Costs key for AMR; fleet, routes need work: experts
Costs key for AMR; fleet, routes need work: experts
Wed Nov 30, 2011 11:43pm GMT
By Kyle Peterson and John Crawley
(Reuters) – Bankruptcy will help American Airlines slash costs, but Chapter 11 is not a silver bullet for operational problems that dropped American from its top position among U.S. carriers to No. 3 in the last few years, experts say.
The AMR Corp (AMR.N) unit declared bankruptcy on Tuesday, citing a cost structure that put it at a disadvantage against rivals. The company has not set a target for cost savings, but says “everything is on the table” and that it will be more efficient post-bankruptcy.
“I don’t think any of the cost cuts are going to solve the problem,” said Robert Mann, an airline consultant and former AMR fleet planner. “There’s an equally serious revenue problem, but that’s tougher to address.”
American has long complained its labor costs, in particular, are higher than those of competitors such as United Airlines (UAL.N) and Delta Air Lines Inc (DAL.N) that restructured in bankruptcy and later found merger partners. United bought Continental Airlines and Delta bought Northwest airlines.
But American also operates an aircraft fleet featuring out- of-date and inefficient aircraft the carrier still leases. AMR said in court documents it wants to shed unwanted leases for 24 aircraft.
“Those cost problems don’t address the top-line revenue problem, which is that American now has a tier-three network,” Mann said. “They are now third choice (for business travelers) behind United Continental and Delta-Northwest.”
ROUTES AND NETWORK
American will scrutinize its hubs, routes and alliances for signs of weakness. AMR Chief Executive Tom Horton said on Tuesday the airline may shed capacity “modestly,” but gave no hint of a major network overhaul.
Jamie Baker, an airline analyst at JP Morgan, said in a research note that capacity cuts are “more likely than not.”
“Airlines have consistently utilized Chapter 11 as a means of culling unproductive, unprofitable flying. As the only loss-producing airline of size, AMR should have little difficulty in identifying where to cut,” Baker said.
“We expect Chicago to emerge as one such candidate,” Baker added, noting Chicago’s O’Hare airport is a hub for both American and United Airlines.
“Notwithstanding initial management commentary, we expect no less than a 10 percent (capacity) reduction.”
Mann said American’s hub in Los Angeles may also be ripe for cutbacks on less profitable flying, but he said the carrier needs to beef up flying on Pacific and Atlantic routes that are valuable to business travelers.
An AMR spokesman declined to comment on whether any of its hubs were targets for service reductions.
The airline has a hub-and-spoke service strategy targeting “cornerstone” markets — major cities that are home to big businesses.
Former Continental Chief Executive Gordon Bethune told Reuters American’s hubs are solid in Chicago, Miami and Dallas.
“They keep their network,” Bethune said. “They have a great network. That’s not the problem. They have a cost structure that does not work in this environment. Some is the cost of people and some is fuel and the equipment they have.”
LABOR AND FLEET
By several estimates, AMR’s labor and fleet costs are raging out of control. The airline struggled with labor costs, despite concessions from unionized workers in 2003.
Those concessions enabled it to avoid Chapter 11 at the time, but they came up short of cuts made by rivals who also shed pension obligations in bankruptcy.
American has been mired for years in contract talks with key work groups, including its pilots. Contract talks with pilots hit a stalemate recently over wages, benefits and work rules. Talks with unionized flight attendants have also stalled.
One analyst, Basili Alukos with Morningstar said AMR can save between $1.2 billion to $1.5 billion in labor costs. If AMR can dump its defined benefit pension plan it can shed nearly $7 billion in debt, Alukos said.
AMR’s fleet expenses also are uncompetitive because the carrier owns or leases more than 200 outdated gas-guzzling MD-80s, many of which are not even in active service. The carrier has undertaken a major fleet modernization.
Speaking at an aerospace conference in New York on Wednesday, John Leahy, sales chief of plane-maker Airbus (EAD.PA), said he expects AMR to dump older, less-efficient aircraft more quickly as it restructures.
“I think you’ll see a faster renewal of their fleet,” Leahy said.
Jim Albaugh, the chief executive of Boeing Commercial Airplanes, said at the same conference that he expects American to restructure some aircraft leases.
Some experts believe, however, that AMR, which placed a giant split order for 460 single-aisle jets worth up to $40 billion with Boeing and Airbus this year, could retreat from a portion of the order with Boeing that is not yet firm.
WELL-TRAVELED PATH
United Airlines spent more than three years in bankruptcy during which it restructured leases, retired older aircraft and launched more international flying. It also terminated pension plans, slashed union contracts and cut thousands of jobs.
United, which cut its costs by $7 billion, preserved hubs in Chicago, San Francisco, Washington, and Denver, but it struggled for four years to find a merger partner while the other big bankrupt carriers between 2002-07 all strengthened their business with deals.
US Airways, which restructured in bankruptcy twice before merging with America West in 2005, also cut pensions and emerged with a leaner workforce. That carrier cut more than $2 billion in costs.
Delta shed debt in bankruptcy and cut about $1 billion in labor costs and added more than 60 international routes to escape low-fare competition in the United States.
(Reporting by Kyle Peterson and John Crawley; editing by Andre Grenon)