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« How the Weeks Ahead Will Shape AMR In The Years To Come »

The biggest story in the U.S. airline industry right now is, of course, American Airlines’ parent company seeking Chapter 11 bankruptcy protection. After a flurry of initial filings and some alterations at American Eagle, there hasn’t been a lot of movement from AMR.

The lack of news from it or the bankruptcy court probably has a lot of people - union leaders, media, employees, communities – wondering what is taking so long. That’s the first key to understanding this airline bankruptcy is different and why other airlines such as United, Delta and Southwest as well as the federal government and even regional carriers are keenly watching and waiting.

Unlike all the other airlines that have gone through Chapter 11, American doesn’t have a Debtor In Possession (DIP) lender breathing down its neck. That’s because the AMR board of directors made a strategic decision to file for bankruptcy with more than $4 billion in cash in the bank. That’s more cash than any airline that’s ever entered bankruptcy has had on hand and one of the highest totals in U.S. corporate history.

That gives AMR and American some flexibility to run its business during the initial period of exclusivity, protect its interests and, most importantly, time to ensure that its ultimate plan of reorganization (POR) is the very best it can be. While time is still of the essence to put forth a POR, it gives the debtor (AMR), time to look carefully at its network (mainline and regional partner), its labor contracts, its fleet and then make unhurried and potentially dramatic changes.

When United filed in December 2002, the DIP lenders and creditors demanded interim labor deals within 30 days, some even hammered out on Christmas Day. Delta and the Old US Airways faced similar pressures. As much as is possible in the bankruptcy process, American controls its own fate. It needs to use the time it has to get this right and make sure its labor costs and operations are where they need to be when it emerges. If it doesn’t, I don’t believe American in its current form gets a second chance.

A quick aside: This is usually when AA employees harrumph they gave millions in concessions to management in 2003 and that should balance what other airlines gained in bankruptcy court. I have the greatest respect for what American’s unionized employees tried to do back then, but it was apparent by 2006 those concessions weren’t enough. United, US Airways and Delta’s labor cost competitive advantage continues to pound American. The Airline Data Project (ADP) numbers show American’s employees get paid more, work less and have a range of benefits that are distant memories for peers at other airlines. That’s not an accusation; it’s simply the way the industry restructuring unfolded.

It’s also why all the other airlines, including venerated low-cost carrier Southwest Airlines, are nervously waiting to see what American looks like when it emerges from restructuring.  Following AMR’s Chapter 11 filing, Southwest CEO Gary Kelly posted an open letter to employees saying American, and the other major carries that went bankrupt, did so because of “high costs” and that “Great Customer Service cannot overcome high costs.”

I view Kelly’s letter as an important glimpse into what became American’s inevitable bankruptcy filing and what it means for the rest of the industry.

Kelly said he expected American to become leaner and warned, “If they do emerge from bankruptcy, as I believe they will, they will join the New United, New Delta, and New US Airways as giant, lower-cost airlines. They are, collectively, much more formidable competition than their predecessors. The term “Legacy Carrier” no longer will apply.”

In what had to be a stunning admission to most Southwest employees, Kelly also said, “We currently do not have a sufficient cost advantage to stimulate the market because our fares are much closer to our New Airline competitors.”  In effect, this is what I’ve been saying for years: the “Southwest Effect” is dying, if not dead.

If that’s the feeling in the executive suite at the most consistently profitable airline in aviation history, then I can only imagine how raw nerves must be at Delta, United and US Airways.

American’s filing is the airline industry’s version of “Freaky Friday” with role reversals that have long-term implications. Delta’s pilots are next up in negotiations and, like American did for the last several years, management will essentially be negotiating against itself. Remember, it was just within the last year plus that a significant number of Delta’s pilots began earning more than their colleagues at American… and that was with an infinitely more flexible scope clause that permits the higher pay at the mainline. Delta will be left negotiating improvements to the highest cost pilot contract in the industry knowing American will attempt to emerge from Chapter 11 with significantly improved scope and much lower costs. That’s essentially what American faced from Delta in 2007.

The recent NMB rulings upholding election results afford Delta only a temporary reprieve from unionization efforts. I can all but guarantee Delta will face additional organization campaigns, forcing it to, once again, spend millions to counter labor representation drives with no assurance it won’t be saddled with costly union contracts.

At the new United, the world’s largest airline might be facing world-class headaches. Integrating Continental pilots into the system is already shaping up to be a long, contentious fight, especially as many of Continental crew currently enjoy better pay rates than United peers. Continental flight attendants make considerably more per hour than their United counterparts. Those facts should not only make United’s future negotiations lively, but also mean it will likely have higher costs than a correctly restructured American.

It’s not just big brother that will garner all the scrutiny either. Eagle has already shed leases and announced potential layoffs. When AMR exits restructuring, the once-for-sale Eagle could look completely different and potentially pose real competition to SkyWest, Republic and the apparently spiraling-toward-Chapter-11 itself, Pinnacle Airlines. With American’s fleet purchase plans and a revamped Eagle, momentous change is potentially in the offing for regional airlines as well. I’ll have more on that at a later date.

As I outlined in my last post, American’s payroll is proportionately out of whack compared to its major competitors. A quick glance at the ADP numbers shows every carrier that’s gone into bankruptcy since 2002 has seen a double-digit reduction in workforce within one year of filing. That doesn’t include the nearly 25,000 jobs Delta shed in the four years prior to going into bankruptcy. Those statistics are small comfort to the employees at American who will likely lose jobs, but there is no disguising the pain this type of necessary transformation causes.

Layoffs will get the bulk of the media and general public’s attention, obscuring changes – scope, productivity, benefits – that will have more far-reaching effects. An American that comes out of Chapter 11 with significant changes in those areas potentially sends tsunami-sized ripples through the industry – particularly the flying within the U.S. domestic industry.

Yet the federal government, industry observers and, likely, the media, will spend considerably more time and hand-wringing on another hot button issue: pensions.

Pension Benefit Guaranty Corporation (PBGC) Director Josh Gotbaum has been very vocal about what he thinks AMR should do with its industry-leading pension plans. In short, he doesn’t want them to become PBGC’s problem. Gotbaum is also very quick to point out the additional burden AMR’s pensions could add to the $26 billion deficit the PBGC currently faces.

A couple of things strike me about the pension issue. Gotbaum has questioned American’s commitment to employees, which I find a bit wrongheaded since the airline spent eight years in a good faith effort to keep its pension obligations off the PBGC rolls. 

Gotbaum said American Airlines employees could lose one billion dollars in pension benefits if the airline terminates plans. That’s a bit misleading as all of the carrier’s employee pension plans are not created equally.

Like employees at the other bankrupt airlines, the majority of employees at American will most probably get their pension benefits in full. In 2012, the maximum PBGC payout is going to be more than $55,000 for those who retire at age 65. That’s more currently than the average American ground worker and flight attendant makes. The pensions really at risk will be those of the people who can most afford it – management and pilots. The bottom line is if American terminates its plans, the PBGC will do what it was designed to do: protect the investments of the working class.

AMR’s bankruptcy process will likely dominate the airline industry’s financial and economic headlines in 2012. What happens in the next few weeks and months as the new American (and Eagle) takes shape, though, will be felt by employees, competitors and taxpayers for years to come.

More to come.

 

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Reader Comments (15)

I believe Mr. Swelbar is spot on with talk of a "correct" restructuring. If AA doesn't emerge as a lean, mean fighting machine and continues to be just a slightly parted down version of its current self, well then, it will only be a matter of time before they go the way of the Dodo.

01.3.2012 | Unregistered Commenterwhenry

Not one time in your article did you mention cuts at the top, which from I have read recieved many bonuses while the bottom continued to get nothing. Not surprised though really its the way of the world to blame the ones on the bottom for everything because you all think we lack education, you are sadly mistaken.

The process will be pro forma while limited to input from the heads on hand (those that elected to run it into bankruptcy) only getting interesting when those heads lose their exclusivity to file a POR. Then watch the gauges start to wake up.

01.4.2012 | Unregistered CommenterLongTimeObserver

I am very surprised, in reading this artcile, that you don't address the cost of 'labor' of management - their hundreds of millions of dollars in bonuses they received, EVEN WHEN THE COMPANY WAS LOSING MONEY. Hmmmm...labor costs too high? Yes....all from the unions? No. I also take great exception to you saying the pilots can most afford to lose their retirements. They took huge cuts in 2003 to keep their retirements....Don't make it sound like we are all living high on the hog. At least present the facts as they are, not as only you see them. Most of the analysts have pointed this out but you did not.

01.6.2012 | Unregistered Commentersurprised in nh

It's funny the only go-to comment that anyone anti-management can think of is the "hundreds of millions in exec bonuses". Seriously, is that the best you can do? Do your homework and look what executives are paid at other companies of similar size. I'm not an executive and have no skin in the game, but you can't pay these people any less and expect them to stick around. The fact of the matter is that bloated wages and benefits of workgroups that are 100x the size of management have a lot more of an impact in driving sustained profitability than bonuses that were paid out in poor taste once years ago. Those bonuses are long gone - but the poor productivity, extremely generous benefits, and wages out of line with reality remain.

01.6.2012 | Unregistered Commenterjust thinking...

Ok, besides the bonuses management has come up with the ridiculous cornerstone plan, and completely gave up BOS and Caribbean flying, failed to modernize their fleet, and was completely void of innovation that the predecessors at AMR lead the industry with.

01.7.2012 | Unregistered CommenterHmmm...

Oh and watch themselves go from largest carrier to 3rd or 4th place while losing corporate contracts and failing to expand internationally (Asia) .

01.7.2012 | Unregistered CommenterHmmm...

The reason AA gave up on BOS and Caribbean flying is because there is no way they could compete with Jetblue. Jetblue has a much better product and much lower costs. Taking on Jetblue in those markets would have resulted in a much quicker filing for Chapter 11.

Let's all remember that those "bonuses" were not bonuses. They were part of their contracts and were paid out with stock, which affected the company's bottom line very, very little. Not to mention the fact that the unions approved of the formula and the process of these payouts.

Let's just be honest and remember that AA got to the place it is today (bankruptcy) because both management and union leadership refused to innovate.

01.9.2012 | Unregistered CommenterRichard R.

I find that idea that roles are reversing - and that American could emerge as a lean, powerful competitor - to be a compelling one. However, in order for that to happen there is going to be have to be a detente between labor and management. Additionally labor is going to have to recognize and accept that painful cuts will be a key part of this process.

The unions have several chances to accept fair, if not overly generous, new contracts. Their failure to do so led AA to where it is today. If they fail again the consequences are too terrible to consider.

01.10.2012 | Unregistered Commentermalcontent

I am so sick of reading about labor costs at AA - without one mention of adding management's salary into the mix. They (AA managers) are the highest paid in the industry at any level by far. It just goes to show you that big business controls everything - including the media. I would like to punch all you scumbag, anit-union - silver spoon jackwods, right in your lying teeth.

01.10.2012 | Unregistered CommenterSteve Buschemi

Ahhhhhh....those poor, underappreciated and unrespected Executive Leaders at AA will be crying all the way to their 23 million dollar pad in London. Mr. Swelbar, you just don't get it.

01.10.2012 | Unregistered CommenterDave

Management and all management. Bought TWA and dovetailed all their employees into ours. WRONG.Made Raliegh Durham/ San Jose Hubs. WRONG. All the different Manufactures of Planes and there inventory costs. Douglas/Boeing/ AirBus/Focker Wrong Wrong Wrong.In 50s, 60s and 70s. Management salaries/bonuses amounted to maybe at most 4x the saleries of the working man. Today that exceeds triple that or more. And the excuse we need to retain these people to move forward. Heck they were the one's that drove us backward and into the ditch.

01.11.2012 | Unregistered CommenterJust a Plain Joe

"They (AA managers) are the highest paid in the industry at any level by far."

Love to see some data on this.

01.11.2012 | Unregistered Commenterjust thinking...

A couple of observations.

1.) Top management salaries and bonuses are a drop in the bucket compared to the overall payroll expense of any business, not only airlines. That doesn't mean they're justified, especially when a business is performing marginally at best. Excessive bonuses send a bad message at a time when cooperation is needed. The only saving grace is that much of these bonuses were paid in stock, which is now virtually worthless, so the bonuses have ultimately reflected the executives' performance.

2.) The current situation with the airline industry is parallel to what occurred 30 to 40 years ago with the freight railroads. The industry had grown far too large for the emerging market and the carriers were unwilling or unable to adapt to the new realities of the marketplace. At one time, the railroads were so large an economic force in this country, they had their own Dow-Jones index (what is now the Transportation index was the railroad index). Massive government investment in the Interstate highway system and other infrastructure, along with crippling regulation and labor contracts (If you think airline contracts are bad, you should have seen the railroad contracts) made it impossible to compete with trucks or "right size" their operations to fit the new reality. There were many bankruptcies that only provided band-aids.

Then came the seventies with three major events; the creation of Amtrak, to relieve the carriers of the burden of passenger service and the bankruptcies of the Penn Central (along with virtually every other northeastern railroad; the exceptions being the coal haulers; Norfolk and Western and Chesapeake and Ohio that are now the "legacy companies" behind today's Norfolk Southern and CSX) along with the Milwaukee Road and Rock Island in the mid-west. Most of these railroads were essentiallly liquidated, either through physical plant abandonment or financially.

Then came the Staggers Act. Railroads were then free to merge or otherwise restructure. The upshot of all of this was massive, permanent job loss. I don't remember the exact figures but the losses were in the millions of jobs, somewhere in the range of 2.5 million jobs reduced to some 500,000 or fewer. The total track miles shrunk by 40% or more.

The bottom line is that this kind of restructuring is not unprecedented. How many people are employed in the buggy whip industry? The airlines didn't know how to handle deregulation. They grew too big for the new reality.

If past is prologue, and the railroad model holds, the airline industry will consolidate into four large network carriers (United, Delta, American/USAirways and Southwest/AirTran). I think it's also quite possible that Delta's apparent desire to acquire American is a push for two large legacies instead of three. There will also be massive consolidation in the regional sector with no more than three survivors (that seems inevitable given the recent Mesa bankruptcy, the Pinnacle financial mess and the likely demise of 50 seat regional jets). There will also be room for a few niche carriers such as Allegiant, Alaska, Hawaiian, etc. Service to small cities and towns will be "rationalized" to fit the new market and financial realities.

If past is prologue, bellieve the AMR bankruptcy is only the beginning of the end game. There's more pain to come. But once the pain is over, the patients will survive and be strong, consistently profitable companies. Warren Buffett lost a bundle on old US Airways stock. He just took the Burlington Northern Santa Fe Railway private. That, to me, speaks volumes about the past, present and future of the airline industry.

01.13.2012 | Unregistered CommenterDesertGhost

I liked DesertGhosts' analogy and agree with his logic. I have been thinking the exact same thing for months especially on the airline merger outcomes.

I didn't see you mention it so I will. As far as Regional airline outcomes - I see: Skywest buying/merging with Eagle. ASA/Expressjet (completed merger), and Pinnacle/Mesaba/Colgan coming out of bankruptcy with a much stronger and unified labor contract. What to make of Comair? I think they will be Delta's pet project actually and will hang around as a balancing force (weak link in the chain) that will end up keeping the Skywest beast in check. I also think that Air Wisconsin may be bought up long term by a major too if Comair is treated the same way as I think Delta will.

I think that scope will be a big fight in the new Delta contract as Delta pilots' try to push hard on that one only a few years after they gave it up. I heard a rumor that Delta Mgmt will try and get them to give up scope though in exchange for pay. Interesting times.

02.20.2012 | Unregistered CommenterAirline Pilot

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