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No Longer On The Brink, American Air Is Still In P  
User currently offlineSTT757 From United States of America, joined Mar 2000, 17593 posts, RR: 50
Posted (12 years 2 months 1 week 4 days 22 hours ago) and read 5751 times:

"No Longer on the Brink, American Air Is Still in Peril


From Today's New York Times Business Section:

Published: March 18, 2004

American Airlines has pulled back from the brink. Now all it has to do is figure out how to stay on top of the brutally competitive airline industry.

In the year since it skirted bankruptcy, American, the nation's largest airline, and a unit of AMR, has wrung $2 billion in concessions from its unions and surprised Wall Street by cutting its costs to 9.5 cents a seat-mile in the fourth quarter.

But it is still a long way from profitability. While its operating costs are the lowest among the major airlines, they are still significantly above the 5.9 cents a seat-mile at JetBlue Airways, the industry leader. American is also saddled with a crushing $21 billion debt, as well as ballooning pension and health care costs that it has few options to address.

It must contend, meanwhile, with feuding unions that are loath to cut it any more slack, stiff competition for customers from low-fare airlines, and jet fuel prices that have soared 15 percent in the last 12 months to slightly more than $1 a gallon, including an increase of nearly 4 percent yesterday alone.

On Tuesday, a UBS Warburg analyst reversed his full-year estimate for American from a profit of $1.05 a share to a loss of $1.20, citing the issues American faces.

At least mere survival is not one of them.

"We're no longer talking about the b-word; we're talking about our future," American's chief executive, Gerard J. Arpey, said in a telephone interview. But while bankruptcy is no longer American's immediate problem, Mr. Arpey has no illusions about the difficulties that remain.

"We recognize we dug ourselves a pretty big hole in the first years of this century," he said. The airline lost $1.5 billion last year, on top of $2.5 billion in 2002.

Analysts say the most difficult immediate problem is the rising cost of jet fuel, which threatens to erase the tiny net income that many said they had expected the airline to earn this year. Yesterday, American contended it still expected to cut costs this year, despite the spike in fuel prices.

To be sure, American is not alone in being hammered by fuel costs. Continental Airlines said last week that it did not expect to be profitable this year because of fuel prices, and Delta Air Lines raised its first-quarter loss estimate to $400 million last week for the same reason.

American also faces trouble with its unions. While it has talked glowingly of the cooperation it has received in the last year from employees, some of the union leaders who persuaded pilots and flight attendants to accept deep wage cuts as an alternative to bankruptcy have departed.

Further complicating the matter, the Aircraft Mechanics Fraternal Association said last week that it would ask a federal labor board to conduct an election in its bid to unseat the Transport Workers Union, which represents American's 12,000 mechanics.

The contest is bound to be lively, because the association's executive director, O. V. Delle-Femine, is a longstanding skeptic regarding airlines' pleas for cooperation. He has refused to sit on airline boards or sign confidentiality agreements that would give the union access to airlines' books.

"I'm not buying it," he said of American's bankruptcy threat last year. Were his union in place then, he would have told executives, "go before the judge and prove it," Mr. Delle-Femine said.

American contends it was ready to do just that. "We were as close to filing as you can possibly be without filing," Mr. Arpey said. "The papers were ready."

But American's chief financial officer, James A. Beer, says just as firmly that bankruptcy would have been worse for American than the measures it took to avoid Chapter 11.

While its $2 billion a year in labor savings is less than the $2.56 billion a year that United Airlines, a subsidiary of UAL, achieved under bankruptcy protection, American was spared the upheaval and scrutiny that a filing would have caused, Mr. Beer said. He added that United, which filed in December 2002, is still under court protection.

The concessions were not the only way American has attacked costs. Early last year, it began a top-to-bottom quest to overhaul operations, yielding $2 billion a year in savings in addition to the labor cuts.

Its search has gone as deep as the air filters on its jet engines. Instead of paying its old supplier $31.70 a filter, American found another company offering the same filter for $1.25, and got the government's approval to install it.

It has overhauled maintenance procedures at its repair base in Tulsa, Okla., where technicians no longer use drill bits once and toss them away. Its Boeing 777 long-range jets used to have two seating configurations - one for flights to the Pacific, the other for the Atlantic. They now have just one. Most important, American is down to 7 aircraft types, from 14 during the 1990's. It will be at six types when it finishes retiring its Fokker F-100 jets this fall. That saves on the cost of training and spare parts.

Such improvements are old hat to other industries, like automobiles and electronics. It is also the way things have always been done at the thrifty Southwest Airlines, the industry's low-fare leader.

But thrift was never essential to the big airlines, which covered costs by raising ticket prices. "It wasn't because we were stupid," Mr. Arpey said. "That kind of thinking just drove us in the 1980's and 1990's."

But that is no longer possible, in an era when low-fare airlines claim 25 percent of all domestic passengers. "It's becoming increasingly clear that to survive in this industry, you have to be vigilant on costs," said Darin Lee, an economist with the LECG Corporation, a consulting firm based in Emeryville, Calif.

Mr. Arpey, who is the son of an airline executive and a licensed pilot, is attacking his job with a drive that brings to mind the zeal of Robert Crandall, who was chief executive of the airline from 1986 until he retired in 1998.

But where Mr. Crandall stoked controversy, clashing with unions, and readily offering his blunt views on industry affairs, Mr. Arpey, 45, has been more low key.

He has done few interviews and made only a handful of public appearances during his freshman year as chief executive at the airline, where he has spent his whole carrier, having joined in 1982 after earning his M.B.A. from the University of Texas. One appearance was on Christmas when he went to Dallas-Fort Worth International Airport to greet passengers and employees. Another occurred Jan. 27, when he testified before a commission investigating the September 2001 attacks.

Mr. Arpey, who was in charge of flight operations when terrorists hijacked two American planes, called his predecessor as chief executive, Donald J. Carty, with the news. The pair monitored the events to their tragic conclusion.

Rather than dwell on the past, Mr. Arpey prefers to focus on American's challenges now, including low-fare rivals that threaten American's turf. "We will not retreat," he said.

In fact, more than two million people traveled American last year on fares of $150 or less, said Daniel P. Garton, American's executive vice president for marketing. And when JetBlue introduced transcontinental fares as low as $79 each way last year, American did it one better: it matched the fares, and offered "fly two, get one free" deals to frequent fliers from Boston and New York to California and Florida. Delta also matched the deal.

At American, more than 150,000 people signed up, including 30,000 new members of its AAdvantage frequent-flier program, said Mr. Garton. That easily justified the free tickets American will award this fall to those who took two trips. "It's icing on the cake," he said.

Yet even as American enjoys such moments, Wall Street is dubious. Philip Baggaley, airline analyst for Standard & Poor's Ratings Services, says American will have to spend nearly $2 billion in cash this year to pay its debts and invest in facilities and equipment. That is almost as much as the $2.6 billion in unrestricted cash it had on hand at the end of 2003. American said yesterday that it expected to have $3 billion at the end of the first quarter.

Mr. Baggaley, whose agency rates American's debt at B-, its second-lowest investment grade, said he was deeply concerned by American's pension and health care costs. They were not reduced in its negotiations with unions on concessions. The most effective way other major airlines have been able to attack those costs is to invalidate the obligations under bankruptcy protections, but that is the path American chose not to seek.

Mr. Baggaley, who has known Mr. Arpey since the early 1990's, said he believed that the American chief executive's work was just beginning.

"Even though he's been in the organization a long time, he's approaching it with a fresh set of eyes," Mr. Baggaley said. "He may indeed make some further changes. I don't think the story's over there yet."

Kevin P. Coughlin for The New York Times
American Airlines has won $2 billion in concessions from its unions and cut costs to 9.5 cents per seat-mile."

Eastern Air lines flt # 701, EWR-MCO Boeing 757
6 replies: All unread, jump to last
User currently offlineN844AA From United States of America, joined Jul 2003, 1352 posts, RR: 1
Reply 1, posted (12 years 2 months 1 week 4 days 22 hours ago) and read 5685 times:

This is something that I was wondering about when I read the article that it seemed to be unclear on. The article says that American's Q4 seat mile costs in 2003 were 9.5 cents, but the chart says the 2003 seat mile costs were 10.5 cents. Does that mean the seat mile cost declined throughout 2003? If so, that would seem to be good news for American with regard to the rest of the majors, assuming that they didn't similarly improve their numbers throughout last year.

On another note, I was astounded to see how low B6's seat mile costs were. I knew they were low, but I had no idea they were that low. I assume those costs will rise, though, as its employees gain seniority, the second fleet type is introduced, and their current equipment ages.

New airplanes, new employees, low fares, all touchy-feely ... all of them are losers. -Gordon Bethune
User currently offlineConcordeBoy From , joined Dec 1969, posts, RR:
Reply 2, posted (12 years 2 months 1 week 4 days 20 hours ago) and read 5575 times:

Its Boeing 777 long-range jets used to have two seating configurations - one for flights to the Pacific, the other for the Atlantic. They now have just one.

...this statement seems to jump the gun, or has AA indeed converted to only a single longhaul product?

User currently offlineElwood64151 From United States of America, joined Feb 2002, 2477 posts, RR: 5
Reply 3, posted (12 years 2 months 1 week 4 days 19 hours ago) and read 5539 times:

American has done an excellent job at controlling its costs without bankruptcy. It has cut fleet types, and I assume it has increased utilization of its aircraft as an extension of the reduction in fleet types. AA looks like it's on the right track.

Just my unqualified opinion.

Those who fail to learn history are doomed to repeat it in summer school.
User currently offlineKKMolokai From United States of America, joined Feb 2000, 760 posts, RR: 2
Reply 4, posted (12 years 2 months 1 week 4 days 13 hours ago) and read 5424 times:

"Its Boeing 777 long-range jets used to have two seating configurations - one for flights to the Pacific, the other for the Atlantic. They now have just one.

...this statement seems to jump the gun, or has AA indeed converted to only a single longhaul product?"

I was shocked to hear this as well. I haven't heard any recent updates on AA's 777 fleet configs. I've heard in the past that AA would be converting over to one seating config on the 777, but it was never said which config would be kept; the Pacific (pod sleeper seats in First) or the Atlantic (Flagship Suites in First).

I will certainly check on this tomorrow at work.

We are the people of American Airlines. And we know why you fly.
User currently offlineKKMolokai From United States of America, joined Feb 2000, 760 posts, RR: 2
Reply 5, posted (12 years 2 months 1 week 4 days 13 hours ago) and read 5400 times:

I just checked Sabre as well as the seat map on AA.com, and both are showing a mix of Atlantic and Pacific 777s. Surprisingly, the flights between ORD-LHR are a mix of both configs, where normally the Pacific version was used primarily on the AA), Japan">NRT flights.

We are the people of American Airlines. And we know why you fly.
User currently offlineAAR90 From United States of America, joined Jan 2000, 3589 posts, RR: 44
Reply 6, posted (12 years 2 months 1 week 3 days 11 hours ago) and read 5304 times:

Does that mean the seat mile cost declined throughout 2003?

In a word... YES! Labor contracts were signed in April. It takes time to implement all the changes. Most are done, but a lot of items remain and that's just the pilot contract. The bigger you are the harder/longer it takes to effect change.

*NO CARRIER* -- A Naval Aviator's worst nightmare!
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