AMR loses $214 million; Arpey has some ideas to right the ship:
http://biz.yahoo.com/prnews/041020/daw026_1.html
Not as bad as some feared, but still bad news.
http://biz.yahoo.com/prnews/041020/daw026_1.html
AMR Corporation Reports a Third Quarter Loss of $214 Million and Ends Quarter With $3.6 Billion in Cash and Short-Term Investments, Including a Restricted Balance of $481 Million
Wednesday October 20, 11:28 am ET
Results Impacted By High Fuel Prices, Low Fares and Multiple Hurricanes
American Announces Series of Steps to Increase Revenues and Reduce Costs
Actions Include American Withdrawing Equivalent of 15 Aircraft in 2005 and American Eagle Not Taking Delivery of 18 Embraer Regional Jets
FORT WORTH, Texas, Oct. 20 /PRNewswire-FirstCall/ -- AMR Corporation (NYSE: AMR - News), the parent company of American Airlines, Inc., today reported a net loss of $214 million in the third quarter, or $1.33 per share. This compares to last year's third quarter net profit of $1 million.
"Our business was buffeted by three dramatic and harmful developments during the third quarter," said AMR Chairman and CEO Gerard Arpey. "The first was record high fuel prices. The second was a weak revenue environment which meant that despite our best efforts -- and unlike other fuel-intensive businesses -- we have been largely unable to pass the higher fuel costs on to our customers. The third development was the unprecedented series of hurricanes, which depressed revenue, increased costs and repeatedly disrupted an important part of our network."
Skyrocketing fuel prices during the quarter resulted in a year-over-year increase of more than 40 cents per gallon, which translated into $342 million in incremental fuel costs compared to a year ago. Meanwhile, American's revenue per available seat mile declined 2.5 percent, driven by a 4.8 percent drop in passenger yield (passenger revenue per passenger mile).
"Weak yields are an industry-wide phenomenon," Arpey said. "Although many industries are getting hammered by high fuel prices, the airline industry has largely been unable to price its product in a way that reflects the higher cost of production. Low cost carrier growth is partly responsible for the depressed fare environment, but there are other factors at work too.
"Specifically, there is a growing disconnect between industry capacity growth in the domestic marketplace and overall economic growth," Arpey said. "While the economy has grown roughly three and a half percent this year, available domestic seat miles are up more than six percent. Making matters worse has been the competitive behavior of some carriers either in or on the verge of bankruptcy."
According to Arpey, the confluence of high fuel prices and low fares has sharpened the company's focus on making the changes necessary to improve the company's financial condition. "The harsh reality is that despite our tremendous progress to date, our cost structure remains too high for us to succeed in a world where the price of oil is at such an extraordinary level," Arpey said. "However, there is still a lot we can do, and are doing, to increase revenues and reduce expenses."
That said, AMR anticipates the record high fuel prices to continue in the fourth quarter -- a quarter that is typically seasonally weak from a revenue perspective. Thus, AMR expects to incur a fourth quarter loss significantly larger than that recorded in the third quarter.
Arpey cited a series of steps American has taken to increase revenues, cut costs and put the airline on a stronger financial footing. One expected outcome of these initiatives is that there will be a reduction in the size of the workforce, although the details for accomplishing this are still being identified. American's new initiatives include:
Aircraft Decisions -- American has decided to withdraw capacity equivalent to 15 narrow-body aircraft in 2005 while its regional affiliate, American Eagle, has reached an agreement in principle with Embraer to not take delivery of the last 18 ERJ-145 regional jet aircraft, scheduled for delivery between July 2005 and February 2006.
Seat Decisions -- American will add back a portion of the coach seats previously removed from its MD80, 737, 767 and 777 fleets. On the MD80 and 737 aircraft, only one of the two rows of coach seats originally removed will be added back to those airplanes. In addition, the MD80 reconfiguration will expand the first class cabin by two seats, in recognition of the value American's customers place on its first class product.
International Expansion -- American intends to increase revenue by continuing its expansion in the growing Asia/Pacific market. Yesterday, the airline announced that it will launch daily nonstop service between Chicago and Nagoya, Japan, on April 3, and resume daily nonstop service between Dallas/Fort Worth and Osaka, Japan, on Nov. 1, 2005. American is also vigorously seeking authority to begin nonstop service between Chicago and Shanghai, China, starting on May 1, 2005.
Simplified Operations -- American has decided to expand upon an experiment it launched in the summer of 2004 in Chicago, in which aircraft types were isolated to certain stations, and flight crew and aircraft were scheduled together. This change of approach will be implemented throughout American's system in 2005, Arpey said. "We are pressing ahead aggressively to streamline and simplify American's operations."
Other Revenue Initiatives -- American's revenue initiatives have involved a variety of fare actions in certain markets as well as the introduction of ticketing fees. American now charges $5 for tickets purchased through U.S. reservations offices while a $10 fee applies to tickets bought at U.S. airport locations. There also is now a fee for paper tickets purchased through travel agents in certain European countries, the Caribbean, Mexico and Latin America for itineraries that are eligible for electronic tickets. Additionally, the U.S. Department of Transportation recently issued a favorable ruling, allowing U.S. carriers to apply fuel surcharges to all of their international routes, which should further improve revenue.
Dallas Reservations Office Consolidation -- To cut costs and increase efficiency, American said it has decided to consolidate its reservations office in south Dallas with its much larger Southern Reservations Office near DFW Airport, saving the company hundreds of thousands of dollars a year in various expenses.
With regard to adding back seats, Arpey said American is acting to increase revenue by eliminating a seating capacity disadvantage largely attributable to the More Room Throughout Coach program the airline launched several years ago. "When we launched More Room Throughout Coach, healthy yields and robust business travel were the norm, and both conditions were essential to the success of More Room," Arpey said. "However, times have changed, and we must acknowledge that in today's low-fare environment, having fewer seats on our aircraft has put us at a real revenue disadvantage compared to other airlines."
Arpey said that as a result of its aircraft and seating changes, American's first quarter domestic capacity will decrease approximately 5 percent. "Given our skyrocketing fuel costs, and our limited ability to pass those costs on to our customers, we feel it is prudent to draw down a portion of our domestic schedule. And rather than decrease flight schedules across the board, we will be focusing our cuts on specific markets where our service is either redundant to service to nearby cities or is less essential to our domestic network. At the same time, we are going to intensify our focus on our areas of strength. For instance, we now plan to increase our flying at Dallas/Fort Worth by 90 operations year over year, a larger increase than we had previously announced," Arpey said.
As a result of the initiatives discussed above, the company reported that some special charges may be recognized in the fourth quarter -- the amount and scope of which are currently being identified. In addition, the company expects to record a gain of approximately $145 million from the sale of its interest in Orbitz (an on-line travel agency in which American holds an ownership stake), if the closing of that sale occurs in the fourth quarter.
"Very challenging industry conditions are nothing new to the people of American Airlines," Arpey said. "We remain committed to continuing to evolve our company by wringing out costs and inefficiency from everything we do. What's more, we are determined to make the hard choices necessary to ensure our company's competitiveness and ultimate success."
Not as bad as some feared, but still bad news.