Concessions don't mean American is in the clear By Dan Reed, USA TODAY No other airline has ever accomplished what American Airlines pulled off= =20 this week. But even getting $1.6 billion in concessions from its three=20 unions to avoid an immediate bankruptcy-protection filing may not be enough= =20 to keep the world's biggest airline out of Chapter 11 for long. Despite=20 cutting labor costs by a fifth, its cash is running low, lenders have cut=20 it off and, with travel demand remaining weak, it still can't make money.=20 CEO Don Carty made that clear in his stump speech pleading for employees'=20 votes approving the deals. The concessions, he said, "won't guarantee that= =20 we won't have to enter bankruptcy sometime farther down the road ... but it= =20 gives us a fighting chance." Wednesday, members of the Association of=20 Professional Flight Attendants union, given an extra day to change their=20 minds, reversed their original vote and accepted their $340 million-a-year= =20 piece of the concessions package. Pilots and ground workers approved=20 similar concessions packages, effective May 1, on Tuesday. The deals=20 provide for 1.5% annual raises beginning next January and the possibility=20 of larger raises in the last three years if American hits certain financial= =20 targets. Now, with $1.8 billion in annual labor savings, including $200 million from= =20 management and non-union workers, locked in for six years, and $2.2 billion= =20 a year in operational and financial savings in the works, American must=20 tackle what some experts say will be an even tougher challenge. It must=20 find a way to make money competing against far leaner discount carriers=20 that now overlap it on more than 80% of its routes. It must do that at a=20 time when its traditional customers =97 corporate travelers =97 are= insisting=20 on low fares or skipping travel altogether. That's what the concessions and= =20 other cost cuts are all about. From 1994 to 2000, American parent AMR raked= =20 in $5.5 billion in profit using a business model aimed at attracting=20 high-fare-paying business travelers. American sold lots of discounted seats= =20 in the back of its planes, but made money selling lots of high-fare seats. In the past two years, that system, with its accompanying high costs, broke= =20 down dramatically under the weight of a weak economy, fears of terrorism,=20 war, growing competition with low-cost carriers and, lately, consumers'=20 concerns about the mysterious virus severe acute respiratory syndrome, or=20 SARS. Two big network airlines have already entered Chapter 11 bankruptcy=20 reorganization. US Airways, which filed last summer, "was the industry's=20 high-cost leader," says UBS Warburg analyst Sam Buttrick, and emerged from= =20 bankruptcy this month "as merely a high-cost carrier." Profits are unlikely= =20 this year and uncertain in 2004. United Airlines, American's closest rival,= =20 entered Chapter 11 in December. It has used bankruptcy protection to=20 extract huge concessions from its workers, but this week announced an=20 additional 12% reduction in service because of weak revenue. There's=20 considerable debate among experts as to whether it, or other high-cost=20 carriers, can avoid liquidation. "It is inevitable that some of the=20 high-cost network carriers will disappear from the marketplace," says=20 consultant Michael Roach of Unisys R2A in Hayward, Calif. Some of those big= =20 airlines "will refuse or be unable to get their costs down enough to= compete." Fitch Ratings, in a report issued Wednesday, said American's successful=20 labor-cost restructuring "does not ... eliminate the ongoing credit=20 challenges that will continue to complicate the airline's effort to=20 generate strong cash flow and begin the process of rebuilding" its=20 decimated balance sheet. The winding down of the war with Iraq should=20 produce some improvement in travel bookings, the ratings firm said, but=20 American, like other big traditional carriers, "continues to struggle with= =20 a destructive pricing environment, weak business travel demand and=20 stiffening competition from low-cost carriers." High costs remain its=20 biggest problem. The $4 billion in annual cost cuts American is=20 implementing will reduce its disadvantage in costs per seat mile vs. the=20 likes of Southwest from about 50% to just under 30%. Roach and some others= =20 say that's not enough. Carty says it is. American, he says, can generate a= =20 30% premium in revenue for each seat mile it flies compared with what=20 Southwest gets. That's because American can sell first- and business-class= =20 tickets and some of its coach seats at much higher prices than can the=20 strictly low-fare carriers. American is not generating 30% revenue premiums= =20 now, Roach says. Even if its reduced costs were already implemented,=20 American still would be losing money in today's environment, he says. But=20 American says it would be near break-even. In the late-1990s, when the nation's economy was being driven to dizzying=20 heights, American's business model =97 the one used by all the big carriers= =20 except Southwest =97 worked magnificently. They filled lots of seats in the= =20 back of their planes with leisure travelers flying on cheap tickets that=20 kept them competitive with the discounters. But up front, they made money=20 by charging business travelers much higher prices. Working on the long-held= =20 industry assumption that business travelers were insensitive to price but=20 very much driven by time and convenience considerations, the big airlines=20 spent lavishly on aircraft, facilities, people and programs, and on=20 operating the vast route networks necessary to attract high-fare-paying=20 business travelers. And AMR soared higher than them all. Its peak year was= =20 1998, when it earned $1.3 billion. American, like United, has suffered from= =20 misfortune. Both airlines had two jets hijacked in the Sept. 11 attacks.=20 Two months later, an American jet crashed in Queens, N.Y. Then in December= =20 2001, a terrorist on an American jet tried to blow up the plane by=20 attempting to set off explosives in his shoes. Now, the war and SARS are=20 choking international travel. But some experts say American planted some of= =20 the seeds of its current financial distress. Missteps: Costs got out of control. American's costs skyrocketed, going from 9.4=20 cents to fly one seat mile in early 1990 to 11.8 cents in early 2001 =97 a= =20 26% increase. The airline's ground workers and flight attendants unions=20 pushed for and got industry-leading contracts in 2000 and 2001. Its pilots= =20 union, in contract talks for more than two years now, didn't give up the=20 goal of an industry-leading contract until fall, when US Airways was=20 already in bankruptcy-court protection and rival United was pleading with=20 its workers for concessions to stave off a filing. Management went on a=20 spending spree. The airline placed orders for 600 new Boeing planes and=20 invested billions on airport-expansion projects. Disappointing mergers. In= =20 November 1998, it spent $124 million on the nearly bankrupt West Coast=20 carrier Reno Air, mainly to keep it from going to United. The pilots union= =20 protested with an 11-day sickout that cost American millions of dollars. In= =20 the end, it abandoned nearly all of Reno's routes within three years. But=20 in 2001, Carty went back to the merger well, paying $742 million in cash=20 for the assets of TWA. American took on an additional $3.5 billion in debt.= =20 This time, Carty was careful to get the acquiescence, if not the blessing,= =20 of his pilots first. The deal initially was hailed as a genius move that=20 would again make American the biggest airline in the world and deliver a=20 gut punch to United in Chicago. The plan was to shift lower-fare connecting= =20 traffic in the Midwest to TWA's old hub in St. Louis, leaving more American= =20 seats at Chicago to sell to high-fare business travelers =97 at United's= expense. But by the time the deal closed in April 2001, the downturn had begun. Five= =20 months later, planes hijacked by terrorists crashed into the World Trade=20 Center in New York, the Pentagon in Washington and a field in Pennsylvania.= =20 American's layoffs since then have just about equaled the number of TWA=20 people it acquired, though the St. Louis hub remains open. Carty gets lots= =20 of criticism for the TWA deal. Many, including lots of employees, say that= =20 money would have helped the company survive the downturn. But even Phil=20 Baggaley, who as a debt analyst at Standard & Poor's dislikes mergers in=20 general, says the deal "was a pretty good one, done at a very attractive=20 price, that made sense strategically at the time they did it." In=20 hindsight, he says, "The timing couldn't have been worse. But it's hard to= =20 criticize management for that." A more fair criticism, analysts say, is=20 that American's management, long considered the most technologically savvy= =20 in the industry, failed to comprehend the real impact of the Internet as a= =20 distribution tool. As recently as last May, Carty told a reporter, "You'd have to sell an=20 enormous number of really cheap tickets" via the Internet to negate the=20 distribution cost savings made possible by the Internet. But by fall,=20 Carty, in speeches and interviews, had begun listing Internet ticket sales= =20 as a prime factor in American's loss of pricing power over its own=20 services. In its quest for an ever-larger share of the business-travel=20 market, American did the unthinkable in 2000 when it removed 12 rows of=20 seats from every plane to give passengers more legroom. For years, airline= =20 executives had dismissed consumers' pleas for more legroom, saying fewer=20 seats meant fewer tickets to sell. Prices on the remaining seats couldn't=20 be raised enough to offset lost revenue. But with its "more room throughout= =20 coach" program, American bet big that it could steal from rivals a larger=20 share of business travelers willing to pay a small premium for comfort. Now, low-cost carriers are growing rapidly, stealing market share from=20 American and other big carriers. Many analysts, like Roach, argue that=20 business travelers are concerned about price. Still, American's management= =20 is getting some praise for trying to reduce costs without resorting to=20 bankruptcy protection. Carty has been lauded for trying to preserve as many= =20 jobs as possible and for not stiffing creditors in bankruptcy court months= =20 ago. "Carty deserves credit for sticking his neck way out to try to keep=20 this thing out of bankruptcy," says Patt Gibbs, co-founder of the flight=20 attendants' union, who waged public battles with Carty's predecessor,=20 Robert Crandall, in the 1980s, The risk is a bankruptcy-court filing down=20 the road would "destroy his credibility not only with the employees, but, I= =20 imagine, with the creditors and the investment community too." *************************************************** The owner of Roger's Trinbago Site/TnTisland.com Roj (Roger James) escape email mailto:ejames@xxxxxxxxx Trinbago site: www.tntisland.com Carib Brass Ctn site www.tntisland.com/caribbeanbrassconnection/ Steel Expressions www.mts.net/~ejames/se/ Site of the Week: http://www.carstt.com TnT Webdirectory: http://search.co.tt *********************************************************