01/23/2003
By ERIC TORBENSON / The Dallas Morning News
AMR Corp. will lose $5 million Thursday, just as it lost $5 million Wednesday and as it will every day for the foreseeable future.
And on Wednesday, American Airlines' parent company said it can't keep soaking up that kind of red ink.
"It's clear from the magnitude of losses we sustained this quarter and this year that our current situation is not sustainable," chief financial officer Jeff Campbell said.
AMR said it lost $3.51 billion in 2002. In the next three months, it predicts an $800 million loss. The continued losses will eat away at the Fort Worth-based company's bankroll, now at $2.7 billion. Analysts say an airline as big as American needs at least $1 billion in cash to stay in the air.
American also has almost no room left to borrow, so if you do the math, the carrier is on a course to join United Airlines Inc. in bankruptcy in about a year.
"Absent a miraculous recovery, AMR needs to achieve material labor savings by this summer to avoid bankruptcy by next winter," said analyst Samuel Buttrick of UBS Warburg.
The news spooked investors, who sent AMR shares down more than 23 percent to $3.77 on Wednesday.
Bankruptcy isn't imminent, analysts said, but the signs aren't encouraging.
"I think American can muddle through this year," said airline analyst Ray Neidl of Blaylock & Partners. "But the business model has changed permanently; American has to change, too."
American executives say, however, that they don't intend to change their strategy. They still aim to carry many more high-paying business fliers than the low-cost carriers by emphasizing American's global network and frequent flier perks.
American believes that plan will work, but only if it can cut spending by $4 billion a year.
Mr. Campbell said he has found $2 billion in cuts. The hard part ahead is persuading its employees to shoulder the rest.
"I absolutely think that we can be a tremendously successful airline – with competitive labor costs – without having to use the bankruptcy process," Mr. Campbell said.
Changes in schedule
AMR also will continue to tinker with its schedule. American Airlines will fly 2 percent less capacity this year, using regional carrier American Eagle to fill the gaps. American's international schedule – where it's seeing better results than on domestic routes – will grow 7 percent in 2003. A more immediate problem: American now thinks its costs – measured by each seat mile flown – will rise slightly this year, despite the aggressive cost cutting.
That's bad news when there's no sign of a recovery in the crucial business travel market and with the lingering threat of a war in Iraq.
The cost problems include higher jet fuel prices, health care costs and raises due various employee groups, some of which AMR has asked the unions to forgo. Mr. Campbell predicted passenger traffic will be flat this year, meaning there isn't much chance that revenue will grow fast enough to offset those higher costs.
Low-cost competition
The rapid growth of low-cost carriers such as Dallas-based Southwest Airlines Co. has also hurt. American now faces low-fare competition on 82 percent of its routes, up from 75 percent this summer, Mr. Campbell said. "We don't have any pricing power out there," he added.
It shows in the numbers. AMR's 2002 revenue was $17.3 billion, an 8.8 percent drop compared with 2001 and 14 percent off from two years ago.
AMR actually beat analysts' estimates for the fourth quarter, losing $3.39 per share, or $529 million. Wall Street had predicted a $3.73 per share loss.
The company lost $798 million in fourth quarter 2001. But the year-end loss – including about $1.5 billion in special charges – surpassed the $1.7 billion in red ink recorded in 2001.
There's no easy way out. Saddled with $20 billion in debt, AMR has few options to raise money, such as mortgaging some of its 1,105 aircraft for cash. Investors' appetite for used aircraft has disappeared since Sept. 11, 2001.
American said it needs to renegotiate conditions of $800 million of debt due June 30, and Mr. Campbell said he's optimistic that the company will win more workable terms.
Another problem is AMR's pension plan. The sagging stock market and low interest rates have hurt AMR's pension performance, as they have with most big companies. American will take a $1.1 billion noncash charge – meaning it doesn't count against quarterly earnings, but does affect its balance sheet – to fix the pension shortfall.
Other financing in doubt
The company's access to other financing is "very uncertain," Mr. Campbell said. Major credit rater Standard & Poor's Inc. said Wednesday that it would downgrade some of American's debt ratings because of mounting losses. "I think my predecessor [former CFO Thomas Horton] said that after Sept. 11 that we were throwing the furniture into the fireplace," Mr. Campbell said. "One could say there's not a lot of furniture left in our house."
Mr. Campbell said he wouldn't confirm a Reuters report that AMR had hired a law firm specializing in bankruptcy.
He did say that all airlines are making prudent decisions in seeking out legal advice with the potential threat of another Persian Gulf War. United Airlines hired bankruptcy attorneys shortly after Sept. 11, 2001, and filed for Chapter 11 protection six weeks ago.
"This is a precarious time for American – we're living on borrowed money, we're losing millions every day, and we are up against forces that we have never encountered in our past," AMR chief executive Donald Carty said in a recorded message to employees.
Meetings with labor
All this news adds pressure to the meetings between American management and labor groups, the next one of which is scheduled for Friday. "These numbers came as no shock," said George Price, spokesman for the Association of Professional Flight Attendants.
The union has its own financial analysts preparing a report for its board in late February. "We were encouraged by the fourth quarter numbers because they were a lot lower than the last fourth quarter," he said.
Mr. Price couldn't say whether the airline's poor financial outlook would affect his union's approach to talks.
Most analysts expect American's unions to concede something in coming months, but wonder if such savings will be enough.
"Since bankruptcy is a very poor outcome for labor – not to mention shareholders – labor has significant incentive to negotiate," said Mr. Buttrick, the analyst.
E-mail [email protected]
By ERIC TORBENSON / The Dallas Morning News
AMR Corp. will lose $5 million Thursday, just as it lost $5 million Wednesday and as it will every day for the foreseeable future.
And on Wednesday, American Airlines' parent company said it can't keep soaking up that kind of red ink.
"It's clear from the magnitude of losses we sustained this quarter and this year that our current situation is not sustainable," chief financial officer Jeff Campbell said.
AMR said it lost $3.51 billion in 2002. In the next three months, it predicts an $800 million loss. The continued losses will eat away at the Fort Worth-based company's bankroll, now at $2.7 billion. Analysts say an airline as big as American needs at least $1 billion in cash to stay in the air.
American also has almost no room left to borrow, so if you do the math, the carrier is on a course to join United Airlines Inc. in bankruptcy in about a year.
"Absent a miraculous recovery, AMR needs to achieve material labor savings by this summer to avoid bankruptcy by next winter," said analyst Samuel Buttrick of UBS Warburg.
The news spooked investors, who sent AMR shares down more than 23 percent to $3.77 on Wednesday.
Bankruptcy isn't imminent, analysts said, but the signs aren't encouraging.
"I think American can muddle through this year," said airline analyst Ray Neidl of Blaylock & Partners. "But the business model has changed permanently; American has to change, too."
American executives say, however, that they don't intend to change their strategy. They still aim to carry many more high-paying business fliers than the low-cost carriers by emphasizing American's global network and frequent flier perks.
American believes that plan will work, but only if it can cut spending by $4 billion a year.
Mr. Campbell said he has found $2 billion in cuts. The hard part ahead is persuading its employees to shoulder the rest.
"I absolutely think that we can be a tremendously successful airline – with competitive labor costs – without having to use the bankruptcy process," Mr. Campbell said.
Changes in schedule
AMR also will continue to tinker with its schedule. American Airlines will fly 2 percent less capacity this year, using regional carrier American Eagle to fill the gaps. American's international schedule – where it's seeing better results than on domestic routes – will grow 7 percent in 2003. A more immediate problem: American now thinks its costs – measured by each seat mile flown – will rise slightly this year, despite the aggressive cost cutting.
That's bad news when there's no sign of a recovery in the crucial business travel market and with the lingering threat of a war in Iraq.
The cost problems include higher jet fuel prices, health care costs and raises due various employee groups, some of which AMR has asked the unions to forgo. Mr. Campbell predicted passenger traffic will be flat this year, meaning there isn't much chance that revenue will grow fast enough to offset those higher costs.
Low-cost competition
The rapid growth of low-cost carriers such as Dallas-based Southwest Airlines Co. has also hurt. American now faces low-fare competition on 82 percent of its routes, up from 75 percent this summer, Mr. Campbell said. "We don't have any pricing power out there," he added.
It shows in the numbers. AMR's 2002 revenue was $17.3 billion, an 8.8 percent drop compared with 2001 and 14 percent off from two years ago.
AMR actually beat analysts' estimates for the fourth quarter, losing $3.39 per share, or $529 million. Wall Street had predicted a $3.73 per share loss.
The company lost $798 million in fourth quarter 2001. But the year-end loss – including about $1.5 billion in special charges – surpassed the $1.7 billion in red ink recorded in 2001.
There's no easy way out. Saddled with $20 billion in debt, AMR has few options to raise money, such as mortgaging some of its 1,105 aircraft for cash. Investors' appetite for used aircraft has disappeared since Sept. 11, 2001.
American said it needs to renegotiate conditions of $800 million of debt due June 30, and Mr. Campbell said he's optimistic that the company will win more workable terms.
Another problem is AMR's pension plan. The sagging stock market and low interest rates have hurt AMR's pension performance, as they have with most big companies. American will take a $1.1 billion noncash charge – meaning it doesn't count against quarterly earnings, but does affect its balance sheet – to fix the pension shortfall.
Other financing in doubt
The company's access to other financing is "very uncertain," Mr. Campbell said. Major credit rater Standard & Poor's Inc. said Wednesday that it would downgrade some of American's debt ratings because of mounting losses. "I think my predecessor [former CFO Thomas Horton] said that after Sept. 11 that we were throwing the furniture into the fireplace," Mr. Campbell said. "One could say there's not a lot of furniture left in our house."
Mr. Campbell said he wouldn't confirm a Reuters report that AMR had hired a law firm specializing in bankruptcy.
He did say that all airlines are making prudent decisions in seeking out legal advice with the potential threat of another Persian Gulf War. United Airlines hired bankruptcy attorneys shortly after Sept. 11, 2001, and filed for Chapter 11 protection six weeks ago.
"This is a precarious time for American – we're living on borrowed money, we're losing millions every day, and we are up against forces that we have never encountered in our past," AMR chief executive Donald Carty said in a recorded message to employees.
Meetings with labor
All this news adds pressure to the meetings between American management and labor groups, the next one of which is scheduled for Friday. "These numbers came as no shock," said George Price, spokesman for the Association of Professional Flight Attendants.
The union has its own financial analysts preparing a report for its board in late February. "We were encouraged by the fourth quarter numbers because they were a lot lower than the last fourth quarter," he said.
Mr. Price couldn't say whether the airline's poor financial outlook would affect his union's approach to talks.
Most analysts expect American's unions to concede something in coming months, but wonder if such savings will be enough.
"Since bankruptcy is a very poor outcome for labor – not to mention shareholders – labor has significant incentive to negotiate," said Mr. Buttrick, the analyst.
E-mail [email protected]
