Good Ole Bob

[TIME FOR CHANGE]

http://bobcrandallthinks.blogspot.com/2011/09/morons-or-something-better.html



And finally, we need to re-create the middle class by restoring the link between productivity and compensation. It’s a sad fact that average per hour compensation has not increased, in real terms, since the late 1970s. Productivity has risen dramatically, but the returns on that productivity have gone almost exclusively to either capital or the highest earners in our society. The result is a higher level of income and wealth inequality than we have had since 1929. Whether that discrepancy gets fixed through revisions in the tax code, by reforming corporate governance or by strengthening the union movement, we all need to face the fact that equality matters, and that we can have neither a dynamic economy nor a politically cohesive citizenry if a small percentage of the people have most of the money.
To accomplish any of this, we’re all going to have to do a better job of educating ourselves, of listening carefully to the other guy’s point of view and talking to one another about how to get America’s mojo back.
I hope we will.

 

[WorldTraveler]

"We can create a better America, but only if we start tuning out the false messages and focus on the fact that if we want our country to do better, it’s going to take a huge collective effort.
The first step should be to recognize that there is no easy way out of our present problem. We have dug a deep ditch, and to get out, we are going to have to stop digging, and change our ways. "
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Well said, and as always, the airline industry led the trends in the global economy.
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Problem is that special interests, not common sense make public policy and those special interests are in contrast to what will help average Americans.
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Crandall's recommendations are spot on, but looking at other countries, the only way they come to the place when they change their ways is when they find that things are too broken to maintain... sadly, America hasn't reached that point.
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And again, specific to the airline industry, and the tide that is hitting AA right now, there are enough people that have adapted and won that there is no way anyone is willing to question that the system is broken.
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As for wages improving for the airline sector to match the productivty gains he talks about, part of that ability will come as airlines regain pricing power. For the first time in decades, ALL large airlines are managing their capacity rationally and making decisions that are helping to push prices higher.
Only when the industry stops having to subsidize its losses on the backs of employees can they begin to regain something of what has been lost.
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Maybe, just maybe, the airline industry could become a leader in the US in change for the good instead of always what is bad.

 

[Bob Owens]

.
Crandall's recommendations are spot on, but looking at other countries, the only way they come to the place when they change their ways is when they find that things are too broken to maintain... sadly, America hasn't reached that point.
.
And again, specific to the airline industry, and the tide that is hitting AA right now, there are enough people that have adapted and won that there is no way anyone is willing to question that the system is broken.
.
As for wages improving for the airline sector to match the productivty gains he talks about, part of that ability will come as airlines regain pricing power. For the first time in decades, ALL large airlines are managing their capacity rationally and making decisions that are helping to push prices higher.
Only when the industry stops having to subsidize its losses on the backs of employees can they begin to regain something of what has been lost.

Hmm, if we had raises that went by productivity they would have to double our wages.

Want to get rid of unemployment? Simple, knock the workweek down to 32 hours and mandate that all OT is paid at 2x. The problem is that people may like it.

Pricing power? Well they have raised prices several times this year, they fly fewer people but their revenues are up. The problem isn't revenue generation either, It's uncontrolled spending, and they can't pin it all on oil and it's not going to wages.

Just had a gander at the 8k. AMR is spinning off Eagle but saddling AA with the planes and all the debt, that will increase AA debt by over $2 billion. The planes aren't worth what is owed on them , so in addition to taking on the $ 2 billion in debt that AA will have to service, thus driving up CASMs, they are going to have another $300 million paper loss to try and use as leverage in negotiations.

 

[commavia]

Just had a gander at the 8k. AMR is spinning off Eagle but saddling AA with the planes and all the debt, that will increase AA debt by over $2 billion. The planes aren't worth what is owed on them , so in addition to taking on the $ 2 billion in debt that AA will have to service, thus driving up CASMs, they are going to have another $300 million paper loss to try and use as leverage in negotiations.

AMR isn't "taking on" any new or additional debt - that $2B is already on AMR's books today. All that AMR is doing is choosing not to send that $2B debt out the door with Eagle, as a way of trying to offload Eagle as quickly and painlessly as possible. All else being equal, I think that's a fair decision - it's probably what's best for AA in the long-run.

Either way, in terms of CASM, the only impact this would have would be if it increased mainline's interest expense - that's the only cost impact of debt from an accounting standpoint that I can think of. I'm not sure how that cost is allocated across AMR subsidiaries today.

 

[FWAAA]

Just had a gander at the 8k. AMR is spinning off Eagle but saddling AA with the planes and all the debt, that will increase AA debt by over $2 billion. The planes aren't worth what is owed on them , so in addition to taking on the $ 2 billion in debt that AA will have to service, thus driving up CASMs, they are going to have another $300 million paper loss to try and use as leverage in negotiations.

commavia is right, this isn't new debt that AMR is taking on; it's Eagle's airplane debt that is already guaranteed by AA and/or AMR. Ever co-sign a loan for a friend or family member because the bank demanded it? Lenders have required that most (if not all) the Eagle debt be guaranteed by the corporate parent (AMR) all along. These guarantees have been discussed in every 10-K.

Ever tried to remove your name or get out from under a debt you co-signed before it's paid off? Darned near impossible unless you give the lender lots of money in most cases. Practically pay off the debt. AMR will own the planes and have to make the payments and will lease them to Eagle for a pittance. Of course, AMR can make it up on the Fee for Departure rate it pays Eagle.

 

[frontline]

AMR isn't "taking on" any new or additional debt - that $2B is already on AMR's books today. All that AMR is doing is choosing not to send that $2B debt out the door with Eagle, as a way of trying to offload Eagle as quickly and painlessly as possible. All else being equal, I think that's a fair decision - it's probably what's best for AA in the long-run.

I agree that this is fair and best for all parties. Starting Eagle out with a big debt load out of the gate would not help it's success. This way they at least have a chance to get going without a big burden.

 

[chris perry]

I just want to see to what pile that the debt was added ......It appears it was added to labor,the brick pile was loaded with another 200 million...Since the books will never be opened no one will ever know!!!!!!!!

 

[eolesen]

I just want to see to what pile that the debt was added ......It appears it was added to labor,the brick pile was loaded with another 200 million...Since the books will never be opened no one will ever know!!!!!!!!

Read closer, Chris. The debt related to Eagle aircraft was already on AMR's books. There's no net increase in AMR debt --- it's just being noted as *not* moving over to Eagle's balance sheet as debt. Most certainly, it will be coming out of what they're paid per departure, which will be limited to paying for fuel and crew.

This arrangement isn't new. It's how ExpressJet and CO were set up when XJet spun off. If AA owns the aircraft, they can also pull them in the future if Eagle's costs don't remain competitive. Good move, actually...

http://www.aero-news.net/index.cfm?do=main.textpost&id=a6c4087d-9c2e-4e4a-80c6-737adeb2951a

DL and DH (ACA before they became Independence Air) had a slightly different structure -- DH owned the aircraft, but IIRC had a "put option" where DL became liable for them if the flying or the contract was eliminated. When DL pulled the contract Express flying from DH, DL was stuck with the FRJ fleet (and wound up dumping them in bankruptcy).

-------

And the $800M is the labor related gaps between AA and other airlines. Doesn't mean that there's been $800M in costs; it just means that the other carriers' costs haven't risen at the same rate AA's have.

All are affected by health care, but levels of coverage are different. AA is still covering stuff like Viagra and sex changes. I don't know that other carriers are or aren't covering elective stuff like that...

With the collapse of the stock market (again), it's also likely that a good portion of the gap is coming from added cash AA will need to kick in to meet pension funding requirements.

 

[will fix for food]

Did I read it correctly that AA was going to assume the 2.2 billion dollars owed on Eagle's aircraft but also pay Eagle fair market value for the planes?

 

[FWAAA]

Did I read it correctly that AA was going to assume the 2.2 billion dollars owed on Eagle's aircraft but also pay Eagle fair market value for the planes?

Yes, and it's likely that the debt exceeds the FMV of the airplanes in many cases, so in that case, Eagle won't be netting any cash from AMR for the planes, just like if you sold your one year old car to a dealer but still had four or five years worth of car payments, making you upside down on the car loan. You wouldn't net any cash on the sale, and it's likely that Eagle won't net any cash on its upside down airplane debt.

The "assumption" of the Eagle airplane debt isn't new debt for AMR; AMR is already a guarantor of that debt. All AMR is doing is cutting Eagle loose with no debt and no owned airplanes (they'll be owned by AMR and leased to Eagle for a nominal pittance - which is probably the fair lease value - practically nothing).

In Friday's filing with the U.S. Securities and Exchange Commission, AMR said if the debt on the aircraft exceeds the value of the planes, Eagle will give American company notes to cover the gap.

http://finance.yahoo.com/news/AMR-buying-planes-back-from-apf-1189874109.html?x=0&.v=1

Of course, if you sold your upside down car to a dealer, the dealer would probably require that you give them cash to cover the gap - AMR is willing to take an IOU from Eagle to cover any gap between FMV and the debt.

 

[commavia]

With the collapse of the stock market (again), it's also likely that a good portion of the gap is coming from added cash AA will need to kick in to meet pension funding requirements.

I obviously have no idea how AA arrived at that $800M labor cost disadvantage number, since the company has never quantified it publicly - and for understandable reason, since I'm sure they don't ever want to get into a public discussion about highly proprietary cost figures and don't want the labor groups to be able to poke holes in it.

And, of course, I'm sure that the company used the most pessimistic possible ground rules and assumptions in generating that $800M figure. That number was of course a negotiating tactic - just as is the messaging from the unions. It's negotiations 101 - everybody starts high, and far apart, and hopefully works towards something in the middle.

However, all that being said, I would imagine that yes, probably a substantial portion of what AA is quantifying as a "labor cost disadvantage" is the amortized future liability of defined benefit pension funding obligations that other airlines (that have frozen/dumped their defined benefit pension plans, or never had them to begin with) may not have, or may not have nearly as much of.

 

[FWAAA]

Apparently, AA sees a $600 million wage disadvantage (combination of wage rates and productivity issues) plus another $200 million attributable to the pensions:

In responding to the bankruptcy question, Goulet referred to American's labor cost disadvantage, which she put at about $800 million annually, including about $600 million for wages, benefits and work rules, and $200 million in pension costs. American's two principal competitors were able to abandon fixed benefit pension plans through the bankruptcy reorganization process.

http://www.thestreet.com/story/11247389/2/american-airlines-exec-faces-critics.html

 

[Hopeful]

Apparently, AA sees a $600 million wage disadvantage (combination of wage rates and productivity issues) plus another $200 million attributable to the pensions:



http://www.thestreet.com/story/11247389/2/american-airlines-exec-faces-critics.html

Unlike executive compensation and pensions..how much does this cost the company?
..what about executive productivity? Tell me how is that gauged?

 

[Hackman]

Unlike executive compensation and pensions..how much does this cost the company?
..what about executive productivity? Tell me how is that gauged?

Yes! What are the mAAnagment productive costs of losing 500 million in one quarter?

It's got to be in some seriously negative Bernie Madoff type numbers.

My calculator would probably start smoking some silicon chips from going that negative.... :huh:

 

[Buck]

Follow the link all the way to the last page of "5 things"

Interesting reading. Could be an indicator as the direction AA is heading?