New Analyst Report AA Cash Crunch
- Thread starter AAquila
- Start date
cs_studentguy
Newbie
- Joined
- Jan 9, 2003
- Messages
- 7
- Reaction score
- 0
The Baumert Report January 16, 2003
Origins of a Cash Crunch
As the steward of shareholders’ capital, it is the CEO’s responsibility to
allocate capital so it will generate an appropriate return. Poor capital
allocation, combined with management miscues and a weak economy, can lead to
a cash crunch for even the strongest commodity company. Warren Buffett
himself has warned that a commodity business cannot survive inept
management. AMR has not lacked for either poor capital allocation or
management miscues over the last several years.
The TWA Acquisition
While AMR may have paid $742 million in cash for TWA, that alone did not
reflect the actual cost. AMR also assumed $2.06 billion of TWA’s
obligations such as current liabilities, non-pension postretirement benefits
and capital leases. The actual purchase cost resulted in approximately $1
billion worth of goodwill that AMR was forced to write-off entirely due to
impairment.
And AMR continues to pay in many ways for the ill-advised acquisition. For
instance, by the end of 2001 AMR’s aircraft rentals shot up over 42% because
of the addition of TWA aircraft. During the third quarter of 2002, AMR
announced it would retire thirteen leased aircraft earlier than planned, but
AMR will still have “pay†for those retired leased aircraft through 2014 to
the tune of $159 million in total cash outlays.
Now, here was an airline with low yielding routes and a 15% revenue gap
relative to the industry average. Yet, AMR management assumed they could
increase TWA’s unit revenues through synergies and management prowess. It
never happened. Goldman Sach’s Glen Engel on the acquisition: “Most of the
poor relative performance reflects the inclusions of lower yielding TWA
routes; there is little evidence yet of any American synergies to help close
the TWA’s traditional 15% revenue gap. AMR has yet to achieve higher
revenue per aircraft on its TWA assets. We remain disappointed with the
progress on former TWA routes, which continue to lag the system.†Even had
9/11 and the recession not occurred, this takeover still would not have been
profitable. It just might’ve taken a little longer to find out.
Pension Funding
While the bear market and low-yielding bonds can account for some of AMR’s
pension funding problems, the main cause is management’s continued use of
very aggressive pension return assumptions. As Warren Buffett explains,
“Now, the higher the expectation rate that a company uses for pensions, the
higher the reported earnings. That’s just the way pension accounting
works…â€
>From 1995 through 2002, AMR used a very high pension return assumption of
9.25% to 9.5% that padded its bottom line for a time, but in the end, was
unhealthy for the funded status of its pension. The Fitch rating agency
currently estimates AMR’s pension to be underfunded by about $3.3 billion.
Mr. Buffett thinks a pension return assumption of around 6% is realistic,
and thus he warns, “Considering how poor returns have been recently and the
reprises that probably lie ahead, I think anyone choosing not to lower
assumptions – CEOs, auditors and actuaries all – is risking litigation for
misleading investors.†It is not known if AMR has finally succumbed to
reality and lowered their assumption to a reasonable rate this year.
Had AMR management just set realistic pension return assumptions, they would
not be in as big a predicament as they are today. Last year, they had to
contribute $250 million in cash to their pension and take a $1 billion
dollar charge against shareholder’s equity. Also, according to
BusinessWeek, if AMR’s pension assets lost just 5% last year, they may have
to contribute an additional $415 million this year.
More Room In Coach
In Forbes magazine, Howard Banks explained that American started the “More
Room in Coach†project because they wanted to gain back market share by
attracting more business travelers who would be willing to pay about 5% more
for a little more room. Well, they didn’t gain back market share, and they
couldn’t increase prices by 5%. But worst of all, the “More Roomâ€
initiative actually increased American’s unit costs.
Now, with AMR management craving lower costs and a new focus on leisure
travelers, Smith Barney’s Brian Harris and Goldman Sach’s Glen Engel have
questioned the logic of maintaining the “More Room†scheme. By bringing
back the seats, American could immediately lower unit costs and accelerate
the retirement of more aircraft. And since leisure travelers are priced
focused, not more room focused, there’s little need keep the initiative for
them.
Latin America and Business Travelers
Ignoring obvious risks, American dove headfirst into a region that is known
for being both economically and politically volatile, to the point that in
2001 Latin America represented 52% of American’s international revenues.
Now, American is paying for their decision to concentrate so much of their
revenue on such an unstable geographic region. With many Latin American
countries in either economic or political turmoil (or both), Latin America
unit revenues have cratered.
American’s focus on the major US business centers resulted in an
over-reliance on business demand, leaving them extremely vulnerable to an
extended economic downturn. Due to poor planning or believing the economic
cycle had been repealed, AMR management made no initial moves until well
into the recession. With the business demand lagging far behind the return
of leisure travelers, they were caught with their pants down. Goldman’s
Engel believes the dearth of business travel and its exposure to Latin
America will cause American’s eventual recovery to lag the industry.
Labor Relations and Corporate Culture
Investing legends Warren Buffett and Phillip Fisher believe good labor
relations are so important for business success and profits, they will not
buy the stock of a company that has poor labor relations. On the subject,
Mr. Buffett wrote that should management “behave with little regard for
their people, their conduct will often contaminate the attitudes and
practices throughout the company.†Buffett and Fisher hold firm that good
labor relations rewards shareholders.
In his book, “Loyalty Rules!†Frank Reicheld says when corporations alienate
employees; they in turn can alienate customers. And that hurts profits and
growth. He goes on to explain that by nourishing loyalty and morale,
corporations can increase productivity and customer retention. Money
manager Whitney Tilson believes that when it comes to corporate culture, he
“would argue that few characteristics are more important to a company’s –
and stock’s – success.†AMR’s continued labor relation tactics clearly
demonstrates they do not believe in any such correlation, despite all
evidence to the contrary.
Steven Baumert
To receive The Baumert Report email baumertpm@hotmail.com.
Sources: AMR Annual Report 2000, 2001; AMR ’01 10K; AMR 3Qtr. 10Q; AMR
8/13/02 and 3Qtr. Conference Call; Berkshire Hathaway Annual Report ’01; S&P
Stock Reports; Goldman Sachs; Smith Barney; Whitney Tilson; Forbes; Fortune;
BusinessWeek; Reuters News Service; Buffett: The Making of an American
Capitalist by Roger Lowenstein; The Warren Buffett Way by Robert Hagstrom;
Common Stocks and Uncommon Profits by Phillip Fisher.
Origins of a Cash Crunch
As the steward of shareholders’ capital, it is the CEO’s responsibility to
allocate capital so it will generate an appropriate return. Poor capital
allocation, combined with management miscues and a weak economy, can lead to
a cash crunch for even the strongest commodity company. Warren Buffett
himself has warned that a commodity business cannot survive inept
management. AMR has not lacked for either poor capital allocation or
management miscues over the last several years.
The TWA Acquisition
While AMR may have paid $742 million in cash for TWA, that alone did not
reflect the actual cost. AMR also assumed $2.06 billion of TWA’s
obligations such as current liabilities, non-pension postretirement benefits
and capital leases. The actual purchase cost resulted in approximately $1
billion worth of goodwill that AMR was forced to write-off entirely due to
impairment.
And AMR continues to pay in many ways for the ill-advised acquisition. For
instance, by the end of 2001 AMR’s aircraft rentals shot up over 42% because
of the addition of TWA aircraft. During the third quarter of 2002, AMR
announced it would retire thirteen leased aircraft earlier than planned, but
AMR will still have “pay†for those retired leased aircraft through 2014 to
the tune of $159 million in total cash outlays.
Now, here was an airline with low yielding routes and a 15% revenue gap
relative to the industry average. Yet, AMR management assumed they could
increase TWA’s unit revenues through synergies and management prowess. It
never happened. Goldman Sach’s Glen Engel on the acquisition: “Most of the
poor relative performance reflects the inclusions of lower yielding TWA
routes; there is little evidence yet of any American synergies to help close
the TWA’s traditional 15% revenue gap. AMR has yet to achieve higher
revenue per aircraft on its TWA assets. We remain disappointed with the
progress on former TWA routes, which continue to lag the system.†Even had
9/11 and the recession not occurred, this takeover still would not have been
profitable. It just might’ve taken a little longer to find out.
Pension Funding
While the bear market and low-yielding bonds can account for some of AMR’s
pension funding problems, the main cause is management’s continued use of
very aggressive pension return assumptions. As Warren Buffett explains,
“Now, the higher the expectation rate that a company uses for pensions, the
higher the reported earnings. That’s just the way pension accounting
works…â€
>From 1995 through 2002, AMR used a very high pension return assumption of
9.25% to 9.5% that padded its bottom line for a time, but in the end, was
unhealthy for the funded status of its pension. The Fitch rating agency
currently estimates AMR’s pension to be underfunded by about $3.3 billion.
Mr. Buffett thinks a pension return assumption of around 6% is realistic,
and thus he warns, “Considering how poor returns have been recently and the
reprises that probably lie ahead, I think anyone choosing not to lower
assumptions – CEOs, auditors and actuaries all – is risking litigation for
misleading investors.†It is not known if AMR has finally succumbed to
reality and lowered their assumption to a reasonable rate this year.
Had AMR management just set realistic pension return assumptions, they would
not be in as big a predicament as they are today. Last year, they had to
contribute $250 million in cash to their pension and take a $1 billion
dollar charge against shareholder’s equity. Also, according to
BusinessWeek, if AMR’s pension assets lost just 5% last year, they may have
to contribute an additional $415 million this year.
More Room In Coach
In Forbes magazine, Howard Banks explained that American started the “More
Room in Coach†project because they wanted to gain back market share by
attracting more business travelers who would be willing to pay about 5% more
for a little more room. Well, they didn’t gain back market share, and they
couldn’t increase prices by 5%. But worst of all, the “More Roomâ€
initiative actually increased American’s unit costs.
Now, with AMR management craving lower costs and a new focus on leisure
travelers, Smith Barney’s Brian Harris and Goldman Sach’s Glen Engel have
questioned the logic of maintaining the “More Room†scheme. By bringing
back the seats, American could immediately lower unit costs and accelerate
the retirement of more aircraft. And since leisure travelers are priced
focused, not more room focused, there’s little need keep the initiative for
them.
Latin America and Business Travelers
Ignoring obvious risks, American dove headfirst into a region that is known
for being both economically and politically volatile, to the point that in
2001 Latin America represented 52% of American’s international revenues.
Now, American is paying for their decision to concentrate so much of their
revenue on such an unstable geographic region. With many Latin American
countries in either economic or political turmoil (or both), Latin America
unit revenues have cratered.
American’s focus on the major US business centers resulted in an
over-reliance on business demand, leaving them extremely vulnerable to an
extended economic downturn. Due to poor planning or believing the economic
cycle had been repealed, AMR management made no initial moves until well
into the recession. With the business demand lagging far behind the return
of leisure travelers, they were caught with their pants down. Goldman’s
Engel believes the dearth of business travel and its exposure to Latin
America will cause American’s eventual recovery to lag the industry.
Labor Relations and Corporate Culture
Investing legends Warren Buffett and Phillip Fisher believe good labor
relations are so important for business success and profits, they will not
buy the stock of a company that has poor labor relations. On the subject,
Mr. Buffett wrote that should management “behave with little regard for
their people, their conduct will often contaminate the attitudes and
practices throughout the company.†Buffett and Fisher hold firm that good
labor relations rewards shareholders.
In his book, “Loyalty Rules!†Frank Reicheld says when corporations alienate
employees; they in turn can alienate customers. And that hurts profits and
growth. He goes on to explain that by nourishing loyalty and morale,
corporations can increase productivity and customer retention. Money
manager Whitney Tilson believes that when it comes to corporate culture, he
“would argue that few characteristics are more important to a company’s –
and stock’s – success.†AMR’s continued labor relation tactics clearly
demonstrates they do not believe in any such correlation, despite all
evidence to the contrary.
Steven Baumert
To receive The Baumert Report email baumertpm@hotmail.com.
Sources: AMR Annual Report 2000, 2001; AMR ’01 10K; AMR 3Qtr. 10Q; AMR
8/13/02 and 3Qtr. Conference Call; Berkshire Hathaway Annual Report ’01; S&P
Stock Reports; Goldman Sachs; Smith Barney; Whitney Tilson; Forbes; Fortune;
BusinessWeek; Reuters News Service; Buffett: The Making of an American
Capitalist by Roger Lowenstein; The Warren Buffett Way by Robert Hagstrom;
Common Stocks and Uncommon Profits by Phillip Fisher.
767jetz
Veteran
- Joined
- Aug 20, 2002
- Messages
- 3,286
- Reaction score
- 2,779
This sounds like a chapter out of the generic Airline Playbook. It could fit just about any major airline with very little modification. First USAir. Then United. Same Circus... Different Clowns! Now it looks like the flame is being turned up under AMR. Since US & UA are now in the courts, expect all eyes of the media to start scrutinizing AA.
Will it ever end?
Will it ever end?
767jetz
Veteran
- Joined
- Aug 20, 2002
- Messages
- 3,286
- Reaction score
- 2,779
Oh, and by the way. You AA folks be careful out there. There are guys on the US board convinced that they will emerge from CH11 in March, ready to buy pieces of other failing airlines. They've already decided how they will carve up the remains of UA. If they smell blood at American, they might try to cook up a "Mysterious Corporate Transaction" and start talking about picking at the carcass of AA.
We have all seen how chip and crew will soon rule the world as the single largest most profitable airline ever. BK was just a technicality and that the RSA (big daddy) will buy them anything they want right after their coming out party.
Oliver Stone''s Apprentice
Veteran
- Joined
- Aug 19, 2002
- Messages
- 786
- Reaction score
- 0
[font size=4]Steven Baumert is an AA flight attendant, and not a professional analyst or reporter.[/font]
He fails to disclose that in his "columns" just as some other employee/analysts often fail to do. The more reputable analyst/employees will always put a disclaimer in their briefs.
With that in mind, I tend to view his analysis in the same way I do as stuff written by Chip Munn and John McCorkle: sometimes they hit valid points, but written without a lot of neutrality or objectivity.
He fails to disclose that in his "columns" just as some other employee/analysts often fail to do. The more reputable analyst/employees will always put a disclaimer in their briefs.
With that in mind, I tend to view his analysis in the same way I do as stuff written by Chip Munn and John McCorkle: sometimes they hit valid points, but written without a lot of neutrality or objectivity.
WingNaPrayer
Veteran
Doesn't matter if he's an AA flight attendant or not. When you closely examine everything he has to say in his report.....he's right on target![BR][BR]Rather than chastising him for being an employee and not stating it in his report, why not try using your energies to debunk what he has to say using hard numbers and not corporate rhetoric. Possible?
Oliver Stone''s Apprentice
Veteran
- Joined
- Aug 19, 2002
- Messages
- 786
- Reaction score
- 0
In your opinion he's on target. In mine, he's not, but quite frankly its not my time and effort to debunk arguments for someone who isn't even a participant here.
I'll save that effort for people who do participate, thank you...
I'll save that effort for people who do participate, thank you...
[blockquote]
----------------
On 1/17/2003 8
18 AM eolesen wrote:
[font size=4]Steven Baumert is an AA flight attendant, and not a professional analyst or reporter.[/font]
----------------
[/blockquote]
Hey guys and gals;
Lighten up, the best you can do right now is to continue to do the work that made this company great in the first place. These current market conditions could not have been predicted by either a professional analyst, or whatever dress a guy is wearing today anyway. We must all come out of our pessimistic shells and do the right thing by the passenger, that's what we're paid as professionals to do.
Pessimism (ask any x-TWA co-worker) is your greatest enemy right now. Overcome it and your futures are secure.
----------------
On 1/17/2003 8
18 AM eolesen wrote: [font size=4]Steven Baumert is an AA flight attendant, and not a professional analyst or reporter.[/font]
----------------
[/blockquote]
Hey guys and gals;
Lighten up, the best you can do right now is to continue to do the work that made this company great in the first place. These current market conditions could not have been predicted by either a professional analyst, or whatever dress a guy is wearing today anyway. We must all come out of our pessimistic shells and do the right thing by the passenger, that's what we're paid as professionals to do.
Pessimism (ask any x-TWA co-worker) is your greatest enemy right now. Overcome it and your futures are secure.
WingNaPrayer
Veteran
At one time, Latin America and Caribbean markets used to be a huge cash cow for AA, but thanks to yield, those flights were oversold (and still are) up the ass and it's been that way ever since I started using the routes and as a result, vouchers, vouchers, vouchers....most of the passengers traveling on those flights now are flying for free....but don't blame yield, they do a great job! (for a bunch of bumbling idiots).[BR]
Aloha,
Just because a person is a F/A doesnt mean his opinions or analysis is any better or worse than someone who works on Wall St. Mr Baurnert made some very valid points. One is the huge $3.3 BILLION dollar pension shortfall and the fact that AMR will lose over $1 BILLION in just the 4Q. Thats a cash burn rate of over $11 Million a day. When the war starts at the end of Feb fuel will go up and passenger traffic will go down, making matters worse. The one point I do not agree with is the purchase of TWA. Mr Carty has said time & time again that the TWA LLC, STL Hub is the most profitable hub in the system and without that purchase AA would have to shrink even more than it did.
DISCLAIMER: I am not a Flight Attendant.
ALOHA, 007
Just because a person is a F/A doesnt mean his opinions or analysis is any better or worse than someone who works on Wall St. Mr Baurnert made some very valid points. One is the huge $3.3 BILLION dollar pension shortfall and the fact that AMR will lose over $1 BILLION in just the 4Q. Thats a cash burn rate of over $11 Million a day. When the war starts at the end of Feb fuel will go up and passenger traffic will go down, making matters worse. The one point I do not agree with is the purchase of TWA. Mr Carty has said time & time again that the TWA LLC, STL Hub is the most profitable hub in the system and without that purchase AA would have to shrink even more than it did.
DISCLAIMER: I am not a Flight Attendant.
ALOHA, 007
This is not about a cash crunch!!! It is about history that no longer applies in the present environment. The situation in the past is not the situation of the present. The present situation is simly about revenue that does not cover costs. Management made those decisions on the best information they had at the time. They do not have any better insight into the future than the rest of us. If some of those were "bad" decisions, they were bad decisions. What seems more important than blaming is how to address the present problems. Living in the past is a recipe for not living at all.
Something's got to give. If finally GW gets to play with real live armed forces, well so be it. Once the issue of the build up, the when and where is over. The sooner we can try to get back to normal. Maybe then this administration can do something serious about the economy. Well, something other than awarding the Walmart heirs tax relief from the burden of there billions of dollars.
[blockquote]
----------------
On 1/17/2003 3:36:20 PM FA Mikey wrote:
Something's got to give. If finally GW gets to play with real live armed forces, well so be it. Once the issue of the build up, the when and where is over. The sooner we can try to get back to normal. Maybe then this administration can do something serious about the economy. Well, something other than awarding the Walmart heirs tax relief from the burden of there billions of dollars.
----------------
[/blockquote]
Aloha Mikey,
I totally agree. Its not management or the Unions. ITS THE ECONOMY! Bush has chosen guns over butter and you cant eat guns. How many people, without children, who read this board are really going to get much tax relieve? Lets get the War over with so we can all get back to work. Unemployment is at 6% and will go way up during the war. I do not see an economic turn around for a couple of years. Just before the next elections. If then.
ALOHA, 007
----------------
On 1/17/2003 3:36:20 PM FA Mikey wrote:
Something's got to give. If finally GW gets to play with real live armed forces, well so be it. Once the issue of the build up, the when and where is over. The sooner we can try to get back to normal. Maybe then this administration can do something serious about the economy. Well, something other than awarding the Walmart heirs tax relief from the burden of there billions of dollars.
----------------
[/blockquote]
Aloha Mikey,
I totally agree. Its not management or the Unions. ITS THE ECONOMY! Bush has chosen guns over butter and you cant eat guns. How many people, without children, who read this board are really going to get much tax relieve? Lets get the War over with so we can all get back to work. Unemployment is at 6% and will go way up during the war. I do not see an economic turn around for a couple of years. Just before the next elections. If then.
ALOHA, 007
B
bagsmasher
Guest
TWAFA007 writes:
"The one point I do not agree with is the purchase of TWA. Mr Carty has said time & time again that the TWA LLC, STL is the most profitable in the system."
How have I missed this? I have never heard Carty say that "STL is the most profitable in the system." Where did that come from? Sounds like it came from one of the many dellusional TWAer's on this board.
"The one point I do not agree with is the purchase of TWA. Mr Carty has said time & time again that the TWA LLC, STL is the most profitable in the system."
How have I missed this? I have never heard Carty say that "STL is the most profitable in the system." Where did that come from? Sounds like it came from one of the many dellusional TWAer's on this board.
