Boyd Group's review and analysis of AA's bankruptcy

[eolesen]

Buck, Mike Boyd heads up a consulting firm out of Colorado. I haven't heard of him doing anything with airlines, but he does advise unions and airports.

Known for not sugar coating anything, and has come up with some good one liners when quoted in the media over the years.

His specialty with small airports, doing market stimulation & traffic analysis to support Essential Air Service & other Federal grant applications.

When he's commenting on regional carriers, I'd say he's probably doing so from a stronger position than most analysts who are focused on financials alone.

 

[Buck]

Buck, Mike Boyd heads up a consulting firm out of Colorado. I haven't heard of him doing anything with airlines, but he does advise unions and airports.

Known for not sugar coating anything, and has come up with some good one liners when quoted in the media over the years.

His specialty with small airports, doing market stimulation & traffic analysis to support Essential Air Service & other Federal grant applications.

When he's commenting on regional carriers, I'd say he's probably doing so from a stronger position than most analysts who are focused on financials alone.

So then his input may be revelant to the downsizing of American Eagle.

 

[eolesen]

So then his input may be revelant to the downsizing of American Eagle.

Perhaps. It's a bit more extreme of an outcome than I'd expect, but Mike's not in the same class as some of the other analysts I call out here from time to time.

 

[FWAAA]

Boyd worked for AA for several years about 40 years ago, so some might assume that he's biased in favor of AA. Then he worked for Braniff. IMO, he's a straight shooter.

 

[eolesen]

Boyd worked for AA for several years about 40 years ago, so some might assume that he's biased in favor of AA. Then he worked for Braniff. IMO, he's a straight shooter.

Well, Bob Mann worked for AA, too. And Bob is well known for being biased against AA.

 

[MCI transplant]

<_<------- Hey! Crandel worked for TWA also, but I wouldn't say that proves anything. :huh:

 

[WorldTraveler]

I'm all ears when someone has an opinion to share. I would rather be pleasantly surprised that WT's analysis was a little aggressive that to be shocked in disbelief that Horton wants more draconian cuts from labor.

Common sense says that shutting someone up because you don't agree with them is a rather risky way to live; valor dictates listening to counter points of view and then engaging in a discussion on where you believe the other person is not correct.
Thank you for demonstrating valor and common sense..... and I would very much like to see AA people be pleasantly surprised but let's face it, even the most dismal projections about the airline industry have missed the mark when it comes to the movement towards the bottom. The US airline industry remains highly unstable and competitive.
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Many of the top executives and analysts who have been in the industry more than 10 years have spent time at AA in management or leadership positions which is a tribute to how well run AA used to be. But 8 years of standing still has cost AA a huge amount and an 18 month trip through BK at best will put AA back on par with its peers. Returning AA to a position of leadership in the industry may take a whole lot longer.
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Boyd's focus on helping airports, esp. small airports - is one of the largest portions of aviation consulting and analysis outside of what is done by investment companies. Airport consulting is far less focused on the dynamic competitive nature of the industry which is what market analysts do.
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For the record, one analyst has already said they expect AA to cut 10% of its capacity to the benefit of its competitors.
http://www.marketwatch.com/story/jp-morgan-raises-its-airline-outlook-2011-12-01
Given that there has never been an airline go through BK w/o cutting capacity and w/o having competitors jump all over its markets, I'm not sure how any one could believe AA will be any different.

Creditors are loathe to see companies get involved in expensive competitive wars in BK... they are interested in preserving their investment and maximizing their recovery. BK is the ideal place to leave markets that don't work and build the business around what does work.
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NYC and CHI are two of AA's most competitive markets - and are also ones where AA has lost quite a bit over the past several years to competitors. There is every reason due to the slot deal, the UA/CO merger, growth of LFCs at ORD etc that the trend will continue. Throw in the fact that competitors know that AA is strategically hamstrung for the next several years while in BK and it is foolish to think that AA can peacefully restructure while competitors sit quietly on the sidelines.

Glad you changed your approach, Buck. The bottom line is that the chances are very high that AA won't come out of BK with the same network it has now.... and it will lose position in many of its key markets... that is just what happens in BK in a competitive industry.
As a mechanic (not sure if you are line or base), you may not be directly tied to a city.. but if you are line and are in one of the more competitive NYC or ORD markets, I would think about heading south if you could... AA is likely to cut deeper network and personnel wise in the north in favor of its strengths in DFW and MIA.
If you are in base maintenance, then you are part of that group that are only as good as the whole... positioning yourself around what is most likely to remain is the best protection you can personally take.
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Given that a 10% capacity cut could result in at least a 10% reduction in the workforce, there will very likely be job cuts. large ones.
Assuming that AA's trip through BK will simply take care of "back office" and accounting adjustments could be a very deadly mistake to make.
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BTW< those who believe AA will quickly shed hundreds of RJs in BK might want to double check AMR's 2010 annual report where AA classifies all of its AE fleet as owned, not leased assets. Yes, they can park those aircraft but they have to write down those assets - which are also undoubtedly collateralized. Unless AMR has a unique way of classifying owned vs. leased assets, you don't reject leases on owned aircraft.

 

[Bob Owens]

Despite being acquainted with Mr Boyd, I don't always agree with him, but he's about 90% correct in this piece. He convincingly dispels much of the ridiculous drivel being spouted by many of the "analysts" in the press this week.

I agree, however in the 10% would be the graph showing "Benefits Costs per mainline employee" where AA is listed as the most expensive in 2010. Its misleading because in 2009 they were near the bottom at $18000, above only FL. The reason for the big change, and I feel this was intentional and further supports the theory that AA has been planning this BK for some time, is because in 2009 they paid nothing into the Pension, then had to play catch up in 2010, that plus a lackluster stock market drove the costs from $18000 in 2009 to $35,000 in 2010. So the figure is not a reliable comparator. Costs at competitors would not really change due to stock market fluctuations and its likely that in an improved economy AA could once again have the lowest benefit costs in the industry since just as their competitors dont see their benefit costs go up in a poor market they dont enjoy the savings in a good market. One would have to look at the time from 2005 to 2010 and average the costs for a somewhat fairer comparasion. So the graph is pretty much useless and misleading, its a snapshot not a story.

 

[FWAAA]

I agree, however in the 10% would be the graph showing "Benefits Costs per mainline employee" where AA is listed as the most expensive in 2010. Its misleading because in 2009 they were near the bottom at $18000, above only FL. The reason for the big change, and I feel this was intentional and further supports the theory that AA has been planning this BK for some time, is because in 2009 they paid nothing into the Pension, then had to play catch up in 2010, that plus a lackluster stock market drove the costs from $18000 in 2009 to $35,000 in 2010. So the figure is not a reliable comparator. Costs at competitors would not really change due to stock market fluctuations and its likely that in an improved economy AA could once again have the lowest benefit costs in the industry since just as their competitors dont see their benefit costs go up in a poor market they dont enjoy the savings in a good market. One would have to look at the time from 2005 to 2010 and average the costs for a somewhat fairer comparasion. So the graph is pretty much useless and misleading, its a snapshot not a story.

I focused on the nine pages of explanatory text and not his graphs and charts. But I agree with you - something's fishy in that 2010 AA average benefit per employee figure. Here are the average employee benefit costs for AA mainline for 2002-09 from Bob Herbst's website (taken from DOT filings):

2002.....$21,364
2003.....$24,575
2004.....$23,692
2005.....$24,459
2006.....$25,611
2007.....$24,121
2008.....$24,335
2009.....$30,516

http://www.airlinefinancials.com/uploads/2002-2009_AA_mainline.pdf

And now Boyd says 2010 was $35,269. I'm a little skeptical that the cost per employee has grown by more than $10k per employee in two years. I think there's an issue with Herbst's figure for 2009 and I'm not sure about Boyd's figure for 2010.

I don't remember seeing any reference to the 2009 figure you mentioned of just $18k in 2009. That looks as dubious to me as the 2009 number from Herbst and Boyd's 2010 number.

Anyway, Boyd is incorrect when he claims that pension contributions cause fluctuations in this figure. Pension costs are determined by what the plans pay out each year, not the amount of cash AA must contribute. 2009 was not the first year AA didn't have any pension contributions, so if the lack of pension contributions caused this number to fluctuate that wildly, there would have been large fluctuations in the 2002-08 numbers reported by Herbst, and the figures hover between $21k to $25k during that span.

 

[BoeingBoy]

And now Boyd says 2010 was $35,269.

Since a lot of this financial info comes from the same source, the BTS, there shouldn't be too much difference no matter who reports it. But MIT's Airline Data Project definitely has a different number.

Jim

 

[FWAAA]

Since a lot of this financial info comes from the same source, the BTS, there shouldn't be too much difference no matter who reports it. But MIT's Airline Data Project definitely has a different number.

Jim

Looks like the MIT numbers don't line up with any of Herbst's numbers for any of the years. Makes me wonder if they aren't including the same items in their pension and benefits category. And, of course, there aren't any 2010 numbers available from the BTS as it's too early - aren't their numbers generally 18-24 months behind? So I wonder where Boyd got his 2010 figure.

 

[BoeingBoy]

The 2010 numbers are available from the BTS now. They run a couple of quarters behind (international traffic numbers being one exception). MIT only deals with years, not quarters, to balance out the ups and downs that naturally occur during the course of any given year because some expenses/income fluctuate during the course of a year. Like number of employees - that number never remains the same for a given year, especially as it contains part-timers who are "counted" as 1 FT employee per 2 part-timers whether that is accurate for a specific company or employee group or not.

The biggest problem with the BTS numbers is the limited breakdown by employee group and item. That's why MIT has pilot, FA, and maintenance data but not separate CSA data - CSA is lumped in with the other employees, as is ramp.

I believe most of the independent analysts, including MIT, also use SEC filings to supplement the BTS data.

Jim

 

[mistified]

Common sense says that shutting someone up because you don't agree with them is a rather risky way to live; valor dictates listening to counter points of view and then engaging in a discussion on where you believe the other person is not correct.
Thank you for demonstrating valor and common sense..... and I would very much like to see AA people be pleasantly surprised but let's face it, even the most dismal projections about the airline industry have missed the mark when it comes to the movement towards the bottom. The US airline industry remains highly unstable and competitive.
.
Many of the top executives and analysts who have been in the industry more than 10 years have spent time at AA in management or leadership positions which is a tribute to how well run AA used to be. But 8 years of standing still has cost AA a huge amount and an 18 month trip through BK at best will put AA back on par with its peers. Returning AA to a position of leadership in the industry may take a whole lot longer.
.
Boyd's focus on helping airports, esp. small airports - is one of the largest portions of aviation consulting and analysis outside of what is done by investment companies. Airport consulting is far less focused on the dynamic competitive nature of the industry which is what market analysts do.
.
For the record, one analyst has already said they expect AA to cut 10% of its capacity to the benefit of its competitors.
http://www.marketwatch.com/story/jp-morgan-raises-its-airline-outlook-2011-12-01
Given that there has never been an airline go through BK w/o cutting capacity and w/o having competitors jump all over its markets, I'm not sure how any one could believe AA will be any different.

Creditors are loathe to see companies get involved in expensive competitive wars in BK... they are interested in preserving their investment and maximizing their recovery. BK is the ideal place to leave markets that don't work and build the business around what does work.
.
NYC and CHI are two of AA's most competitive markets - and are also ones where AA has lost quite a bit over the past several years to competitors. There is every reason due to the slot deal, the UA/CO merger, growth of LFCs at ORD etc that the trend will continue. Throw in the fact that competitors know that AA is strategically hamstrung for the next several years while in BK and it is foolish to think that AA can peacefully restructure while competitors sit quietly on the sidelines.

Glad you changed your approach, Buck. The bottom line is that the chances are very high that AA won't come out of BK with the same network it has now.... and it will lose position in many of its key markets... that is just what happens in BK in a competitive industry.
As a mechanic (not sure if you are line or base), you may not be directly tied to a city.. but if you are line and are in one of the more competitive NYC or ORD markets, I would think about heading south if you could... AA is likely to cut deeper network and personnel wise in the north in favor of its strengths in DFW and MIA.
If you are in base maintenance, then you are part of that group that are only as good as the whole... positioning yourself around what is most likely to remain is the best protection you can personally take.
.
Given that a 10% capacity cut could result in at least a 10% reduction in the workforce, there will very likely be job cuts. large ones.
Assuming that AA's trip through BK will simply take care of "back office" and accounting adjustments could be a very deadly mistake to make.
.
BTW< those who believe AA will quickly shed hundreds of RJs in BK might want to double check AMR's 2010 annual report where AA classifies all of its AE fleet as owned, not leased assets. Yes, they can park those aircraft but they have to write down those assets - which are also undoubtedly collateralized. Unless AMR has a unique way of classifying owned vs. leased assets, you don't reject leases on owned aircraft.

All quiet possible I suppose. But I also keep hearing that each BK is uniquely different. No two are the same? To many moving parts. Also keep in mind that this is the first BK by a major airline since the new BK rules came into effect. One major difference with this one when compared to the DAL or UAL Bk's, is the amount of money the airline is bringing into the mix ($4.5 bil). AA will not have to find DIP financing. Wasn't that the case with NWA?? Because of that pensions were frozen not terminated.. I was also surprised to see that AMR did not ask for immediate draconian (sp) relief from labor. A tell tale sign of the health of a company going into BK.
Also it is unique that AA has such a large AC order which they have been very vocal about completing. I would have thought that for sure would have been down played. If you take that at face value and considering the fleet replacement numbers, it would indicate that at the very minimum there would not be a net loss in aircraft from old to new? Yea I know hard to believe but time will tell.
The Boyd report also points out that airlines do not have to be BK to shed routes. So why wait for BK?
Something seems different here for sure when compared to how other airline BK's started.
Who knows until it's over!

 

[WorldTraveler]

It is true that AMR came into BK in better shape including that they did not need DIP financing but they also had no unmortgaged assets before they went into BK - they borrowed everything they could before they got to BK as an attempt to avoid BK - but it is precisely because they had money in the bank that lbaor did not believe they were truly serious about cutting costs - or did not realize the consequences if they did not cooperate. Other carriers filed for BK before they had mortgaged all of their assets obtaining DIP with what was left unmortgaged.
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It is also not necessarily true that AMR's interest rates on the debt it obtained in the past year has much lower interest than DIP financing. AMR's credit rating has increased its lending costs considerably and because AMR has very little unsecured debt, their lending costs are not going to decrease as a result of being able to dump unsecured debt.
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Freezing pensions was only available by the time DL and NW filed; the only option for US and UA was to terminate - and the companies sought it to reduce the amount of the reorganized company that the PBGC will take as a a result of terminating pensions.
Terminating vs. freezing pensions has nothing to do with DIP; DL froze pensions for all but pilots and they terminated that plan because it had a lump sum provisions which made it impossible to fund.
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It is true that a company does not have to be in BK to shed routes but they cannot get rid of many of the costs outside of BK; they cannot walk away from leases outside of BK and therefore cutting capacity w/o being able to cut costs overall only results in higher costs for the capacity that remains.

Yes, every BK is different. The biggest difference now is that AMR is the only major airline restructuring which leaves it far more vulnerable than when other carriers were all restructuring at the same time.

 

[eolesen]

The fact that AMR is the only carrier in court could also work to their benefit. There was some degree of pattern bargaining going on with the creditors and lessors if I recall back in 2004-2005.