American Airlines faces turbulent ride
Wednesday, October 5, 2011
NEW YORK (AP) — American Airlines’ CEO is proud that his company, unlike its biggest rivals, avoided the bankruptcy process to remake itself. Investors aren’t so sure.
As the economic outlook darkens, the airline industry is bracing for trouble. Among the biggest U.S. carriers, American has the most to fear. It faces the highest labor, aircraft and borrowing costs.
“They’ve become old and feeble,” says Vaughn Cordle, chief analyst with AirlineForecasts.
American’s problems are the kinds that can be fixed under the protection of a bankruptcy court. And some analysts point to the airline’s beaten-down stock price — it’s fallen 69 percent this year — as evidence that Chapter 11 is not out of the realm of possibility.
On Monday, as speculation about a bankruptcy filing swirled, the stock fell 33 percent. Shares bounced back Tuesday, rising nearly 21 percent.
Executives at parent company AMR Corp. insist a Chapter 11 filing is not in the cards. The Fort Worth, Texas-based company has $4.2 billion in cash and other short-term investments — enough of a cushion to sustain at least another year’s worth of losses while it comes up with a plan for growth, analysts say.
While most U.S. airlines were profitable in the first half of the year, American had a net loss of $715 million on revenue of $11.6 billion. The company is forecast to show a loss of $132 million when it reports third-quarter results in two weeks.
American was once an innovative airline. It invented frequent-flier miles and it launched the first computerized ticketing system. Now, that edge is gone.
Ray Neidl, an airline specialist with the Maxim Group, said in a recent note the airline’s management is experienced “but they appear to be riding on the storied airline’s past.”
American’s biggest problem is the high cost of labor.
It spends $3,008 on salary and benefits for every hour each of its 650 planes is in the air, according to Cordle. United spends $2,801, Delta $2,587 and US Airways $1,991.
Put another way, if American had the same labor costs as US Airways — which restructured in bankruptcy court in 2002 and 2004 — it would save $2.2 billion a year, Cordle said.
American had hoped that gap would shrink as employees at the other airlines negotiated higher wages in new contracts. But that has yet to happen.
The airline has other disadvantages:
— More than $12.1 billion in outstanding debt, about the same amount as airlines twice its size.
— An unfunded pension liability of $7.9 billion. For the most part, other airlines don’t have traditional pension plans.
— High borrowing costs. It agreed to pay 8.75 percent interest on $726 million it borrowed last week.
— The oldest and least fuel-efficient fleet in the country.
American was in such a tough financial situation in the past decade that it couldn’t invest in new jets. The airline is aggressively replacing its gas-guzzling jets with newer, more-efficient planes. But it’s a slow process.
To fly one passenger 1,000 miles, it took American an average of 19.8 gallons of fuel last year. The industry averaged 18.4 gallons. That might not sound like a giant difference, but based on the 125 billion miles American’s passengers flew last year the airline burned through $400 million worth of fuel that its competitors didn’t have to.
American refused to comment for this story but management does have some plans to right the airline.
It recently gained government approval for joint ventures with British Airways, Japan Airlines and Qantas, allowing the airlines to work together to set prices and schedules on routes. The move gives American some of the benefits it would have seen through a merger.
American is also in the process of trying to separate its unprofitable regional airline, American Eagle, into an independent airline.
In the years after the Sept. 11 terrorist attacks, Delta Air Lines, United Airlines and US Airways all restructured in bankruptcy court. In contrast, American was able to secure concessions from its unions and avoid that fate.
“I have a different definition of success than bankrupting your company,” American CEO Gerard J. Arpey said in April.
Still, the competition emerged from bankruptcy stronger, while American struggled and looked everywhere it could to cut costs.
“We discussed how often the trash was picked up,” Thomas R. Del Valle, senior vice president of airport services for American, said in a recent interview.
With the merger of Delta and Northwest in 2008, American had fallen from its perch as the world’s biggest airline. Two years later, it fell further in the pecking order with the merger of United and Continental.
Even if American can bring its labor costs in line with the other major airlines, it — and the rest of the industry — still need to compete with younger airlines like JetBlue, Frontier and Virgin America.
If American paid the same wages and benefits that Virgin America does, it would save $4.6 billion a year.