AMR's pension contributions still cheaper than the competition

FWAAA

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Jan 5, 2003
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Just finished reviewing the 2006 10-Ks of both Southwest and AMR and once again, AMR's pension contributions were much cheaper (more affordable) than the retirement contributions by that Dallas-based competitor.

AMR contributed $329 million to its DB plans last year on revenues of $22.5 billion and total wage/benefit expenses of $6.8 billion.

Southwest contributed $301 million to its employees' retirement plans (Defined Contribution) last year on revenues of $9.1 billion and total wage/benefit expenses of $3.05 billion.

And AMR's contribution was $100 million larger than the legally-required minimum contribution; without that extra contribution, AMR was required to contribute $229 million.

So even though AMR's revenues were two and a half times larger than WN's and AMR's wages were more than double those of WN, AMR's pension contribution (even with the extra $100 million) were $28 million larger than much smaller-Southwest.

Don't let management threaten to terminate the DB plan: it is substantially cheaper than the defined contribution scheme at WN.

UAL hasn't yet filed its 10-K, but my suspicion is that AMR holds a cost advantage over UAL on this issue as well. Conventional wisdom is that DB plans are more expensive and are dead, but I wouldn't be so quick to write AMR's DB plans' obituaries just yet.

For ages, we've heard that WN workers are more productive. Well, that depends on how you measure productivity. Over at WN, their total compensation expenses now consume 33% of revenue, while the "less productive" AMR employees only get 30.2% of revenue. Per dollar of revenue, those AMR slackers look pretty productive.

Sure, measured by ASM, those hyper WN employees look pretty efficient. But you don't pay your employees or the fuel bill or any other bills with ASMs, you pay it with dollars (as in revenue). And viewed in this light, AMR's workers don't look as inefficient as the conventional wisdom would have us believe.

Lastly, advertising. For the first time in several years, AMR actually increased the advertising expenditures last year, up from $144 million in 2005 to $154 million in 2006.

Meanwhile, over at WN, those advertising spendthrifts upped their ad spending from $173 million in 2005 to $182 million in 2006. If AMR spent the same proportion of its revenues on ads as WN does, its ad budget would have been $450 million. Despite the AA stadium naming deals, AMR's ad budget is relatively tightfisted compared to those drunken sailors at the WN ad department.
 
FWAAA,

Unit based metric are used because it is the fairest way to compare. If AA were flying STL-MCI, how many people would have to work the flight? How much would it cost AA for them to do that work? It's difficult to simply use revenue because AA's revenue is generated in a far different manner. Specifically, an AA 777 may fly two flights a day which requires few employees vs the WN 737 which flew 6 flights. Those six flight could still generate the same revenue as the two 777 flights because that 777 was flying ORD-LHR and getting premium first class $$$ while the WN flights were all coach used on the following flights STL-MCI-OMA-TUL-MDW-MCI-STL. You can look at it in a variety of ways, but unit metric are used in every industry to normalize data across competitors. Mileage units in the airlines, same store sales in retail, etc.
 
You are comparing AA's DB plan to Southwest's DC plan. AA's DC plan is not as generous.

I wonder why AA converted the non union employees from DB to DC a few years ago if it wasn't to save money.
 
Sure, measured by ASM, those hyper WN employees look pretty efficient. But you don't pay your employees or the fuel bill or any other bills with ASMs, you pay it with dollars (as in revenue). And viewed in this light, AMR's workers don't look as inefficient as the conventional wisdom would have us believe.

Viewed in the light of reality at the Tulsa M&E, one would have to conclude it is the epitome of inefficiency. Productivity is the exception, not the rule.
 
You are comparing AA's DB plan to Southwest's DC plan. AA's DC plan is not as generous.

I wonder why AA converted the non union employees from DB to DC a few years ago if it wasn't to save money.


Easier to attract white-collar workers, as they prefer the mobility of a DC plan.
 
You are comparing AA's DB plan to Southwest's DC plan. AA's DC plan is not as generous.

I wonder why AA converted the non union employees from DB to DC a few years ago if it wasn't to save money.

Dunno why it happened, but perhaps it was a knee-jerk decision pursuant to the conventional wisdom that a DC plan is always cheaper than a DB plan. For the last several years, that hasn't been true if you compare the costs of the WN DC plan contributions with the AMR DB plan contributions.

Although the AMR DC plan may not be as generous as the WN DC plan, I have to assume that AA's unions wouldn't agree to a DB termination unless the DC replacement was at least as generous as the WN plan. Of course, given the performance of AA's unions, that probably isn't a very sound assumption.
 
Don't forget that WN has a growing number of senior employees, and as older emplopyees put away more into their 401K, the amount of the match goes up until they hit the matching cap.

One reason companies like the 401K match is because junior employees tend not to think about things like retirement until they hit 30 or get married. I'm sure AA was counting on not having to fund a match for those employees who chose not to fund their 401K at a very low rate or not at all.
 
Dunno why it happened, but perhaps it was a knee-jerk decision pursuant to the conventional wisdom that a DC plan is always cheaper than a DB plan. For the last several years, that hasn't been true if you compare the costs of the WN DC plan contributions with the AMR DB plan contributions.

Although the AMR DC plan may not be as generous as the WN DC plan, I have to assume that AA's unions wouldn't agree to a DB termination unless the DC replacement was at least as generous as the WN plan. Of course, given the performance of AA's unions, that probably isn't a very sound assumption.

Sound the trumpets! We seem to totally agree on this.