Baumert Report Feb. 13, 2003

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bagsmasher

Guest
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 .
 
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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.

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Mr.Baumert should see if that "Business Time Machine" you see in the IBM E-Business commercials is available.Thats the only way the "TWA Debacle" as he puts it can be undone.

Neidl,Buttrick and the rest of the airline analysts were praising Americans shrewdess when this deal was announced.

I seem to recall Mike Boyd calling TWA Americans "Ace in the hole" during the summer.


I wonder what scathing commentary Mr.Baumert would have come up with had United and US Airways merged and American not taken action to prevent being left in the dust in terms of market share?


Always amazing how clearly the Monday Morning Quarterbacks can see things.


Methinks Mr.Baumert is looking to fill the analyst vacancy at SSB created by Jack Grubmans departure.
 

lownslow

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Aug 19, 2002
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Personally, I find the calls to end MRTC amusing. Could it help? Possibly, but only if doing so would come with boosted RPMs (or only if load factor does not drop proportionally). In fact, the extra passengers you might get to carry would in fact need to provide enough incremental revenue to cover the cost of all the additional weight, as well as any drop in yield you may notice from the other passengers (you may be less likely to get high-fare passengers if you give them less room).

With two of the major problems facing the industry being pricing schemes (note how America West cut their highest fares significantly and dramatically increased revenue at the same time) and overcapacity, adding more capacity and relying on a return of high-fare passengers is an extremely risky strategy....
 

L1011Ret

Veteran
Oct 31, 2002
1,326
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Again the "analyst" seeks to blame either Mr. Carty or the TWA acquisition. Well, TWA did not lose 3.5 Billion in its 75 years of existence. If that is not enough, all the other major carriers are at or near bankruptcy. So I guess it is not only Mr. Carty who makes bad business decisions and covers them up with lies, but all the other airline CEOs also? The "analyst" relies on past history to explain current events. But the real issue is simply revenue versus costs. That gap is leading to daily 5 million dollar losses. The "analyst" is seeking to place blame rather than analyze. The above "analysis" is only flame bait and does not address the fundamental problem.
 

flyhigh

Veteran
Jan 4, 2003
657
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Well, at least there is some rational thinking on this board.

This "analysis" is the biggest joke I've seen. As myny of you pointed out, the hindsight on the acquisition of TWA is 20/20. Would he do it today...most likely not. At the time though, recall what CO was saying they would pay for the LGA slots alone ($400M). AMR gained mkt share (revenue and traffic wise) for a paltry price.
As for the "this is different" issue. Anybody who has seen the changes in the industry, can tell you how much infiltration low-cost carriers have had on the network. Sure, JetBlue isn't flying out of LGA, but they are taking LGA traffic who want lower fares. Sure, WN doesn't fly to Boston, but they are taking Boston pax through Providence. And the other two low-cost names (AirTran & Frontier) are serving premium airports reducing the fares there as well. And as history has shown, during down times, low-cost guys tend to take share from majors mostly during down times and they never give it back in good times...
 
OP
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bagsmasher

Guest
For the record, the TWU officially opposed this acquisition, as did the other two AA unions. They knew that it would cause turmoil on both sides. It should have been opposed for this reason alone. Why do we have to be the biggest anyway? Hasn't helped us at all yet, it has only helped us set records for the greatest loss. Management needs to learn that this is no way to treat your employees.
 
Aug 20, 2002
664
50
[blockquote]
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On 2/15/2003 2:24:57 AM lownslow wrote:

Personally, I find the calls to end MRTC amusing. Could it help? Possibly, but only if doing so would come with boosted RPMs (or only if load factor does not drop proportionally). In fact, the extra passengers you might get to carry would in fact need to provide enough incremental revenue to cover the cost of all the additional weight, as well as any drop in yield you may notice from the other passengers (you may be less likely to get high-fare passengers if you give them less room).

With two of the major problems facing the industry being pricing schemes (note how America West cut their highest fares significantly and dramatically increased revenue at the same time) and overcapacity, adding more capacity and relying on a return of high-fare passengers is an extremely risky strategy....
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Exactly right. I can/t imagine why anyone would think it is a good idea to put seats back in the plane just to fly them around empty. Anyone who advocates that just to drop the CASM a little isn/t thinking very clearly.
 

L1011Ret

Veteran
Oct 31, 2002
1,326
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No, you are correct LGA I cannot back that up. However, having worked for TWA since the mid 60s thru the 90s, I do not think TWAs losses would amount to that number as I remember them. There are a lot of postings on these BBs trying to suggest that the acquisition of TWA is responsible for AA's current problems. I just do not buy such thinking especially since two carriers are in bankruptcy and several others NWA, DAL, CO and AA are hiring bankruptcy lawyers and coming to their workforces with requests for concessions. The problem is more industry wide and suggesting it was the acquisition of TWA or Carty's bad management misses the mark. And anyway, undoing history or blaming management detracts from thinking about how to solve the problems AA faces.
 

L1011Ret

Veteran
Oct 31, 2002
1,326
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So he claims to be an analyst but is really a F/A with an agenda? My, that explains a lot about his posts. But then there were lots of "analysts" at big Wall Street brokerage firms that claimed to be "analysts" too but they really had no honesty, no accountability, and no professional responsibility. Some will start doing time soon.
 

TWAnr

Veteran
Aug 19, 2002
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www.usaviation.com
[blockquote]
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On 2/15/2003 5:10:54 PM AAmech wrote:

This Baumert has got a serious chip on his shoulder and is anything but objective!!
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Could that possibly be because he is not a financial analyst, but a Miami based American Airlines flight attendant who selectively quotes real so called financial analysts, often out of context, to promote his own agenda?
 

desertfox

Advanced
Sep 13, 2002
210
0
[blockquote]
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On 2/15/2003 6:13:41 PM TWAnr wrote:

[blockquote]
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On 2/15/2003 5:10:54 PM AAmech wrote:

This Baumert has got a serious chip on his shoulder and is anything but objective!!
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[/blockquote]

Could that possibly be because he is not a financial analyst, but a Miami based American Airlines flight attendant who selectively quotes real so called financial analysts, often out of context, to promote his own agenda?
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That's correct there is no Baumert......I've done Google searches, as well as 3 other search engines and no Baumert report or analysis is shown. This post is a sham that is a reflection of Bagsmasher's alter ego. Apparently the result of a medical experiment gone horribly wrong.
 

flygal4500

Member
Jan 6, 2003
15
0
Carty was asked about TWA in DFW and said that in hindsight, he probably wouldn't have bought it if he'd known what was about to happen. He also wouldn't have bought all the planes or done any construction, either. He's grounded airplanes, cut back on the construction projects and laid off an awful lot of TWA people.

I'd hate to be a TWA person working for us now, pulling up message boards reading all this nastiness about how they alone have put this drag on American. First, they didn't do it and second, honestly, guys -- they're AAers now. Show some decency toward your co-workers.
 

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