"Is recovery at American Airlines losing altitude?"

Sunday, July 25, 2004

Is recovery at American Airlines losing altitude?
BY DAVID KOENIG
The Associated Press


FORT WORTH, Texas - After staving off bankruptcy a year ago, American
Airlines slashed costs below many of its competitors and its executives
talked brightly about returning the largest U.S. carrier to its former
glory.

Analysts praised American, which eked out a tiny profit from April to
June - only its second winning quarter in three years of crushing
losses. Investors bid the stock price up for a time.

Now, however, fresh doubts emerge about American's ability to regain its
strength against the tide of high fuel prices, which have wiped out hope
that the carrier might earn a profit this year, and an onslaught of
competitors pushing low fares even lower.

More ominously, there is scant evidence that American, a unit of Fort
Worth-based AMR Corp., has figured out how to win customers away from
other airlines and bring in more revenue. American now faces competition
from low-cost rivals on nearly 90 percent of its routes, frustrating the
company's plans to raise fares.

And, some employees are growing restless a year after taking huge pay
cuts that helped save the airline.

Flight attendants pepper Internet chat rooms with complaints about being
overworked because thousands of colleagues have been laid off.
Attendants on long international flights said they were denied meal and
rest breaks because crews were understaffed. They filed a complaint
through the union, and an arbitrator ruled in the union's favor -
awarding back pay of $9 million to $14 million, which the airline must
pay in October.

All this helped drive down AMR stock 6 percent one day in July after the
former president of the pilots' union suggested that American might not
survive in its current form.

Phillip Baggaley, an analyst with Standard & Poor's, says the pace of
American's recovery "is disappointing and may be stalling out."

Just a year ago, American was at the breaking point after more than $6
billion in losses caused by the recession, the terror attacks of
September 2001, tougher competition from low-cost carriers, and
fundamental changes in the way that people buy airline tickets.

The company was hours, perhaps minutes, from filing for bankruptcy
protection until union employees barely approved a package of painful
concessions, including layoffs and double-digit pay cuts that saved
American $1.8 billion a year.

With those cuts, the company reduced spending on wages, salaries and
benefits by 16 percent through the first six months of 2004.

In early 2003, American had the second highest cost structure in the
U.S. airline industry. One year later, American's cost structure was the
lowest of the six so-called legacy carriers, the others being United,
Delta, Continental, Northwest and US Airways.

American is still not lean compared to low-cost carriers. Southwest
Airlines' cost structure is 15 percent lower than American's; JetBlue's
is 38 percent lower.

The savings helped AMR cut its first-quarter loss to $166 million from
the $1 billion loss a year earlier, and to post a $6 million profit in
April-June period. Analysts expect another small profit in the current
quarter, which ends Sept. 30.

"American is off the critical list," says CEO Gerard Arpey, who
sometimes lugs a small, rectangular sheet of metal with holes in it to
employee rallies and meetings with Wall Street analysts to prove that
American is committed to cutting bloated costs.

The grill provides the foundation for airplane seats. Until recently,
American used to buy the supports for about $1,000 apiece. Now,
employees make them for $157.

Fourteen-dollar Italian blankets offered to customers during flights
were replaced with $8 throws from China, and American saved $600,000 on
silverware by buying plastic utensils in an Internet auction.

"We can take pride in the progress that all our employees have made.
We're a very different company than we were a year ago," he says.

But the other side of the ledger - revenue - is more challenging.

American's planes have grown progressively more full over the past year,
but competition from low-cost carriers has prevented the airline from
raising fares.

"It's a difficult yield environment," Arpey said in a recent interview,
using the industry's term for revenue per passenger. "I don't see
anything on the horizon that's going to change that."

American is expanding its capacity about 6 percent this year, mostly on
international routes. It is operating some planes more often and
reinstalling seats that were taken out to make more legroom.

The extra flights and seats contributed to a 9.9 percent increase in
second-quarter revenue, even though revenue per seat - a closely
followed measure in the airline industry - rose only slightly.

The problem with adding capacity, analysts say, is that everyone else is
doing the same thing, making it even harder to raise prices. Ray Neidl,
an analyst with Blaylock & Partners, says American has shown it can cut
costs and now needs to raise more revenue per passenger.

One way to do that, Neidl says, would be to focus on international
flights, hubs at Dallas, Chicago and Miami, and routes with a heavy dose
of lucrative business travelers, such as New York to Los Angeles - and
leave routes ruled by frugal leisure travelers to the low-cost airlines.

Union leaders say employees have done their part by absorbing layoffs
and pay cuts, and now management needs to figure out how to beat the
competition.

"All we did is buy some time," said John Darrah, whose term as president
of the pilots union ended in July. "If all they do is take our
concessions and don't solve the company's other problems - if they don't
figure out how to compete domestically - the next downturn in the
airline industry may be our last."

ON THE NET

American Airlines: http://www.aa.com/


 Do you have an opinion about this story?
Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/dcfp/dcboard.php


*****************************************