AMR progress is 'fragile,' CEO says
Arpey rips fuel prices, tax rates, corporate jets in Chicago speech
E-mail | Print | | Disable live quotes By William Spain, MarketWatch
Last Update: 5:21 PM ET May 24, 2006
CHICAGO (MarketWatch) -- For the head of American Airlines' parent company, the carrier's slow march back to profitability is "gratifying, but with no fuel relief in sight it is also very fragile."
Speaking to a business group in Chicago Wednesday, AMR Corp's (AMR : AMR Corporation
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AMR24.82, +0.41, +1.7%) CEO Gerard Arpey also outlined some of the steps his battered company has been taking to turn things around while ripping into everything from "misguided" security mandates to "absurdly high" tax rates to corporate jets that get an "almost free ride" when it comes to paying for an air-traffic-control system that is "approaching overload."
But one of the biggest problem right now is probably the cost of fuel, he said, with about 30 cents of every dollar in revenue going to the oil companies, up from about a dime in the late 1990s -- the last time when the company was consistently profitable.
"That's a tough pill to swallow for a business that earns low margins in the best of times," he said. "Of course, we are not the only industry impacted by the high price of oil. But the peculiarities of the refining business result in us paying a huge premium on top of what the rest of the world pays."
While that is one obvious danger to AMR's bottom line, which in 2006 is expected to be in the black for the first time in years, "a second threat to our business is the fact that -- despite the mythology of the government constantly bailing us out -- many of our government's policies actually seem designed explicitly to make the airlines' recovery efforts more difficult."
Among them: Tax rates. Arpey said that in 1972, there were just three federal taxes and fees on air travel -- a number that has ballooned fivefold and currently costs the industry $15 billion a year.
"To put our burden in perspective, the federal government taxes air travel -- an activity crucial to our economic vigor -- more heavily than it does cigarettes or tobacco, products they are explicitly trying to discourage people from using," he said.
At the same time, it has imposed security requirements "without paying for any of them so we pick up the tab to the tune of hundreds of millions of dollars per year."
The "government's misguided policies are important to the country as a whole because at exactly the time when U.S. airlines should be out in front, leading the globalization parade, we are being marginalized -- literally bankrupted in many instances -- and diminished relative to our global competitors," Arpey said.
He also took aim at the current air-traffic-control system: "It is a scandal that in 2006 our country continues to depend on outdated technology that routinely bogs the system down, and compels airlines to fly inefficient, indirect routes, burning more fuel, creating more emissions and wasting everybody's time and money."
Some of the blame for the problem falls squarely at the feet of business aviation, which he claimed drives as much air-traffic-control activity and cost as "as American and our friends at United (UAUA : ual corp com new
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UAUA31.05, +0.66, +2.2%) combined" but pays only $400 million a year for it while those two commercial airlines alone spend more than $2.5 billion.
"Crazy as it sounds, under the current systems, the airlines -- one of our country's most important but least healthy industries -- are actually subsidizing the corporate travel of other, presumably much healthier entities as well as individuals who can afford their own jets," he said.
There was some good news, however, as Arpey touted his company's narrowing losses even in the face of astronomical fuel prices and stiff competition from low-cost carriers.
In 2003, when it launched a turnaround plan, "we had millions of dollars flying out the door each day" while in the first quarter of this year, it turned in an operating profit and positive cash flow.
In addition, throughout the past few years, "we have continuously funded our pension plans and we have now begun the job of chipping away at out mountain of debt."
William Spain is a MarketWatch staff writer in Chicago.
