AMR profit predicted

[WorldTraveler]

Let me provide a bit more color to show where AA's MAINTENANCE costs compare to other carriers.
Based on data each carrier provides to the DOT and reported in Aviation Daily, here are labor costs in total and per ASM (which is the basis of costs BTW; costs are spread over the units of production in an industry which in the airline industry is ASMs or available seat miles):

For 2Q10,

AS $116M, 1.91 cents per ASM
AA $594M 1.55
CO $243M 1.02 (excl CO Mike which reports separately)
DL $504M 0.99
UA $417M 1.34
US $250M 1.36

FL $ 65M 1.05
B6 $ 69M 0.80
WN $278 1.09

These are TOTAL maintenance costs - doesn't matter whether the carrier did the work in-house or outsourced it.

Of the network carriers, AA has the highest maintenance costs per ASM while DL has the lowest. In fact, DL's maintenance costs are lower than FL and WN's both of which have newer fleets than DL. In fact, DL spent less on maintenance than AA despite DL having a larger fleet.

There are no specific, publicly available data on LABOR productivity at US airlines by EMPLOYEE GROUP but we can easily calculate AA's labor productivity for the entire system. AA does in fact produce 20% less ASMs per employee than peer other airlines such as DL and UA do.

Unless you can tell me how AA maintenance is bucking the trend of AA's lower productivity in the rest of the company and unless you can tell me how AA's labor costs can be 50% higher than DL's, then the fact still remains that AA is a far more costly and less efficient airline. Since it is highly doubtful that AA pays more for materials or facilities on any where near the scale necessary to make up for the 50% disadvantage that they have relative to DL, then you have to conclude that AA's LABOR productivity in maintenance is also far less than at DL. Since DL does in fact do plenty of maintenance in-house as evidenced by the size of their maintenance operations - plus they insource a significant amount of work FROM other carriers - DL apparently has found a financially justifiable balance between in-sourcing and outsourcing.

Similar comparisons can be made with other carriers although DL and AA are clearly at extremes in the maintenance side of the industry.

And Boeing Boy,
while you are correct that ONLY 1/4 of network carrier employees have lost their jobs in the past decade instead of 1/3 (which does include companies that went "belly up", that is still a significant loss of employees.
Further, you can go back 30 years if you would like but you also need to look at the size of the industry. The simple fact is that the US decided to deregulate the airline industry under President Carter with the full intent of allowing free marketing forces to work in the airline industry. That is exactly what has happened as more productive and lower cost new carriers have forced network carriers to either adapt and reduce costs and improve productivity or perish.

It is actually now the consolidation in the industry both at the network and low fare carriers that offers promise of reducing the bruising competition that has bloodied the airline industry for more than 30 years.

 

[telebender1956]

I'm not sure it is a good thing to be spending a lot less on Aircraft Maintenance than your competition. Where are the corners being cut at to pull this off?

 

[telebender1956]

I think you are getting things mixed up here. GAAP is the real world-all publicly traded and many privately held corporations utilize GAAP to prepare their income statements, balance sheets, and statements of cash flows. I have a Masters of Science degree in accounting from NYU Stern School of Business and can tell you this is the real world. I'm not a union member and don't work for an airline, but believe me I know about finance and economics. Open the AMR annual report and you will find "in accordance with the U.S. GAAP....".



Passenger ticket sales, cargo sales, mileage award fees, Admirals Club memberships, change fees, sale of AAdvantage miles to partners such as Citibank, codeshare agreements, third party overhaul work conducted in-house, etc. You are correct that without airplanes, facilities, capital, employees AA couldn't operate. The only metric between employees and revenue is only to revenue per employee-a metric used to evaluate the relative productivity of AA employees.

Josh

Uh, you live in the accounting world by your own statement and not in the real airline world.

 

[BoeingBoy]

And Boeing Boy,
while you are correct that ONLY 1/4 of network carrier employees have lost their jobs in the past decade instead of 1/3 (which does include companies that went "belly up", that is still a significant loss of employees.

1 - in replying to eolsen, who said "airline jobs" NOT network airline jobs - I was merely saying that his 3X the number of employees now as in 1979 was high, and that going back as far as the BTS onliine data went there were ~24,000 less FTE's now as in 1990, again talking about airlines NOT network airlines.

2 - I did mention where many of the jobs were now vs then - lcc's, regional operators, freight carriers.

3 - I don't think I said anything about how significant or insignificant the change in the number of FTE's has been.

Jim

 

[BoeingBoy]

Uh, you live in the accounting world by your own statement and not in the real airline world.

If you think that employee cost should be counted as revenue on the income statement (although you said balance sheet), you're the one not living in the real world. As I said, money the airline (or any company) takes in is revenue. Money the airline (or any company) pays out is expense. It's a simple concept - if you're paying $200/month car payment, is that $200/month income that you can buy groceries with? Obviously not - it's $200/month less that you can spend on other things or save. In other words, it's an expense.

I don't think that anyone has disagreed with what I think your point is - without the employees there wouldn't be any revenue. But that doesn't equate to employee costs being treated as revenue on the income statement.

I really don't know why this is even a point of contention - we all agree that the employees do their part to produce the revenue, but your statement that employee cost should be on the revenue side of the "balance sheet" (income statement) is wrong.

Jim

 

[eolesen]

1 - in replying to eolsen, who said "airline jobs" NOT network airline jobs - I was merely saying that his 3X the number of employees now as in 1979 was high, and that going back as far as the BTS onliine data went there were ~24,000 less FTE's now as in 1990, again talking about airlines NOT network airlines.

My last set of annual reports pre-deregulation is from FY-1976. According to that, there were 271,700 employees working for the trunk carriers (AA,BN,DL,CO,EA,NA,NW,UA,TW,WA) and PA. Airlines were a lot different then... the IT functions for Sabre, Apollo, and PARS were still done by airline employees, and both AA and UA still insourced their flight kitchens. That would back the number down somewhat, but we'll leave it high to be conservative...

I don't have any data for non-trunk carriers like Alaska, North Central, Southern, Ozark, Texas Int'l, or Frontier. Adding 10% to the trunk carriers (not too far off when comparing BTS Major to BTS Total) brings it up to around 300,000.

Here's the employee growth curve:

Year      1976       1990       2000       2009
Major     271700     558301     685426     515431
Total     300000     588926     753614     563419
Chg       --         196%       251%       188%

USPop     220M       249M       281M       307M

I was wrong when I said 3x. It was 2.5x... But the point still stands. Those who say deregulation caused a decline in employment aren't being entirely truthful. There are still almost twice as many airline employees today as there were under regulation.

Population growth 1976 to present is about 40%. Airline employment growth is still 4x the population growth rate.

Just for some perspective for those who think AA was always huge... in 1976, AA had 36,000 employees, and 150 aircraft. In 1981, AA's fleet was a little larger, but still smaller than today's shrinking MD80 fleet:

7073    34
7270    56
7272    88
727A    25
741     8
74F     6
Total  217

Three whole fleet types, all Boeing.... UA, on the other hand, had over 350 aircraft in that timeframe, and around 50,000 employees. WN only had 23 airplanes.

 

[BoeingBoy]

I was wrong when I said 3x. It was 2.5x... <snip>There are still almost twice as many airline employees today as there were under regulation.

That's ok - lots of people have trouble with percentages... 😀

Like I said, the BTS only has employment data back to 1990 online so anything prior to that would be pure guess on my part.

Jim

 

[telebender1956]

If you think that employee cost should be counted as revenue on the income statement (although you said balance sheet), you're the one not living in the real world. As I said, money the airline (or any company) takes in is revenue. Money the airline (or any company) pays out is expense. It's a simple concept - if you're paying $200/month car payment, is that $200/month income that you can buy groceries with? Obviously not - it's $200/month less that you can spend on other things or save. In other words, it's an expense.

I don't think that anyone has disagreed with what I think your point is - without the employees there wouldn't be any revenue. But that doesn't equate to employee costs being treated as revenue on the income statement.

I really don't know why this is even a point of contention - we all agree that the employees do their part to produce the revenue, but your statement that employee cost should be on the revenue side of the "balance sheet" (income statement) is wrong.

Jim

If I'm not living in the real world then your example here is very simplistic.
My car payment is not just an expense because it gets me to and from my job which provides income[revenue] to buy groceries.
My contention is that employees are shown ONLY AS AN EXPENSE and not included as some dollar value on the revenue side of the balance sheet when they are helping produce the revenue.
Bean Counters ALWAYS view us as a drag down on the balance sheet and NEVER as a part of the revenue side.

 

[WorldTraveler]

The airline industry is carrying FAR more passengers today than it did in 1979 so even though the total employment has indeed shifted from the then "trunk" carriers to regional carriers (which had a very different role then), freight carriers, and low fare carriers.
My point is not the size of reductions at any specific carrier or set of carriers but that the ENTIRE US industry has moved from a very concentrated, inefficient industry that was almost entirely composed of the trunk carriers to a number of types of carriers that specialize in their particular segment of the industry.

The whole reason the freight carriers have grown - FedEx is a pretty young company - is because they do something that the network passenger/combination carriers cannot do and FedEx/UPS do that far more efficiently.

Likewise, regional carriers have grown because they have the ability to serve small markets with relatively high frequencies which was necessary to do when you had a half dozen network carriers, all of which needed to serve a number of key medium and small cities, esp. in the middle of the country. As the industry consolidates and there are fewer but larger carriers, it is no longer to fly from, say, OKC, to 5 hubs on the same airline... which is why DL has been one of the most aggressive as the first US megacarrier (UA/CO now in that process) to realize that reducing regional flying in favor of mainline growth reduces costs while still allowing medium and small markets to remain well connected to the network. The reduction of STL, PIT, and CVG as hubs are evidence that it is still possible to serve the US well with a lot less hubs and with the potential to use larger aircraft. Efficiency and productivity is moving into the system.

IT functions were indeed largely done manually by airline employees years ago. Airlines then developed massive computers and operated them in-house. Now those computer systems and IT have largely been outsourced to more efficient IT companies that do IT for the globe, not just the airline industry.

The whole discussion about outsourcing maintenance is exactly the same discussion. AA still has most of its maintenance in-house but it is costly and inefficient compared to other carriers which have outsourced all or part of its maintenance. Nearly every other US airline has decided it is not worth trying to keep maintenance completely in-house. The reason DL stands as such as an exception is because it has cut costs while also insourcing aspects of maintenance that it believes it can make money at.... DL doesn't do a number of types of heavy checks which cerrtainly reduces costs but that also helps them compete for other higher value types of maintenance.

The airline industry over the past 30 years has moved from a very inefficient, centralized industry to one that has become fragmented, specialized, and much more efficient.

The airlines in the industry that are the most successful today are those that recognize the changes and have adapted to changes in the industry.

 

[Hopeful]

The airlines in the industry that are the most successful today are those that recognize the changes and have adapted to changes in the industry.

The changes you refer to were force fed beginning with deregulation. Of course air travel has increased over the past 30 years. But that came on the backs of destroying airline workers and their pay and beneifts. Airlines have used bankruptcy not only to screw their workers but to screw their creditors and shareholders as well. This is viewed as "good managment" nowadays.
We've heard all the numbers about the increase in air travel and airline employment. How about some numbers are what airline workers gave up and continue to give up to get to the point we are now?
What some people here seem to say is that it is better to have more people employed at less wages, little or no benefits than to have less people earning a decent living.
Here's a novel idea for those folks.....why don't we all work for minimum wage so profits can increase end unemployment?

 

[737823]

If I'm not living in the real world then your example here is very simplistic.
My car payment is not just an expense because it gets me to and from my job which provides income[revenue] to buy groceries.
My contention is that employees are shown ONLY AS AN EXPENSE and not included as some dollar value on the revenue side of the balance sheet when they are helping produce the revenue.
Bean Counters ALWAYS view us as a drag down on the balance sheet and NEVER as a part of the revenue side.

First off, with all due respect revenue isn't even included on the balance sheet. A balance sheet is in short a document that shows AMR (or any other corporation's) assets, liabilities, and stockholders equity. It's at a certain point in time-generally at the end of the fiscal year and includes cash, account payable, accounts receivable, PPE (property plant and equipment), contributed capital, retained earnings, etc. Revenue and expenses do not show up on the balance sheet

Revenue is included on the income statement which covers a given time period-often one year or one quarter. Think of the income statement as a document telling a story about the company's performance-they took XXXXX in revenue paid YYYYYY in expenses and had ZZZZZ in net income.

If employees were included on the revenue said, AMR's net income would be overstated as you'd be adding labor to revenue then subtracting in the expense account for salary expense.

Josh

 

[Hopeful]

Accounting 101.....Debits vs Credits......
One side of the ledger is "money in"...the other side is "money out".....Pretty basic sysytem.
And yes, the money out side does include salary and benefits....Can't argue that!

But with this company, and the industry in general, what we have seen is management define it as something evil.
Employee cost is just unacceptable to the bottom line. They actually blame us more than the price of fuel for their woes because oil is not a fixed expense. So they turn to labor, as they have for the past 30 years.

So even though those carriers which have gone bankrupt and abbrogated all their labor agreements, they will eventually see their costs rise again and their profits decline. And once again, they will look to labor.

I foresee a future where all we get is a 40 hour paycheck for 40 hours worth of work. Nothing more!

It's funny how airlines want to gut peoples wages to the point that they couldn't afford the price of a ticket had they have to pay full fare.

 

[BoeingBoy]

But with this company, and the industry in general, what we have seen is management define it as something evil.
Employee cost is just unacceptable to the bottom line. They actually blame us more than the price of fuel for their woes because oil is not a fixed expense. So they turn to labor, as they have for the past 30 years.

Other than the "evil" part, I can't disagree. Unfortunately, employee cost is about the only thing that any company has pretty much complete control over (given negotiations with a union, if present). The cost of about everything else is at least partially out of the company's hands. Hence employees make attractive targets for cost cutting.

 

[WorldTraveler]

Hopeful,

I don't underestimate in the least the impact that airline employees have taken in the name of moving the US airline industry from a protected utility that it was before US deregulation to the current no-holds-barred free market that exists today.

But it is also easy to believe that the airline industry that has been affected by this highly competitive market characteristic that exists today - and it is not. Many industries AND American workers in the US have been very negatively affected by the current highly competitive markets that exist today including the automotive and steel industries among manufacturerers (and they are only examples, there are many more other industries) as well as service industries such as telecommunications and IT, again just to name a few.

The real question is whether free markets have really benefitted America and many of us would argue that we would gladly trade the older days of a higher prices om some things for more American jobs. When you consider the airline industry in which most jobs CANNOT be exported (crew members and airport agents for example MUST be in the US for US flights), then it becomes even more apparent that the notion of lower prices and cut throat competition, even among other domestic airlines, is not really beneficial to Americans as a whole.

Many developing countries have looked at the mess that exists in many American industries and are not opening their markets to the same degree the US did precisely because they do not believe that it is worth having their industries and their workers cheapened just for the sake of lower prices and more consumers. I for one am glad they are learning from US "mistakes" which have zealously pushed markets open at the expense of US workers.

There is some good news for AA, though. No one hear has picked up that UA and CO both had fairly significant non-fuel cost increases in the most recent quarter. As I have said many times, AA had about a 12% cost disadvantage relative to UA and about a 20% cost disadvantage to DL. In the most recent quarter, AA did a very good job of keeping mainline costs flat although regional costs went up; DL had about a 2% increase in costs at both mainline and their regional operations which was about the level of cost increase that WN had. The bottom line is that UA's cost advantage relative to AA was significantly reduced. DL is still a significantly lower cost producer than AA but they also now are in the same relative position on costs relative to the new UA as well..... it makes UA's ability to "beat up" on AA much more difficult even if DL is in a better position to now take revenue from BOTH AA and UA... but AA is not the sole high cost standout. And remember that the UA/CO merger had not even closed until the end of the last quarter - and costs ARE expected to go up as part of that merger.

The AA leaders that many here want to bash chose not to take a more aggressive approach w/ AA's labor costs based on their belief that costs at other competitors in the industry would increase, making it easier for AA to compete with its network peers, even if it still has a cost disadvantage relative to other network peers like DL, US, and AS as well as with low fare carriers.
So, relative to at least UA, AA is not as bad off as they were a couple months ago and AA"s position relative to the industry AVERAGE will not be as bad because AA mgmt WAS correct that part of AA's cost disadvantage would be eliminated through cost increases at other carriers. AA is not out of the woods relative to its cost issues but at least its largest competitor will be in a similar overall cost position.

It is still far too early to say whether the US airline industry will finally stabilize but AA mgmt is not at all ready to admit defeat, even if it means they might have a window of breathing room in which they don't have to be as forceful in solving AA's cost problems.

 

[Hopeful]

It is still far too early to say whether the US airline industry will finally stabilize but AA mgmt is not at all ready to admit defeat, even if it means they might have a window of breathing room in which they don't have to be as forceful in solving AA's cost problems.

Good post. But what separates us AA people from the rest of the industry is what we gave back to help them avoid bankruptcy. I am all for change and understand that there are conditions and work rules that may be antiquated and inefficient. However, I also believe that certain employee costs can be offset with work rule changes and how certain facilities operate individually all without further deterioration of wages and benefits.

I mentioned this before, but this forum has become what seems to be a "AA'S COSTS ARE HIGHER BECAUSE WE DO ALL OUR MAINTENANCE IN HOUSE."

How about the hours and duty time of flight and cabin crews? Does that factor into the $600m figure? How about productivity of non-clock punching managers who are salaried but take days off and come and go as they please without loss of pay? There a slew of cost factors that exist which are not exclusive to union workers. The automatic reaction here is to blame unions and their contracts. Who's looking after those who are doing the watching?


If they company truly wants radical changes in all work group contracts, then they need to be more creative in what they offer in return for those changes?
I still go to the school that believes money motivates.