AA reports 4Q2012 and FY results

[WorldTraveler]

http://finance.yahoo...-133000794.html

The most evident thing in this financial report is "we can do it on our own - look what we've done so far."

Still, RASM esp. in Latin America and the Pacific took a hefty hit in the 4th quarter - which basically means AA is not growing revenues as fast as it is adding capacity. Domestic and Atlantic revenues were positive because of capacity cuts - the same thing that has driven profits at other US carriers.

Makes it very hard to argue that AA can base its financial turnaround on capacity growth.

Note that wages, salaries, and benefits in the 3rd quarter were down 13% or $245M which was a larger number than the improvement in AA's 4Q profit/loss after special items.
IOW, AA employees took cuts to help fund 4th quarter operational losses which AA attributed to ...
"The fourth quarter of 2012 was negatively impacted by Hurricane Sandy and the early November snow storm in the Northeast and, separately, by the residual headwind on fourth quarter bookings from the operational disruptions experienced in late September and early October. The cumulative impact from these events is estimated to have reduced net profits by $142 million."

 

[jimntx]

Well, it's obvious that we are still paying the employees too much. Who can we outsource to contract labor next?

 

[WorldTraveler]

Jim,
although AA mgmt seems like they are ready to get out of BK, in the most recent quarter, they cut labor costs $1B on an annualized basis but they are barely profitable and still have a CASM that is 10% higher than at least one other larger network carrier based on last quarter's results (AA is the first carrier to report 4th quarter financials).

I would love to get behind those who support AA's turnaround plan but they aren't there with respect to profitability or their ability to successfully compete.

The 4th quarter is not a great quarter and the operational issues can't be ruled out - but weather will always be an issue for airlines.

Note that AA's mainline employee ranks are down by about 4K employees - or about 6%.

 

[FWAAA]

While I agree that AA has a long way yet to go, I don't see the finances improving in a merger with US, in large part because of the huge raises that the US employees would get to bring them up to AA's payscales. Add to that the $522 million over six years that Parker promised to give the AA pilots above the current bankruptcy agreement. Plus add to that the reasonable potential that the APFA and TWU will get similar contract improvements from Parker.

The pilots' MOU says that the US pilots would get the APA contract as the transition agreement pending negotiation of a new agreement. The US pilots would get the raises on day 1.

The pilot portion equals $87 million per year, on average. Add the FAs and TWU and agents and now we're probably talking $200 million to $250 million per year in contract improvements on the AA side. For purposes of discussion, let's say the US employee pay increases (to bring to AA parity) cost another $250 million a year. There's nearly half a billion dollars in higher wage/benefit expense for the combined airline. Achievable if the synergies are out of this world, but financial disaster if the combined airline shrinks by several percent (which mergers have been known to cause).

In prior airline bankruptcies like at UA, we had many months of financial data after it forced paycuts onto its employees to see whether the airline would be profitable. Parker is in such a rush to join with AA that we might not get to see very many more months of AA standalone results. Thus, we may never know whether AA could have turned it around on its own.

 

[jimntx]

And, the fact that the dollars don't add up is just the first of many problems with this merger. What if the merger doesn't solve the seniority issue to the satisfaction of a large percentage of the LCC pilots? Do we then inherit the mess that they currently have? Both airlines are currently hiring new flight attendants. Do they become merger layoff fodder? Would it not be fair to let them know that upfront before they quit their current jobs? (Assuming of course that they currently have jobs.)

I'm already embarrassed by the service/amenity cuts we have implemented--such as, the infamous nut ramekin full of bean dip with a package of pita chips served to F/C passengers on a 2 hour, 40 minute flight between major cities (MIA-YYZ). Once the result of the enormous increase in payroll as FWAAA has outlined comes to the attention of Centreport, what will we cut to make up the difference?

 

[WorldTraveler]

While I agree that AA has a long way yet to go, I don't see the finances improving in a merger with US, in large part because of the huge raises that the US employees would get to bring them up to AA's payscales. Add to that the $522 million over six years that Parker promised to give the AA pilots above the current bankruptcy agreement. Plus add to that the reasonable potential that the APFA and TWU will get similar contract improvements from Parker.

The pilots' MOU says that the US pilots would get the APA contract as the transition agreement pending negotiation of a new agreement. The US pilots would get the raises on day 1.

The pilot portion equals $87 million per year, on average. Add the FAs and TWU and agents and now we're probably talking $200 million to $250 million per year in contract improvements on the AA side. For purposes of discussion, let's say the US employee pay increases (to bring to AA parity) cost another $250 million a year. There's nearly half a billion dollars in higher wage/benefit expense for the combined airline. Achievable if the synergies are out of this world, but financial disaster if the combined airline shrinks by several percent (which mergers have been known to cause).

In prior airline bankruptcies like at UA, we had many months of financial data after it forced paycuts onto its employees to see whether the airline would be profitable. Parker is in such a rush to join with AA that we might not get to see very many more months of AA standalone results. Thus, we may never know whether AA could have turned it around on its own.

I am not at all saying that AA will be helped by US -but I also fear that AA is in a rush to prove that it can make it on its own and try to get out of BK before the job is really finished, including ensuring that the revenue goals can be met. Costs have been cut but alot of AA's turnaround is based on revenue growth which so far has not been achieved at levels necessary for AA to comfortably emerge.
And yes there will be cost increases in a merger which no one has fully factored in....esp. in light of the fact that sustainable profitability has not been reached.

It is highly risky to run out of BK w/o really knowing that AA is ready to compete... and right now they haven't shown they are, as much as some people might not want to admit it.

Let's not forget that US rushed thru BK #1 only to refile pretty soon thereafter.

I'm still not convinced that a merger is a done deal... the tone of the earnings report sounds very much like AA mgmt has been told to figure out how to make the company work on its own or merge... and the creditors are not convinced yet that a merger is necessarily in their best interests.

AA mgmt seems very much interested in trying to prove they are almost there all by themselves.

 

[FWAAA]

I am not at all saying that AA will be helped by US -but I also fear that AA is in a rush to prove that it can make it on its own and try to get out of BK before the job is really finished, including ensuring that the revenue goals can be met.

I neither said nor implied that you said the merger would help AA. For the most part, I'm in complete agreement with you.

IMO, the first major failure by AA management was giving in on the pensions. As has been posted repeatedly, the pilots are the group that would have been harmed by a distress termination rather than freeze. Giving in to the adminstration's (Gotbaum's) demands will probably cost AA an extra $300 million to $500 million in annual cash contributions that it simply doesn't have. And that extra cash benefits only the pilots, and even they don't get that much benefit. The PBGC is the huge winner.

Had AA terminated the pensions, everyone but the pilots would have received the same pension checks as they will now with a freeze. The pilots will get their substantial annuities (no lump sum option anymore). If AA had terminated the pensions, the PBGC and the pilots could have fought over the new equity (along with all the other creditors). Just like at UA and DL, with enough new equity, the pilots could move past the termination of their pensions.

But instead, AA rolled over and agreed to retain a huge annual cash obligation just so the PBGC won't have a claim in the POR. AFAIK, the PBGC will get nothing, as AA didn't foist anything onto the PBGC.

A lot of people (in the media, mostly) said last year that the UCC was in favor of a freeze because that way the PBGC wouldn't hog all the new equity. That makes no sense. The new equity would be much more valuable if AA were freed from the obligation to continue to fund the frozen pensions (via a termination).

But here we are, with wage reductions of nearly a billion dollars per year and some other savings (lower lease rates, reduced interest expense, etc). And I'm far from convinced that AA cut its expenses far enough. Of course, if the employees are mad now about the concessions they suffered, imagine how mad they'd be if AA had cut wages further. And imagine how mad they'll be if AA ends up in Bankruptcy Round 2 in a year or two if AA didn't cut expenses enough.

AA reported a lot of good news in 2012 and thanks in large part to Smisek's problems integrating UA and CO, AA's revenue numbers were a lot better than most people predicted 12 months ago. But, like you, I'm not convinced that today's press release is really good news. Ok news, perhaps, but not cause for celebration.

 

[WorldTraveler]

now that I've picked myself up off the floor, I'll say that in how many years of debating each other online, I think we are now at the same place.

that said, I think we both wish AA and its employees all the best w/ whatever they now face.

 

[AA-MRO.COM]

I neither said nor implied that you said the merger would help AA. For the most part, I'm in complete agreement with you.

IMO, the first major failure by AA management was giving in on the pensions. As has been posted repeatedly, the pilots are the group that would have been harmed by a distress termination rather than freeze. Giving in to the adminstration's (Gotbaum's) demands will probably cost AA an extra $300 million to $500 million in annual cash contributions that it simply doesn't have. And that extra cash benefits only the pilots, and even they don't get that much benefit. The PBGC is the huge winner.

Had AA terminated the pensions, everyone but the pilots would have received the same pension checks as they will now with a freeze. The pilots will get their substantial annuities (no lump sum option anymore). If AA had terminated the pensions, the PBGC and the pilots could have fought over the new equity (along with all the other creditors). Just like at UA and DL, with enough new equity, the pilots could move past the termination of their pensions.

But instead, AA rolled over and agreed to retain a huge annual cash obligation just so the PBGC won't have a claim in the POR. AFAIK, the PBGC will get nothing, as AA didn't foist anything onto the PBGC.

A lot of people (in the media, mostly) said last year that the UCC was in favor of a freeze because that way the PBGC wouldn't hog all the new equity. That makes no sense. The new equity would be much more valuable if AA were freed from the obligation to continue to fund the frozen pensions (via a termination).

But here we are, with wage reductions of nearly a billion dollars per year and some other savings (lower lease rates, reduced interest expense, etc). And I'm far from convinced that AA cut its expenses far enough. Of course, if the employees are mad now about the concessions they suffered, imagine how mad they'd be if AA had cut wages further. And imagine how mad they'll be if AA ends up in Bankruptcy Round 2 in a year or two if AA didn't cut expenses enough.

AA reported a lot of good news in 2012 and thanks in large part to Smisek's problems integrating UA and CO, AA's revenue numbers were a lot better than most people predicted 12 months ago. But, like you, I'm not convinced that today's press release is really good news. Ok news, perhaps, but not cause for celebration.

By all means if they cant run an airline we will just have to work for free. Back to the Judge so the employees can subsidize incompetence

 

[wings396]

I think that you are off a bit by claiming huge raises for all of the US people. I believe that the Fleet and CSA groups are pretty darn close in their respective wages at this point. While we may get a raise, I doubt that it will be huge in your words. Both groups at US are currently in negotiations, and will see some improvements even without a merger. As usual, the pilots will be the biggest winners.

 

[johnny kat]

There is nothing good about working under the sucky duty rigs of the AA f/as. Yeah, a raise would be nice but it isn't as if it is a huge raise. Modest would be a better description. The US f/as for the most part are trying to be optimistic about a merger. But, let's face it...if it wasn't for the circumstances of all of this, AA would not be the first merger choice as far as the f/as are concerned.

So, let's not be phrasing this as AA doing any great things for the US f/as. This merger is only a way for both companies managements to enrich themselves and pay the creditors claims. It will not do one damn thing to truly make the lives of the US f/as better. Except it may provide a way for vast numbers of employees to stay employed in the airline industry until they can retire. There will be very, very few of the original US employees still flying for the new AA within the next 10 to 15 years. as they will have retired. And that is the only reason I support this trainwreck.

 

[FWAAA]

I think that you are off a bit by claiming huge raises for all of the US people. I believe that the Fleet and CSA groups are pretty darn close in their respective wages at this point. While we may get a raise, I doubt that it will be huge in your words. Both groups at US are currently in negotiations, and will see some improvements even without a merger. As usual, the pilots will be the biggest winners.

Read my post again. Nowhere did I say that "all of the US people" would get huge raises. Since it's common knowledge (even among non-employees) that the US pilots and FAs are severely underpaid compared to the rest of the industry, I figured that the employees would realize that.

Estimates of the raises necessary to bring the US pilots up to the AA levels vary, but it could easily be $40k per pilot (or more). Plus the extra 4% 401(k) contribution on what they already earn (AA is 14% v 10% at US) plus 14% of the raise. With benefits, each US pilot could become $50k more costly on average. With 5,000 pilots, that's $250 million. Add to that the contract improvements that Parker offered to the APA of $87 million per year, or another $10k per pilot, on average. So add another $50 million to the US pilot tally. Now they're $300 million more expensive each year.

Parker offered the FAs $40 million per year (which they rejected) and that would not have brought them up to AA's payscale. To bring them up to AA's payscale plus the anticipated contract improvements that APFA will get could end up costing $75 million or more per year across the 6,800 US FAs. FAs make a lot less than the social security cap (unlike pilots), so raises increase their costs by the additional FICA their employer must pay.

Even if US fleet, agents and maintenance already make as much as AA, the pilots and FAs could be in line for raises that increases their cost by $300 million to $400 million per year. That soaks up the annual profits at US, and then some.

How is it that Parker has reported some profits since the merger? Pilots and FAs who are willing to work for regional airline pay.

 

[FWAAA]

There is nothing good about working under the sucky duty rigs of the AA f/as. Yeah, a raise would be nice but it isn't as if it is a huge raise. Modest would be a better description. The US f/as for the most part are trying to be optimistic about a merger. But, let's face it...if it wasn't for the circumstances of all of this, AA would not be the first merger choice as far as the f/as are concerned.

So, let's not be phrasing this as AA doing any great things for the US f/as. This merger is only a way for both companies managements to enrich themselves and pay the creditors claims. It will not do one damn thing to truly make the lives of the US f/as better. Except it may provide a way for vast numbers of employees to stay employed in the airline industry until they can retire. There will be very, very few of the original US employees still flying for the new AA within the next 10 to 15 years. as they will have retired. And that is the only reason I support this trainwreck.

Whether the merger is a good thing for individual employees is irrelevant to the discussion here, which is an objective look at the increased costs of bringing the woefully underpaid US pilots and FAs up to anywhere near industry-standard (AA's currrent rates plus the raises Parker promised them). Could very well be that the US contracts are superior for QOL issues, but the objective fact is that if they become AA employees they will get huge raises and will cost the company a lot more money than they do now.

 

[WorldTraveler]

and Parker will have to be able to show that the synergies that are created because of the merger will be greater than the pay raises and merger costs... and above what AA says they will generate in new revenues.

It's just a math decision and the UCC will make the final decision... it seems clear that AA's board and Parker continue to try to present competing plans.

 

[eolesen]

now that I've picked myself up off the floor, I'll say that in how many years of debating each other online, I think we are now at the same place.

They do say a broken clock is also correct twice a day, and that even a blind squirrel will find a nut from time to time.

That said, all three of us are in agreement on the merger's business case. I also don't see it.

As UA continues to struggle, AA has made gains without needing US, but there's more that AA could have done on the economic front. They chose peace vs. pissing off the employees more than they already were, and ignoring the vocal/bitter minority of employees here, the fact still remains that relatively few employees have been fed up enough with the changes to leave over the past 10, 11, 12 years that things have been dragging on.

Maybe the announcement in 90 minutes will be the merger, but I suspect it's just the branding.