"Analysts: American, Continental Stronger"

Thursday, September 15, 2005

Analysts: American, Continental Stronger
Analysts See American, Continental Flying Above Bankruptcy Threat
By DAVID KOENIG
The Associated Press


DALLAS - Unlike two carriers that filed for bankruptcy this week, American
Airlines, the nation's largest carrier, has already cut wages sharply, eked
out a small profit and piled up more than $3 billion in cash. 

Analysts say American and Continental Airlines Inc., the No. 5 carrier, are
unlikely to follow rivals Delta Air Lines Inc. and Northwest Airlines Corp.
into bankruptcy anytime soon. But American which barely avoided bankruptcy
two years ago and Continental are also struggling with high fuel prices and
big pension obligations. 

If Delta and Northwest use the bankruptcy process to dump their pension
obligations and cut employees' pay, it could force American and Continental
to do the same, analysts say.

"The managements at Delta and Northwest are going to be very aggressive
about cutting costs. It's going to be tougher for other legacy carriers like
American and Continental to compete against all these bankrupt carriers,"
said Ray Neidl, an analyst with Calyon Securities. 

With the parents of United Airlines and US Airways already reorganizing,
four of the six legacy carriers those that existed before deregulation in
1978 are now in bankruptcy after four years of sluggish business travel, low
fares and high fuel prices. 

American's parent, Fort Worth, Texas-based AMR Corp., has lost $7.4 billion
since the beginning of 2001, yet it may be the strongest financially of the
traditional airlines. It earned $58 million in the April-June period,
despite a 47 percent jump in fuel costs to $1.35 billion. 

AMR sits on $3.4 billion in cash and short-term investments. 

AMR's relative health is due largely to the fact that it was the first major
carrier to sharply cut wages and benefits. In 2003, American's employees
agreed to $1.8 billion in annual wage and benefit concessions, most of it
from unionized pilots, flight attendants, mechanics and ramp workers. 

The airline's lawyers were poised to file bankruptcy papers if the unions
voted down the concessions, which left workers "forced to choose between two
very bad alternatives," said Ralph Hunter, president of the pilots' union.
American also cut thousands of jobs. 

Hunter said he doesn't see an immediate risk of bankruptcy but said that
American may seek to get more work out of the same number of pilots, or the
same amount of work with fewer pilots. He didn't rule out further pay cuts
but suggested that American would have to protect current pension plans to
preserve its recently improved relations with the unions. 

Chief Executive Gerard Arpey "can't make us do anything," Hunter said. "He
has to show us the consequences if we don't do what may need to be done."
That said, he added, "I've got some guys who want to burn the place down for
what we've already done" on concessions.

Union officials said AMR made a $74.4 million payment to the company's
pension plans on Wednesday, but it still has a sizable deficit $2.69 billion
at the end of 2004 and the company and its unions are lobbying Congress for
relief. 

Tommie Hutto-Blake, president of the flight attendants' union at American,
applauded the pension payment but said workers are worried by the new
bankruptcy filings. 

"They're scared they would be crazy not to be concerned," she said. 

Continental is no stranger to the bankruptcy process. It reorganized twice
in the 1990s, and many analysts credit that experience with giving the
Houston-based carrier lower costs than its rivals. 

Last year, Continental set out to cut another $500 million in labor spending
and has achieved $418 million of that, while negotiations continue with
flight attendants. The company posted a $100 million profit in the second
quarter and padded its cash and short-term investments to more than $2
billion. Continental's year-end pension shortfall was $1.58 billion. 

A spokesman said Continental was better positioned than other network
airlines but not immune to rivals getting a cost advantage from bankruptcy
protection. He said the company expected to "be a survivor." 

Jeff Brundage, American's senior vice president for human relations, said
the airline has cut $4 billion in annual costs without the help of
bankruptcy courts. He said the company is looking for new revenue, citing an
effort to perform maintenance for American and other carriers instead of
outsourcing the work. 

"American is restructuring right in front of their eyes," Brundage said.
"The difference is we're maintaining control of that restructuring instead
of handing it off to the bankruptcy judges, investment bankers and lawyers."


Keeping control of the company is a powerful reason for executives to avoid
bankruptcy, as is the cost of hiring lawyers, said analyst Bill Warlick of
Fitch Ratings. Beyond that, he said, "It's an admission that management has
failed. It's a loss of pride."

Philip Baggaley, an analyst for Standard & Poor's, said American and
Continental and other carriers could benefit if Delta and Northwest reduce
flights, leading to fewer seats and, in turn, higher fares. 

Analysts said they expected the bankruptcies to have little effect on
Southwest Airlines Co., the most consistently profitable U.S. carrier. 

Industry observers doubt that many Delta and Northwest passengers will
switch carriers. They said consumers are getting used to bankrupt carriers. 

"United filed for Chapter 11 and they're selling all their product," said
industry consultant Michael Boyd. "Chapter 11 is just a change in legal
proceedings." 

AMR shares fell 27 cents to close at $11.86, and Continental shares fell 44
cents to close at $11.71, in trading Thursday on the New York Stock
Exchange.


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