers (the Vendors, and with the agreements the Vendor Agreements). Generally, under the terms of these Vendor Agreements the Company or American will receive the benefit of lower rates and charges for certain goods and services, and more favorable rent and financing terms with respect to certain of its aircraft.

There were subsequent debt restructurings in 3Q03, including one transaction involving $133M and 33 F-100's.

So contrary to the oft-repeated breakroom myth that only labor gave concessions, there was also voluntary restructuring of contracts going on with suppliers and lenders. Some of those suppliers who didn't agree to restructure wound up being replaced with new suppliers as their contracts permitted and/or expired.

And no, I don't have specific numbers as to the total value of vendor and lender concessions, but that's the beauty of doing this outside of bankruptcy -- the specifics didn't have to be made public.

 

[FWAAA]

I have said repeatedly that part of AMR's problem is that you can't get all of the costs out of labor when you are comparing them to carriers that used BK which also reduces finance and leasing costs, which AA barely changed in their out of court process.

That's not accurate. Compare AMR's aircraft rent for 2002 with the same line item in 2004. 2002 = $840 million. 2004 = $609 million. That's a 27.5% reduction. I'd say that's more than "barely." Pre-TWA aircraft rental at AMR was $607 million, so the 2003 restructuring had the effect of wiping out all of the TWA aircraft rental expense.

In addition, the TWA LLC aircraft that AA kept (primarily 103 MD-80s and 27 757s) following the 2001 asset acquisition were leased by AA at substantial reductions from the lease rates paid by TWA (AA had the leverage of TWA's Ch 11 filing to renegotiate the TWA leases on aircraft).

It's difficult to compare debt and interest numbers pre- and post- restructuring because AA was borrowing all it could immediately following the imposition of concessions in May, 2003 and onward.

Lenders and lessors take note when their borrower and lesee is about to file a Ch 11 petition; they saw the risk that AA would file and renegotiated accordingly.

Overall, AA did not slash its labor expenses as severely as some of its legacy peers were able to do in Ch 11. But I don't see evidence that AA failed to reduce its non-labor costs by significant amounts.

 

[FWAAA]

Thats the dumbest statement from you yet.

Thank you very much. That's high praise coming from you.

Now you are trying to spin this up to a $1,34 billion cost disadvantage?
You need to check your math, even AA only claimed a $600 million disadvantage.

That's not the dumbest thing you've ever posted, Bob, but it's up there near the top.

Bob, all I did was compare the labor costs at US with the labor costs at AA. And no, I'm not claiming that US has a $1.34 billion cost advantage, as some of the difference (as I posted) is the AA labor cost of insourced overhaul (which, as you know, makes AA's labor cost line item higher than it would be if AA outsourced all its overhaul). I don't know how much of that $1.34 bilion difference is spent by AA on overhaul, but I do know that overhaul doesn't soak it all up - because AA's total maintenance expenses aren't even $1.34 billion.

I don't know where Brundage came up with the $600 million labor cost disadvantage number, but I suspect that it was an average of the legacy peers. I chose US for this simple comparison because its pay rates and are so woefully below AA's pay rates for pilots and FAs, and its labor costs are substantially less than AA's labor costs as a percentage of its revenue. US employees generate far more revenue than you do for a lot less pay.

What percentage of their costs go to pay for outsourced maintenance? When UAL made their presentation to their mechanics they claimed that 13% of their total costs was for outsourced maintenance services, plus another 22% for the rest of their labor costs. USAIRs costs are probably around the same. That comes out to 35% for UAL. AA's numbers are also inflated because of 3P related labor costs. So every hour that a mechanic in AFW puts into rebuilding an engine for some other airline, that cost gets added to AAs labor costs, every hour a mechanic in Europe earning $45/hr spends working on another airlines airplane gets added to AAs labor costs. TEASEL does a lot of 3P work, all that gets added in.

In 2010, US paid $661 million for maintenance materials and repairs. That includes outsourced maintenance plus parts for insourced line maintenance. AMR's maintenance materials and repairs line item was $1.33 billion. Add the labor costs for US together with its $670 million maintenance materials and repairs line item and do the same for AA. AA's labor costs plus maintenance materials and repairs far exceeds the number at US. No matter how much you spin, the fact is that US has a huge cost advantage over AA. Other legacy peers may have smaller advantages, but they have lower costs than AA. On that issue, WT is correct.

Do you know for certain that AA includes the labor expense for its MRO work for other airlines in its labor cost line item? Or are you just making things up? I don't know. Perhaps you do?

Whats the percentage of labor costs for TIMCO or AAR? I'll bet they are a lot higher than 31.4% and I bet the revenue generated per hour for that labor is much, much less. The fact is you are making statements and implying something without all the facts even though you have them, I'm not saying I have all the facts but I'm adding facts that make your conclusion less acceptable.

Who cares what percantage of MRO chop shop revenue is used to pay their employees, Bob? I was comparing the labor expense of US and AA, you know, two competing airlines. I couldn't care less if those MROs paid their employees 5% of their revenue or 95%, since that trivia doesn't change the fact that US pays its employees substantially less (both absolutely and as a percentage of revenue) as AA pays its employees.

Capt. Sully made just $125/hr as a near-retirement A320 captain. AA's widebody First Officers all make more money per hour and every AA captain makes much more per hour than $125/hr; AA's MD-80 captains make $161/hr. US FAs make a fraction of AA's FAs. US fleet service make substantially less than your TWU bretheren in fleet service. In short, US employees make far less on average than AA employees. AA spends far more per employee than US, despite your desparate wish that it not be so.

If USAIR and UAL were structured the same, which they arent then your compasions might have some validity. Should guys at TIMCO wear it proudly that labor costs at Timco are a greater percentage than labor costs at UPS even though they make half as much? No, thats dumb. Time and time again we've debunked the importance of AA's labor cost difference yet you keep pushing the same misinformation. Why not just answer my question from a month ago about where the billions between their lower labor costs , increased revenue and Fuel costs went?

Yes, Bob, your typical MO: when the facts aren't on your side, start with the name calling and your own misinformation campaign. Just par for the course from an ineffective union leader who thus far has failed to persuade his employer to pay him what he's worth. You guys are worth far more than AA is paying you - so why do you waste valuable time arguing with me about facts that can be found in varous public filings? Or are you now arguing that US is filing false info with the SEC as well?

You've debunked nothing so far. I'm just glad that my negotiating team is more effective (and less skeptical of the facts) than you and the TWU. I think that helps them focused on thinking of ways to get their membership the results they want.

 

[strikeforce]

You've debunked nothing so far. I'm just glad that my negotiating team is more effective (and less skeptical of the facts) than you and the TWU. I think that helps them focused on thinking of ways to get their membership the results they want.
[/quote]
You're negotiating team is absolutely responsible for the higher costs because it takes TWO to come to an agreement. Management agreed to those higher costs. They didn't have to place AA at a cost disadvantage! But, they have, and now YOU want to blame labor. Typical of AA management. Now, you can see the real problem at AA.....absolutely horrible labor relations, and not only with union, but with non-union employees.

 

[WorldTraveler]

FWAAA,
I wouldn't disagree that AMR's overall cost issues - other than personnel - are not out of line w/ the industry. But that doesn't mean that AA couldn't lower them further.
Total rent has gone down and AMR did benefit from TWA's prepackaged BK which reduced lease rates on those planes before AA acquired them... but AA is also getting rid of some of those aircraft.
What we can look at is lease rates for specific aircraft types...it is reported to the DOT and Aviation Daily has it as a data item every quarter and publishes it.
AA pays more to lease its M80s than DL does even though DL's are newer... same thing for 757s.... DL was able to "reset" the lease rates based on the market... you and I know that AA could reduce its M80 lease rates to next to nothing (and potentially provide a fleet of low cost aircraft for expansion) if it had BK available to it.
IN other cost items, other carriers were able to reduce the cost of contracted services quite a bit in bankruptcy... AA may or may not be paying comparable rates but obviously BK provides the opportunity to renegotiate those contracts effective immediately.
Debt can be refinanced and even though it does not appear that AMR has much or any unsecured debt which could be cancelled right away, Other debt could be pushed back further to give AA more breathing room to restructure - or excess assets sold and the debt paid off.
As to the whole moral argument of paying bills vs BK, C11 is a part of US law... interest rates are set based on the recognition by lenders it is possible... as credit risks for a company increase, so do their interest rates.
----
BOB,

AMR MUST show all revenue that come into the company as well as all costs that go out.... DL and LH etc separate out their revenue/costs for insourced maintenance, although they don't have to... AMR doesn't have to and it is very possible that they intentionally are leaving some of those costs in in order to bias their costs against their employees. Not out of the realm of possibility.
But DL says its ancillary businesses (all of them which I believe includes their vacation company as well as Tech Ops etc), all are enough to change DL's CASM by 0.31 cents. DL is a larger airline than AA. DL outsources some maintenance, undoubtedly at cheaper rates - but all of which are reflected in the maintenance category on its income statement.
EVEN WITH the MAINTENANCE CASM difference between AA and DL of more than .6 cents which could be reduced by half if AA is doing a comparable amount of maintenance for its size (DL claims its MRO is the largest in North America), AA would have to be spending .3 cents/ASM on overhaul maintenance, all other things equal between DL and AA. I can assure you that if AA is spending almost 1/3 the CASM on overhaul for what DL spends on all of its maintenance, then doing in-house maintenance is UNACCEPTABLY expensive.. given that DL still does overhauls and every other type of maintenance as well, just in different manners.

Rather than focus on US which is a much smaller aircraft and has a fleet that is alot more different than AA and DL and doesn't insource near as much, I think the comparison of AA and DL maintenance costs makes a whole lot more sense. DL is also the lowest cost maintenance producer among major US airlines whcih also says that AA mgmt undoubtedly is looking at what DL does right (and potentially wrong) and is far more likely to use them as a yardstick.

Based on that metric, you should be able to justify whether AA's maintenance costs really are justifiable against DL's.

Make sense?

 

[chris perry]

All this comparison against one carrier to another on labor costs is pretty much spin. Complete BS!
It takes 4 times the mechanics to maintain widebody aircraft,I keep seeing U S air coming up 341 aircraft total.They have 16 widebody Aircraft total.How can you compair AA with US air? Its Apples and Oranges.....Just pick 34 of USAir aircraft and 34 of AA's one could say that AA''s costs are 50% higher due to labor costs.They Just fail to mention that AA were all widebodys and USAIR'S were narrow body...

 

[eolesen]

The only reason it's a valid consideration is that the brunt of AA's business is still domestic travelers, and they aren't going to pay more to fly on AA simply because they have 100+ widebodies. I won't.

I'm off to Toronto next week. AA and UA wanted $1500 RT, while US wanted $1000 to connect in PHL. US will still make more money on the ticket because of their cost structure, while AA will likely fly with empty seats, and on Eagle to boot. Fares to BUF were around $450, which is the same relative direction and distance...