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The Baumert Report February 13, 2003
The Concession Stand
In attempting to snatch massive concessions in wages and benefits from labor unions, AMR management is a trying to convince its workers that the current revenue environment is permanent and thus, costs must be permanently altered correspondingly; a notion CEO Don Carty hopes employees will blindly accept. While convenient to put forth at the bottom of an economic cycle, the concept of a permanent revenue environment is a dubious assumption and one that ignores historical precedent. As Goldman Sachs‚ Glen Engel states, airline revenues remain closely linked to nominal GDP growth and the economy.
American''s revenues stalled during the ''90-''91 recession and then soared during the rest of the decade along with GDP growth and the economy. With American still entrenched at major airports of major business centers and with most budget carriers reluctant to fly into those airports due to astronomical landing fees (which would increase their costs), its obvious that American''s unit revenues will expand sharply with the return of corporate profit growth, and thus the business traveler, and a strong economy. Yet, AMR management is hoping to convince employees to extrapolate the current situation well into the future. In other words, they should drive by looking in the rearview mirror.
Still, AMR management persists, repeatedly saying, This time it''s different. However, that''s an often-used phrase employed to justify the unjustifiable or the unprovable. You''ll recall This time its different was the mantra used by stock traders to justify outlandish stock prices for Internet companies. Now AMR management is using it to justify outlandish permanent concessions from its unions.
Yet, American could immediately and permanently lower its unit costs simply by ending the more room in coach initiative and putting those seats back on the planes. But that would entail AMR''s CEO admitting he made a serious mistake. That''s highly unlikely, even though Mr. Carty said in a February 4 speech at the Goldman Sachs Transportation Conference, ...honest self-analysis has, in my view, become an absolute prerequisite for those of us seeking to shepard our companies through this troubled period.
Honest self-analysis would also mean Mr. Carty coming clean about the TWA debacle and accepting responsibility for an ill-advised acquisition that has drained AMR of an enormous amount of cash. Sam Buttrick, airline analyst at UBS Warburg, recently said, American wouldn''t be in this mess if it hadn''t bought TWA. He added that TWA has exacerbated American''s cash loss by more than $1 billion. Still, Mr. Carty utterly ignores the colossal blunder and, time and again, fails to even mention those three letters or their relation to American''s financial situation.
Honest self-analysis would further require Mr. Carty to acknowledge how management''s decision to use aggressive pension assumptions cost AMR over $1.3 billion last year and will cost them over $200 million in cash this year. Warren Buffett once said that a CEO who deceives others in public would likely deceive himself in private. It looks like AMR''s CEO has accomplished both. While Mr. Carty''s call for honest self-analysis is on the mark, perhaps it will carry more weight when he actually engages in it.
Also, in his speech at the conference, Mr. Carty repeated his call for a shared sacrifice from employees. However, he has an unusual concept of sharing. Under Carty''s plan, his sacrifice consists of temporarily freezing only his base salary, the smallest portion of his compensation package (which also consists of stock options, bonuses and long term incentive payouts). On the other hand, labor''s sacrifice would involve enormous concessions in salary, work rules and benefits, and would be permanent, not temporary like Carty''s.
So, senior management‚s sacrifice would be miniscule and temporary, while labor‚s sacrifice would be immense and permanent. This astonishing inequity renders Carty''s entire notion of a shared sacrifice as an outrageous sham. Should his demands be met, Mr. Carty may well end up basking in the wealth created by his stock options, bonuses, long term incentive payouts and the un-freezing of this base salary. All the while, labor would continue to suffer under their permanent concessions.
His speech also mentioned employees will share in the benefits that a successful restructuring will provide. Now, just how that is supposed to happen when labor''s cuts are permanent and profit sharing has been eliminated for virtually everyone, he didn''t say. Though with his concept of sharing, it probably means he''ll send employees a smiling photo of himself.
By the way, there exists another so-called cost premium that, for some reason, has been ignored by Mr. Carty. It''s the CEO cost premium. While compensation summaries for 2002 have not been released, in 2001 Carty''s total compensation package amounted to $7.1 million, while Southwest CEO James Parker''s package totaled $4 million (both figures include base salary, stock option awards, bonuses, long term incentive payouts and other compensation). That means AMR has a 77.5% CEO cost premium. In order to align that cost with his stated 30% cost premium goal, Mr. Carty needs to take a $1.9 million pay cut. Maybe he''ll get around to it when gets around to doing some honest self-analysis.
Steven Baumert
Sources: Goldman Sachs, Valueline stock reports, Don Carty speech from the Goldman Sachs 2003 Transportation Conference, The Wall St. Journal, AMR 3Q and 4Q conference calls, The Essays of Warren Buffett, AMR and Southwest Proxy Statements for fiscal year 2001.
To receive The Baumert Report contact baumertpm@hotmail.com .
The Concession Stand
In attempting to snatch massive concessions in wages and benefits from labor unions, AMR management is a trying to convince its workers that the current revenue environment is permanent and thus, costs must be permanently altered correspondingly; a notion CEO Don Carty hopes employees will blindly accept. While convenient to put forth at the bottom of an economic cycle, the concept of a permanent revenue environment is a dubious assumption and one that ignores historical precedent. As Goldman Sachs‚ Glen Engel states, airline revenues remain closely linked to nominal GDP growth and the economy.
American''s revenues stalled during the ''90-''91 recession and then soared during the rest of the decade along with GDP growth and the economy. With American still entrenched at major airports of major business centers and with most budget carriers reluctant to fly into those airports due to astronomical landing fees (which would increase their costs), its obvious that American''s unit revenues will expand sharply with the return of corporate profit growth, and thus the business traveler, and a strong economy. Yet, AMR management is hoping to convince employees to extrapolate the current situation well into the future. In other words, they should drive by looking in the rearview mirror.
Still, AMR management persists, repeatedly saying, This time it''s different. However, that''s an often-used phrase employed to justify the unjustifiable or the unprovable. You''ll recall This time its different was the mantra used by stock traders to justify outlandish stock prices for Internet companies. Now AMR management is using it to justify outlandish permanent concessions from its unions.
Yet, American could immediately and permanently lower its unit costs simply by ending the more room in coach initiative and putting those seats back on the planes. But that would entail AMR''s CEO admitting he made a serious mistake. That''s highly unlikely, even though Mr. Carty said in a February 4 speech at the Goldman Sachs Transportation Conference, ...honest self-analysis has, in my view, become an absolute prerequisite for those of us seeking to shepard our companies through this troubled period.
Honest self-analysis would also mean Mr. Carty coming clean about the TWA debacle and accepting responsibility for an ill-advised acquisition that has drained AMR of an enormous amount of cash. Sam Buttrick, airline analyst at UBS Warburg, recently said, American wouldn''t be in this mess if it hadn''t bought TWA. He added that TWA has exacerbated American''s cash loss by more than $1 billion. Still, Mr. Carty utterly ignores the colossal blunder and, time and again, fails to even mention those three letters or their relation to American''s financial situation.
Honest self-analysis would further require Mr. Carty to acknowledge how management''s decision to use aggressive pension assumptions cost AMR over $1.3 billion last year and will cost them over $200 million in cash this year. Warren Buffett once said that a CEO who deceives others in public would likely deceive himself in private. It looks like AMR''s CEO has accomplished both. While Mr. Carty''s call for honest self-analysis is on the mark, perhaps it will carry more weight when he actually engages in it.
Also, in his speech at the conference, Mr. Carty repeated his call for a shared sacrifice from employees. However, he has an unusual concept of sharing. Under Carty''s plan, his sacrifice consists of temporarily freezing only his base salary, the smallest portion of his compensation package (which also consists of stock options, bonuses and long term incentive payouts). On the other hand, labor''s sacrifice would involve enormous concessions in salary, work rules and benefits, and would be permanent, not temporary like Carty''s.
So, senior management‚s sacrifice would be miniscule and temporary, while labor‚s sacrifice would be immense and permanent. This astonishing inequity renders Carty''s entire notion of a shared sacrifice as an outrageous sham. Should his demands be met, Mr. Carty may well end up basking in the wealth created by his stock options, bonuses, long term incentive payouts and the un-freezing of this base salary. All the while, labor would continue to suffer under their permanent concessions.
His speech also mentioned employees will share in the benefits that a successful restructuring will provide. Now, just how that is supposed to happen when labor''s cuts are permanent and profit sharing has been eliminated for virtually everyone, he didn''t say. Though with his concept of sharing, it probably means he''ll send employees a smiling photo of himself.
By the way, there exists another so-called cost premium that, for some reason, has been ignored by Mr. Carty. It''s the CEO cost premium. While compensation summaries for 2002 have not been released, in 2001 Carty''s total compensation package amounted to $7.1 million, while Southwest CEO James Parker''s package totaled $4 million (both figures include base salary, stock option awards, bonuses, long term incentive payouts and other compensation). That means AMR has a 77.5% CEO cost premium. In order to align that cost with his stated 30% cost premium goal, Mr. Carty needs to take a $1.9 million pay cut. Maybe he''ll get around to it when gets around to doing some honest self-analysis.
Steven Baumert
Sources: Goldman Sachs, Valueline stock reports, Don Carty speech from the Goldman Sachs 2003 Transportation Conference, The Wall St. Journal, AMR 3Q and 4Q conference calls, The Essays of Warren Buffett, AMR and Southwest Proxy Statements for fiscal year 2001.
To receive The Baumert Report contact baumertpm@hotmail.com .
54 PM AAmech wrote: 
