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Friday
Sep182009

Nibbling on a Little Crow While Watching Eagles Fly

Yep, I was one of those observers not long ago suggesting that the current revenue environment would challenge certain carriers’ liquidity.  While not specific on those carriers I believed to be marginal, the supposition was always US Airways, United and American.  In that order.  Of the three, it was understood that American had more options as it had not yet played the cash for miles card. 

Well, that story played out yesterday when AMR announced that it had secured $2.9 billion in new financing, in part by selling a billion dollars worth of frequent flier miles to Citigroup. Meanwhile United is hinting that more liquidity raising efforts are ahead and Delta is in the market for $500 million.  American’s announcement makes it clear that the credit window remains open for carriers that have quality unencumbered assets to pledge and a reputation for paying their bills. But, I remain unconvinced that the window will stay open for all carriers operating today. 

The same day, American announced network and fleet changes I see as important steps the carrier is taking as a decision nears on its immunized alliance with British Airways. Those changes also can be read as important to the ability of American to forge a closer relationship with JAL. 

The Changing Face of the Domestic Market

While St. Louis has been a hub in name only for American in recent years, yesterday’s announcement that it would stop serving 20 cities out of Lambert and reduce departures to 36 per day pretty much provides the final eulogy for the former TWA.  Now if Delta would only do what it should and pull Cincinnati down to a similar size, much of the necessary work on dismantling unnecessary and redundant secondary, mid-continent hubs will be done. 

Unlike Delta, American has historically owned a strong position in New York; therefore, its announced changes to that critical dot on the airline map were minimal.  And assuming that American’s immunized alliance is granted, New York promises to be one supremely competitive market between STAR, SkyTeam and oneworld carriers in each the domestic and international markets.

Speaking of Alliances

American has absolutely no choice but to counter Delta’s rumored bid for JAL.  The opportunity to make London and Tokyo bookends to a focused domestic network provides the airline the opportunity to finally take advantage of Asia and sell Europe, Africa and the Middle East like their aligned peers. 

It’s no secret that US legacy carriers have their problems. But trust me when I say that the US carriers are productive, nimble and agile when compared to JAL.  At this point, it appears that American would be working in cooperation with, British Airways and Qantas to court the Japanese airline.

JAL needs major surgery.  But assuming that JAL survives the procedure, its recovery requires a presence in all major world regions.  That is why I like the fact that each of the critical players in the oneworld alliance are involved.  As Japan is almost certain to become an open skies country in the coming months, a healthier and allied JAL is critical.

For those concerned about competition in Tokyo, let’s not forget the presence of STAR in the form of ANA.  For those crying about poor little Delta, let’s not forget that Delta remains the largest single carrier in the world in terms of revenue.  For those that may cry foul over competition in the North Pacific, let’s not forget about Delta’s SkyTeam relationship with Korean.  And a case can be made that Seoul has become a more powerful hub than Tokyo largely because of JAL’s weakness and Korea’s aggressiveness. 

Lots of Happenings at American

This latest news is interesting in part because American has been forced to make many changes the hard way as its competitors cut costs through bankruptcy.   American has managed through crisis after crisis all the while toting around a cost and an alliance disadvantage versus most of its legacy peers.  Moving to renew its fleet in the midst of a nasty economic cycle is bold. 

But more impressive to me is the steady, targeted focus on the balance sheet that made yesterday’s liquidity raise possible. It’s not all pretty there. Management continues to struggle to come to agreement with unions on new contracts that won’t exacerbate the company’s competitive disadvantages, and that’s all the harder when union leaders continue to make demands that could not and cannot be met given the competitive environment.

Making this even harder is explaining that the improved liquidity position is only because of borrowing, not that the company has suddenly found the recipe for outsized profits.   

Labor:  This Is a $2.9 Billion DIP Loan……Without the Consequences for You

It is safe to say that no other US carrier could accomplish this type of a capital raise at this time.  Any near-term concerns that analysts or observers might have about American’s ability to meet its obligations should be quelled.  Clearly American management believes in the company’s future or it would not be investing in it.  After all, the quest of any company is to produce a return on that capital.

American just leveraged the future.  And if I am a union leader there I would want to tie my industry-best lot among the US legacy airline world to the carrier that just put its money where its mouth is.  To continue resisting changes critical to the company’s future profitability only leads to the propagation of the status quo. 

Yes, I’d make some demands. When the economy and the industry do recover, I would insist that some of my members’ earnings are tied to company performance.  That is real leverage – not the illusory leverage unions try to create by promoting the false belief that past concessions and 1990’s wages relative to inflation should be restored in an industry vastly changed.

There is ultimately going to be a recovery.  Like American’s decision to order aircraft anticipating the recovery, if I am labor at American I would want to get my negotiations done sooner rather than later.  Just think how little incentive there will be for companies to conclude negotiations during an economic upturn given the losses suffered over the past 8 years.  As I have written before, I am astounded at how much time labor spends negotiating downside protections versus provisions that enable the members they represent to participate financially on the upside – a scenario that promises much more than any negotiated increase in wage rates.

More on this.