Bob was right about 3Billion profit

[Buster CRC]

http://aviationblog.dallasnews.com/2013/03/analysts-expect-merged-amr-to-earn-close-to-3-billion-in-2014.html/

 

[WorldTraveler]

Key sentence in article:
American and US Airways have estimated that the merger will add $1 billion in synergies, mostly from higher revenues. The analysts sniffed.

They also did not note that AA/US will have 20,000 more employees on a combined basis than DL or UA for similar sized operations/revenues.

 

[robbedagain]

while 20k more employees i would suspect that they may make buyout offers which could help time will tell

 

[WorldTraveler]

I'm sure they will... but removing 20% of the workforce via buyouts is a huge task - and not one that has been done before. Add in that part of the point of a merger is to reduce capacity - which the article alludes to - in order to force up fares, and even more employees become surplus.

Let's also forget that the combined profit of AA/US for 2012 was minus $1B... AA labor may have given a lot but they haven't taken cuts big enough to swing the profitability of the company by $4 billion/year.

 

[700UW]

Watch Doug's interview with Charlie Rose, only layoffs will be management, and wt, the experts have certainly taken into account the merged company's costs and employees.

US made a record profit in 2012 and AA hadnt completed its restructuring yet, so the cost cuts havent taken full effect.

Spin, spin spin.

 

[WorldTraveler]

No sir, no spin.

AA's cost cuts don't come anywhere close to covering what is necessary to swing the AA/US group profits by $4B. AA/US may possibly be allowed to fully merge by the end of 2013 but if they have completed that step it will have only been for a quarter, even by Parker's estimates of when the merger will be approved.
The revenue benefits - which even these analysts said are overly aggressive (which I have said here before) are only $1B or $250M per month.

Sorry, the math doesn't add up.

But if I'm wrong, and if the combined AA/US reports a $3B profit for 2013, I'll send you the gift card that has gone unclaimed.

 

[AANOTOK]

WT, I must admit, you missed your calling. You should have been one of them there analyst.

 

[WorldTraveler]

WT, I must admit, you missed your calling. You should have been one of them there analyst.

there's not much more to it than a little common sense.....no roket cientisks need apply

 

[Glenn Quagmire]

Key sentence in article:
American and US Airways have estimated that the merger will add $1 billion in synergies, mostly from higher revenues. The analysts sniffed.

They also did not note that AA/US will have 20,000 more employees on a combined basis than DL or UA for similar sized operations/revenues.

You failed to include the entire qoute in context WT:

"American and US Airways have estimated that the merger will add $1 billion in synergies, mostly from higher revenues. The analysts sniffed."

“We’re fans of consolidation. But we don’t really buy into synergies—You won’t find a synergy line item in our merger model,” they wrote.

“Yes, we believe consolidation leads to more prudent deployment of capital, and yes, we believe this transaction in particular may lead to firmer domestic pricing. But try identifying synergies from recent DAL, LUV or UAL results and reconciling them with management guidance given years ago. We don’t believe it can be done.”

(DAL = 2008 merger of Delta and Northwest Airlines.)
(LUV = 2011 merger of Southwest Airlines and AirTran Airways)
(UAL = 2010 merger of United and Continental Airlines.)

Their report also said the merged AMR will benefit from the work done to get labor buy-in before the merger was announced, and the stated policy that the combined carrier will use AMR’s information technology rather than US Airways."

Their report also said the merged AMR will benefit from the work done to get labor buy-in before the merger was announced, and the stated policy that the combined carrier will use AMR’s information technology rather than US Airways.

As a result, “Where we have chosen not to penalize New American is on the basis of integration. Time will tell whether that assumption proves optimistic,” they wrote.

The way I read it is that they still are looking at the $3B number while not having a line item for the synergies or lack thereof.

I am sure you will correct me if I am wrong.

I would also like to hear FWAAA and E chime in on this analysis.

 

[Flying low]

Watch Doug's interview with Charlie Rose, only layoffs will be management, and wt, the experts have certainly taken into account the merged company's costs and employees.

US made a record profit in 2012 and AA hadnt completed its restructuring yet, so the cost cuts havent taken full effect.

Spin, spin spin.

What he failed to mention is the scheduled layoff's coming soon to Tulsa.

 

[Bob Owens]

AA labor may have given a lot but they haven't taken cuts big enough to swing the profitability of the company by $4 billion/year.

No but what makes you think they needed to? What makes you think we needed to take any cuts whatsoever to make them profitable?

 

[WorldTraveler]

I'm not saying they need to take any more cuts - I never said they needed to take the first round, Bob.

Anyone who has read these boards for even half a day over the past 10 years know that I have consistently said that AA's problem is overstaffing across the entire company, driven by inefficient and uncompetitive work rules, high seniority employees, along with declining revenue and increasing incursion of other carriers into AA’s core markets. I have also said that AA’s overstaffing was largely rooted in the flawed assumption that AA mgmt made almost ten years ago that other carriers would fail and AA would grow, justifying the larger size-adjusted workforce than its peers that AA has carried for the past decade.

The latter question regarding revenue growth is clearly addressed in the analyst’s comments – they believe that new AA’s revenue synergy estimates are excessive and those estimates are even more questionable considering that the merger will not be approved for months, perhaps a few months before the end of 2013. Competitive incursions in AA’s key markets continue unabated – DFW, LGA, JFK, ORD, LAX, MIA. US is more stable competitively but competitors have established themselves in several top revenue markets for US.

AA’s labor costs will decline as a result of early retirements and layoffs of some employees but new employees are replacing some of them so the benefit is only partial.

I was just in TUL yesterday, Flying, and couldn’t wonder about the future for that maintenance base as I looked out the window as my jet took off with that magnificent facility and driver of economic activity for eastern Oklahoma in full view. One thing is clear, though, and that is that the entire TUL maintenance base could be closed and it still won’t provide the $4B in the profit swing that is suggested here in this article. AA’s maintenance costs – which were somewhere between $2B and $3B last year – could only be completely eliminated if AA quits flying. Parker can buy a cost reduction for a couple years w/ new aircraft but maintenance costs will go up again even in a few years. B6’ income statements demonstrate what happens when new aircraft start needing maintenance.

True efficiencies from the labor agreements can only be gained if new AA either grows the enterprise to more efficiently use its existing workforce. Remember that Horton’s plan was based on growing the airline by 20% to gain efficiencies and avoid layoffs, even if those goals were unachievable. Indeed, it is no surprise that the creditors saw the flaw in Horton’s plan (which I noted many times here); it is impossible to grow a large US airline by anywhere close to that size, esp. given AA’s costs. In fact, AA’s costs have yet to reach levels competitive with even its network peers, let alone the entire low cost/low fare sector. Parker has said he is not going to cut capacity yet that is the only way to gain the pricing power and improved margins which are the primary economic basis of airline mergers.
Given that there are promises of no layoffs, then the ability to properly match costs with revenues becomes an even harder task than in the plan Horton proposed.

Parker’s plan surely does envision a whole lot of new large RJs which will be more efficient than AA mainline, esp. in markets like ORD where AA’s ability to profitably compete has been challenged for years. Does anyone really believe that UA will sit by and allow AA to add the equivalent amount of new large RJ capacity to the ORD market and, if not, what mainline positions will be lost at ORD?
No context has been lost, Q. I could post the entire article but it doesn’t change the facts that exist and which form the basis for my conclusion that combined AA/US is not going to change the economics of their business sufficiently to swing the company’s profitability by $4B in one year, save accounting gimmicks.

Since you quote the part about more efficient use of capital, has old AA cancelled any of its $25 billion aircraft order book – on top of what old US has? Where are the efficiency gains from use of capital if the new company will take on more debt in a shorter period of time than any airline in the history of US – and perhaps – global aviation and will end up with debt levels twice or more higher than any of its competitors?

First quarter 2013 closes tomorrow and will have an extra revenue boost because Easter falls in March, although that makes the 2nd quarter more challenging. Many of AA’s workforce reductions occurred before the 1st quarter so it will be very insightful as to how well AA did financially during the quarter that is now ending.

It is indisputable and completely in context that AA/US cannot swing profitability by $4B in one year which means that the only profits that new AA can show of that size will come from accounting adjustments that are part of the normal part of exiting bankruptcy but which do not reflect the true economic basis for a viable, long-term business, the only kind that can provide the economic security that AA/US employees are seeking in this merger.

 

[Bob Owens]

I'm not saying they need to take any more cuts - I never said they needed to take the first round, Bob.

Anyone who has read these boards for even half a day over the past 10 years know that I have consistently said that AA's problem is overstaffing across the entire company, driven by inefficient and uncompetitive work rules, high seniority employees, along with declining revenue and increasing incursion of other carriers into AA’s core markets. I have also said that AA’s overstaffing was largely rooted in the flawed assumption that AA mgmt made almost ten years ago that other carriers would fail and AA would grow, justifying the larger size-adjusted workforce than its peers that AA has carried for the past decade.

The latter question regarding revenue growth is clearly addressed in the analyst’s comments – they believe that new AA’s revenue synergy estimates are excessive and those estimates are even more questionable considering that the merger will not be approved for months, perhaps a few months before the end of 2013. Competitive incursions in AA’s key markets continue unabated – DFW, LGA, JFK, ORD, LAX, MIA. US is more stable competitively but competitors have established themselves in several top revenue markets for US.

AA’s labor costs will decline as a result of early retirements and layoffs of some employees but new employees are replacing some of them so the benefit is only partial.

I was just in TUL yesterday, Flying, and couldn’t wonder about the future for that maintenance base as I looked out the window as my jet took off with that magnificent facility and driver of economic activity for eastern Oklahoma in full view. One thing is clear, though, and that is that the entire TUL maintenance base could be closed and it still won’t provide the $4B in the profit swing that is suggested here in this article. AA’s maintenance costs – which were somewhere between $2B and $3B last year – could only be completely eliminated if AA quits flying. Parker can buy a cost reduction for a couple years w/ new aircraft but maintenance costs will go up again even in a few years. B6’ income statements demonstrate what happens when new aircraft start needing maintenance.

True efficiencies from the labor agreements can only be gained if new AA either grows the enterprise to more efficiently use its existing workforce. Remember that Horton’s plan was based on growing the airline by 20% to gain efficiencies and avoid layoffs, even if those goals were unachievable. Indeed, it is no surprise that the creditors saw the flaw in Horton’s plan (which I noted many times here); it is impossible to grow a large US airline by anywhere close to that size, esp. given AA’s costs. In fact, AA’s costs have yet to reach levels competitive with even its network peers, let alone the entire low cost/low fare sector. Parker has said he is not going to cut capacity yet that is the only way to gain the pricing power and improved margins which are the primary economic basis of airline mergers.
Given that there are promises of no layoffs, then the ability to properly match costs with revenues becomes an even harder task than in the plan Horton proposed.

Parker’s plan surely does envision a whole lot of new large RJs which will be more efficient than AA mainline, esp. in markets like ORD where AA’s ability to profitably compete has been challenged for years. Does anyone really believe that UA will sit by and allow AA to add the equivalent amount of new large RJ capacity to the ORD market and, if not, what mainline positions will be lost at ORD?
No context has been lost, Q. I could post the entire article but it doesn’t change the facts that exist and which form the basis for my conclusion that combined AA/US is not going to change the economics of their business sufficiently to swing the company’s profitability by $4B in one year, save accounting gimmicks.

Since you quote the part about more efficient use of capital, has old AA cancelled any of its $25 billion aircraft order book – on top of what old US has? Where are the efficiency gains from use of capital if the new company will take on more debt in a shorter period of time than any airline in the history of US – and perhaps – global aviation and will end up with debt levels twice or more higher than any of its competitors?

First quarter 2013 closes tomorrow and will have an extra revenue boost because Easter falls in March, although that makes the 2nd quarter more challenging. Many of AA’s workforce reductions occurred before the 1st quarter so it will be very insightful as to how well AA did financially during the quarter that is now ending.

It is indisputable and completely in context that AA/US cannot swing profitability by $4B in one year which means that the only profits that new AA can show of that size will come from accounting adjustments that are part of the normal part of exiting bankruptcy but which do not reflect the true economic basis for a viable, long-term business, the only kind that can provide the economic security that AA/US employees are seeking in this merger.

As far as the overstaffing I wont bother going into it again as I've done it many times before and everyone on this board knows how you just keep repeating the same thing over and over again to try and get it accepted as fact.

Reducing headcount, your assumption is that the headcount remains relatively the same year to year without hiring, what you fail to consider is that the High seniority workforce that not only is at AA but also pretty much every carrier except perhaps SW and Jet Blue. And even at Jet Blue the average age is high compared to the age of the Company, many of its mechanics started at middle age. What this means is yes most are at top pay but also that attrition will be higher than normal for this industry through retirements. Attrition through retirements means that those workers aren't just leaving that company but leaving the workforce permanently. So I don't see the layoffs that you project unless there is a big decrease in demand. As far as the savings from hiring new workers I agree that the savings they normally would see are not going to materialize since in some cases the new workers, in order to get them, are being hired at topped out pay rates or will top out in two years. So the bulk of the savings will be from the fact they have less vacation, but that will in turn likely increase turnover which drives other costs. In negotiations the company assigned values to the learning curve of allowing mechanics to simply change shifts, that would be a tiny fraction of the learning curve costs associated with constantly replacing mechanics who need to go through months of company training when they get hired before they even hit the floor. Over the last ten years AA has lost 10,000 mechanics, all through attrition or refusal to relocate. So that averages one thousand a year, a rate that should remain somewhat constant meaning that in order for them to simply maintain their headcount they will need 6000 new mechanics over the life if the agreement. Of course AA is projecting to continue to shrink its M&R workforce to just 6325 by 2017, so your feelings as to the fate of Tulsa are justified. So there may be layoffs in Tulsa when the workload and headcount has dropped to the point it doesn't make sense to keep it open anymore but hiring on the line will likely continue as those middle aged mechanics in Tulsa refuse to relocate like many in AFW chose to do. The system only produces around 3000 A&Ps per year for the entire Aviation community, thats General Aviation, Helicopters, MROs, Corporate, Government (Police, Firefighters, Military) and Commercial. AA will need 30% of those mechanics, and they will not get them, they know it, they built their business model on every mechanic working 12% more hours at OT rates. AA's problems wont be from having too many workers but rather not being able to attract replacements for those who leave, this is already occurring in New York.

 

[dfw gen]

One thing that will help AMR’s bottom line is that the unions negotiated away profit sharing, the elimination of which he estimated added $300 million to $450 million in EBITDAR for AMR. In addition, the new American’s pilot costs will be lower than Delta’s and United’s until 2016.

from the article thank goodness we gave away that pesky profit sharing for pennies on the dollar now aa can make a real profit!

 

[dfw gen]

does the international have a private profit sharing plan? naw couldnt happen they would never lie or deceive the membership