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http://www.swelblog.com/articles/american-limited-options-pain-likely.html
American: Limited Options, Pain Likely »
American: Limited Options, Pain Likely » 1of2
Many readers have let me know that they are not as encouraged about the financial prospects of American Airlines with its massive aircraft order as I was in
this piece. After all, the folks at AMR have problems beyond an ancient fleet, including an anemic revenue performance relative to the industry, high labor costs and all the other economic misery inflicted on many airlines in the past ten years.
I believe that AA’s aging fleet contributes some to the competitive disadvantage it suffers, and bright, shiny, fuel-efficient new planes will help impress customers and cut fuel and maintenance costs. But what comes next?
Anxious analysts point to the fact that the price of oil impacts everyone, yet AA’s performance lags quarter after quarter. And there’s seemingly no significant movement yet in the airline’s labor negotiations, despite years at the bargaining table. With contract costs higher than anyone else in the industry, the company wants more productivity and smarter work rules in exchange for enhancements. All the while the unions have dug in either thinking or pretending that their righteous indignation will somehow turn the global economy and thus the industry around and recoup for labor all of losses in recent years.
American is one of the few carriers out there that didn’t turn to bankruptcy to shed some of these costs. In bankruptcy
you cannot restructure the price of oil, but you can shed the leases of the least desirable aircraft, work with creditors to reduce debt and make changes to the labor agreements.
But bankruptcy is probably not a realistic option now.
This is not 2002 with the shadow of 9/11 cast over the proceedings. This is not 2005 when the price of oil began its march upward and served as a catalyst for the bankruptcy filings of Northwest and Delta on the same day.
No it is 2011, 10 years past the date that the country would like to forget. Now, many airlines are flush with cash and don’t have the liquidity scares that were present when others filed. Many U.S. airlines are making money or at the very least are cash positive, despite jet fuel prices at the equivalent of a barrel of oil at $130.
American, however, is on the wrong end of the industry today and some smart people question whether it will survive to see it’s much talked about long-term plans take wing.
So, let’s assume that Avondale Partners’ airline analyst Bob McAdoo was right in his May 16, 2011 analysis that American simply needs to shed capacity. McAdoo cited US Airways as an example, where new management culled 20 percent of jet capacity. But what he did not figure in is the likely relief American would need from its pilots union to make that kind of correction possible. More on that later.
American still relies on its regional partners to fly 37 and 44 seat jets because they are part of the pilot contract’s “scope” equation that determines the number of larger regional jets American can fly. A 20 percent reduction in flying, much of it on long haul wide body routes flown by senior crews, would likely result in a furlough of up to another 1,500 pilots. But American can’t do that either because of the same contract provisions that say American cannot drop below 7,200 pilots on the active roster. And that doesn’t even take into consideration what the other union groups may have in their contracts that prevent the company from making the kind of changes that may be necessary to save the airline.
So what choice does American Airlines have? Cutting that much capacity will be extremely painful for employees, and could put at least an additional 11,000 other American Airlines workers on the furlough list and in the unemployment line. Cutting that much capacity would also redraw American’s network and route structure as we know it, giving its competitors greater strength in some cities and markets where American’s presence would dwindle or disappear.
McAdoo’s analysis calls for American to pull down certain Chicago to London flying; cut flights to Buenos Aires from multiple AA gateways; eliminate service to India; reduce by half the flights from Chicago to China; and trim transcon service between JFK, Los Angeles and San Francisco.
McAdoo also challenges American’s “Cornerstone Strategy.” In addition to flying a money-losing route between London Heathrow and Los Angeles, American is building its LAX presence using those inefficient, small regional jet aircraft. The same is true at Chicago and New York JFK. In McAdoo’s view, Chicago is too dependent on connecting traffic at fares that are not compensatory. Further he claims that in many instances, Chicago and Dallas/Ft Worth compete for many of same passengers connecting to points east and west and internationally and therefore are redundant service.
Maybe it is time to de-emphasize LAX because the mix of traffic makes profitability difficult. Maybe it is time to pull out of O’Hare because de-leveraging a hub is tricky particularly with an aggressive United hubbing in the same market. Honestly, the only real big bang [removing fixed costs] American may have left is to massacre a hub like Chicago the way US Airways did to Pittsburgh and Delta did to Dallas/Ft. Worth. The bigger the hub takedown, the bigger the fixed cost savings.
As for New York, American is now third in the market behind Continental at Newark and Delta at JFK and offers less connecting service than does Delta at JFK. American’s relationship with jetBlue was supposed to address some of these competitive disadvantages but, as McAdoo points out, one can look a long time before finding many jetBlue to American connections in the various distribution systems.
In the local New York market, AMR’s revenue per seat mile is underperforming when compared to peers at JFK and Newark. Maybe it is time for American to pull out of JFK except for some select Trans-Atlantic flying, select transcon flying, and turn the rest of the region’s feed over the jetBlue. But oneworld is depending on American to make New York the best market it can be for the alliance so this would be harder to do.
In fact with more 70-seat aircraft American could actually become more competitive there. That would, again, depend on the pilot union’s willingness to do the right thing.
There is no doubt that a 20 percent cut in capacity would cause significant pain at American, even if it might be absolutely necessary to address the airline’s structural problems. But what if the cuts go even deeper? What will be the impact on necessary American Eagle capacity that American has contracted for in the new Air Services Agreement? If there is no Eagle feed, then there is no need for many mainline aircraft now dependent on the flow from points of all sizes behind and beyond the hub. The virtuous circle spirals downward.
At that point, American’s Cornerstone Strategy will be more about Dallas/Ft Worth, Miami and a little New York JFK and Los Angeles. And the labor savings will come simply by cutting headcount.