Analysts again say that AA should shrink to help the industry (the competition)

[FWAAA]

Some background: When AA filed for bankruptcy protection on November 29, 2011, analysts like Jamie Baker and others predicted (incorrectly) that AA would shrink by 10% or more while in Ch 11 and that the other airlines would pick up the share (and revenue). There were even some analysts predicting 15% or more shrinkage at AA.

Jamie Baker's 10% prediction: http://www.reuters.com/article/2011/11/30/us-americanairlines-idUSTRE7AT2OD20111130

Turns out that the analysts' predictions were wrong and management did not take their advice, as AA shrank a percent or two during its bankruptcy yet increased its unit revenues ($$ per seat mile) and its total overall revenues ($$) substantially prior to the merger with US.

In the months leading up to the merger, the analysts (who really wanted the merger to happen) were practically unanimous in their view that AA was too small to survive on its own against the much larger merged UA-CO and DL-NW, and thus, AA's only hope was the merger with US. Prior AA management had a plan to grow AA independently, which would have forced other airlines to eventually reduce capacity (or lose tons of money). The analyst community was again unanimously opposed to the AA plan because that would have hurt UA-CO and DL-NW and US as lower-cost (post-bankruptcy) AA would have grown and the others (being higher cost) would have had to shrink. That would have hurt the stock prices of the others, and the analysts didn't want that.

So now that AA has emerged from bankruptcy in a shotgun marriage to US, and is now substantially larger than UA and slightly larger than DL, the analysts have once again begun beating the "AA has to shrink for the good of all" drum:

Of all the legacy carriers, we think American Airlines is under the most pressure to cut domestic capacity, and has the biggest opportunity to do so. Major airline mergers have typically resulted in a ~10% capacity cut relative to industry including US Air with America West announced in 2005 (-11%), Delta with Northwest in 2008 (-6%), United with Continental in 2010 (-19%) and Southwest (LUV) with Airtran in 2010 (-5%). Lower capacity has generally corresponded with unit revenue outperformance, but AAL has not taken much capacity out of its network since its merger (-1%). We think American Airlines and the other airlines would benefit from a ~5% domestic capacity cut at American Airlines.

http://blogs.barrons.com/stockstowatchtoday/2015/05/21/american-airlines-what-did-you-expect-them-to-say/?mod=yahoobarrons&ru=yahoo

Sure, the industry would benefit if AA were to shrink. Why stop at 5%? Why not call for a 25% or 50% reduction in AA capacity? That would help the industry (UA, DL, WN and the rest) a lot more than if AA shrank just 5%.

The quoted analyst-doofuses omitted to mention that AA did nothing but shrink between 2001 and 2011, having reduced the mainline fleet by about 350 planes, and it shed tens of thousands of employees. Sure, the mega-mergers of the other airlines resulted in capacity reductions, but AA reduced capacity multiple times by huge amounts despite not being in bankruptcy, all while fuel costs skyrocketed. AA's reductions were backfilled, of course, by lower-cost airlines like B6, WN, VX and even post-merger DL.

In 2012-14, while AA was improving its yield, unit revenue and overall revenues, UA was melting down, and began to shrink. In 2012-13, AA prospered at UA's expense. The reasons for UA's troubles included the disastrous switch to Shares from Sabre and the resulting operational meltdowns that followed.

Low-cost airlines tend to grow, and that growth further lowers their unit costs (spread over more seat-miles). Higher cost airlines ten to shrink, ending up in a vicious circle of shrinking and higher costs, resulting, eventually, in bankruptcy. AA has a short window of lower costs courtesy of its Ch 11 filing. Even after the merger, AA has to grow to fill the holes in the network that US didn't bring to the table (Asia, Latin America, LAX, etc).

WN has announced plans to grow by about 8% this year and next year, far above the GDP growth. DL is growing. And yet, here are the two-faced analysts who once again think that it's AA's time to take one for the team and shrink, so "other airlines" could benefit. In 2011, they incorrectly predicted that AA would shrink. They got that one wrong. In 2013, they said that AA was "too small" to survive on its own and only a merger with US could save AA. They got their wish. And now, with very low fuel prices, AA has to surrender to DL and WN, which are both growing rapidly. Uh-huh. Stock-pushing whores.

Obviously, all mergers do result in excess capacity being withdrawn, eventually. But 2015 is very different from any of the years since 2001, and that's the fact that fuel prices have collapsed, and thanks to Parker's fear of (and prior incompetence at) fuel hedging, AA has by far the lowest fuel costs this year. DL, UA and WN all have some money-losing hedges that absorb some of their savings from lower fuel prices, but AA's advantage will be short-lived, as those other airlines are unwinding the losing hedges and pre-paying to get out from under them. By the end of the year, all airlines will have the same fuel costs.

As posted elsewhere, Parker promised the various Attorneys General in the affected states that their state's hubs would not see drastic service reductions for at least three years. That period ends on December 9, 2016. After that, more hub rationalization could occur, but for now, change has to be slow and incremental.

In a period of very low fuel prices (compared to the previous 10 years), AA should be the one taking one for the team and shrinking? I expect the chorus of securities "analysts" to keep singing from this page in the coming days and weeks.

 

[autofixer]

Mr. Parker buys and shrinks.  I'm betting the analyst's predictions are based on historical precedent.  

 

[WorldTraveler]

first, AA grew in BK even before it decided based on creditor pressure to merge.

and while AA's RASM eventually improved, it dropped below industry average for the latter part of BK, including after the pilot actions.

second, even though AA's RASM eventually grew, it grew at a slower pace that the rest of the industry - and just as in the early months of BK, AA's RASM grew in the early months after the merger only to be below industry average RASM growth for the past 6 months or more.

that said, AA is under no more of an obligation to shrunk than is any other airline. If anything, AS and WN are the two carriers that are and have stated their intent to grow well above industry average. If anyone needs to cut capacity and slow their growth plans, it is them, not AA.

In counterpoint, AA has not unveiled any plans to rationalize its network, something that all 3 of the other big 4 carriers have done.

AA stock was down the most of the large carriers today.

 

[Bob Owens]

Some background: When AA filed for bankruptcy protection on November 29, 2011, analysts like Jamie Baker and others predicted (incorrectly) that AA would shrink by 10% or more while in Ch 11 and that the other airlines would pick up the share (and revenue). There were even some analysts predicting 15% or more shrinkage at AA.Jamie Baker's 10% prediction: http://www.reuters.com/article/2011/11/30/us-americanairlines-idUSTRE7AT2OD20111130Turns out that the analysts' predictions were wrong and management did not take their advice, as AA shrank a percent or two during its bankruptcy yet increased its unit revenues ($$ per seat mile) and its total overall revenues ($$) substantially prior to the merger with US.In the months leading up to the merger, the analysts (who really wanted the merger to happen) were practically unanimous in their view that AA was too small to survive on its own against the much larger merged UA-CO and DL-NW, and thus, AA's only hope was the merger with US. Prior AA management had a plan to grow AA independently, which would have forced other airlines to eventually reduce capacity (or lose tons of money). The analyst community was again unanimously opposed to the AA plan because that would have hurt UA-CO and DL-NW and US as lower-cost (post-bankruptcy) AA would have grown and the others (being higher cost) would have had to shrink. That would have hurt the stock prices of the others, and the analysts didn't want that.So now that AA has emerged from bankruptcy in a shotgun marriage to US, and is now substantially larger than UA and slightly larger than DL, the analysts have once again begun beating the "AA has to shrink for the good of all" drum:http://blogs.barrons.com/stockstowatchtoday/2015/05/21/american-airlines-what-did-you-expect-them-to-say/?mod=yahoobarrons&ru=yahooSure, the industry would benefit if AA were to shrink. Why stop at 5%? Why not call for a 25% or 50% reduction in AA capacity? That would help the industry (UA, DL, WN and the rest) a lot more than if AA shrank just 5%.The quoted analyst-doofuses omitted to mention that AA did nothing but shrink between 2001 and 2011, having reduced the mainline fleet by about 350 planes, and it shed tens of thousands of employees. Sure, the mega-mergers of the other airlines resulted in capacity reductions, but AA reduced capacity multiple times by huge amounts despite not being in bankruptcy, all while fuel costs skyrocketed. AA's reductions were backfilled, of course, by lower-cost airlines like B6, WN, VX and even post-merger DL.In 2012-14, while AA was improving its yield, unit revenue and overall revenues, UA was melting down, and began to shrink. In 2012-13, AA prospered at UA's expense. The reasons for UA's troubles included the disastrous switch to Shares from Sabre and the resulting operational meltdowns that followed.Low-cost airlines tend to grow, and that growth further lowers their unit costs (spread over more seat-miles). Higher cost airlines ten to shrink, ending up in a vicious circle of shrinking and higher costs, resulting, eventually, in bankruptcy. AA has a short window of lower costs courtesy of its Ch 11 filing. Even after the merger, AA has to grow to fill the holes in the network that US didn't bring to the table (Asia, Latin America, LAX, etc).WN has announced plans to grow by about 8% this year and next year, far above the GDP growth. DL is growing. And yet, here are the two-faced analysts who once again think that it's AA's time to take one for the team and shrink, so "other airlines" could benefit. In 2011, they incorrectly predicted that AA would shrink. They got that one wrong. In 2013, they said that AA was "too small" to survive on its own and only a merger with US could save AA. They got their wish. And now, with very low fuel prices, AA has to surrender to DL and WN, which are both growing rapidly. Uh-huh. Stock-pushing whores.Obviously, all mergers do result in excess capacity being withdrawn, eventually. But 2015 is very different from any of the years since 2001, and that's the fact that fuel prices have collapsed, and thanks to Parker's fear of (and prior incompetence at) fuel hedging, AA has by far the lowest fuel costs this year. DL, UA and WN all have some money-losing hedges that absorb some of their savings from lower fuel prices, but AA's advantage will be short-lived, as those other airlines are unwinding the losing hedges and pre-paying to get out from under them. By the end of the year, all airlines will have the same fuel costs.As posted elsewhere, Parker promised the various Attorneys General in the affected states that their state's hubs would not see drastic service reductions for at least three years. That period ends on December 9, 2016. After that, more hub rationalization could occur, but for now, change has to be slow and incremental.In a period of very low fuel prices (compared to the previous 10 years), AA should be the one taking one for the team and shrinking? I expect the chorus of securities "analysts" to keep singing from this page in the coming days and weeks.

AA should shrink, and allow competitors who treat their workers better to expand.

AA earned almost as much as UAL and DAL combined so if anyone should shrink it should be AA. Besides AA is having a hard time finding mechanics that want to work for them anyway.

 

[Bob Owens]

first, AA grew in BK even before it decided based on creditor pressure to merge.and while AA's RASM eventually improved, it dropped below industry average for the latter part of BK, including after the pilot actions.second, even though AA's RASM eventually grew, it grew at a slower pace that the rest of the industry - and just as in the early months of BK, AA's RASM grew in the early months after the merger only to be below industry average RASM growth for the past 6 months or more.that said, AA is under no more of an obligation to shrunk than is any other airline. If anything, AS and WN are the two carriers that are and have stated their intent to grow well above industry average. If anyone needs to cut capacity and slow their growth plans, it is them, not AA.In counterpoint, AA has not unveiled any plans to rationalize its network, something that all 3 of the other big 4 carriers have done.AA stock was down the most of the large carriers today.

$4 billion in profit vs $2billion.

 

[WorldTraveler]

AA should shrink, and allow competitors who treat their workers better to expand.

AA earned almost as much as UAL and DAL combined so if anyone should shrink it should be AA. Besides AA is having a hard time finding mechanics that want to work for them anyway.

because AA didn't pay over $1 billion in profit sharing which is what DL did.

AA also didn't account for income taxes while DL did - a benefit of being fresh out of bankruptcy.

 

[Bob Owens]

Did Delta make $4 billion in profits the year after they left BK?

 

[WorldTraveler]

no, DL and NW merged right as the real estate crisis hit.

and as I have repeatedly noted, AA waited to file for BK and then merge (not part of the original plan) as the last merger of the big 4 and part of the merger process for every one of the other 3 involved significant cuts in capacity and rationalization of their networks - something one of the articles here noted.

and as much as people talk about DL cutting MEM and CVG, that is exactly the result of the merger that Wall Street wants to see; in each merger, there have been hubs from each merger partner that are stronger than what the other partner brought.

It is precisely that duplication that now exists between LGA/JFK/PHL/DCA and PHX/LAX that AA has to resolve.

DL moved fairly quickly and deliberately to rationalize its network and WN did the same thing; it isn't a surprise that DL and WN have been leading the industry in revenue production and are also in a position to be growing more aggressively.

I don't write blogs in newspapers but I do understand the factors that are shaping the industry; I said years ago that AA would be facing increased competition in its key markets at the same time as it would be trying to make a merger work.

Analysts recognize that and are the ones writing that AA needs to cut capacity. They aren't saying the same thing about DL or UA.

 

[commavia]

Oh boy - here we go again with the "AA didn't account for income taxes" BS.  Like with so much else of the "best in commercial aviation" analysis some of us have been treated to, it seems as though some feel if they just repeat patently false ridiculousness over and over, people will start to believe it's true.  Not so in this case.  AA absolutely did account for income taxes - they just happen to have billions in DTAs (net loss carryforwards) that dilute their tax liability.  You'd think that by now some people would quit while they're behind in the spouting off meaningless accounting-related drivel department.
 
On the broader point - I generally agree.  In an era of $4B annual profits and very high load factors, AA need not shrink capacity materially, although I do agree that in general some capacity likely will come out of AA's system as the merger integration and network optimization takes place - personally, I suspect disproportionately weighted towards PHX and CLT.

 

[WorldTraveler]

AA is getting the SAME tax benefit coming right out of BK that DL and UA did; they just don't have to show any income tax expenditures because they have those tax valuations.

the reason why you are rolling your eyes is because you don't want to admit that on an operational margin basis, AA is not doing any better than other carriers. The reason why AA's net profit is so much larger is because
1. they have income tax offsets while other carriers including WN are paying cash taxes and DL is accounting for taxes but not paying cash at this point
2. AA is not paying profit sharing, the only large US carrier not to do so - which is resulting in DL's costs being over $1 billion higher than AA's. I'm sure AA employees are very proud that their company is saving $1 billion by paying them less - in fact I know so because they actually post about their pay and compensation levels. Further, a likely pending contract with DL and its pilots will push AA's salaries up even more

and
3. AA didn't have fuel hedge losses which DL had - but DL still managed to report revenue growth and will paying similar cash costs for fuel within a couple months. and AA has still not written off its $650 million in currency impairments in Venezuela.

and again it is analysts who recognize that AA has not rationalized its network - the same thing I said years ago that AA would have to do and they are being pressured by Wall Street to do so at the very time they are hiring more employees and trying to get their unit costs down PLUS facing new competitive pressures in N. Texas and Latin America which is where they either have to add their own capacity or watch their market share fall.

When you factor in these significant strategic challenges that AA is facing and the pressure from Wall Street, Parker and co. will be hard-pressed to continue with their plan of Asia growth, defending key markets in Latin America and N. Texas, and maintaining its domestic network at its present size.

but hey I'm just am armchair analyst that doesn't get paid and in your words doesn't get it at all. I'll just let you know when the paid analysts finally say the same thing that I have been saying for years would happen.

 

[FrugalFlyerv2.0]

2. AA is not paying profit sharing, the only large US carrier not to do so - which is resulting in DL's costs being over $1 billion higher than AA's. I'm sure AA employees are very proud that their company is saving $1 billion by paying them less - in fact I know so because they actually post about their pay and compensation levels. Further, a likely pending contract with DL and its pilots will push AA's salaries up even more

 
It's very interesting how you're able to gauge the attitude of the AA workforce (i.e. fabricate things, lie, BS, etc.), but fail to mention how thrilled DL employees are seeing the airline flush money down the toilet with the Trainer refinery and the massive fuel hedging losses.
 
Spin away!

 

[700UW]

AA most certainly paid profit sharing to the PMUS CSA and RES.

 

[WorldTraveler]

and yet not only did they exclude profit sharing from their JCBAs with groups that have signed them but they will do the same for all other groups when they do sign.

congratulations for what you had at US. it won't last.

and Trainer is profitable. you also realize - of course you don't so silly me for asking - that DL paid more in profit sharing than it made in net profit in the 4th quarter?

no, DL employees who understand that their profit sharing is paid BEFORE hedge losses are not complaining about hedge losses because hedge losses don't affect profit sharing.

and since the Trainer Refinery is profitable, it only adds to their profits.

strike 299.

 

[Bob Owens]

AA most certainly paid profit sharing to the PMUS CSA and RES.

And Little, the same guy who forced us into the Association, and gave away our negotiated Profit Sharing without a vote,  told us that US didn't have Profit Sharing. 

 

[FWAAA]

AA should shrink, and allow competitors who treat their workers better to expand.

A variation on your well-worn, tired narrative of "AA should shut down and we'd all find jobs at the competition." Which big competitors of AA "treat their workers better"? Since you're really focused on your workgroup, the question is really whether DL, UA or WN treats their mechanics "better" than AA. Hands down, WN pays theirs more money with better benefits. UA or DL? Not so much.

About WN expanding: WN is already eating AA's lunch in Dallas (the metroplex), one of the few places where AA enjoyed some pricing power. In the next couple of years, the financial damage inflicted by WN on AA in Texas will become very stark. AA doesn't need to shrink its domestic capacity by 5% or 10% so that WN can expand - WN is going to expand anyway. 8% this year and another 8% next year.

I was against this merger more than you were, but if AA begins shrinking like UA has been shrinking, then Parker is going to start talking like Smisek, who declared last year that UA had a $2 billion "cost problem," because it was unable to increase its revenues like DL or AA or US. When an airline shrinks, you don't hire very many new people, and your labor costs keep climbing - eventually resulting in bankruptcy.
 

AA earned almost as much as UAL and DAL combined so if anyone should shrink it should be AA. Besides AA is having a hard time finding mechanics that want to work for them anyway.

From subsequent posts, it's clear that you're talking about 2014, and thus, your post above is completely wrong. On an apples to apples basis, Delta had higher profits than AA in 2014.

DL's net income in 2014 (pre-tax and excluding special items) was $4.5 billion:
 

For the full year 2014, Delta’s pre-tax income, excluding special items, was $4.5 billion, a $1.9 billion
increase over 2013. Delta’s net income for the year was $2.8 billion with an operating margin of 13.1
percent, excluding special items.

http://ir.delta.com/files/4Q/Earnings%20materials/Delta-Announces-December-Quarter-Results_v001_r1emu9.pdf

Delta's profit-sharing of $1.1 billion was computed using total pre-profit-sharing profits of $5.6 billion ($5.6 - $1.1 = $4.5).

AA's 2014 earnings (also pre-tax and excluding special items) was $4.2 billion:

Excluding net special charges, the Company’s 2014 net profit was a record $4.2 billion, or $5.70 per diluted share.

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTY3NDkwfENoaWxkSUQ9MjY4MDk4fFR5cGU9MQ==&t=1

Delta shows federal income tax expense on its GAAP financial statements, but it does not pay federal income taxes due to its huge tax losses, just like AA's huge tax losses that will insulate AA from federal corporate taxes for a few more years:

Tax expense, excluding special items, increased $383 million compared to the prior year quarter, as the company now recognizes tax expense for financial reporting purposes following the reversal of its tax valuation allowance at the end of 2013. Delta’s net operating loss carryforwards of more than $12 billion will largely offset cash taxes due on future earnings during the next several years.

UA's 2014 earnings were $1.97 billion, excluding special items:

http://ir.united.com/phoenix.zhtml?c=83680&p=irol-newsArticle&ID=2009546

UA's profits are smaller because UA has been unable to increase its revenues (total revenues and unit revenues) at the same pace as AA or DL. That's why UA has been shrinking slowly since early 2012. AA took away a bunch of UA's high-yielding customers, and so did DL and US. Now, in 2015, of course, everyone is seeing shrinking unit revenues, but DL and WN keep expanding.

If AA is having a hard time finding new-hire mechanics willing to work for your current payscale, then eventually AA will decide to pay more.