Dallas Business Journal
Slashing AA''s costs presents daunting task
Observers say bulk of $3 billion in cuts must come from pilot salaries
Margaret Allen Staff Writer
FORT WORTH — As Fort Worth-based American Airlines Inc. struggles to slash a whopping $3 billion — about 15% — from its annual operating costs, industry analysts contend the crippled carrier must ravage a large chunk of it from its high-paid pilots.
The analysts estimate 35% to 40% of American''s operating costs are labor, driven largely by pilot pay.
So far, airline management hasn''t approached the pilots'' union for concessions toward the cost cutting, according to Sam Mayer, a New York-based Boeing MD-80 captain who is spokesman for the Allied Pilots Association, the collective bargaining agent for 13,000 American pilots.
Don Carty, chairman and CEO of American parent AMR Corp., has said the airline must fundamentally restructure its business. The hope is to regain collapsing revenue caused by the depressed economy and Sept. 11 terrorism attacks.
American, by late September, had lost $1.8 billion since October 2001, according to Carty. The carrier''s schedule is off 10% to 12% from pre-Sept. 11.
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Solving the knotty problem of reigning in pilot pay, however, won''t save the airline, said Mayer. Raises over the last nine years have averaged 1% a year and pilots have seen no raises the past two years, he added.
The business model has failed. They need to look at the revenue side of the equation, said Mayer. What''s frustrating to the pilots is, that''s been the rhetoric, that''s what Carty is saying. But when it comes to taking action, they still do the same old things — cut back routes, park airplanes and lay off employees. They still haven''t addressed what, by their own admission, is the fundamental problem.
Carty has said American will lay off 7,000 employees between now and next March, reduce flying capacity 9%, aggressively retire aircraft and defer delivery from Boeing Co. — the pick-and-shovel supplier to the U.S. airline industry — of 34 new jets through 2005.
Cutting $3 billion annually will be excruciatingly difficult, according to Bill Warlick, Chicago-based director of airline research with the ratings firm Fitch Ratings.
It''s a very hard thing to pull off; $3 billion is an enormous chunk of change, said Warlick. The $3 billion target Carty''s laid out there is extremely ambitious.
Revenue pressures on the major airlines — said to be losing as much as $12.5 billion total this year — is putting pressure on organized labor, particularly pilots, and is rapidly changing the industry''s labor economics.
American, Delta Air Lines, Continental Airlines and Northwest Airlines are no doubt closely watching what happens at United Airlines, said Warlick. The carrier has threatened it will be forced into Chapter 11 bankruptcy without huge wage concessions from its pilots.
Mayer said United pilots would have to give up a third of their wages to reach parity with American pilots.
If United''s pilots yield, however, the pressure will be on at the other majors, according to Adam Pilarski, senior vice president at Virginia-based aviation consulting firm Avitas.
Then American''s labor will agree to cuts without American actually going into bankruptcy, said Pilarski.
Unions essentially killed the former Eastern Airlines, and United is not far off that model, according to Ron Kuhlmann, a vice president with California-based Unisys Transportation Management Consultants.
The labor unions are the stumbling block, said Kuhlmann, particularly pilots. They don''t have to take large pay cuts, they just have to be made much more productive.
Labor is the biggest differential between the majors and low-cost carriers like Dallas-based Southwest Airlines Co., AirTran Airways and nonunionized JetBlue Airways, he said. Southwest, for example, has high pilot productivity and high aircraft utilization because it doesn''t run a hub-and-spoke system, like American, which is now trying to stagger aircraft arrivals and thereby reduce staff, equipment and gates at its main connecting hubs, Dallas/Fort Worth International Airport and Chicago''s O''Hare International Airport.
Mayer agreed that productivity must improve, but said pilot hands are tied.
We do an awful lot of sitting around. The Southwest pilot doesn''t do that. American doesn''t build its schedules the same way, but that''s not the pilots'' fault, said Mayer. I just came off a trip with a three-and-a-half-hour sit in Dallas. I would''ve loved to have been flying. Management needs to look at their model and see how they can increase our productivity. Our pilots would much rather be flying than sitting around a crew room reading a magazine for three or four hours.
Contact DBJ writer Margaret Allen at [email protected] or (214) 706-7119.
Slashing AA''s costs presents daunting task
Observers say bulk of $3 billion in cuts must come from pilot salaries
Margaret Allen Staff Writer
FORT WORTH — As Fort Worth-based American Airlines Inc. struggles to slash a whopping $3 billion — about 15% — from its annual operating costs, industry analysts contend the crippled carrier must ravage a large chunk of it from its high-paid pilots.
The analysts estimate 35% to 40% of American''s operating costs are labor, driven largely by pilot pay.
So far, airline management hasn''t approached the pilots'' union for concessions toward the cost cutting, according to Sam Mayer, a New York-based Boeing MD-80 captain who is spokesman for the Allied Pilots Association, the collective bargaining agent for 13,000 American pilots.
Don Carty, chairman and CEO of American parent AMR Corp., has said the airline must fundamentally restructure its business. The hope is to regain collapsing revenue caused by the depressed economy and Sept. 11 terrorism attacks.
American, by late September, had lost $1.8 billion since October 2001, according to Carty. The carrier''s schedule is off 10% to 12% from pre-Sept. 11.
Airlines & Airports
Sign up to receive free daily business updates by email every weekday afternoon.
Use Search Watch to watch for related topics, companies.
Receive free Industry News via email. Choose from 46 different industries.
Solving the knotty problem of reigning in pilot pay, however, won''t save the airline, said Mayer. Raises over the last nine years have averaged 1% a year and pilots have seen no raises the past two years, he added.
The business model has failed. They need to look at the revenue side of the equation, said Mayer. What''s frustrating to the pilots is, that''s been the rhetoric, that''s what Carty is saying. But when it comes to taking action, they still do the same old things — cut back routes, park airplanes and lay off employees. They still haven''t addressed what, by their own admission, is the fundamental problem.
Carty has said American will lay off 7,000 employees between now and next March, reduce flying capacity 9%, aggressively retire aircraft and defer delivery from Boeing Co. — the pick-and-shovel supplier to the U.S. airline industry — of 34 new jets through 2005.
Cutting $3 billion annually will be excruciatingly difficult, according to Bill Warlick, Chicago-based director of airline research with the ratings firm Fitch Ratings.
It''s a very hard thing to pull off; $3 billion is an enormous chunk of change, said Warlick. The $3 billion target Carty''s laid out there is extremely ambitious.
Revenue pressures on the major airlines — said to be losing as much as $12.5 billion total this year — is putting pressure on organized labor, particularly pilots, and is rapidly changing the industry''s labor economics.
American, Delta Air Lines, Continental Airlines and Northwest Airlines are no doubt closely watching what happens at United Airlines, said Warlick. The carrier has threatened it will be forced into Chapter 11 bankruptcy without huge wage concessions from its pilots.
Mayer said United pilots would have to give up a third of their wages to reach parity with American pilots.
If United''s pilots yield, however, the pressure will be on at the other majors, according to Adam Pilarski, senior vice president at Virginia-based aviation consulting firm Avitas.
Then American''s labor will agree to cuts without American actually going into bankruptcy, said Pilarski.
Unions essentially killed the former Eastern Airlines, and United is not far off that model, according to Ron Kuhlmann, a vice president with California-based Unisys Transportation Management Consultants.
The labor unions are the stumbling block, said Kuhlmann, particularly pilots. They don''t have to take large pay cuts, they just have to be made much more productive.
Labor is the biggest differential between the majors and low-cost carriers like Dallas-based Southwest Airlines Co., AirTran Airways and nonunionized JetBlue Airways, he said. Southwest, for example, has high pilot productivity and high aircraft utilization because it doesn''t run a hub-and-spoke system, like American, which is now trying to stagger aircraft arrivals and thereby reduce staff, equipment and gates at its main connecting hubs, Dallas/Fort Worth International Airport and Chicago''s O''Hare International Airport.
Mayer agreed that productivity must improve, but said pilot hands are tied.
We do an awful lot of sitting around. The Southwest pilot doesn''t do that. American doesn''t build its schedules the same way, but that''s not the pilots'' fault, said Mayer. I just came off a trip with a three-and-a-half-hour sit in Dallas. I would''ve loved to have been flying. Management needs to look at their model and see how they can increase our productivity. Our pilots would much rather be flying than sitting around a crew room reading a magazine for three or four hours.
Contact DBJ writer Margaret Allen at [email protected] or (214) 706-7119.
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34 PM j7915 wrote: 
