Did AA plan this BK in 2003?

[WorldTraveler]

I wonder if the $5.00 hypothetical theory could be achieved by dipping into the golden parachutes or the bonuses?



I did not "jump" on E's analyses. I asked if labor costs were an issue. Question asked, Qestion answered.

diffusing the last several responses, there are no magic bullets that can turn around AA's labor cost problem.... and FWAAA is correct that mgmt pay amounts to next to nothing in terms of AA's overall labor expenses. AA's top 6 execs, per the proxy statement from April 2011, had compensation of less than $20M - 75% or more of which was in stock.
AMR's labor cost for all employees is running at more than $6 Billion per year - and that doesn't include all of the pension liabilities.
In fact the salary and benefits packages for the top 6 execs amounts to 1/3 of 1 percent of AA's total employee compensation.
Even if you add in the 45 other or so VPs, who are paid alot less than the top 6 execs- the number is inconsequential.
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again there are other airlines that have excess capacity and growth strategies that are dependent on growing into AA's key markets - which are also top industry markets. There is no room for AA to raise fares precisely because of the competitive pressures from other carriers.
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FWAAA,
in fact, for the first quarter, AMR's consolidated yield increased by 6.2% compared to 12% for DL and 12.7 for UA. AA's capacity growth at 2.7% was between UA's at a 1.4% increase and DL's at a 5% increase.

AA's yield growth has underperformed its peers for a number of quarters.
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AA's biggest competitive threats are the low cost carriers whose business plans are built on growth and who have wider differences between their costs and AA's.... that is why carriers like B6, VX, and WN are taking far bigger shares of AA's business than AA's network carrier peers.

 

[eolesen]

My analysis was flawless. Buck is only quoting part of it, and WT is obviously too wrapped up in self-importance to fact check his own novella.

I said essentially what FWAAA did earlier -- adding $5 to pay for raises sounds great, but never works because AA no longer has ability to control pricing, and won't get it back anytime soon, if ever. Raise prices when you don't control pricing, you drive demand down, and net revenue stays the same or worse. People either chase the $5 savings on someone else, or they stay home.

Anyone who worked in or around sales or RM should recognize that concept. It was covered on Day One of training.

 

[strikeforce]

except that pricing in the industry is not controlled by costs, but by competition.
AA mechanics might want a fare increase to increase their pay but airline X has employees who are willing to work (relatively peacefully) for the salary they make.
Raising fares also results in a decrease in demand... that is a fact of pricing.
Airline X is a competitor of AA...they are not interested in raising prices and have costs low enough that they can determine the pricing levels.
AA has no choice but to match airline X's fares or lose market share - because air travel is essentially a commodity. For the vast majority of people, price is the number one purchase factor..
It is precisely because AA's costs are above its competitors that it loses money at fares that other airlines charge... and AA has no choice but to match those fares or lose customers.
The fact that AA's RASM increased in the most recent quarter ONLY where they decreased capacity or increased it only to industry average levels shows that AA has no pricing power on a system basis in its markets... customers are not willing to pay more for AA's services. We need to see the rest of the industry but analysts expect that AA will once again underperform the revenue performance of its peers.
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No, AA did not plan this BK in 2003. They had every intention of turning the company around. But they made very faulty assumptions about who would fail to reorganize and were quite surprised when they found out they are competing with airlines who all managed to successfully reorganize - the highest percentage of successful Chapter 11 restructurings in airline industry over a given time period.
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AA mgmt's miscalculations and its unwillingness or inability to use the advantages it gained in its own out of court restructuring are what has doomed AA at this point.
Given that no other major competitor of AA is in the financial situation AA is in and demand for ALL carriers shrinks as fare levels raise in response to higher fuel, there are enormous competitive pressures on AA. Other carriers have aircraft assets they need to redeploy in order to avoid shrinking their operations. As in any business, AA's competitors will redeploy their assets where they believe they have the greatest chance of making a profit... and if that profit comes becomes they can successfully steal passengers today and weaken AA over the long term, that is where they will grow. The fact that AA is seeing more competitive growth in its key markets than any other carrier shows that AA is seen by the industry as highly vulnerable.
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Given that AA's financial damage is very deep and it is highly unlikely they can resolve it without very severe employee cuts similar to the size that have doomed every other airline, the prospects for AA are not good, regardless of whether they reorganize in C11 or not.
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The only way that AA can pay the enormous debt levels it has now and will have in the future with its new fleet is by extracting huge pay cuts from its labor force.
Other airlines who are much larger or have lower costs will price the seats that AA will sell. AA's ability to service its debt levels which are at and will be at much higher levels than its competitors can only be sustained through employee wage cuts.
The notion that AA will possess a fuel cost advantage relative to its peers denies the fact that AA's competitors are replacing their own fuel-inefficient aircraft but at much lower overall cost.
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Those who want to finish a career at AA should put as much of their own money away in savings to cover the inevitable cost cuts and reduction in pension benefits; those who have the flexibility to leave should be making plans to do so.

In an earlier thread, I mentioned that AA is refurbishing terminals, upgrading in flight entertainment systems, and buying new vehicles when the airline is losing hundreds of millions per qtr....and many said that AA has to compete with other airlines.....well, if price is the only factor for the vast majority of customers, then why not adopt WN's business model? WN's business model is simple, and they don't waste money on elaborate in-flight entertainment systems that are costly and take up lots of maintenance time to fix. Why not keep it simple? After all, customers are only willing to pay the lowest fares available for air travel from point A to point B, and make sure AA doesn't lose their bags. I'll bet that choice of airline doesn't even enter into the equation for most customers, it's strictly price and whether it's non-stop or connecting......business travel may be different, maybe.

 

[eolesen]

Sure. Park all the wide bodies while you're at it...

And lets not forget the main reason WN's model works: some of the least restricting work rules known to the industry, driving some of the highest productivity and lowest costs as a result.

 

[strikeforce]

Sure. Park all the wide bodies while you're at it...

And lets not forget the main reason WN's model works: some of the least restricting work rules known to the industry, driving some of the highest productivity and lowest costs as a result.

didn't say anything about wide-bodies.....take IFE out of the domestic planes like 757 and 737, and even on INTL flights I can see IFE in first or business, but coach? most of the IFE problems occur in coach. What work rules is restricting AA from having the highest productivity at the line stations?? They already put 1/3 of a guy on each airplane.

 

[eolesen]

So, what you're now suggesting is to have a bare bones domestic airline flying big jets, and a full service international one?

Sounds like Ted. Metrojet. Song. Delta Express. Continental Light.

Did I miss anyone?....

AA looked at an airline within the airline once that I know of while I was at HDQ, and at least once before that, when AA was considering biding on Pan Am's IGS hub at TXL. We also looked at buying HP (Project Cowboy?) in the early 90's, and operating it as a separate single class operation.

It might work in other countries, where you typically have different unions representing long haul and short haul workers, and occasionally different operating certificates/entities.

Maybe there's a way to do it in the US, but history has shown otherwise unless they do it truly as a separately run operation. We've seen the battles over Eagle, so I really don't think AA's going to do any better than the five split-personality airlines mentioned above.

 

[WorldTraveler]

My analysis was flawless. Buck is only quoting part of it, and WT is obviously too wrapped up in self-importance to fact check his own novella.

I said essentially what FWAAA did earlier -- adding $5 to pay for raises sounds great, but never works because AA no longer has ability to control pricing, and won't get it back anytime soon, if ever. Raise prices when you don't control pricing, you drive demand down, and net revenue stays the same or worse. People either chase the $5 savings on someone else, or they stay home.

Anyone who worked in or around sales or RM should recognize that concept. It was covered on Day One of training.

to be fair, I did not see your analysis... I know only as much of it as what Buck reported/referenced.
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If the assumption was that AA could raise fares to cover a cost which AA needed to cover and others didn't need to cover, then the analysis is flawed.
Since you now say that you agree with what has been said that AA has no pricing power - which means they cannot withstand higher fares - then we are in agreement.
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POINT OF ORDER
Any analysis is "flawless" only if it can be demonstrated in actual practice to generate results predicted in the analysis.
If you recognized from the beginning that AA could not raise fares apart from its competitors, then whatever numbers you put together to create an unattainable financial result mean nothing.
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Song was not a bare bones operation. It was product competitive with JetBlue.
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The flaw in Song's business plan was that they were using higher capacity aircraft using a higher cost base than B6 hoping they could regain market share and pricing control.
B6's smaller aircraft and lower costs gave THEM the flexibility to better match supply with demand which meant that Song was forced to fly 200 seat 757s with alot more discount seats or reduce capacity and not be competitive on fares.
Ted was the classic example of cutting revenues faster than costs - but also shows that no internal strategy can fix a hypercompetitive market like DEN which UA has now determined they cannot serve at levels they once did - and they have ceded alot of market share to competitors as they have pulled down their presence.
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Song's business plan is not a whole lot different from AA's... there is/was little ability to use smaller, lower trip cost aircraft allowing lower cost competitors with more network choices to control the destinies of Song then and AA now.
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It is also worth noting that B6's low cost model - single class - doesn't work on longhaul markets and it didn't work for Song either. VX recognized this and obtains substantial revenue premiums to B6 in long haul markets; a single class product spills alot of revenue, including those who are willing to pay higher fares with the expectation of getting some upgrades.
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It is also noteworthy that with the slot deal DL will erase much of B6's JFK network advantage by replicating many of B6's markets and connection capacity at LGA, an airport with much larger numbers of higher value local traffic.
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Not surprisingly, B6 is at a strategic crossroads as its product and network strategies have been trumped by other carriers - and so far we have not seen that they have come up w/ any new ideas to address those.
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Every US airline has toyed w/ the airline within an airline concept and they have all failed or never got started because it has become very obvious that network airlines cannot get costs out FASTER THAN the drop in fares that result from a barebones product.
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AA being last in many things allowed them to not make the mistakes of other carriers with respect to an airline within an airline.
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IFE on int'l flights is a given... technology does not exist to support the level of choices for personal IFE over the oceans that an onboard IFE system can provide... and because major int'l airlines on every continent provide personal IFE, no int'l airline that wants to compete on the same scale can be uncompetitive on product.
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I would agree that onboard airline provided IFE within the US is not likely to be expanded any further and when existing planes/technologies wear out they won't be replaced.
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WN's business model works because it largely was built on creating new demand using a low cost base in uncompetitive markets. Now that WN's costs are approaching the levels of its network carrier peers, WN has not been shown to be able to effectively compete against network carriers with greater product offerings.
Complexity and network size provide advantages which the network carriers have over low fare carriers... precisely why it doesn't make sense for network airlines to give up their current business models - and why every one of them have realized that.
And, yes, WN's employees are becoming more senior and costly to keep - just like what happened to the network carriers.
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I didn't realize that AA once considered bidding for PanAm's TXL operation... obviously that proved smart not to do so... but AA's hesitancy to develop continental Europe is precisely why their network is losing much of its distinctive appeal; other carriers have similar access to LHR but AA has not grown its presence in Europe.
It is quite striking that AA now operates just one flight per day to Germany, the largest economy in Europe and the fifth largest global economy.

 

[FWAAA]

So, what you're now suggesting is to have a bare bones domestic airline flying big jets, and a full service international one?

Sounds like Ted. Metrojet. Song. Delta Express. Continental Light.

Did I miss anyone?....

How about Shuttle by United (later named United Shuttle)?

 

[Buck]

How about Shuttle by United (later named United Shuttle)?

the point of a historical hypothetical price increase to raise the mechanics wages is just a story from the past. In today's enviroment the pundants keep saying that AMR must get their labor costs under control. Since raising fares are not in the realm of reality, then labor adjustment must be found somewhere else.

I hope that this quote from the Special Jetwire yesterday does not resemble WT's post but it is somewhat necessary

Whether we like it or not, there is simply no path to long term success without competitive costs - in every aspect of our business, including our labor costs. The playing field in which we compete is dominated by carriers who have used the bankruptcy courts to restructure their labor agreements, and low cost carriers who do not have the legacy labor cost structure that we have.

Because every one of us has a stake in American's future, every one of us has a stake in addressing this challenge constructively. As you know, we have been bargaining in good faith with the Allied Pilots Association, the Association of Professional Flight Attendants, and the Transport Workers Union for a long time - longer, it's fair to say, than anybody would prefer. It's a tough challenge for everyone involved. But our objective is pretty straightforward. We are seeking next-generation labor contracts that will enable us to be a successful, profitable business, while creating a more secure future for our employees. We must improve productivity by reforming work rules that don't make sense, establish a new competitive framework for new hires, eliminate restrictions on the way we conduct business, and bring other elements of our contracts more in line with the realities of the marketplace.

Our labor cost challenge, while not particularly complicated, is not an easy one to solve. And given the recent rumors and speculation in the media, and the recent volatility of our company's stock price, it's clear that some have their doubts as to whether we will succeed in bringing our negotiations to a successful conclusion. We continue, however, to have faith in the process, and in all the teams involved. And it remains our goal to reach agreements that meet the needs of American Airlines and our people.

This sounds like the company needs to institute a new "B-Scale" as they did in the M&R contract of FEB 1983. By bringing the newhires in at approximately half of the compensation of the current unionized employees. along with a 401k matching thereby remove any furture Defined Benefit Pension obligations. The company renewed their fleet, maybe its time to renew their labor savings?

 

[WorldTraveler]

the point of a historical hypothetical price increase to raise the mechanics wages is just a story from the past. In today's enviroment the pundants keep saying that AMR must get their labor costs under control. Since raising fares are not in the realm of reality, then labor adjustment must be found somewhere else.

I hope that this quote from the Special Jetwire yesterday does not resemble WT's post but it is somewhat necessary



This sounds like the company needs to institute a new "B-Scale" as they did in the M&R contract of FEB 1983. By bringing the newhires in at approximately half of the compensation of the current unionized employees. along with a 401k matching thereby remove any furture Defined Benefit Pension obligations. The company renewed their fleet, maybe its time to renew their labor savings?

I presume you are saying that B scale type arrangement should be applied to all labor groups? Didn't AA's pilots agree to a similar type arrangement in the past as well?
If you have to keep renewing B scale arrangements against other carriers that don't have them, doesn't that say that AA has a fundamental problem that is not being addresssed?
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I'm sure you are aware that B scale type arrangements are highly divisive and deteriorate morale. Can AA really afford to have part of its workforce with even lower morale?

And based on Bob Owens' comments, AA can't find the newhires to work at the present scale.
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Implementing a B scale arrangement across AA might provide the opportunity for many higher seniority to finish their careers with the company w/o major additional pain but it makes the airline within an airline concept look very palatable in contrast. At least in airline within airline concepts, the lower cost people were segregated to a particular part of the business.
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Keep in mind that the B scale sets the benchmark for labor rates in the future... are unions like the APA going to acknowledge that longterm labor rates will be at B scale levels?
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Or is it possible that AA labor and mgmt can agree to a relatively short term B scale concept which would phase out by the time the majority of the fleet has been replaced w/ newer more efficient models, obtaining cost benefit from labor in the near term and from fleet in the longer term?

 

[Buck]

I presume you are saying that B scale type arrangement should be applied to all labor groups? Didn't AA's pilots agree to a similar type arrangement in the past as well?
If you have to keep renewing B scale arrangements against other carriers that don't have them, doesn't that say that AA has a fundamental problem that is not being addresssed?
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I'm sure you are aware that B scale type arrangements are highly divisive and deteriorate morale. Can AA really afford to have part of its workforce with even lower morale?

And based on Bob Owens' comments, AA can't find the newhires to work at the present scale.
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Implementing a B scale arrangement across AA might provide the opportunity for many higher seniority to finish their careers with the company w/o major additional pain but it makes the airline within an airline concept look very palatable in contrast. At least in airline within airline concepts, the lower cost people were segregated to a particular part of the business.
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Keep in mind that the B scale sets the benchmark for labor rates in the future... are unions like the APA going to acknowledge that longterm labor rates will be at B scale levels?
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Or is it possible that AA labor and mgmt can agree to a relatively short term B scale concept which would phase out by the time the majority of the fleet has been replaced w/ newer more efficient models, obtaining cost benefit from labor in the near term and from fleet in the longer term?

Yes I would say that a "B-Scale would have to apply to all unionized groups. ( as I am not familar with non-union compensation).

I understand that the pilots had a form of the "B-Scale" , but would welcome a member of the APA to comment.
The source for future pilots for the company has been American Eagle, a "B-Scale" within itself? Now with the divesture of Eagle are these pilots going to be available enmasse?

The fundamental problem could be mismanagement by the company and the union leaership. Morale cannot be much lower.
It would be up to the industry to rectify the issue of whether or not future airline employees are available. I believe Bob Owens was referring to a fix point in time. I have heard that one of the major mechanic schools in Tulsa is having a rough time getting students, whether it is mechanics or pilots.

As a member of the FEB 1983 "B-Scale", I can say that it has not set benchmarks for the future, those benchmarks have been consistantly enforced with each new contract negotiation. It is part of the reality of the labor issues of today. So a short term "B-Scale" no. And yes I believe the Mr. Arpey was saying exactly that, the new aircraft and new hires could benefit the company in the near and long term.

 

[eolesen]

B scale doesn't have to be wage based. It could be as simple as new hires get a 401K and different benefits, maybe paid time off bank instead of sick and VC, or different holidays.

Would that really be devisive?

Management and agents went thru the pension to 401K change over 10 years ago. Didn't see anyone Occupying Centerport because the senior agents had a pension and the junior agents didn't...

1983 to today is an interesting parallel. That's when the 707s finally went away and the MD80s showed up.

 

[WorldTraveler]

B scale doesn't have to be wage based. It could be as simple as new hires get a 401K and different benefits, maybe paid time off bank instead of sick and VC, or different holidays.

Would that really be devisive?

Management and agents went thru the pension to 401K change over 10 years ago. Didn't see anyone Occupying Centerport because the senior agents had a pension and the junior agents didn't...

1983 to today is an interesting parallel. That's when the 707s finally went away and the MD80s showed up.

perhaps others would define it differently but I would consider a B scale a separate pay scale.
If it comes down to different benefits for one group than the other, no, I don't think it would be terribly problematic at all.
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however, I don't think AA can achieve the cost cuts it needs solely thru benefit changes... it will require changes to salary, benefits, and work rules. Of those three, differences in benefits has the least potential to be divisive.
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Your observation about the 1983 round of B scales is interesting. Remember, though, that Arpey says AA needs to be long term competitive, something he says that other network carriers cannot do.
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If the proposal is to permanently slash pay and benefits even for new hires, I doubt seriously it will ever be voluntarily agreed upon.
If the proposal is for a temporary B scale for new hires - protecting existing employees - then it might stand a chance of approval... but unless AA intends to buy out/retire a large percentage of its workforce in a pretty short period, they simply cannot grow the airline fast enough to effect the less labor cost changes.
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If they offer a temporary salary B scale for new hires, permanent benefit changes for new hires, and productivity improvements for all - after aggressive buyout/retirement packages, then there is a very good possibility it could be improved, existing employees will face little pain, and AA can indeed effect a successful, sustainable long term turnaround outside of BK.

 

[Buck]

perhaps others would define it differently but I would consider a B scale a separate pay scale.
If it comes down to different benefits for one group than the other, no, I don't think it would be terribly problematic at all.
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however, I don't think AA can achieve the cost cuts it needs solely thru benefit changes... it will require changes to salary, benefits, and work rules. Of those three, differences in benefits has the least potential to be divisive.
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Your observation about the 1983 round of B scales is interesting. Remember, though, that Arpey says AA needs to be long term competitive, something he says that other network carriers cannot do.
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If the proposal is to permanently slash pay and benefits even for new hires, I doubt seriously it will ever be voluntarily agreed upon.
If the proposal is for a temporary B scale for new hires - protecting existing employees - then it might stand a chance of approval... but unless AA intends to buy out/retire a large percentage of its workforce in a pretty short period, they simply cannot grow the airline fast enough to effect the less labor cost changes.
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If they offer a temporary salary B scale for new hires, permanent benefit changes for new hires, and productivity improvements for all - after aggressive buyout/retirement packages, then there is a very good possibility it could be improved, existing employees will face little pain, and AA can indeed effect a successful, sustainable long term turnaround outside of BK.

There will not be a temporary "B-Scale". It will be based as a contractual item. Now if that contract only lasts a year, that is another story. Consdidering recent history contracts being a forever flowing entity and are only amended, any item including a negotiated "B-Scale" could be there a long time. i.e 10 years to the top as an example....

 

[FrequentFlierCA]

Eric's analysis speaks to the fact (intentionally or not) that the airline industry's pricing is what's been bankrupting and killing airlines for the last decade. The inability to raise fares even $5 is a direct result of competitors with lower costs, who can make a profit without that extra $5 added. The four Chapter 11s last decade exacerbated the problem for AA.

Bottom line is that our air transport system has become unsustainable cost-wise and fares will need to rise at least in line with inflation (which they haven't done since long before deregulation).