AMR 3.5% Lowest Operating Margin

[Big Bear]

Just posted the top 5 Airlines Lowest Operating Margin..........

Below are the top five companies in the Airlines industry as ranked by lowest operating margin. A healthy operating margin is required for a company to pay for its fixed costs and generate cash.

AMR (NYSE:AMR) has an operating margin of 3.5% on trailing 12 months sales of $20.9 billion and sales growth of 16.1%.

Republic Airways Holdings (NASDAQ:RJET) has an operating margin of 6.4% on trailing 12 months sales of $2.3 billion and sales growth of 113.6%.

Hawaiian Holdings (AMEX:HA) has an operating margin of 7.6% on trailing 12 months sales of $1.2 billion and sales growth of 8.2%.

Pinnacle Airlines (NASDAQ😛NCL) has an operating margin of 9% on trailing 12 months sales of $853.2 million and sales growth of 3.5%.

Continental Airlines (NYSE:CAL) has an operating margin of 9.5% on trailing 12 months sales of $13.4 billion and sales growth of 18.6%.

SmarTrend is bearish on shares of PNCL and our subscribers were alerted to Sell on May 04, 2010 at $6.67. The stock has fallen 24.5% since the alert was issued.


No money for restore and more??? :angry:

 

[WorldTraveler]

Sales growth is showing fairly large growth for all network carriers because they are now lapping the horrible revenue downturns from the past year; AA’s 16% revenue growth is actually small compared to other network carriers. The Pacific was esp. hard hit which is why DL and UA both showed ~50% RASM gains in the last quarter.
Regional carriers aren’t showing that kind of revenue growth because they largely fly under contract to the major carriers; their revenues didn’t go down with the downturn and it won’t go up unless they add more flying.
You can look at productivity (ASMs produced divided by number of employees) and see that AA is still well behind other network carriers.

 

[Bob Owens]

I remember years ago when I was in school taking an economics class and the Professor told us that for large companies a 5% margin was considered healthy and sustainable, Blue Chip. In the go-go 90s the expectation was an unrealistic double digit return driven primarily by unrealistic ROI expectations and cutting labor costs. The problem is that when you cut labor costs you are cutting the supply of disposable income that drives the Economy, so its unsustainable.

AA had a 3.5% margin, how does that compare to historical rates? How about rates prior to Deregulation?

This industry has never been about the airlines making money, its been about the industries that feed off the Airlines making money. Most airlines are owned by Instututional Investors, if they were a bad deal why would these organizations insist on owning airlines? Prior to the 2003 where they dumped stock on the employees the company was 97% Institutional owned. By owning the carriers they get to steer the billions in revenue that the airlines generate back to the banks. The more we give up the more they all get, they dont want to leave it in the till because they know if Labor sees any money left over they will want some of it, so the Airlines are kept in a near state of perpetual crisis, they make sure there's little or nothing left over, in the meantime revenues soar, everybody else takes a bigger and bigger piece of it and Labor is told "Times are hard we cant give you anything, in fact we need to take more back". 2nd QTR YOY the banks saw double digit increases in nearly every catagory where they soak the Airlines, Interest charges, Credit card fees etc Our labor costs have gone down year after year since 2003, if the companys costs went up its because of raises and bonueses given to management yet all you hear AA talk about is labor costs, you dont hear them complain about Interest rates, landing fees, Leases, credit card fees, parts, etc etc , many of these things have skyrocketed since 2003 yet we are told that we have to give the company a zero cost contract. Why, so everyone but labor can get more?

If 2003 proved anything it proved that no matter how much we give up things will never get better for us and the company will always claim they need more. The only way to make things better for us is to do the same as everyone else and get in the middle of the frenzy and take more.

 

[Birdman]

Bob, that is a very intriguing analysis of the airlines role in the economy. It makes sense that an airline like WN, who has a lean and efficient business model, can not only maintain high morale but pay its employees a premium wage. In other words, they are bucking the trend that airlines are not designed to make money but make others money, even without going through bankruptcy. It seems our only hope is to swing the pendulum in the opposite direction the powers that be at AA are taking us.

 

[FrequentFlierCA]

It's very simple math. High costs + loss of pricing power to lower cost competitors = low margins and losses.

Until part of this equation is fixed it will be status quo or worse.

 

[WorldTraveler]

Bob,
a few responses.
- Most US stocks - not just airlines - are owned by institutional investors but other companies and industries manage to make money. There is nothing inherently in the ownership of airlines that says they are not interested in making money.
However, most transportation companies as a whole do not make money because transportation is often hiighly capital AND labor intensive.

BUT again, there are other airlines - network and low fare carriers - that make money and our outperforming AA's performance. To excuse AA's performance as just "to be expected" is tantamount to agreeing that AA can't survive - because absent AMR's ability to make money at some point, they cannot survive.

Your example of 5% margins on an ongong basis is valid IF it were true on an ongoing/continual basis. But even for the large network airlines and many LFCs, it is not true. They lose money during the bad times/downturns so they must make good money during the up cycles in order to even stand a chance of making money on an ongoing basis. A 3.5% margin during the best of times guarantees that AMR cannot be profitable on an ongoing basis; CO, DL, and UA have all significantly trimmed their losses during the last downturn and managed to post double digit margins during the past quarter.

The reason analysts are concerned about AMR is because they likely have missed the opportunity to make money in this business cycle. Airlines are highly cyclical and they are also seasonal. There is no assurance that airlines will be profitable again next summer which is when AMR next has the opportunity to make money in all likelihood. When other carriers make money at healthy margins and AMR doesn't for an entire year, it will catch up - likely in the next down cycle when those other airlines have more financial cushion and AMR/AA does not.... but perhaps that is AA mgmt's plan - to bring AA close enough to failure that they can finallly deal with AA's labor costs.

Once again, AA's productivity (number of ASMs produced per employee) is significantly higher than at any other airline. Using the excuse that AA does work in-house that other airlines outsources only matters if those in-house employees can do it efficiently. AA does not have in-house efficiency..

Further, the revenue advantage that many here try to argue exists for AA simply does not exist as it once did. CO and DL now generate as much revenue on NYC to LHR as AA does. VX is carrying a significant number of high value customers on AA's historic transcon markets. DL, beleive it or not, is now the largest carrier between JFK and MIA for LOCAL passengers and they are getting average fares comparable to AA. AA's network is under full assault from every side because every other carrier recognizes AA's vulnerability and AA's revenue premiums are falling - and fast.

AA has no choice but to deal with its labor and network competitive issues and the only way that can happen is if there is a commitment on both sides to allowing AA to effectively compete against other carriers which are much more efficient - and still provide better service.

 

[Bob Owens]

It's very simple math. High costs + loss of pricing power to lower cost competitors = low margins and losses.

Until part of this equation is fixed it will be status quo or worse.

Simple math or simpletons math?

 

[The Goose]

Simple math or simpletons math?

Some either believe all they are told or tell only what they want others to believe. Hard to tell where FFCA fits in.

 

[Bob Owens]

Bob,
a few responses.
- Most US stocks - not just airlines - are owned by institutional investors but other companies and industries manage to make money. There is nothing inherently in the ownership of airlines that says they are not interested in making money.
However, most transportation companies as a whole do not make money because transportation is often hiighly capital AND labor intensive.

Yes, and if labor intensive industries made money then workers expectations would rise and they would be compelled to meet those expecations, so they make sure they funnell the money elsewhere. Is there really any justification for $1000 toilet seats? $4500 landing fees?

BUT again, there are other airlines - network and low fare carriers - that make money and our outperforming AA's performance. To excuse AA's performance as just "to be expected" is tantamount to agreeing that AA can't survive - because absent AMR's ability to make money at some point, they cannot survive.

Make money or show a profit? From the Industry we have heard time and time again about how this industry has been an overall net loss to the tune of Billions of dollars over the last 75 Years. Why does it still exist? Because despite the lack of posted profits it generates revenues and spurs economic activity.

Your example of 5% margins on an ongong basis is valid IF it were true on an ongoing/continual basis. But even for the large network airlines and many LFCs, it is not true. They lose money during the bad times/downturns so they must make good money during the up cycles in order to even stand a chance of making money on an ongoing basis. A 3.5% margin during the best of times guarantees that AMR cannot be profitable on an ongoing basis; CO, DL, and UA have all significantly trimmed their losses during the last downturn and managed to post double digit margins during the past quarter.

These are "the best of times"? Funny but everyone else keeps telling us these are "Bad times". I think that if AA didnt have all their contracts in mediation they would have showed a profit but they would not dare to do it now and they simply timed their payments, writedowns etc to show a loss. The fact that during a recession those carriers are showing profits just shows how much the workers have been ripped off.

The reason analysts are concerned about AMR is because they likely have missed the opportunity to make money in this business cycle.

Name them. Then we will look and see how credible they are.

Once again, AA's productivity (number of ASMs produced per employee) is significantly higher than at any other airline. Using the excuse that AA does work in-house that other airlines outsources only matters if those in-house employees can do it efficiently. AA does not have in-house efficiency..

You are contradicting yourself.

We keep seeing that same spin. AA actually brings more work in house, ANDits labor costs went down. They actually acheived a remarkable feat. Comparing AA to other carriers in this respect is not really a valid comparision, because many of them simply transferred the costs to a different category. We often see the corporate press cite things like "The carrier decided to contract out work to another company that pays their workers much less", but they never tell what the carrier is paying that company for the labor. So labor costs may have gone down but in the end it may not have had a positive effect on either the CASMs or RASMs. For instance UAL saw their maintenance costs go up when they sent out most of their Heavy OH work. AA says they can send out some of its heavy OH and pay $55 per hour, well when you factor in all the lower paid workers AA is only paying around $27/hr. They could lower their labor costs by paying the vendor $55 per hour but it would raise their CASMs. At UAL sending the work out lowered their labor costs but had a negative effect by incresing their CASMs. What we need to look at is all the costs that go into the CASMs, pull out labor and outsourced labor related costs , then compare whats left. Even then there are so many other variables that a true comparision between carriers as a whole are nearly impossible. Arpey claimed that they could not figure out if insourcing is more cost effective than outsourcing even after 6 years, its doubtful that you or the analysts would have access to info in which you could make such a determination either.

One thing that can be looked at is how the carrier compares to itself at an earlier time. AA's labor costs are in fact at an all time low, consuming a smaller percentage of the revenue than ever before despite the fact that we do more maintenance in house than we did before. In fact we're so productive that AA reatains around 1800 mechanics that contractually they could lay off at any time. The company even offered to give 500 of that 1800 system protection, that wasnt a union demand, it was a company offer.

 

[WorldTraveler]

Yes, and if labor intensive industries made money then workers expectations would rise and they would be compelled to meet those expecations, so they make sure they funnell the money elsewhere. Is there really any justification for $1000 toilet seats? $4500 landing fees?





One thing that can be looked at is how the carrier compares to itself at an earlier time. AA's labor costs are in fact at an all time low, consuming a smaller percentage of the revenue than ever before despite the fact that we do more maintenance in house than we did before. In fact we're so productive that AA reatains around 1800 mechanics that contractually they could lay off at any time. The company even offered to give 500 of that 1800 system protection, that wasnt a union demand, it was a company offer.

Despite the mindset that some seem to have, companies can't just "hide" money. There are standards for accounting and audits - and they are tougher than ever. To argue that AA is hiding its money to avoid having to give something to the unions misses the fact that AA is genuinely losing money... there just aren't any two ways to hide that. If AA's labor costs are the lowest percentage they have ever been, then AA hasn't made the changes that other carriers have - and that is reflected in AA's market value which is lower than CO, DL, or UA and only 20% higher than Alaska.
Here is what the Motley Fool said about AMR stock
http://www.fool.com/investing/general/2010/05/26/throw-this-stock-away.aspx
AMR's labor costs are $600 million higher than they would be at the other major carriers. His words may seem like a negotiating ploy in squeezing concessions out of its unions, but the company's red ink doesn't lie.

"Let's go over a few of the other reasons to avoid AMR.

•The airline is still not profitable. Analysts see another loss this year. And this is not an industry thing. Several carriers, even some of AMR's legacy peers, are projected to land squarely in the black this year.
•AMR isn't trending favorably. It posted larger losses than analysts were expecting in each of the two previous quarters.
•Leverage cuts both ways, and AMR is feeling the pinch of its $11.4 billion in net debt position.
AMR isn't toast. Consumers seem to have no beef with the product, considering 7.1 million passengers boarded American flights last month. There also appears to be some near-term relief in fuel prices.

However, AMR's bloated cost structure is still going to make it the last kid picked. If its competition can be profitable at price points where AMR is not, this can't end well for the legacy carrier."

I have a family member who works for AA - I have every reason to want them to turn around.

 

[olderguyAMT]

About Operating Margin. OK, I am not a bean counter. but,

Correct me if I am wrong.

Operating Margin is a measure of efficiency. And, a high OM is better than a low OM. Best to be trending higher over time.

So a low OM compared to the competition is not good, and means that the co. is not as efficient in comparison

. Who to blame for this?

you can google it like I did, or you can keep on believing that a low OM is good.

I have a bridge in Arizona to sell you.

 

[jimntx]

About Operating Margin. OK, I am not a bean counter. but,

Correct me if I am wrong.

Operating Margin is a measure of efficiency. And, a high OM is better than a low OM. Best to be trending higher over time.

Well, yes and no. A high Operating Margin is always better than a low Operating Margin. However, efficiency is just one of the factors affecting Operating Margin. You can have the most efficient airline operation in the business (think Southwest), but if fuel prices rocket into the stratosphere, if there's a recession and people stop flying, or people become less willing to pay top dollar for their ticket, you are still going to have a serious reduction in your operating margin.

Operating Margin is the difference between the cost of providing a good or service and the amount of profit you can generate from that good or service. Grocery stores are notorious for having razor-thin operating margins--generally less than 2%. But, they manage because their fixed costs tend to remain steady, and they can plan for everything except a spike in the cost of green beans. If that happens they can raise the selling price of the beans without jacking up the cost of the coffee and hamburger at the same time.

With an airline, the only relationship with the customer (at least from their viewpoint) is the ticket and what it costs. Because jet fuel is not an optional item for us, the cost of it must be covered. The customer who thinks nothing of paying twice as much for green beans this week and doesn't notice because the coffee and the hamburger costs the same is furious at the "outrageous" jack up in air tickets this week because when he was just casually looking at Expedia last week, the cost was only $89 to fly to LAS. This week it's $250. Of course, last week was Aug 15th-Aug 25th. When he has decided to go is Labor Day weekend, and a well just blew out in the Gulf creating a shortage of crude oil supplies.

 

[WorldTraveler]

Well said, Jim. A few points.
The real issue is not if ALL airlines have to pay higher prices for oil or grocery stores for green beans; the problem arises when some have an "unfair advantage" such as what WN had for the first half of this decade with hedges that kept their price at a fraction of what the network carriers paid. That advantage allowed WN to aggressively move into new markets like PHL and DEN and take share from other carriers. WN's fuel prices are now closer to the rest of the industry so fuel is not the advantage for any carrier it once was.
But fuel is not the only issue... a recent article (I think USAToday) ranked the least efficient US airlines and DL was just below AA. Of couse DL is parking DC9s and AA is replacing M80s but there is still a large difference between total costs at DL and AA despite very similar fuel costs both per gallon and per ASM. The discussion gets uncomfortable for a lot of people when it becomes apparent that there isn't any manipulation of the numbers but there are vastly different cost structures between DL and CO - which have pretty similar overall costs - and AA.

Maintaining premium revenue is key to helping offset higher costs and that traditionally has been how network carriers have offset their higher costs. But as low fare carriers have flourished and network airlines have "invaded" each other's core markets, revenue premiums diminish.

The clear key for network airlines is to continue seek new revenue sources (ie expansion of flying to new regions/cities) as well as keep costs down. The best way network airlines keep costs down is by growing since there is a natural increase in costs as employees move up the seniority scale. A big part of CO's success in the 1990s and 2000s was because they rapidly grew which meant they were starting a lot of new routes with incrementally less expensive employees (in aggregate for the entire company's costs). Not surprisingly as CO's growth as slowed, their costs have gone up relative to other network carriers. But CO was able to grow rapidly in the 1990s because they had low costs and found revenue premiums - largely developing EWR as a large global hub for NYC.

There are a lot of us that would be tickled pink to see AA return to a high growth mode which will help keep costs down and allow them to further grow their network - which will be significantly challenged by the combined UA/CO and DL.... but AA must have competitive costs in order to be able to grow.

 

[eolesen]

I agree that growth will only come with lower costs, but I don't know what's left for them to expand right now.

They're pretty well boxed in at ORD and JFK between competition from UA and DL respectively, and both facilities are already at capacity.

Neither LAX or BOS have proven to be airports where any one carrier is dominant, and they're already so large at MIA and DFW that further expansion there flies in the face of the Law of Diminishing Returns.



Operating profit is an important measure to watch, but not the only one since it is also before taxes and interest, and AA's still got a lot of debt to service...

 

[MCI transplant]

It's very simple math. High costs + loss of pricing power to lower cost competitors = low margins and losses.

Until part of this equation is fixed it will be status quo or worse.

<_< ------- The end results of "deregulation!" Until fairs are reasonably priced (not a popular idea) none of this will change! It's that simple!