Wall St. takes a swipe at AMR

[FWAAA]

I do believe AA has had higher labor costs ever since and maybe before the Crandell years. So this is nothing new.

And that was no problem at all during all those years when AA was able to command very real fare premiums (much higher revenue). Like before WN became a 550-airplane domestic competitor. Like before all the legacy competition went thru Ch 11 to screw their employees and reduce their labor costs to levels below AA. Like before non-union B6 became a 200-airplane competitor with very low labor costs compared to AA and focused on AA's transcons and the Caribbean. Like before Carty and low-cost Virgin America took aim at AA's transcons and ORD and DFW. The places AA used to print money.

Not to repeat WT's oft-repeated posts, but AA is now the high-cost airline, and sadly, it isn't always getting the revenue premiums it used to. And huge raises for the mechanics ain't gonna fix that problem.

 

[Mr Red]

With all the bean counters @ AA the Idea that they would let a disadvantage continue is rediculous!!! Oldest Fleet in the business explains higher maint costs.

 

[WorldTraveler]

CUT COSTS?

Where were you in 2003 and since? when we gave back billions?
I am more than qualified to attack AA management on ALL fronts.
I can recall many a ridiculous decision over the years that I can almost bet NO EXECUTIVE ever paid a price for those decisons..

Buying MD11s only to sell them as soon as possible?
Buying Follkers? Biggest mistake ever made..
Spending millions upon millions building hubs in RDU and BNA.....only to shutter them a few years later...
Speninding millions reconfiguring seats for the MRTC campaign! Only to undo that move as soon as possible.
Giving up SJU?
Value pricing?

I agree.... AA was a leader in marketing and distribution but has a less than stellar track record in thinking ahead strategically from a network standpoint... you don't open and close 5 hubs either through internal growth or acquisition (BNA, RDU, STL, SJC, and SJC) if you are thinking ahead and responding to the competitive challenges... changing product strategies (MRTC) which obviously didn't have buy-in from all of AA's leadership team....

Haven't we learned that shrinking to profitability won't work? I am not a finance major but I get the point that having less planes and revenue and keeping other costs the same only makes the situation work. The cornerstone policy is NOT working folks. Putting our eggs into 5 baskets is causing us to miss opportunities and given AA tunnel vision. Explain to me why we have shrunk/ignored business centers like Boston, Seattle, San Francisco, San Jose, Washington,DC?

Maybe Delta is shrinking capacity more then AA is because they have grown more in the past while we sat on the sidelines. Plus, a lot of their capacity reduction is in/out of Japan...which makes sense.

In my humble opinion, we need someone OUTSIDE of AA to do a top down analysis of our operation looking at what types of planes we fly, where we fly them to,and how do we configure them. There is something much deeper here then labor costs. For some reason we cannot capitalize on our strengths.

I couldn't agree more... but the problem is that it is a whole lot harder to sustain capacity during a downturn when you are the highest cost carrier. Fares are going up this year because of fuel and that will drive a reduction in demand. Other airlines are going to be just as focused on filling seats to prevent withdrawing capacity as well... AA is in the worst position to hold onto its capacitiy in a demand driven downturn.

And despite what AA's execs have tried to argue, AA's ability to compete is not as great because they didn't go through a merger like DL and UA did which gives those two additional capacity to pull out of the market and additional duplication in their networks. AA doesn't have that luxury without losing market share - which in part is why it is so difficult for them to pull capacity. AA has also dropped to #3 or #4 in capacity and revenue in many key cities as well as in the domestic market overall. Add on to that the fact that the fall is a traditionally slow period for domestic travel and AA is looking at keeping alot of capacity in the market which Wall Street analysts believe needs to come out.

And yes I do think there is a serious change in thinking in order at AA/AMR - but it doesn't affect just management; it needs to include labor leaders as well.

And that was no problem at all during all those years when AA was able to command very real fare premiums (much higher revenue). Like before WN became a 550-airplane domestic competitor. Like before all the legacy competition went thru Ch 11 to screw their employees and reduce their labor costs to levels below AA. Like before non-union B6 became a 200-airplane competitor with very low labor costs compared to AA and focused on AA's transcons and the Caribbean. Like before Carty and low-cost Virgin America took aim at AA's transcons and ORD and DFW. The places AA used to print money.

Not to repeat WT's oft-repeated posts, but AA is now the high-cost airline, and sadly, it isn't always getting the revenue premiums it used to. And huge raises for the mechanics ain't gonna fix that problem.

very well said, FWAAA.
My point in repeating what I do is simply for people to understand the environment in which AA competes.... pretending there will be a magic bullet or that AA will somehow overcome history in the airline industry is just fanciful.

Here is another assessment of AA's position from debt ratings agency Fitch which includes references to AA's position relative to the industry...

AMR faces some uniquely difficult challenges due to its position as the U.S. legacy carrier with the highest unit labor costs. In order to move from the bottom of the pack in margin potential and cash flow generation, it needs to either deliver a larger RASM premium relative to the other legacy carriers or push unit costs lower. Neither outcome is likely in the near term as AMR is lagging the industry on RASM growth in 1Q'11 and management remains locked in a struggle with the unions over new contracts that could push labor costs still higher. With the majority of U.S. airline collective bargaining agreements amendable by 2012, AMR hopes to bridge the cost gap as pay rates at other carriers rise.



AMR is facing another year of substantially negative free cash flow, and leverage is likely to move higher this year in response to fuel-driven operating weakness. Fixed cash obligations are large, with planned capex of $1.6 billion this year (about $1.1 billion of that total is tied to new aircraft deliveries) and scheduled debt maturities of $2.5 billion. Cash pension payments are expected to total $520 million this year (versus $640 million in accrued pension expense). Given these heavy cash obligations and the need to continue a multi-year fleet renewal program, AMR will not be in a position to begin reducing debt levels until solid RASM growth and moderating fuel prices push operating margins back to levels seen in 2006 and 2007 (the peak of the last demand cycle).

http://finance.yahoo.com/news/Fitch-Affirms-AMR-Corp-and-bw-1640012681.html?x=0&.v=1

 

[eolesen]

I agree.... AA was a leader in marketing and distribution but has a less than stellar track record in thinking ahead strategically from a network standpoint... you don't open and close 5 hubs either through internal growth or acquisition (BNA, RDU, STL, SJC, and SJC) if you are thinking ahead and responding to the competitive challenges...

Malarky. They closed BNA & STL to respond to a competitive opportunity: Eastern's implosion. All those airplanes and lots of the employees wound up in MIA funding what is now one of AA's most profitable expansion moves in the last 30 years. The terminal was a disaster for connecting and clearing immigration, but that now isn't a problem either. Dade County didn't make that happen -- AA did. They screwed up the construction progress, but the design of the facility was entirely AA's vision. It was so good, Dade County copied the design for the South Terminal (finished in half the time and a lot less money).

Going back a few years from that, AA was a pioneer with inland US-Europe hubs. DL had to go buy the carcass of PAA at JFK & FRA in order to catch up to what AA had been doing from 1987 onward at ORD. And it was 1991 or 1992 before UA was able to catch up to AA. I haven't compared schedules lately, but excluding codeshare partners, it wouldn't surprise me to see that AA was still launching more US-Europe flying than UA is at ORD.

AA is in the worst position to hold onto its capacitiy in a demand driven downturn.

Maybe, but they're also in the best position to put down a large number of airplanes quickly. AA gets hammered for not having replaced the MD80s faster, yet that's exactly what gives them the flexibility to put more airplanes on the ground than any other major airline.

And despite what AA's execs have tried to argue, AA's ability to compete is not as great because they didn't go through a merger like DL and UA did which gives those two additional capacity to pull out of the market and additional duplication in their networks. AA doesn't have that luxury without losing market share - which in part is why it is so difficult for them to pull capacity.

You're right that AA doesn't have the luxury of losing market share, but the analysts bashing AA for not showing as much capacity restraint are forgetting how it was five years ago. It was usually NW and CO who didn't cut nearly as much as AA, UA, and DL did. Today, with all the share shift that's taken place, and even by your own words, AA is essentially in the #4 position domestically after UA, DL, and WN.

There's no doubt that excess capacity has to come out, but arguably, it's UA and DL who are responsible for the excess capacity, driven largely by commitments they made not to lay people off as a result of their respective mergers.

Now UA & DL are facing the same problem that AA did with the TW acquisition. They have to go back on their commitments, and for the same essential reasons. And that's going to create its own ugliness, perhaps on the same level as the ugliness between AA and its unions. UA still hasn't resolved transition contracts, much less single carrier agreements. DL may dodge the bullet a little better than UA will, but if they too have to start furloughing, it is just a matter of time before there's another card drive.

 

[strikeforce]

Assuming, for purposes of argument, that your ridiculous and ignorant assertions above were true, what explains the massive losses during the years when AA was not in negotiations with its represented workgroups? You (and others) seem to believe that management can magically turn on the profits spigot, so why didn't management do that in 2002? Or 2004? Or 2005? Or any other year when AA lost money and was not in the midst of contract negotiations.

Think about it. If AA were posting Delta-sized profits instead of huge losses, AMR stock would easily be worth several multiples of its current price of $6.41/sh. That, in turn, would be worth many tens of millions of dollars more in the pockets of Arpey, Horton and the other greedy bastard executives in the PSP compensation. Likewise, the market value of AMR stock would be worth billions of dollars more, in the aggregate, than its current market cap of $2.1 billion.

Nevertheless, you (and some others) persist in posting ignorant nonsense like the above, which can be paraphrased as follows:

AMR executives and shareholders are so hell-bent on screwing some poor (and poorly represented) union members that they are willing to spend billions (by manufacturing "fake" losses) in order to deny those poor union members the wages they deserve. And once they screw those union members to low-raise contracts, AA will magically produce record profits.

Yep. Sure. And the only reaon that AA's airplanes burn as much fuel as they do is because the govenment and the oil companies have conspired to prevent the sale of the magic device that would cause AA's planes to fly 10x farther on a gallon of jetA, just like the device that would allow cars to get 300 mpg. See how uneducated that sounds? It's right up there with the idea that AA loses money solely to screw the working man.

Make no mistake: I'm certain that there are management employees who delight in screwing the working man. But management doesn't have to invent "fake" losses in order to do that. The worthless union is perfectly adept at screwing its members even when the company posts profits during contract negotiations. 1995 anybody?

I didn't make any assertions about screwing the union man....I'm merely pointing out that when it's contract time AA was always in the red. 1995, 2003, 2008 and now we're 2011 and low and behold AA is the only legacy carrier that showed a loss and we don't cut capacity? are you serious! All part of the ball game my friend. I've been around too long and seen so much waste about this company. It would seem very fishy to me if I just raped the working man of 1.6B and then show a profit the very next year. Can't do it for 5 years. The working man is going to want his money back if I do that. Why doesn't AA provide the books to the union when the union asks for it during negotiations? must be hiding something???????

 

[eolesen]

I'm merely pointing out that when it's contract time AA was always in the red

Nice breakroom myth, but not true...


1985 (+$234M in 84 and +$346 in 85)
1989 (+$477M in 88 and +$475 in 89)
1995 (+$228M in 94 and +$162M in 95)
2001 (+$813M in 00 and -$1.7B in 01)

That looks like three contracts in years when AMR was in the black for both the year signed and the previous year, and almost a fourth with 2001 (IIRC, AA was in the black during 1Q and 2Q but in the red with 9/11 occuring in 3Q).

Here's AMR's profit/loss going back to deregulation. 17 good years, 13 bad years.

Year Profit/loss, Global events
1981 $47 <----Recession of 81/82
1982 -$20
1983 $228
1984 $234
1985 $346
1986 $279
1987 $198
1988 $477
1989 $455
1990 -$40 <----Kuwait Invasion
1991 -$240 <----Gulf War 1
1992 -$935
1993 -$110
1994 $228
1995 $162
1996 $1,016
1997 $985
1998 $1,314
1999 $985
2000 $813
2001 -$1,762 <----9/11
2002 -$3,511
2003 -$1,228 <----Gulf War 2
2004 -$781
2005 -$893
2006 $189
2007 $456
2008 -$2,188 <----Great Recession
2009 -$1,468
2010 -$473


Not sure what else you're expecting to see in "the books" that the company isn't already disclosing in SEC or DOT filings. Or are you expecting to see the secret second set of books?...

 

[Bob Owens]

It's becoming apparent why AA has the labor problems it has because some people's comprehension and logic is clearly lacking.

I said nothing about AA labor other than to say that part of the reason why AA has not cut more capacity is that if you cut costs, you drive up labor costs. Given that AA already has the highest labor costs in the industry, any attempts AA has to get its costs down backfire. If you don't understand that concept, I am not sure how you can call yourself qualified to be attacking AA mgmt for not knowing what they are doing - because they - and I understand the concept.

Under normal circumstances you may be right, but most of the "newer" people are recalls, many with max vacation, sick time etc.

In maintenance the company could easily reduce capacity and labor costs at the same time without laying off anybody. AA has so much work, and so much OT that a reduction of capacity would allow them to catch up and reduce OT.

Fares are going up yet the fare increases have not resulted in reduced demand, so why didnt they raise the fares sooner? If anything higher fuel prices means less disposable income for potential passengers. So the fact that the increases have not curbed demand probably means that capacity is where it should be but the prices are still too low.If there were lotts of empty seats then maybe they should cut capacity. I dont see that though, I see full airplanes. I understand the theory, cut capacity create scarcity and then you can raise prices even more, well what if there already is scarcity? Will making it more scarce produce higher prices or will people alter their spending patterns? Maybe go to the Cattskills instead of St Thomas because its so hard to get a seat and if you do the price is so high. To me it doesnt make sense, why not just see what the market will bear pricewise at current capacity then as load factors fall cut capacity to follow the fall in demand? Is the idea to make flying something for only the rich again?

Whats really comical is that you come here saying that Delta is a success story, tell that to the people who owned Delta before they filed for bankruptcy.

 

[Bob Owens]

Nice breakroom myth, but not true...


1985 (+$234M in 84 and +$346 in 85)
1989 (+$477M in 88 and +$475 in 89)
1995 (+$228M in 94 and +$162M in 95)
2001 (+$813M in 00 and -$1.7B in 01)

That looks like three contracts in years when AMR was in the black for both the year signed and the previous year, and almost a fourth with 2001 (IIRC, AA was in the black during 1Q and 2Q but in the red with 9/11 occuring in 3Q).


Not sure what else you're expecting to see in "the books" that the company isn't already disclosing in SEC or DOT filings. Or are you expecting to see the secret second set of books?...

The 1985 contract would have been signed at least eight months before the 1985 profits were posted, same in 1989 and 1995. So at the time that negotiations were going on AA was no doubt crying the blues, if not losses then debt, if not that then they would say that they lost "$100 million in profits compared to the prior year. In 2001 they couldnt hide the profits and we restored much of what was taken away during previous negotiations.

According to your numbers AA lost over $5billion since deregulation.

 

[eolesen]

Bob, AA was in the black for all of 1983, 1984, and 1985. How can you claim they were crying the blues while posting profits?

Likewise, in 1987, 1988, and 1989... record profits in 1988 in fact. How is that crying the blues?

 

[Bob Owens]

The 1985 contract would have been signed at least eight months before the 1985 profits were posted, same in 1989 and 1995. So at the time that negotiations were going on AA was no doubt crying the blues, if not losses then debt, if not that then they would say that they lost "$100 million in profits compared to the prior year. In 2001 they couldnt hide the profits and we restored much of what was taken away during previous negotiations.

According to your numbers AA lost over $5billion since deregulation.

 

[eolesen]

According to your numbers AA lost over $5billion since deregulation.

Oh, it's worse than that.

AA actually had a cumulative profit of around $6.42B as of Dec 2000.

Since then, you've lost $11.66B, and that's just to Dec 2010.

 

[FWAAA]

Fares are going up yet the fare increases have not resulted in reduced demand, so why didnt they raise the fares sooner?

Everytime airfare is increased, the quantity demanded decreases. You may not have seen it on the flights you have flown, but AA and Eagle combined fly about 3,600 daily flights - that means you have seen the inside of very few of them. Same thing with me. My flights are full, but load factors were down late last year from the prior year, and so far in Jan and Feb, I think load factors have been slipping from 2010 Jan and Feb numbers. Higher fares mean less passengers. That's almost universally true: higher prices for anything means you'll sell less of it and, of course, lower prices mean you'll almost always sell more of it.

If anything higher fuel prices means less disposable income for potential passengers. So the fact that the increases have not curbed demand probably means that capacity is where it should be but the prices are still too low.If there were lotts of empty seats then maybe they should cut capacity. I dont see that though, I see full airplanes. I understand the theory, cut capacity create scarcity and then you can raise prices even more, well what if there already is scarcity? Will making it more scarce produce higher prices or will people alter their spending patterns?

AA adjusts fares on each flight and the allocation of inventory to each fare bucket perhaps thousand of times in the 331 days it is on sale before departure. If you see full planes, it's probably because AA has done everything it can do to maximize the revenue while selling as many seats as it can, even if it meant discounting some of the seats more than it would like.

Maybe go to the Cattskills instead of St Thomas because its so hard to get a seat and if you do the price is so high. To me it doesnt make sense, why not just see what the market will bear pricewise at current capacity then as load factors fall cut capacity to follow the fall in demand?

Is the idea to make flying something for only the rich again?

Basically, yes. Fuel costs for full-year 2011 are expected to be more than five times higher than in 1998-99. At those fuel prices, airfare must be substantially higher than it is today if the airline is to recover all of its costs (including the costs of airplanes - which is depreciation).

Either that or airline employees will have to take intolerable paycuts of 50% or more, which I'm certain you and everyone else would find unacceptable.

The poor and middle class won't be able to afford to fly to vacation destinations as often as they used to if fuel stays at $3.00/gal or goes higher. The rich will have no difficulty paying the fares. Our nationwide air travel network is far too large right now to produce profits with $3/gal fuel. Wanna make some guesses how much smaller the network has to get if fuel goes to $4/gal or $5/gal? Or how low wages will have to go to subsidize the current-sized network?

Our country had a good 30 year run with cheap airfare post-deregulation. Except for some temporary fuel spkies, fuel was affordable and fares constantly fell. WN grew from three 737s to about 550 737s, all while offering fair fares. Not always the cheapest, but usually less money than the legacy walkup fares, and often substantially cheaper than the legacies prior to WN's entry in the market. People like low fares, and WN's domestic victory is proof of that.

Whats really comical is that you come here saying that Delta is a success story, tell that to the people who owned Delta before they filed for bankruptcy.

Agreed. I rode some DAL all the way to $1/sh thinking it would avoid a Ch 11 filing. Delta has turned in one big profitable year out of the last 10 and WT is here crowing every day (after a several year absence from this forum while things didn't look so good for Delta) about how Delta is going to win because it is so much larger than AA and because its costs are so much lower than AA's costs. As to the second point, I agree with him, but it's the way he conveys the message and dances the victory dance that can be annoying.

If DL pays about $3/gal for fuel for full-year 2011, I doubt that DL will turn in a profit for 2011, but I may be mistaken.

As I've posted before, I suspect that AA will file a peition in Ch 11 within the next couple of years, most likely in response to a work stoppage (eventually some group will be released and will think AA can break open a secret piggy bank and restore the pre-2003 contracts, so they'll exercise self-help). Many will cheer that filing as it will give AA a chance to abrogate contracts and leapfrog beneath the labor costs of its legacy competitors (UA and DL), just as labor costs at UA and DL are finally catching up to AA's current numbers. If AA survives, it will likely be staffed with 14,000 different FAs (not the current ones) who are happy to fly at jetBlue wages, 8,000 different pilots who are happy with Eagle or jetBlue wages and the planes will be fixed by different people than today but who earn about the same wages you make right now. The planes will be overhauled, of course, in IND, Alabama, SAL, HKG, SIN and perhaps various other cities in China and around the world.

 

[strikeforce]

Nice breakroom myth, but not true...


1985 (+$234M in 84 and +$346 in 85)
1989 (+$477M in 88 and +$475 in 89)
1995 (+$228M in 94 and +$162M in 95)
2001 (+$813M in 00 and -$1.7B in 01)

That looks like three contracts in years when AMR was in the black for both the year signed and the previous year, and almost a fourth with 2001 (IIRC, AA was in the black during 1Q and 2Q but in the red with 9/11 occuring in 3Q).

Here's AMR's profit/loss going back to deregulation. 17 good years, 13 bad years.

Year Profit/loss, Global events
1981 $47 <----Recession of 81/82
1982 -$20
1983 $228
1984 $234
1985 $346
1986 $279
1987 $198
1988 $477
1989 $455
1990 -$40 <----Kuwait Invasion
1991 -$240 <----Gulf War 1
1992 -$935
1993 -$110
1994 $228
1995 $162
1996 $1,016
1997 $985
1998 $1,314
1999 $985
2000 $813
2001 -$1,762 <----9/11
2002 -$3,511
2003 -$1,228 <----Gulf War 2
2004 -$781
2005 -$893
2006 $189
2007 $456
2008 -$2,188 <----Great Recession
2009 -$1,468
2010 -$473


Not sure what else you're expecting to see in "the books" that the company isn't already disclosing in SEC or DOT filings. Or are you expecting to see the secret second set of books?...

in 2003 the secret set of books included 45 senior executives protecting their pensions in BK that the union didn't know until after ratification. How about in 2000 during negotiations that AA purchased TWA out of the blue.
speaking of negotiations, and according to your records...AA lost money in 1993 and negotiations started in 1994....we we're under contract in 2003 and AA was bleeding red, and in 2008 the great recession hit. fast forward to 2011 and we're 2B in the hole. it pays to tell the truth!

 

[eolesen]

AA lost money in 1993 because of the APFA strike (estimated in the annual report at $190M). Absent that event, it looks like AMR could have posted a small profit for 1993 as well. They also took a $100M write-down for a serious Sabre screw up called CONFIRM, and

Regardless, the fact still remains that every contract negotiated between AMR and the TWU between 1981 and 2003 was done while AMR was posting profits. You guys keep claiming the company posts losses to make negotiations better, but the facts simply don't support that accusation.

This round of negotiations is the first since deregulation where AMR has truly been in the red. And if you guys think it is an act, that's your right, but post-Enron, I seriously doubt it. Falsifying SEC filings to try and make a labor negotiations go in their favor is not only illegal, but it's going to be discovered at some point.

Whether you think they're competent or not, I really don't think Bella Goren or Gerard Arpey are going to risk jail time for the company, nor does their auditing firm (Earnst & Young) want to become the next Arthur Anderson....


FWAAA mentioned revenue premiums earlier... here's a perfect illustration of how screwed up things are:

1993 CASM was 8.25c -- in 2010, it was 12.62

1993 RASM was 13.28c with 60% LF's --- in 2010, it was 10.94 with 81% LF's

Even with 35% higher load factors, AA is bringing in less revenue per ASM today than they were 18 years ago. If you ever needed proof that AA has no pricing power, there it is...

And before anyone says AA has shrunk significantly.... 1993 mainline ASMs were 161M, and 2010 ASMs were 153M (approx 95% smaller). Aircraft counts were 667 in '93 vs 620 in '10

Eagle isn't included in those numbers. Their ASMs jumped from 4M to 12M.

 

[chris perry]

in 2003 the secret set of books included 45 senior executives protecting their pensions in BK that the union didn't know until after ratification. How about in 2000 during negotiations that AA purchased TWA out of the blue.
speaking of negotiations, and according to your records...AA lost money in 1993 and negotiations started in 1994....we we're under contract in 2003 and AA was bleeding red, and in 2008 the great recession hit. fast forward to 2011 and we're 2B in the hole. it pays to tell the truth!
[/quote



Come on now that money was theirs,it was earmarked!!!!! Its not a cash bonus now either,that spends different come on guys
your not seeing the big picture.....= NO TRUST WHATSOEVER