News Column

Are Things Looking Up for American Airlines?

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One year later, with eight new labor contracts in place and after 5,500 court filings, AMR Corp. is getting closer to emerging from bankruptcy.

Industry analysts say the carrier will likely complete its restructuring by next spring, although it's still unknown whether American Airlines will remain a stand-alone airline or merge with suitor US Airways.

American has agreed to new labor deals that will save it hundreds of millions of dollars annually and has terminated expensive leases on gas-guzzling planes that were too costly to fly. The carrier has increased its average fares and maintained its cash balance at $4 billion throughout the restructuring.

But as the airline hits the one-year anniversary of its bankruptcy filing, analysts say management missed opportunities to dramatically change the Fort Worth company and its cost structure.

While pensions are frozen and employees and retirees are paying more for healthcare benefits, the labor contracts still don't give American enough flexibility to compete with bigger rivals United and Delta, analysts say.

"American, in my view, didn't differentiate themselves enough from the industry," said Bill Swelbar, an airline researcher at the Massachusetts Institute of Technology.

"There was a chance for radical surgery and instead they did selective surgery."

Accomplishments

When AMR filed for bankruptcy Nov. 29, 2011, the company had $4.1 billion in cash, so it did not need debtor-in-possession financing to continue operating.

Tom Horton, who was named chief executive that day when Gerard Arpey resigned, quickly went to work on the carrier's balance sheet, terminating leases at airports it no longer used and rejecting contracts on older airplanes parked in the New Mexico desert.

In February, Horton unveiled a restructuring plan intended to improve AMR's finances by $3 billion a year, with $1 billion in increased revenue and $2 billion in reduced costs, including restructured debt and employee-related cuts.

"We have completed really the vast majority of the financial restructuring," Horton said in October. "The savings we have achieved from those things have exceeded what was built in the original plan."

AMR's monthly unit revenue has steadily improved since the spring, and the carrier has signed new regional feed contracts with SkyWest and ExpressJet.

Recently, it renegotiated its financial contract with BNDES, the Brazilian Development Bank, on its 216 Embraer aircraft, giving AMR more flexibility on how it will operate the smaller regional jets.

In its most recent financial report, AMR said it improved its revenue by 0.8 percent to $6.4 billion in the three months that ended Sept. 30 as average fares paid by customers grew 3.5 percent.

However, the carrier posted a $238 million third-quarter loss, mostly from charges related to reorganization items and severance costs for buyouts. Without the charges, AMR would have made a profit of $110 million.

Since United Airlines, Delta Air Lines and Northwest Airlines all went through bankruptcy a few years ago, Horton and his team benefited by following the same game plan, said Greg Charleston, senior managing director at Conway MacKenzie.

"They have followed the blueprint to a T and accomplished a lot in one year," Charleston said. "I give them a lot of credit."

On the labor front, AMR froze pensions, reducing its liability by billions of dollars, and negotiated new lower-cost contracts with eight union groups, including flight attendants, mechanics and ground workers.

American had asked all employee groups to cut costs by 20 percent. But after months of negotiations, the unions, except for the pilots, agreed to cut costs by 17 percent.

"I think they've done as good a job as can be done, given the fractious relationships that existed going into bankruptcy," said Swelbar, who gives Horton's team a grade of B.

"Horton is going to be able to keep his promise that the company will emerge from bankruptcy in 18 months instead of wallowing in it for three years, like United."

Missed opportunities

While analysts agree that American has improved its balance sheet, they say the carrier has missed opportunities.

Profit margins are still below those of its main competitors, and labor costs remain relatively high, even with the new contracts, analysts say.

A contract agreement being voted on by pilots does not give American enough flexibility on code sharing and regional feed contracts, Swelbar said.

American had wanted to impose work rules that would allow for more comprehensive code sharing with other domestic carriers, such as JetBlue. But the bankruptcy judge ruled that the airline was overreaching.

Swelbar said expanded code sharing would have bolstered American's revenue, if it remains a stand-alone carrier, without adding unnecessary capacity to the industry.

"There were some opportunities to do something unique to the industry while their costs were going to come down," Swelbar said. "I don't know if American looks terribly different from the rest of the industry."

Without additional domestic capacity to funnel passengers to more profitable international routes, American will likely continue to struggle as a stand-alone carrier, said Bob Herbst, founder of AirlineFinancials.com.

A merger with US Airways would give American the domestic network it needs to compete with United and Delta, he said.

"American gave up a lot to get these labor agreements," Herbst said. "I just don't think they are going to have the revenue to support it."

Final steps

One major element still missing from American's restructuring is a new pilots contract.

The pilots rejected an offer in August and are voting on a new agreement that includes pay raises and a 13.5 percent equity stake in exchange for more regional-jet flying and work rule changes.

Voting will end Dec. 7.

"The pilot contract is the most important final hurdle, and I think upon reaching that agreement or not, we'll be prepared to put together the plan of reorganization," Horton said.

AMR has until Jan. 28 to file a reorganization plan with the Bankruptcy Court, and creditors will have 60 days to consider it.

Analysts say creditors and the court are unlikely to sign off without an approved pilots contract.

The unsecured creditors committee also appears to be considering a merger offer from US Airways supported by American's three largest unions.

Hunter Keay, an analyst with Wolfe Trahan, said that a new pilots contract would seem to help AMR emerge from bankruptcy on its own but that the Allied Pilots Association and the bondholders could have an unwritten agreement in favor of a merger.

"We believe a tacit agreement exists between [the pilots union] and the [creditors committee] simply because APA leadership is endorsing this [agreement] and APA leadership wants a merger with [US Airways]," Keay wrote in a research note to investors Friday.

"If APA members ratify the [agreement] and no merger is announced, we believe AMR pilots would move to recall much APA leadership."

But what the creditors decide is anyone's guess.

"Unsecured creditors, who may ultimately determine which direction the company goes, are a true unknown, and though we believe this group tends to side with AMR management, they may ultimately decide where the best value lies for their claims in reviewing all deals," Maxim Group analyst Ray Neidl told investors Monday.

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