Amr first quarter reusults

[Bob Owens]

The following was sent to me from CitiGroup;

What’s New? — Late last night, LUV (LUV.N; US$11.65; 1H) was the final major US airline to match the 11th broad-based domestic fare increase attempt initiated by DAL on April 18th. The success of the 11th fare hike of $10 roundtrip on most domestic routes marks the 7th successful attempt of this year, following the past 4 failures due to a lack of LUV’s participation. Domestic fares now stand up to $58-70 roundtrip higher than at 2010-end (note: 2010 average domestic fares $337). We continue to believe disadvantaged airlines should materially cut incremental capacity to support these fare increases while maintaining high load factors, offsetting the 30% YTD surge in jet fuel (GC) prices, and holding 2010 profit levels. If US airline managements show real capacity discipline in the coming week during the 1Q 2011 earnings season, we would expect the 14% YTD selloff in the XAL index to partially reverse.

The airlines have given themselves 7 raises this year. Ticket prices have seen as much as a 21% ($70 vs $337) increase. Fuel may be up 30% but fuel only makes up 30% of the total cost, so fuel would only be responsible for raising total costs roughly thirty percent of thirty percent or 11%.

So it appears that increased ticket prices have more than made up for the increased price of fuel. The question is why didnt the airlines do it sooner? I mean increased fuel costs puts a drain on the rest of the economy, meaning that when fuel was cheaper passengers would have more disposable income and would have paid more for airfare if the airlines would have charged more. But I suppose thats why these guys deserve millions a year in compensation!

It seems that most people are ignoring this line from the cover of the report;

AMR reported first quarter consolidated revenues of approximately $5.5 billion, an increase of 9.2 percent year over year. American, its regional affiliates, AA Cargo, as well as the ‘other revenue’ category, experienced year-over-year increases, as total operating revenue was approximately $465 million higher in first quarter 2011 compared to the first quarter of 2010.Consolidated passenger revenue per available seat mile (unit revenue) grew 5.2 percent, while mainline unit revenue at American grew 5.0 percent, in each case compared to the first quarter of 2010.

If they brought in $22 billion last year they could end up bringing in $24 billion this year.

Our offer was for $0.19 billion a year or $0.047Billion a quarter, meanwhile their revenue for the first quarter was up $0.465 billion. So the revenue increase from just this one quarter would cover 10 consecutive quarters, or 2 and a half years of our table position.

 

[odie01]

The following was sent to me from CitiGroup;



The airlines have given themselves 7 raises this year. Ticket prices have seen as much as a 21% ($70 vs $337) increase. Fuel may be up 30% but fuel only makes up 30% of the total cost, so fuel would only be responsible for raising total costs roughly thirty percent of thirty percent or 11%.

So it appears that increased ticket prices have more than made up for the increased price of fuel. The question is why didnt the airlines do it sooner? I mean increased fuel costs puts a drain on the rest of the economy, meaning that when fuel was cheaper passengers would have been even less tight with their money and would have paid more for airfare if the airlines would have charged more. But I suppose thats why these guys deserve millions a year in compensation!

With all of the recent mergers creating less competition, it seems like we are going back to some form of regulation between the airlines.

 

[WorldTraveler]

The following was sent to me from CitiGroup;



The airlines have given themselves 7 raises this year. Ticket prices have seen as much as a 21% ($70 vs $337) increase. Fuel may be up 30% but fuel only makes up 30% of the total cost, so fuel would only be responsible for raising total costs roughly thirty percent of thirty percent or 11%.

So it appears that increased ticket prices have more than made up for the increased price of fuel. The question is why didnt the airlines do it sooner? I mean increased fuel costs puts a drain on the rest of the economy, meaning that when fuel was cheaper passengers would have more disposable income and would have paid more for airfare if the airlines would have charged more. But I suppose thats why these guys deserve millions a year in compensation!

It seems that most people are ignoring this line from the cover of the report;



If they brought in $22 billion last year they could end up bringing in $24 billion this year.

Our offer was for $0.19 billion a year or $0.047Billion a quarter, meanwhile their revenue for the first quarter was up $0.465 billion. So the revenue increase from just this one quarter would cover 10 consecutive quarters, or 2 and a half years of our table position.

Bob,
the simple answer is that not ALL fares go up 30%... that is why you look at YIELD which is the change in fares that are actually received... not all of the fare increase actually goes to the bottom line because of sales, discounts etc.
Also, AA's fuel bill increased by most of that $465M.... all AA basically did was cover their incremental increase in fuel costs (most carriers covered the fuel increases this quarter with fare increases) but AA didn't fix its underlying structural issues including its underperformance of revenue. SEE BELOW....


---------------------------
I am very glad to see that some people are taking these posts as an opportunity to discuss AA’s strengths and weaknesses so that the people who have the most at stake in AA’s future can be fully aware of the factors involved and can formulate meaningful strategies to allow AA to return to its previous position of industry leadership.

How many do DL and CO/UA operate today?

DL and AA operate 15.6% and 13.1% respectively of the flights in NYC. CO/UA operate over 25%, Jetblue is 10%.

So using your revenue share stats and weighting to total departures, AA is pulling down 17% of the revenue share with 13.1% of the departures, which isn't too shabby, and about the same ratio of revenue:departures as what CO/UA pull in today, which is 33% with 25% of the market. DL has 25% with 15.6%.

I'm sure you realize that market share and revenue share don't increase on a straight-line; they increase on a curve, and that's apparent when you factor in all carriers at NYC, and not just the top 4.

Consistent with the curve, DL is clearly earning more revenue share better, but again, they serve more markets, and that's expected in a hub. And surprisingly, CO/UA doesn't look as good as I would have expected. AA? Not too far off from where I'd expect them with fewer markets.

First, Eric, I am particularly glad we can dialogue about important industry issues…. 
I had part of the data but filled in the missing pieces …
In the summer of 2006, at all 3 main NYC airports, AA had an average of 150 mainline flights per day, CO had 250, and DL had 171. There were an average of 1050 mainline flights on all carriers per day.
Looking at total flights (mainline and regional) in 2006, AA had 256, CO 453, and DL had 286 with a total on all carriers of 1663 per day (note all of these are averages since not all flights operate every day).
Note also that I am including NW’s counts in DL’s for both 2006 and 2011 even though NW wasn’t merged with DL – but you can see the growth rates more accurately. I am not including UA’s counts in CO’s.
As of this summer, AA has 131 ML, CO 203, and DL 184 out of 1008 (note that LGA overall has lost about a small percent of flights while JFK is up; EWR is down somewhat as well). Total flights for AA and AE is 233, 397 for CO, and 370 for DL
(I honestly didn’t realize DL was so close to CO in overall flights and I think this explains all the more why CO felt it needed to merge because its dominant position in NYC was threatened – as evidenced by the small difference between CO and DL’s revenue percents).
So, based on total flights, in ’06, AA had 15%, CO had 27%, and DL had 17%. Now, AA has 14%, CO has 24%, and DL has 22%.
All three carriers are generating a couple percent more revenue than their share of flights which isn’t unexpected since they are the three primary international carriers; the growth of the market by low fare carriers is coming via fares well below the average fares of AA, CO, and DL; and carriers such as US are not efficiently using their slots using small aircraft that are generating little revenue – thus the impetus for the slot deal which makes sense both for NYC and for US who gets rid of underperforming assets and DL which can apparently use them more efficiently.
While your methodology of looking at revenue relative to the total size of the slots in the metro area is not typical (revenue comparisons are usually done per passenger), there is an obvious correlation since AA, CO, and DL receive fairly similar average fares and have similar average aircraft sizes.
What the data says is the same point I made before which is that DL is the network carrier that has chosen to grow in NYC while every other network carrier including CO have pulled back on their operations but with AA’s reductions resulting in the greatest percent reduction in revenue of the network carriers.
So it is the low fare carriers and Delta who are growing in NYC at the expense of the other network carriers including AA.
Of course, CO is offsetting its decline in market share through the merger with UA which keeps them above DL in total revenue from the NYC metro area but also helps them strengthen their revenue position at LGA and JFK which generate higher percentages of NYC local revenue than EWR.
So, your methodology does show that AA is maintaining its revenue share relative to its reduced schedule but I still have questions for you.
1. Why couldn’t AA have figured out how to grow in NYC the same way DL did? Remember that AA actually cut flights at LGA… I still don’t know where those slots went. Do you?
2. Even considering that the Caribbean markets which B6 particularly invaded and which resulted in a lot of AA seats coming out of the NYC market, is it really sustainable to see AA shrink its revenue in other regions to/from NYC?
3. Can you show me a corporate strategy that has a company moving from number 2 to number 3 in a market and calling that success?
4. You mention hub strategies… so you certainly know that there are precious few markets in the US that are divided among multiple carriers. DL was unable to play a distant second fiddle to AA in DFW. UA’s share in DEN is falling at the expense of two low cost carriers – and UA is pulling back capacity. FL could not maintain its presence against DL on its own in ATL and sought WN as a merger partner. There are no examples of long term success of two large carriers in the same market of substantially different sizes…. In ORD, AA and UA have lived fairly comfortably side by side as AA has been the dominant carrier ORD-east while UA has been dominant ORD-west. But the UA/CO merger ups the ante against AA in all of the traditional AA/UA competitive markets by balancing UA’s strength in the western US with CO’s strength in the East.
Can you give me an example of an airline strategy that has resulted in long-term success for a carrier who had not one but two larger competitors in the same region? Remember that CO/UA’s revenue share in NYC will be about 1/3 while DL is pushing the upper 20s now and could get into the low 30s if the LGA slot deal goes through – both revenue shares close to double what AA has now.
If you can show me some evidence from business history esp. among airlines that shows that one carrier is able to survive long term as a major competitor half the size of two others, I am all ears.
I’m glad to be able to rationally discuss these issues and appreciate the contributions we can make together to helping understand AA’s situation and perhaps help find a solution or two….

Tell me, WT..What is your advice for AA management? Should they too decide if THEY want to do something about employee morale at AA?
Because if you think that a bankruptcy filing by AA will right this ship, your are wrong! What rebuilds AA is gaining employee trust and respect. That, in turn, will improve morale, and the end result will be a better AA.
But simply telling employees we need to take in the rear again will only anger employees more.

No I don’t think you should bend over and take it again…. I’ve said many times that AA’s employee cost problems are productivity related… too many employees doing the same work that other carriers do with less people.
My recommendations….
1. The current management team has to go… I don’t see how even if they got all they wanted cost wise could have the credibility with employees to lead AA. It is no surprise that DL was one of the most successful airlines in the pre-deregulation era when it had well above average employee relations. They lost a lot of that or allowed it to be tossed out the window as they struggled to figure out who they should become for much of the last quarter of the 1900s. It also isn’t a surprise that CO’s resurgence came in part because they rebuilt very badly damaged employee relations and also become highly successful. Morale can be rebuilt but it never happens without a change of leadership….
2. That leadership in my mind has made some very wrong strategic decisions including holding out for an alliance with BA while other carriers built other alliances much faster and which are larger than oneworld; AA’s decision to be a niche airline in key competitive business markets where other carriers are choosing to grow is discussed above; AA’s inability to find Pacific growth opportunities outside of the crushing influence of UA which has outperformed AA on every route out of ORD on which they compete.. and is now extending that to Atlantic routes as well.
3. Increased productivity is not something unions will go after… it is generally against union principles to reduce headcounts in order to increase the size of the compensation pie for a smaller number of employees – but that is what AA must do. AA could reduce its employee costs and its employees could avoid further paycuts but productivity has to go up. Yes, I know all of the stories about all the new supervisors being hired and that TOO has to end… but that hasn’t been the case for the past several years while other carriers have increased their productivity.
4. There are some principles that you die for and there are others where you can’t buck what is happening elsewhere in the world and you just figure out how to adapt.
Standing against outsourcing is great – but you’ve got to attack it at the industry/government level. AA and its employees cannot go down in flames trying to stand for something that no one else even sees as an issue any longer.
5. AA has to meaningfully invest in its product; there is nothing distinctive about AA’s product or service any longer.
Finally, DL and US both reported their first quarter 2011 financials today; all of the network carriers and AMR’s largest low fare competitors have now reported.
A couple items stand out:
AMR underperformed its peers on RASM growth as I expected…. The industry as a whole was around ten percent. AMR was at 5 percent, DL and US were at 7-8%, and UA and WN and other LFCs were at 10% or above. UA used its position as the largest carrier in the domestic, transatlantic, and Pacific regions to not grow or pull down more capacity than its peers, helping push UA’s RASM higher.

1. AMR underperformed its network peer RASM in every DOT global region (domestic, transatlantic, transpacific, and Latin America). AA and DL grew at similar 4-5% growth rates and plan to do so into the 2nd quarter; US was about a point lower while UA expects flat capacity through the end of the year. All US network carriers expect to grow int’l faster than domestic…. But AMR’s greatest underperformance was in the int’l regions. AA’s best performance relative to its peers was on domestic but it still underperformed by a point or more.... most network carriers had flat domestic capacity and intend to keep it that way through the year. AA and DL were both RASM growth negative to Europe/Africa/Middle East/India while UA was slightly positive (US does not report RASM by region) although DL had double digit capacity growth and generated slightly higher RASM. In the Pacific, AA also had negative RASM growth on ~25% more capacity but DL had double digit RASM growth on about 20% more capacity. UA grew Pacific capacity by just 4%. Given that AA and DL both started HND routes and DL and UA are both much larger to Japan than AA, Japan itself does not appear to the source of the AA’s Pacific RASM problem. AA and DL both started new PEK flights in the past year with bad slot timings at PEK. I would strongly suspect that AA’s Pacific problems are related to its new PEK flight; DL’s new PEK flight is a 767 from the west coast vs. AA’s 777 from ORD, making DL’s new PEK route a much smaller part of its network. IN AA’s backbone Latin America system, AA had the most capacity (both by percentage and absolute amount) and reported half the RASM growth that DL and UA reported.
Even though AA’s RASM underperformance was worse on int’l compared to domestic, AA plans to continue growing int’l.

Secondly , DL, UA, and US all paid down debt in the first quarter while AMR took on additional debt.

Finally, AA did buy jet fuel for the lowest price…. About 5 cents better than UAL and 10 cents better than DL and US.
AA also had the best mainline cost control among the network carriers.

Even though other carriers faced their own challenges – all noted revenue hits due to operational/weather/natural disasters, AMR reported the weakest revenue performance and the weakest overall finances.

AA is in a difficult position. It cannot remove capacity without affecting its network footprint and increasing its CASM, already the industry’s highest. Other carriers can pull down small amounts of capacity throughout its network and force up RASM and still have a strong network; AA, which chose not to merge, does not have that luxury.

So, Hopeful, bending over again won’t fix AA’s most significant problem relative to its peers which are at their roots revenue related.

Figure out how to get AA’s revenue production fixed and you have fought a good chunk of the battle you face; there are cost issues related to AA’s labor productivity but you don’t need to take pay cuts in order to fix it… you just need to get rid of some folks.
.
It is also apparent that significant changes to AMR’s strategic thinking are what is needed, not just pay cuts or even productivity alone from the employees.

 

[Bob Owens]

Bob,
the simple answer is that not ALL fares go up 30%... that is why you look at YIELD which is the change in fares that are actually received... not all of the fare increase actually goes to the bottom line because of sales, discounts etc.
Also, AA's fuel bill increased by most of that $465M.... all AA basically did was cover their incremental increase in fuel costs (most carriers covered the fuel increases this quarter with fare increases) but AA didn't fix its underlying structural issues including its underperformance of revenue. SEE BELOW....

I think you are biting off more than you can chew. I didnt say fares went up 30%, fuel reportedly went up 30%, I said fares went up 21% and yield would not reflect that because the fares went up in incremnents, but fares are now around 20% higher than they were Jan 1. Fuel also went up incrementally so even though fuel costs are 30% more now that doesnt mean that their bill for the quarter would be 30% higher and AA has hedges that would offset the increases as well. According to the statement it looks like fuel drove CASMs up around 8% if I'm reading it right.

Underperformance of revenue? Revenue went up over 9% yoy, with less people and less planes. If my revenue increased by the same percentage as AMRs I wouldnt be posting on this website. Overall, since the concessions, despite shedding 200 airplanes and 40,000 workers revenue had increased by 23% by 12/31/2010. Thats pretty remarkable by any standards. I think you have unrealistic expectations, how many 75 year old companies have seen double digit revenue growth while shrinking output by over 30% at the same time?

 

[eolesen]

WT, one thing that 25 years in the industry has taught me is that there are few absolutes.

History shows that the "only one airline can dominate" argument falls apart pretty quickly in the US when you're dealing with local markets with >10M people in the catchment area, e.g. LAX, ORD, and NYC. They've got huge O&D. Even having just 15% of the market can mean >$1B in local revenue.

ORD has successfully supported two hub carriers, and they also do so with WN having a hub at MDW.

Without going into OAG forensics, I have no idea why AA is down a whopping 20-some flights a day over a five year period. There isn't as much northeast-Florida flying, and with the JetBlue agreement, the BA/IB ATI, and other partnerships, having fewer flights also doesn't necessarily mean that they lost those customers when it comes to flying on a route AA is in.

 

[FWAAA]

I think you are biting off more than you can chew. I didnt say fares went up 30%, fuel reportedly went up 30%, I said fares went up 21% and yield would not reflect that because the fares went up in incremnents, but fares are now around 20% higher than they were Jan 1. Fuel also went up incrementally so even though fuel costs are 30% more now that doesnt mean that their bill for the quarter would be 30% higher and AA has hedges that would offset the increases as well. According to the statement it looks like fuel drove CASMs up around 8%.

If AA's unit revenue were up 20% since January 1, 2011, AA's problems would largely disappear. AA's unit revenue increased in Q12011 but nowhere near 20%.

Delta said today that its higher fares in the first quarter covered only about 70% of its higher costs:

Year to date, U.S. airlines have raised airfares 17 times in an attempt to match climbing fuel prices, but the industry continues to fall behind the cost increase. For Delta, fare hikes in the first quarter offset just 70% of its higher expenses.

http://www.marketwatch.com/story/delta-says-fares-to-europe-are-going-up-2011-04-26?siteid=yhoof

AA managed to raise fares higher than UA's fares in the first quarter, but fewer people flew and AA's load factor fell, causing UA's unit revenue (PRASM) to exceed AA's PRASM even though AA's average fare (yield) was higher than UA's yield. Raise fares too much and passenger count drops off. UA did a better job than AA as UA didn't raise fares quite as high.

Underperformance of revenue? Revenue went up over 9% yoy, with less people and less planes. If my revenue increased by the same percentage as AMRs I wouldnt be posting on this website. Overall, since the concessions, despite shedding 200 airplanes and 40,000 workers revenue had increased by 23% by 12/31/2010. Thats pretty remarkable by any standards. I think you have unrealistic expectations, how many 75 year old companies have seen double digit revenue growth while shrinking output by over 30% at the same time?

By starting with one of AA's worst years ever (2002 or 2003), you inflate the revenue gains, making it appear as though AA should have billions of extra money left over. 2002 and 2003 saw very low revenues - billions less than expenses, so of course as AA slowly recovered from the low revenues of late 2001 the revenue delta grew very large. AA's mainline revenues were much better in 2010 than in 2002, but many expenses were much larger, like fuel and interest expense.

 

[Bob Owens]

If AA's unit revenue were up 20% since January 1, 2011, AA's problems would largely disappear. AA's unit revenue increased in Q12011 but nowhere near 20%.

You seem to be suffering from the same affliction as WT. Where did I say revenues went up 20%? Fares are now up Industrywide by up to $70 compared to the end of 2010, that comes out to around 20% according to the report. AA reported that revenues were up 9%, on reduced capacity, still pretty good, a lot better than our revenues.

Delta said today that its higher fares in the first quarter covered only about 70% of its higher costs:

Key missing word, Fuel. Its says costs went up more than fare increases. Delta gave their mechanics a raise last year, I imagine other workers saw increases as well. Besides Delta showed a healthy half a $Billion profit last year, maybe they saved all their expenses for this year. When does their Pilots contract open? 2012? Losses in 2011 would be posted next year just as the pilots start negotiating their contract, imagine that!

By starting with one of AA's worst years ever (2002 or 2003), you inflate the revenue gains, making it appear as though AA should have billions of extra money left over. 2002 and 2003 saw very low revenues - billions less than expenses, so of course as AA slowly recovered from the low revenues of late 2001 the revenue delta grew very large. AA's mainline revenues were much better in 2010 than in 2002, but many expenses were much larger, like fuel and interest expense.

You say that expenses were Billions less than revenues in 2002, well could you be more exact? $17 billion is "Very Low Revenues"?

I figure the fact that they cut 40,000 workers and over 200 airplanes, shrinking the company by nearly 30% more than levels the field. The revenue gains are what they are, they arent inflated, if anything they underscore the total gain.

Besides how many references go back more than 10 years?

How much more are they paying in interest? Because in 2003 we were told they had $22 billion in debt now they have at least $5billion less but they are paying more now than they were then?

 

[FWAAA]

Key missing word, Fuel. Its says costs went up more than fare increases. Delta gave their mechanics a raise last year, I imagine other workers saw increases as well. Besides Delta showed a healthy half a $Billion profit last year, maybe they saved all their expenses for this year. When does their Pilots contract open? 2012? Losses in 2011 would be posted next year just as the pilots start negotiating their contract, imagine that!

That's not how accrual accounting works. Companies don't "save expenses" for future years.

 

[Bob Owens]

That's not how accrual accounting works. Companies don't "save expenses" for future years.

Perhaps but when they post their earnings they include things like depreciation, which can be accellerated, Special items, Good Will and other intangibles. They may not "save expenses' per se but they can strategically time when they include some of that other stuff and make a profitable year dissappear.

You avoided the core question, was the cost increase only for fuel?

 

[WorldTraveler]

I think you are biting off more than you can chew. I didnt say fares went up 30%, fuel reportedly went up 30%, I said fares went up 21% and yield would not reflect that because the fares went up in incremnents, but fares are now around 20% higher than they were Jan 1. Fuel also went up incrementally so even though fuel costs are 30% more now that doesnt mean that their bill for the quarter would be 30% higher and AA has hedges that would offset the increases as well. According to the statement it looks like fuel drove CASMs up around 8% if I'm reading it right.

Underperformance of revenue? Revenue went up over 9% yoy, with less people and less planes. If my revenue increased by the same percentage as AMRs I wouldnt be posting on this website. Overall, since the concessions, despite shedding 200 airplanes and 40,000 workers revenue had increased by 23% by 12/31/2010. Thats pretty remarkable by any standards. I think you have unrealistic expectations, how many 75 year old companies have seen double digit revenue growth while shrinking output by over 30% at the same time?

You seem to be suffering from the same affliction as WT. Where did I say revenues went up 20%? Fares are now up Industrywide by up to $70 compared to the end of 2010, that comes out to around 20% according to the report. AA reported that revenues were up 9%, on reduced capacity, still pretty good, a lot better than our revenues.



Key missing word, Fuel. Its says costs went up more than fare increases. Delta gave their mechanics a raise last year, I imagine other workers saw increases as well. Besides Delta showed a healthy half a $Billion profit last year, maybe they saved all their expenses for this year. When does their Pilots contract open? 2012? Losses in 2011 would be posted next year just as the pilots start negotiating their contract, imagine that!



You say that expenses were Billions less than revenues in 2002, well could you be more exact? $17 billion is "Very Low Revenues"?

I figure the fact that they cut 40,000 workers and over 200 airplanes, shrinking the company by nearly 30% more than levels the field. The revenue gains are what they are, they arent inflated, if anything they underscore the total gain.

Besides how many references go back more than 10 years?

How much more are they paying in interest? Because in 2003 we were told they had $22 billion in debt now they have at least $5billion less but they are paying more now than they were then?

Perhaps but when they post their earnings they include things like depreciation, which can be accellerated, Special items, Good Will and other intangibles. They may not "save expenses' per se but they can strategically time when they include some of that other stuff and make a profitable year dissappear.

You avoided the core question, was the cost increase only for fuel?

Bob,
The simple and pretty complete answer is that the vast majority of AMR’s increased revenues went to pay for increased fuel .
Using AA’s 1st quarter financial news release,
http://finance.yahoo.com/news/AMR-Corporation-Reports-1Q-prnews-2771578228.html?x=0&.v=1
AA’s revenue increased by about $460M while fuel went up $365. A few other cost items came down while a few others went up BUT the net result is that AA REDUCED its losses from a year ago through the increased revenue.
Even though AA’s additional capacity generated revenues below what AA had received before), it managed to cover cost which meant that the rest of the system – employees, aircraft – were more efficient. That’s why AA’s mainline costs were flat when they naturally would be going up every year because people move up the pay scales etc.

Your snapshot also misses the point that revenue has not kept with AA’s increasing costs, some of which are due to the natural increase in costs that come – as people move up the pay scale, as planes age etc and as fuel is getting more expensive… even if you level out the spikes in fuel prices, fuel costs more now than it did a decade ago.

AA is trying to combat the non-employee part of the cost creep by replacing aging airplanes with newer, more fuel efficient models….
But the only way you can control employee costs is by getting rid of a lot of high seniority people on a pretty regular basis which is almost impossible to do since the highest seniority are the last ones to get cut in layoffs, you cut their pay, or you grow so that you have a steady supply of low salary people coming in at the bottom to counteract the higher salary people at the top of the scale… the 2nd option is what happens in bankruptcy while the 3rd is what WN and others have used to keep costs from growing… and what DL is doing now to offset its own cost creep.
BTW, DL’s CASM was up 4% this quarter and they said half of that was due to storms/Japan etc. All DL pilots received some sort of increased pay/benefits (not sure of the details) as well as all PMDL non-contract employees… combined that is probably 75% of DL’s workforce. The PMNW people didn’t get payraises pending the outcome of the unions appeal… bottom line is that 75% of DL’s workforce received pay raises which increased DL’s CASM by about 2%.... DL has been offsetting those costs by growing the company and by bringing in new, lower salary people.
AA has now started to do the same thing to keep its mainline costs from going up but they are starting with a CASM which is now 5-15% higher than DL and UA.

WT, one thing that 25 years in the industry has taught me is that there are few absolutes.

History shows that the "only one airline can dominate" argument falls apart pretty quickly in the US when you're dealing with local markets with >10M people in the catchment area, e.g. LAX, ORD, and NYC. They've got huge O&D. Even having just 15% of the market can mean >$1B in local revenue.

ORD has successfully supported two hub carriers, and they also do so with WN having a hub at MDW.

Without going into OAG forensics, I have no idea why AA is down a whopping 20-some flights a day over a five year period. There isn't as much northeast-Florida flying, and with the JetBlue agreement, the BA/IB ATI, and other partnerships, having fewer flights also doesn't necessarily mean that they lost those customers when it comes to flying on a route AA is in.

E,
The major coastal markets (BOS, NYC, and LAX) have been divided between airlines for years; everyone had their niche and coexisted reasonably well. It is only during the current round of mergers that the network carriers have decided to claim these coastal cities like they claimed their inland hubs…. You will not see in several years what has existed in these cities in the past which has been that carriers basically had the equivalent of their national revenue share in each of these large coastal markets… and CO in NYC is proof that you can shift the revenue such that one carrier has a disproportionately larger share while others have a disproportionately smaller share.
AA’s current revenue share of the total US market is about 15%. Right now AA is at a revenue advantage to its national share with a 17% revenue share of NYC… but keep in mind that is down about 5% in just the past 5 years, even though AA has cut only about 10% of its capacity. Revenue share is falling off faster than capacity.
The same thing will happen in other markets such as BOS, WAS, LAX, SEA and a bunch of medium and small cities in between the coasts.
Chicago has been a unique market partly because it WAS slot controlled and then was facility constrained. AA, UA, and WN all peacefully coexisted in their relative “boxes”… with the opening of ORD to more and more low fare competition, AA as the #2 and the highest cost carrier will feel the competitive pressure worse than UA…you can look to NYC to see what is happening there…. As lower cost competitors, DL and CO have either been able to grow capacity or in CO’s case, cut w/o a significant loss in its market position (it’s still number one – the UA merger just puts them a little further beyond DL’s reach).
You still are basing your concept of large evenly divided markets on the history of the industry which was content to allow major markets to remain divided. That will not be the case in the future…. And NYC has provided the prototype of what will happen.
Unless AA can bulk up significantly in the major coastal markets AND defend its “monopoly” hubs like MIA and DFW, they will see their revenue in these major markets shrink and that will lead to incursions even in the “monopoly” hubs – not to speak of the three competitive major markets which are part of AA’s cornerstone strategy.

 

[Bob Owens]

Bob,
The simple and pretty complete answer is that the vast majority of AMR’s increased revenues went to pay for increased fuel .

According to your figures their revenue increase exceeded their cost increase by $95 million. Thats not bad.

Even though AA’s additional capacity generated revenues below what AA had received before), it managed to cover cost which meant that the rest of the system – employees, aircraft – were more efficient. That’s why AA’s mainline costs were flat when they naturally would be going up every year because people move up the pay scales etc.
Your snapshot also misses the point that revenue has not kept with AA’s increasing costs, some of which are due to the natural increase in costs that come – as people move up the pay scale, as planes age etc and as fuel is getting more expensive… even if you level out the spikes in fuel prices, fuel costs more now than it did a decade ago.

Lets not forget that AA has continued to recieve several new new aircraft per month. There would not be too much moving up the payscales, if anything now that they are hiring and entry level workers are replacing topped out people who retire costs would be going down not up. Lets not forget that as planes age they usually also get paid off, resulting in saving, sure fuel is more expensive but we use a lot less. We went from 3294 (million) in 2001 to 2764 in 2010, a 16% drop.

BTW, DL’s CASM was up 4% this quarter and they said half of that was due to storms/Japan etc. All DL pilots received some sort of increased pay/benefits (not sure of the details) as well as all PMDL non-contract employees… combined that is probably 75% of DL’s workforce. The PMNW people didn’t get payraises pending the outcome of the unions appeal… bottom line is that 75% of DL’s workforce received pay raises which increased DL’s CASM by about 2%.... DL has been offsetting those costs by growing the company and by bringing in new, lower salary people.

Are you saying that Delta has exhausted their recall lists?

AA has now started to do the same thing to keep its mainline costs from going up but they are starting with a CASM which is now 5-15% higher than DL and UA.

You are claiming they are hiring to lower costs? Thats absurd, they are hiring to maintain production. While the Maint recall lists have been exhausted I dont think they've gone through all the pilots and FAs yet. OT in maint is at record levels across the system and from what I've been told they are starting to bump against the FAA minimums at the bases. They have to hire more, decrease their flying or both.

Where are you getting your CASM figures from? I'm a little skeptical that our CASMS are 15% higher than either UAL or Delta. IIRC the last time I sat through one of the companys presentations they said their total Casms were pretty much in line with other Legacy carriers.

 

[FWAAA]

Mainline CASM for the first quarter (excluding special items):

AA . . . . . 13.32
DL . . . . . 12.75
UA . . . . . 12.56

AA's mainline CASM has been above DL/NW and UA/CO since the bankruptcies of the others.

Delta claims that 0.30 cents of its mainline CASM relates to ancillary business (techops?) and thus its actual mainline CASM was 12.45. Don't know for certain whether AA's CASM includes its 3rd party MRO expenses, but I suspect it does. In any event, DL and UA have significantly lower unit costs. Some of the difference is due to increased seat density on DL and UA (AA tends to have less seating density on its widebodies), but that's not all of it.

CASM numbers came straight from quarterly earnings press releases:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDIyNTgzfENoaWxkSUQ9NDM2NTY2fFR5cGU9MQ==&t=1

http://finance.yahoo.com/news/Delta-Air-Lines-Announces-prnews-2151105544.html?x=0&.v=1

http://ir.united.com/phoenix.zhtml?c=83680&p=irol-newsArticle&ID=1553146&highlight=

 

[WorldTraveler]

Bob,
Based on the most recent quarterly financial releases for mainline CASM, ex-fuel and special items, DL has a 10% cost advantage over AA. It was 15% in the last couple of quarters and again I noted that DL's CASM was up 4%, half of which they attributed to weather/natural disasters and about half due to pay raises and other items.
UA's CASM advantage over AA is about 5-6%.
AA has not been cost competitive with its network peers for several years.

http://finance.yahoo.com/news/Delta-Air-Lines-Announces-prnews-2151105544.html?x=0&.v=1
Mainline CASM excluding fuel and special items 8.15 cents

http://finance.yahoo.com/news/AMR-Corporation-Reports-1Q-prnews-2771578228.html?x=0&.v=1
Operating expenses per available seat mile, excluding impact of special items and the cost of fuel (cents) 8.99

Yes, AA's revenues increased more than their fuel costs... but I didn't detail all of the other changes...you can see them on the same link above... bottom line is that AA's LOSS from a year ago improved by $30M but their net margin was -8% which essentially means that for every 100 dollars in revenue that came in AA's door, 8 of them went back out as a loss.... that isn't sustainable.

AA is simply not hiring new workers fast enough to offset the higher salary workers going out the door... for the last several quarters, Arpey has had mainline costs in balance so they aren't going up any longer like they were for years but they have yet to go down. Yes, the theory is that new 738s and 773s which are fuel efficient and low maintenance should bring down costs but that hasn't happened yet- and I'm not sure you will see them provide you with a forecast of how much their costs will go down using more efficient airplanes - and I certainly can't estimate it.

CASM, not total costs, go down by hiring younger lower paid workers. Bringing in new workers at starting salaries allows an airline to add capacity at lower rates than if that capacity is added using topped out senior employees. For the last several quarters, AA is increasing productivity of existing workers to keep costs from going up. I have heard that AA will be hiring new FAs as well and if that happens in significant numbers along w/ in other groups, CASM will start to go down... but DL is also hiring.
I would imagine AA will have to hire mechanics if what you say is happening - and I don't doubt it... they just want to put off that decision as long as possible.

I think AA still has alot of pilots on furlough... I think FAs are close to being all recalled from what people are saying... that's not my area of expertise, though.
DL said last year they would be hiring about 1000 new FAs and have been hiring new pilots for about the same length of time... not sure of the details of other employee groups but that is part of the reason DL has been able to keep its costs down which is what you want to do after coming out of BK. After all the pain of cutting costs in BK, you don't want to have them go back up and the easiest way to do that is to keep growing... that is why DL has focused on continuing to grow which has been strategically easy to do because DL is still filling out its network.

 

[Bob Owens]

Bob,
Based on the most recent quarterly financial releases for mainline CASM, ex-fuel and special items, DL has a 10% cost advantage over AA. It was 15% in the last couple of quarters and again I noted that DL's CASM was up 4%, half of which they attributed to weather/natural disasters and about half due to pay raises and other items.
UA's CASM advantage over AA is about 5-6%.
AA has not been cost competitive with its network peers for several years.

http://finance.yahoo.com/news/Delta-Air-Lines-Announces-prnews-2151105544.html?x=0&.v=1
Mainline CASM excluding fuel and special items 8.15 cents

http://finance.yahoo.com/news/AMR-Corporation-Reports-1Q-prnews-2771578228.html?x=0&.v=1
Operating expenses per available seat mile, excluding impact of special items and the cost of fuel (cents) 8.99

Yes, AA's revenues increased more than their fuel costs... but I didn't detail all of the other changes...you can see them on the same link above... bottom line is that AA's LOSS from a year ago improved by $30M but their net margin was -8% which essentially means that for every 100 dollars in revenue that came in AA's door, 8 of them went back out as a loss.... that isn't sustainable.

AA is simply not hiring new workers fast enough to offset the higher salary workers going out the door... for the last several quarters, Arpey has had mainline costs in balance so they aren't going up any longer like they were for years but they have yet to go down. Yes, the theory is that new 738s and 773s which are fuel efficient and low maintenance should bring down costs but that hasn't happened yet- and I'm not sure you will see them provide you with a forecast of how much their costs will go down using more efficient airplanes - and I certainly can't estimate it.

CASM, not total costs, go down by hiring younger lower paid workers. Bringing in new workers at starting salaries allows an airline to add capacity at lower rates than if that capacity is added using topped out senior employees. For the last several quarters, AA is increasing productivity of existing workers to keep costs from going up. I have heard that AA will be hiring new FAs as well and if that happens in significant numbers along w/ in other groups, CASM will start to go down... but DL is also hiring.
I would imagine AA will have to hire mechanics if what you say is happening - and I don't doubt it... they just want to put off that decision as long as possible.

I think AA still has alot of pilots on furlough... I think FAs are close to being all recalled from what people are saying... that's not my area of expertise, though.
DL said last year they would be hiring about 1000 new FAs and have been hiring new pilots for about the same length of time... not sure of the details of other employee groups but that is part of the reason DL has been able to keep its costs down which is what you want to do after coming out of BK. After all the pain of cutting costs in BK, you don't want to have them go back up and the easiest way to do that is to keep growing... that is why DL has focused on continuing to grow which has been strategically easy to do because DL is still filling out its network.

One of the problems with the CASMs, which I've brought up before is that all the costs associated with 3P are added to our CASMs. The TAESEL facility employs hundreds of workers and our European Maintenance operation is essentailly an MRO, Even at many Line stations we do 3P work. While recently much of the Domestic 3P work (except Teasel) has fallen by the wayside because we have more of our own work than we can handle due to the fact we've been doing a lot of mods, they've put off maint and flew the crap out of the planes they have, thats a newer development. (Despite cutting the fleet by 20%, making the aircraft they have more fuel efficient, wingletts etc, and adding more fuel efficient aircraft, fuel usage only went down by 16%. )

AMR does not seperate 3P related costs from our own operational costs. AMR also has a wholly owned subsidiary Eagle, which although they supposedly get a revenue premium from, that operates much smaller less efficient aircraft that also drive unit costs up(but also revenues). DL and UA dont have near the amount of ownership in their regional feeders as AMR does.

And, as I've said before, AA is in extended negotiations with all but one of its unionized groups, and that group is only a handful of workers. Its unlikely that AA would come out with positive figures at this time because that would make the unions draw a harder line and increase their determination to gain back what was lost in 2003. That would make AAs costs go up but AA workers are not alone in their determination to gain back what they've lost, other carriers would soon follow suit and its not really an option because in many critical classifications workers are becoming scarce despite the fact that unemployment in the overall economy remains high.

Among mechanics the shortage is becoming critical. Many carriers have found that suprisingly high numbers of people are declining recall, something they never experienced before. AA has exhausted their mechanic recall list and is having a hard time attracting qualified applicants despite lowering the criteria and cutting the experience requirements, and due to the highly publicized setbacks that workers have seen most young peoplke avoid the industry. when you consider that in 2001 AA had over 16,000 mechanics and now has around 9000 nearly half their workforce has permanently left over a 10 year period, that rate is likely to accellerate due to demographics and thats with a slow economy(54% of AAs mechanics are over 50 years of age AA could lose more than half the mechanics they currently have over the next five years). AA can no longer count on being able to draw enough talent for their operation from smaller competitors as most of them pay better and are being supplied by people who left AA. If WN started hiring at ISP I would try to be the first on line and my seniority puts me in top ten percent.

The FAA only issued enough certificates for around 3000 A&Ps last year, many of those would be to foreign nationals who return to their countries where demand is even higher and what remains has to serve the entire Aviation industry, General, corporate, and commercial, AA alone currently attrits out around 500 mechanics a year, a rate thats likely to accellerate. The FAA has pretty much given up on it's initiative to address mechanic fatigue despite the fact that they admit its probably the most significant danger to air travel at the moment because the airlines and their lobbiestss dont want to give the mechanics leverage and the Unions dont want to have their members ability to provide for their families compromised even more by restricting the amount of hours they work. Many Commerical mechanics also work General Aviation or other commercial for quick cash, this often puts them in violation of FAA minimums but the FAA has no system for tracking mechanics hours like they do with pilots. Even then if the ability to work other Aviation jobs was curtained nothing would prevent those workers from doing what the rest of their peers are doing, work a job in another industry. We have guys that work full time for the MTA as well as AA.

If the FAA did crack down , or as I've said before, if mechanics refused to work more than 40 hours a week, hundreds, if not thousands of aircraft would be grounded.

So what this comes down to is not a matter how much AA says they are losing, regardless of their costs, if they want to stay in business they are going to have to pay. Even at 50 years of age we have options because not only is there a shortage of mechanics in Aviation, there is a shortage across the economy and if you can fix airplanes you can pretty much fix anything.

 

[WorldTraveler]

Perhaps but when they post their earnings they include things like depreciation, which can be accellerated, Special items, Good Will and other intangibles. They may not "save expenses' per se but they can strategically time when they include some of that other stuff and make a profitable year dissappear.

Bob,
all of those items are non-cash.... and yes they can be ^moved around" ... cash items cannot.

Mainline CASM for the first quarter (excluding special items):

AA . . . . . 13.32
DL . . . . . 12.75
UA . . . . . 12.56

AA's mainline CASM has been above DL/NW and UA/CO since the bankruptcies of the others.

Delta claims that 0.30 cents of its mainline CASM relates to ancillary business (techops?) and thus its actual mainline CASM was 12.45. Don't know for certain whether AA's CASM includes its 3rd party MRO expenses, but I suspect it does. In any event, DL and UA have significantly lower unit costs. Some of the difference is due to increased seat density on DL and UA (AA tends to have less seating density on its widebodies), but that's not all of it.

CASM numbers came straight from quarterly earnings press releases:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDIyNTgzfENoaWxkSUQ9NDM2NTY2fFR5cGU9MQ==&t=1

http://finance.yahoo.com/news/Delta-Air-Lines-Announces-prnews-2151105544.html?x=0&.v=1

http://ir.united.com/phoenix.zhtml?c=83680&p=irol-newsArticle&ID=1553146&highlight=

the non-fuel, ex special items, ex-contract work, ex-profit sharing CASM is the most meaningful comparison between airlines other than the fact that it is not stage length adjusted. CASM and RASM decline with distance so DL and UA's CASM will proportionately look better than AA because DL and UA have longer average stage lengths because of their Pacific flying... but RASM also goes down w/ distance too... you don't get proportioantely the same amount to carry a passenger 6000 miles as you do to carry them 1000 miles nor does it cost 6X more...there are efficiencies in carrying passengers longer distances.
.
I suspect that AA's 3rd party maintenance income is so small that it doesn't meaningfully change its CASM calculation. Even if you didn't take out DL's contract CASM items (which probably also includes their vacation group that came from NW and I believe is still a wholly owned subsidiary), DL's CASM is lower so the explanation that 3rd party maintenance is the reason AA is higher is just not accurate.

AA has artifically lowered the seat count of its 777s below competitive levels but that again doesn't explain the difference. Before DL began adding seats to its M80s, DL and AA's M80s had the same seat count. For years, AA's 757s had more seats than DL or UA's but I think they are becoming similar... Dl's 744s do have a high seating density but that is actually coming down as they put in lie flat seats.... plus the 744 is a fuel hog compared to the 777.... whatever DL makes up with more seats is "undone" because of fuel... the only reason DL is not replacing the 744s is because the financial burden is too great right now.. they have calculated it is cheaper to keep older, fuel hungry airplanes that allow it to keep the capacity up to/from Japan where they most fly than it is to replace them... DL probably also wants to see the A350 vs 773 also.. but that's another discussion....
.
bottom line is that AA has a labor productivity and a revenue generation problem.... the minimal differences in AA and DL or UA's operations is insignificant in comparison.

One of the problems with the CASMs, which I've brought up before is that all the costs associated with 3P are added to our CASMs. The TAESEL facility employs hundreds of workers and our European Maintenance operation is essentailly an MRO, Even at many Line stations we do 3P work. While recently much of the Domestic 3P work (except Teasel) has fallen by the wayside because we have more of our own work than we can handle due to the fact we've been doing a lot of mods, they've put off maint and flew the crap out of the planes they have, thats a newer development. (Despite cutting the fleet by 20%, making the aircraft they have more fuel efficient, wingletts etc, and adding more fuel efficient aircraft, fuel usage only went down by 16%. )

AMR does not seperate 3P related costs from our own operational costs. AMR also has a wholly owned subsidiary Eagle, which although they supposedly get a revenue premium from, that operates much smaller less efficient aircraft that also drive unit costs up(but also revenues). DL and UA dont have near the amount of ownership in their regional feeders as AMR does.

And, as I've said before, AA is in extended negotiations with all but one of its unionized groups, and that group is only a handful of workers. Its unlikely that AA would come out with positive figures at this time because that would make the unions draw a harder line and increase their determination to gain back what was lost in 2003. That would make AAs costs go up but AA workers are not alone in their determination to gain back what they've lost, other carriers would soon follow suit and its not really an option because in many critical classifications workers are becoming scarce despite the fact that unemployment in the overall economy remains high.

Among mechanics the shortage is becoming critical. Many carriers have found that suprisingly high numbers of people are declining recall, something they never experienced before. AA has exhausted their mechanic recall list and is having a hard time attracting qualified applicants despite lowering the criteria and cutting the experience requirements, and due to the highly publicized setbacks that workers have seen most young peoplke avoid the industry. when you consider that in 2001 AA had over 16,000 mechanics and now has around 9000 nearly half their workforce has permanently left over a 10 year period, that rate is likely to accellerate due to demographics and thats with a slow economy(54% of AAs mechanics are over 50 years of age AA could lose more than half the mechanics they currently have over the next five years). AA can no longer count on being able to draw enough talent for their operation from smaller competitors as most of them pay better and are being supplied by people who left AA. If WN started hiring at ISP I would try to be the first on line and my seniority puts me in top ten percent.

The FAA only issued enough certificates for around 3000 A&Ps last year, many of those would be to foreign nationals who return to their countries where demand is even higher and what remains has to serve the entire Aviation industry, General, corporate, and commercial, AA alone currently attrits out around 500 mechanics a year, a rate thats likely to accellerate. The FAA has pretty much given up on it's initiative to address mechanic fatigue despite the fact that they admit its probably the most significant danger to air travel at the moment because the airlines and their lobbiestss dont want to give the mechanics leverage and the Unions dont want to have their members ability to provide for their families compromised even more by restricting the amount of hours they work. Many Commerical mechanics also work General Aviation or other commercial for quick cash, this often puts them in violation of FAA minimums but the FAA has no system for tracking mechanics hours like they do with pilots. Even then if the ability to work other Aviation jobs was curtained nothing would prevent those workers from doing what the rest of their peers are doing, work a job in another industry. We have guys that work full time for the MTA as well as AA.

If the FAA did crack down , or as I've said before, if mechanics refused to work more than 40 hours a week, hundreds, if not thousands of aircraft would be grounded.

So what this comes down to is not a matter how much AA says they are losing, regardless of their costs, if they want to stay in business they are going to have to pay. Even at 50 years of age we have options because not only is there a shortage of mechanics in Aviation, there is a shortage across the economy and if you can fix airplanes you can pretty much fix anything.

the whole labor supply-demand situation for mechanics, Bob, comes down to individual worker choices. Yes, you are correct that many are leaving the industry but there are plenty of people in India, China, and Latin America who can and will work on planes - even if they can't read English. Meanwhile, mechanics here will take all the overtime they can get... there is no fear of AA getting the work done on its fleet either through US workers or contractors if it wanted to go that route.... with 10% unemployment and billions of up and coming middle class people worldwide who will work for less and keep the work done....AA simply does not want to hire new mechanics and have calcluated that it is cheaper to keep some aircraft out of service than hire more workers.. remember they are going to set down dozens of airplanes this year anyway.
The economic situation favors AA, not labor.