American Airlines Is Too Profitable for Its Own Good

ContUNITEus

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May 4, 2011
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http://www.slate.com/articles/business/moneybox/2013/10/american_airlines_antitrust_problems_strong_profits_have_undermined_the.html?wpisrc=burger_bar

COMMENTS:
TO DO LIST:
PRIORITY 1: Make our company lose money again (possibly by excessively spending money in unnecessary things, such as executive perks), so that we can cry to the Judge that we are still losing money and therefor can justify the merger with US.




American Airlines is announcing its quarterly earning results on Thursday. Most likely, they’ll post another quarter of profits following success in recent quarters in turning around the bankrupt company. Ordinarily, that would be cause for celebration. There’s more to life than quarterly profits, of course, but workers and managers at established businesses normally like the idea of profitability—except at American Airlines, where good financial results may do more harm than good.


That’s because American is trying to put itself out of business by merging with US Airways. But the Justice Department doesn’t want to let it, arguing that the merger will reduce competition and harm consumers. American’s strongest counterargument would be to show that it’s not viable as an independent company—an argument that strong quarterly earning results would badly undercut.


Rumblings of a merger began almost as soon as American filed for bankruptcy protection in November 2011. The aviation industry had, for quite some time, been in a cycle of consolidation. America West purchased the old US Airways and adopted its brand. Delta absorbed Northwest. United swallowed Continental. Southwest gobbled AirTran. Time and again, airlines managed to reduce excess costs and improve profitability by growing larger in scale. A bigger airline can serve the same population as two smaller airlines with fewer total flights and somewhat less extensive hub operations, and strengthen its financial position.


American’s CEO and a few other top executives stood to reap a huge payday if they managed to emerge from bankruptcy and only later discuss mergers, but American’s workforce preferred to merge as soon as possible. US Airways—considerably smaller than United, Delta, or Southwest but cash-rich enough to swallow American—was the logical partner. And so American’s unions did something a bit unusual and began preemptively negotiating hypothetical labor agreements with US Airways executives.

Post-merger integration of separate collective bargaining agreements has frequently been a problem with airline tie-ups, and bankrupt companies generally want concessions from unions. Labor’s willingness to get these issues straightened out in advance of a merger became a major inducement to merge. Then labor started pressing American’s creditors.


Soon enough, the creditors and US Airways management reached a deal. The plan was to form a new airline that, in deference to American’s larger size, would retain American Airlines’ name and branding. Top management would be current US Airways executives, but the new airline would belong to the American’s OneWorld alliance (with British Airways and Cathay Pacific) rather than US Airways’ Star Alliance (with Lufthansa and Air China).


Politically speaking, it looked like a done deal. Here was an iconic American company that, in principle, could have vanished from the Earth—its airplanes and landing slots auctioned off to pay old debts—and cost the country thousands of jobs. Instead, a new owner was riding to the rescue with the support of the workforce at the troubled firm. What could be better?


But the Justice Department’s Antitrust Division felt otherwise, and filed an injunction to stop the merger.

US Airways and American, it turns out, made the exact same mistake as AT&T and T-Mobile when they tried to merge. A deal with union backing sounds nice, and in purely political terms it is nice. But the Antitrust Division genuinely makes these calls on the merits, and as far as antitrust analysis goes, labor support is actually a huge red flag.


Regulators generally assume that when companies merge, they do so for some kind of sound, profit-increasing business reason. This assumption may actually be wrong. CEOs of larger firms get paid more than smaller ones, but firms that announce acquisitions normally see their share price drop. It’s at least possible that many mergers represent foolish empire-building on the part of executives that has nothing to do with business. But regulators start with the assumption that managers know what they’re doing. And from a competition perspective, the benign answer to the question “Why will this merger help you make money?” is “Combining the companies will let me lay off lots of now-redundant workers.” If workers are excited about a merger, then that means higher profit margins are probably coming in the form of higher prices—which generally means reduced competition.


There’s little doubt that this merger would reduce competition, removing an option on over 1,600 connecting routes around the country. That’s going to mean higher prices for customers, reversing a decades-long trend toward more competition.


When the merger was first announced, my view was that the public should accept it as inevitable. Competition and low prices are great, but you can’t have so much competition that the companies all go out of business. One case for blocking the AT&T/T-Mobile merger was that there were clearly other merger partners available, such as Sprint and Metro PCS; the AT&T angle was the most lucrative one for T-Mobile’s owners, but the worst one for consumers. American is different. Merging with US Airways would reduce competition, but merging with United or Delta or Southwest would be much worse. And the company was, after all, bankrupt and clearly not likely to survive.


That’s certainly the strongest legal argument the company can present at the trial starting in November. But the past two quarters worth of profits have cast doubt on the veracity of the American-was-doomed-anyway argument. Another good earning result this week would further undermine the case and strengthen the Justice Department’s view that American should be forced to stay independent. Strong profits would be good news for travelers, but bad news for the company itself.
 
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This will only help the DOJ:

"AMR Corporation Reports Third Quarter Net Profit Of $530 Million, Excluding Reorganization And Special Items"

http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-newsArticle&ID=1865535&highlight=
 
And, as stated in the article, let's not forget that it is American's unions cheerleading for this merger. The AMR execs did not (and do not) want it. They stand to collect a much larger reward for emerging from BK independently. (And, for some of the upper level management, just below the execs, independent AA means they still have a job.)

I have posted the question several times and no one has attempted to answer...
Where is the money coming from to provide all these goodies that DP promised to the AA unions?

If you apply current AA pay rates to the financial statements of US Airways for the recently past profitable quarters, those profits disappear. DP has promised raises to the AA unions. We already make more money than the pilot and flight attendant unions at US. If the merger goes through, and we get a raise over what we are making now, let me make the wild leap of faith that the US pilots and flight attendants will not stand for being paid less than us. With those kinds of raises paid to ALL pilots and f/as of the merged company the profits not only disappear, the losses skyrocket.

Where is the money coming from?
 
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First profit in how many years? It would take 30 years just to make up for the loses of the last 10 at this rate. Profitable or not has no relationship to the law about mergers.
 
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And, as stated in the article, let's not forget that it is American's unions cheerleading for this merger. The AMR execs did not (and do not) want it. They stand to collect a much larger reward for emerging from BK independently. (And, for some of the upper level management, just below the execs, independent AA means they still have a job.)

I have posted the question several times and no one has attempted to answer...
Where is the money coming from to provide all these goodies that DP promised to the AA unions?

If you apply current AA pay rates to the financial statements of US Airways for the recently past profitable quarters, those profits disappear. DP has promised raises to the AA unions. We already make more money than the pilot and flight attendant unions at US. If the merger goes through, and we get a raise over what we are making now, let me make the wild leap of faith that the US pilots and flight attendants will not stand for being paid less than us. With those kinds of raises paid to ALL pilots and f/as of the merged company the profits not only disappear, the losses skyrocket.

Where is the money coming from?

Supposedly from:

1)"Synergy"
2)Improved network
3)Getting more "corporate contracts"
4)Cutting various ameneties, etc. for pax.(he's basically on record stating such)
5)Firings and IMHO they will be coming.

Parker is full of.....at the end of they day, he has no problems screwing employees over.
 
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There are two numbers that demonstrate the vast majority of what is happening at AA based on their most recent quarterly report.

On a GAAP Basis, Net Profit was $289 Million
In the most recent quarter, AMR's wages, salaries, and benefit costs were down $237 million, or 13.3%.
 
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There are two numbers that demonstrate the vast majority of what is happening at AA based on their most recent quarterly report.

On a GAAP Basis, Net Profit was $289 Million
In the most recent quarter, AMR's wages, salaries, and benefit costs were down $237 million, or 13.3%.
DUH And why do you think Delta is profitable? Remember Delta's little bankruptcy filing a few years back? Not to mention the NW bankruptcy!
 
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I've only been saying it for about 5 years now but apparently some people don't grasp that a large part of AA's problems are because of its underperformance on revenue. Yes, AA now joins all of the other legacy airlines who have been in BK and cut costs, including from employees.

Yet, go back and look at nearly every other BK and AA stands unique in that they have not increased their RASM above the industry during their BK. AA continues to add capacity and its RASM growth trails the industry. Every other airline saw significantly larger revenue increases coming out of BK than AA has seen; furthermore, DL's RASM growth in BK was 3-4X as high as the industry average.

It is precisely because DL improved its revenue growth that they are in the position they are in. If they didn't increase revenues as much as they have, then their employees would not have gained as much back since. CO did the same thing after its 2nd BK. UA also saw significant revenue increases that helped restore a lot of the employees cuts that took place in BK.

Maybe we will see equally large increases in AA employee compensation but since AA/US combined has at least 10K more employees than DL or UA for fairly comparable revenue - after factoring in capacity that will have to be pulled - then the employees at AA/US are already facing an uphill battle to regain compensation.

And since AA's BK business plan has been built around adding capacity back instead of pulling capacity out of the system like every other carrier has done, other carriers will be adding capacity into the most significant markets for AA and US just as AA is coming out of BK and as the two are trying to make a merger work.

Perhaps I'll be wrong but I think history will clearly show that AA's record profits will be short-lived in the face of increased competitive pressures, merger costs, and increased capacity throughout the industry, on top of the AA-unique issues including the Wright Amendment, the DL-VS JV, and Open Skies throughout Latin America.

If I am shown to be wrong 2-3 years down the road, I'll be more than happy to admit it.
 
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No one can predict the future. Not even Delta! There are no guarantees for AA UA DL, or even WN. No company is guaranteed to be profitable, especially airlines. I care about AA but at the end of the day it is just a job. I happen to like my job most of the time, and im proud to work for American. I hope AA is prosperous and continues to exist for 100+ years. What I don't understand is why you continue to talk about Delta on the AA forum? I hope Delta is paying you a lot of $ to go on AAs forum and continue to point out how great Delta is and how incompetent AA is. If they are not paying you (which I seriously doubt) why do you do it? Were you rejected as an applicant? were you fired by AA? other then that it doesn't make sense. As an employee of AA I don't really think about Delta or any other airline or company. And I definitely don't obsess about other companies. If AA made a $5B profit, you would still get on here and continue to trash AA. AA reported a very nice profit for such an incompetent company (as you seem to think). Over half a billion dollars before the bankruptcy leeches get their cut! Maybe you need professional help! Whatever your issue is STFU!
 
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Profitability has nothing to do whether a merger is anti-competitive or not. The justice department has to prove to the court that the merger would be detrimental to the flying public and anti-competitive.....not that two airlines don't need to merge to make money. Southwest has always made money hand over fist yet there was no problem with them merging with Airtran.
 
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It is indeed true that no one can predict the future but it is the job of mgmt of any company – or the leader of any organization – to best guide that organization or company to achieve its objectives now and in the future.

My criticism of AA for years was that it sat paralyzed trying to protect shareholders while seriously harming its future ability to compete. While Arpey said that AA’s first responsibility was to protect AA stockholders (legally it was) and he found plenty of supporters here to agree with him, AA’s competitors all moved quickly to accomplish their strategic objectives, many of which were focused directly at winning over AA’s business.

AA ended up in BK and in the years of delay, AA’s competitors have made significant progress in pulling very real revenue away from AA. I am fully capable of reading AA’s financial reports and seeing what they have accomplished this quarter and since entering BK. Let’s be clear that AA’s BK turnaround has been driven by significant reductions in AA and AE employee costs and a reduction in interest expense. And since AA did attempt to an out-of-court restructuring, its employees DID make significant contributions to turn the company around which turned out not to be enough. When you add up the employee cuts between the 2003 and 2011-2013 restructurings, AA employees will have contributed as much or more than any other legacy employees in turning the company around, even though there were many AA fans on here who have been very free in arguing that AA’s competitors turned their companies around on the backs of their employees.
Notice how much was made in the earnings press release yesterday about reducing debt expense, an issue which I have raised multiple times as a problem for AA. BK allows a company to obtain those kinds of reductions in lending expense… but it doesn’t change that AA’s overall debt levels are increasing rapidly largely because of its massive fleet replacement. AA’s competitors, including AS, DL, and WN, are not spending proportionately anywhere near that same amount of money to renew their fleets and yet those other companies have costs lower than AMR. AMR still will have pension expenses that they didn’t plan on having when they entered BK. AMR will still be a heavily indebted company when they emerge whether as a standalone or with US.

The major focus of what I have written on here over the past 10 years has been about AA’s revenue strategies – or lack thereof. While Arpey was trying to protect shareholder value, AA’s competitors have been systematically winning over revenue in AA’s key markets. As much as you hate to hear it, the greatest example is NYC where 10 years ago AA was the number one airline at LGA and JFK. Today, DL has passed AA in revenue in the NYC region and is a very credible competitor to UA which gained CO’s hub at EWR which was built essentially while DL and AA paid CO no attention. There are few markets left where AA is the dominant carrier from NYC and DL’s strategies are focused on gaining revenue share from AA over the next few years, including with the VS JV. At ORD, UA has done a far better job of holding onto its revenue and winning over revenue from AA. At LAX, AA has held onto its revenue share by operating a lot of money losing routes including to Asia. AA’s best revenue position is at DFW and MIA and yet in less than a year WN will have the opportunity to begin competing for large portions of the N. Texas market that it has not been able to serve before.

These discussions are not just about DL and never have been. If that is all you see, then you don’t understand the business issues about AA. DL and UA both gained significant revenue advantages and have developed them. WN has been very effective at picking off AA revenue in key AA markets, including ones where AA has “thrown in the towel” but where significant local revenue remained.

I slight AA nothing for what they have accomplished in BK but I also am not willing to overlook the fact that AA has gained its advantages in the same way as other carriers have done in BK – largely on the backs of labor with healthy contributions from banks. They have grown revenue for sure but only because other carriers have created a healthy revenue environment across the industry which has allowed AA to add back capacity in order to balance out its costs. AA is living with the reality that those other carriers will continue to grow in key AA markets including NYC, ORD, LAX, and N. Texas – which will have an enormous influence on how long AA can keep this momentum going.

And it also doesn’t change that AA and US are still staring at a lengthy process to merge and do all of the same things that other carriers have completed or are close to completing while those other carriers will be focused on minimizing any gain AA/US will gain from their merger. Add in the strategic challenges such as the end of Wright Amendment (or alteration of its restrictions), the advent of Open Skies in many of AA’s top markets in Latin America, and the DL-VS JV and new AA has enormous challenges that no other carrier will face.

By all means, enjoy the good news from AA. But don’t turn a blind eye as to how AA gained those advantages or pretend it is different from what other carriers have done, the timing of AA’s turnaround compared to other strategies and macroeconomic events in the industry, the much larger scenario that has put AA at a significant disadvantage to other carriers in key markets that cannot easily be overturned even with a merger, or the fact that AA faces a unique set of strategic challenges over the next few years that are unmatched by any other airline in the industry.
 
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...ask ten people and you will get ten different opinions...you know what the say about opinions!!
In the end, the only opinion that's gonna matter will be Judge Colleen Kollar-Kotelly.
 
WT, I think your posts are almost always informative, well reasoned, and extremely knowledgeable about the airline business, but even I find your DL cheerleading a little grating. I get enough of that at home from my boyfriend, a DL FA and a total Debbie Delta. But even he is still not quite as big a pollyanna as you. Almost though.
 
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