Pensions Are Already Underfunded by $14.1 billion

[WorldTraveler]

Just because an asset produces cost savings large enough to pay for the cost of acquiring the asset on day 1 doesn't mean an endless amount debt can be justified to acquire every imaginable asset.

AA might cuts its operational costs for 5 years by acquiring a new asset, but maintenance costs only drop considerably for so many years and then the cost of overhauling a 15 year old aircraft becomes very similar to that of overhauling a 6 year old aircraft.

What makes what AA is doing unique compared to what any other airline has ever done is that they are replacing 2/3 of their fleet over a 5 year period or so and will do it by taking on over $20B in debt producing a debt level that will be far larger than any other airline, including ones much larger.
Add on to that that AA will likely end up with some frozen pension plans just like DL, and AA's balance sheet will be stressed beyond any degree that the airline industry has ever seen.

AIrlines like B6 have new fleets but they have gained that low fleet age by GROWING what they have, not by wholesale replacing everything they have. Other older airlines like WN have much older fleets than what AA is proposing - and they are making money. The only examples of airlines that have fleets as young as what AA proposes are carriers like SQ which have long histories of being profitable and have KEPT their fleets young, not allowed them to become old and then replaced it a rate 3X faster than what any other peer is doing - or what AA has done in the fast.

Add in the fact that AA's competitors who have much older fleets still manage to have costs lower than what AA is proposing and it becomes even harder to understand how AA is going to justify their fleet costs when they will take on such enormous levels of debt only to have cost parity with their peers; bsed on AA's only 1113 documents, they propose to be almost at cost parity with DL and still be higher cost than WN, B6, AS, and VX.

No one doubts that AA needs to renew its fleet. It is the speed with which it is doing so with no evidence that the incremental fleet expeditures will translate into significantly lower costs that is the issue.

 

[WorldTraveler]

As to the question of why DL is not retiring the M80s even though they are the least fuel efficient aircraft outside of the DC9s, the answer clearly is because DL can generate sufficient revenues to cover the cost of operating the M80 which is the backbone of DL's 150 seat fleet in the eastern US. Sure, lower fuel costs could still drop to DL's bottom line but if it requires loading up the balance sheet in order to do it, then the financial costs long-term are too high.

When you consider that the airline industry is highly cyclical and prone to sustain external shocks, then it makes sense to have a fleet (or group) of lower value aircraft with above average costs that can be quickly shed... that is exactly what happened to the 727s on 2011 and every US network airline has used their least efficient fleet types as a buffer when capacity needs to be quickly pulled. AA won't have that buffer because it will have no older fleet types and even the ones that are older still can generate decent incremental value by keeping them in the fleet. Thus, if other carriers are forced to pull down capacity in a downturn and AA can't - or the value is not there in doing so - then AA's revenue generation will suffer - which is exactly why AÁ's revenue generation has trailed the industry for 2 years - because they could not pull aircraft out of the network because they couldn't get costs down.

Add in that a highly leveraged balanced sheet with little fleet flexibility makes it very difficult to engage in strategic growth initiatives such as mergers makes it even harder to understand how AA will win if it comes to competitive merger scenarios - and the likelihood of mergers/acquisitions being a one for one match w/o competition are slim at this point. AA's high debt fleet with little flexibility might make it impossible for them to compete against other carriers in a merger scenario.

The entire balance sheet - pensions and aircraft debt - must be considered alongside overall costs. DL is cutting non-pension debt to ensure it can make its pension payments. UA will trade lower pension liabilities for higher costs. AA will not have a significant cost advantage but will have a smaller network and much higher debt. I'm not sure how anyone can believe that AA will be successful long-term based on that formula.

 

[Veritas]

People often say lawyers or bankers but I substitute that with:
10,000 government workers in the bottom of the sea=a good start.

Josh

So says the person whose occupation is listed as "Financial services/Wealth management."

 

[LD3]

Many of these people pay little or nothing for health care, receive extensive holidays and paid time off, and do little work while on duty.

Your an idiot....I pay my fair share of health care, I do not receive extensive holidays, paid time off is called vacation and I work my ass off every night..Think of the LEO that saves your family member from a crack head with a gun, that LEO is a public sector employee. Believe me, I don't have time to sit around and do nothing, our jobs are getting farmed out more every year just like the private sector.

 

[eolesen]

Isn't it funny, E, that my negative votes always come in 2s and always seem to show up when you are on the board.

Isn't it funny, E, that my negative votes always come in 2s and always seem to show up when you are on the board.

If I was bothering to read your posts, let alone vote, you'd probably get all 5 of mine on any given day. But it's pretty easy to go into the user profile and see what someone has voted on:

http://airlineforums...ms__type__given

That shows you gave me votes 14 times in the past two weeks....

I think I gave you a few in the past month, but one or two were actually positive:


http://airlineforums...ms__type__given

If you're going to throw stones in a glass house, Tim, you might want to know where the mirrors are...

 

[FWAAA]

Just because an asset produces cost savings large enough to pay for the cost of acquiring the asset on day 1 doesn't mean an endless amount debt can be justified to acquire every imaginable asset.

Now I'm confused. AA has ordered enough single-aisle planes for delivery 2013-2022 (460 of them) so that it can replace approximately 75% of its fleet in ten years (not five years as you continually and mistakenly post). So Anderson proposes to save money on fuel by replacing some of DL's 767s, 757s and older A320s with expensive, brand new 739s yet it makes sense not to order planes to replace the MD-88s, which are much less fuel efficient than the 767s, 757s and older A320s?

AA might cuts its operational costs for 5 years by acquiring a new asset, but maintenance costs only drop considerably for so many years and then the cost of overhauling a 15 year old aircraft becomes very similar to that of overhauling a 6 year old aircraft.

What makes what AA is doing unique compared to what any other airline has ever done is that they are replacing 2/3 of their fleet over a 5 year period or so and will do it by taking on over $20B in debt producing a debt level that will be far larger than any other airline, including ones much larger.

Does your analysis change when the actual numbers are substituted for your made-up numbers? AA has ordered 460 single-aisle planes for delivery over ten years (that would be about 75% of the fleet over those ten years). In five years, AA will get about 230 of those planes, or about 38% of its fleet replaced in five years. Here is AA's discussion of the actual numbers:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDMzMjY0fENoaWxkSUQ9NDUxNzM0fFR5cGU9MQ==&t=1

It's apparent that AA intends to use that five year maintenance holiday on the new narrowbody planes to give the outsourced overhaul facilities time to ramp up capacity in San Salvador or Alabama or Indy or wherever so that the heavy maintenance will be cheaper than AA's current expenditures on heavy C checks.

Add on to that that AA will likely end up with some frozen pension plans just like DL, and AA's balance sheet will be stressed beyond any degree that the airline industry has ever seen.

At current fuel prices, the fuel savings make the lease payments. I don't see the problem. Neither does Anderson with respect to Delta's $5 billion purchase of 100 new 739s, as he says fuel and maintenance savings make them profitable and cash flow positive from year one.

AIrlines like B6 have new fleets but they have gained that low fleet age by GROWING what they have, not by wholesale replacing everything they have. Other older airlines like WN have much older fleets than what AA is proposing - and they are making money. The only examples of airlines that have fleets as young as what AA proposes are carriers like SQ which have long histories of being profitable and have KEPT their fleets young, not allowed them to become old and then replaced it a rate 3X faster than what any other peer is doing - or what AA has done in the fast.

Add in the fact that AA's competitors who have much older fleets still manage to have costs lower than what AA is proposing and it becomes even harder to understand how AA is going to justify their fleet costs when they will take on such enormous levels of debt only to have cost parity with their peers; bsed on AA's only 1113 documents, they propose to be almost at cost parity with DL and still be higher cost than WN, B6, AS, and VX.

No one doubts that AA needs to renew its fleet. It is the speed with which it is doing so with no evidence that the incremental fleet expeditures will translate into significantly lower costs that is the issue.

You continue to overstate the pace of AA's refleeting, which amounts to an average of 46 new planes each year for ten years, or just under four airplanes per month on average. At the end of that ten years, AA will have replaced about two-thirds of its fleet. AA's choice is easy: Either buy lots of fuel or spend about the same amount of money on a combination of lease payments on fuel efficient planes plus less fuel. It's a gamble, for sure, that fuel prices do not collapse over the long term, but that looks like a pretty safe bet to me.

 

[Kev3188]

Isn't it funny, E, that my negative votes always come in 2s and always seem to show up when you are on the board.

A quick PM to Spectator and/or Elc should fix that...

You're an idiot....

Josh is just playing wind up artist; don't take the bait.

 

[737823]

Josh is just playing wind up artist; don't take the bait.

Kev, you're usually better than that when someone respectively disagrees with you in principle. Other nameless posters on here not as much, I expect better from you.

Josh

 

[xUT]

Kev, you're usually better than that when someone respectively disagrees with you in principle. Other nameless posters on here not as much, I expect better from you.

Josh

If the shoe fits, wear it.
I think 'wind up artist' fits you pretty well.
B) xUT

 

[Kev3188]

Kev, you're usually better than that when someone respectively disagrees with you in principle. Other nameless posters on here not as much, I expect better from you.

Josh

When your attempt to "disagree in principle" involves broad brush stereotypes, ad hominem attacks, and ends with a terrible joke, you should "expect" me to call it out as such.

 

[WorldTraveler]

Eric,
I know not only where the mirrors are but also that there are a very small handful of vengeful people who account for the vast majority of the negative votes I receive, and indeed some of them make it their priority to use nearly all of the available negative votes they have to vote on my posts.
It’s not surprising since that small number of people is using the voting system as a mechanism to vote against a person and not content since some of them even vote against compliments I give them.
What is apparent is that some of them are unable to compete in the marketplace of ideas and resort to clicking red buttons in an attempt to exact revenge since they can’t get it the way the vast majority of the rest of the people here do – by providing superior ideas.
When there are people whose lives are filled with that kind of anger, it isn’t surprising that they will use the internet as a means to try to regain some sense of their own self-worth, even if it comes at the expense of others.
I focus my efforts on this forum not in attempting to win their favor but in speaking what is accurate and what needs to be said, even if doing so will make some people very uncomfortable.

FWA,

Yes, I know what AA’s fleet plans are and that the 460 narrowbody aircraft, if all are taken will come over as much as 10 years. But the orders start coming very quickly and the firm order, current generation 737 and 320 family aircraft will cost $13B over in as little as the first 5 years. Add in the 777s that are on order plus the 787s and AA is taking delivery of more than 50 new aircraft per year adding $3B in debt or lease payments each year.

Considering that AMR has generated less than $1B in free cash over the past several years, AA will be taking on huge amounts of new debt as part of its refleeting. It will take every bit of the $2B in annual cost cuts the company wants plus $1B more in revenue, both of which are likely to be far less than what AA is hoping for. Add in that AMR doesn’t even classify the majority of its current debt as “subject to compromise” and AA will be adding significantly to its already very high debt levels. Remember also that AA made the aircraft order before the PBGC and the creditors told AMR they wanted AA to not terminate the pension plans, leaving billions more of obligations on AMR’s balance sheet.

Debt is debt and it doesn’t make it any less so because the underlying assets can generate revenue at better costs than what current assets do. The question is the limit of debt that AA, or any company can sustain, and in an industry which is already highly leveraged and which has not covered the cost of the money that it had to borrow, AA will have debt levels FAR HIGHER than anyone else.

The fact is that AA will not be able to cover the cost of its debt for years to come because it waited so long to start refleeting, now has enormous debt because it funded its operational losses with borrowing for years, and will further add onto that with new aircraft.

None of AMR’s other competitors funded their losses with as much debt that remains on its balance sheet. If you don’t think carrying billions of dollars of debt from AMR’s legacy past won’t affect its future earnings performance, you are sadly mistaken.

You can make the argument about the aircraft being cost neutral all day long but it doesn’t change the fact that those cost savings start eroding as the warranties wear off and as maintenance has to be done.

You also still don’t reconcile that DL is managing to buy over 100 used aircraft at acquisition and lease costs far below what AA will be paying and DL’s CASM for those aircraft will be lower than what AA is planning. AMR has already said that it expected to have a CASM only 0.1 lower than DL – and that was before DL did the 717 deal and added to its M90 acquisitions.
The simple reason that DL is choosing to keep the M80s despite their higher fuel burn is because DL can generate sufficient revenues to cover their costs and buying new aircraft will only add debt which offsets a significant amount of those savings. The same principle applies to why DL is refurbishing most of 767ERs instead of replacing them with new aircraft. The simple fact is that borrowed money costs a whole lot more than what most people on the internet seem to understand. Add in the risk that increased indebtedness creates as well as the decreased flexibility that airlines have by having an all new fleet, and it makes little sense to leverage an airline, ESPECIALLY WHEN THOSE INCREMENTAL NEW AIRCRAFT DON’T TRANSLATE INTO LOWER COSTS THAN YOUR COMPETITORS.

And when UA announces its aircraft orders, it will most certainly be for far less than what AA is committing to.

AMR still has not detailed plans to refleet Eagle which means there will have to be billions of dollars in additional costs as well as further ire with labor in order to ramp up hundreds of new large RJs.

Your most telling comment is that AA intends to use the maintenance savings from the new aircraft in order to ramp up outsourcing – and in the process gut its own maintenance capabilities. And the risk that AA is taking throughout its restructuring plan in alienating labor is high enough that it is far from certain that AA employees will decide it is worth it for them to keep the airline going while AA eliminates their jobs.

I’ll leave you with a quote from the press release for the aircraft orders made several months before AA filed for BK:

“We have a long track record of meeting our obligations to all of our stakeholders,
including strategic partners, lenders, suppliers and investors….” Arpey said.

For sure.

 

[Kev3188]

Maybe some people don't agree with what stance(s) you take. Maybe some might agree with the content itself, but are offput by the way your posts ooze narcissism from every letter. They didn't used to be like that, and it's a disappointing spiral to watch. Just an observation.

I realize it might be easier to make yourself into a martyr/some sort of victim but sometimes the most obvious-and less dramatic- reasons are the ones that fit. Might want to give it some thought.

BTW, for someone who constantly dismisses the rating system, you seem to have spent more time/energy than anyone else grappling with it. Multiple posts/topics about it, faux accounts, etc. What gives?

Full disclosure: I actually like the system, and use it for what I assume is it's supposed intent. Up, down, sideways... I know I'm one of the few on this board that do, and if that makes me a "mental midget," or "vengeful," (to use two of your terms), so be it.

Remember, as you yourself like to note, you're posting on a public board; do not be surprised if people react to it.

 

[WorldTraveler]

When there are a handful of people who account for 95% of the negative votes I have received, then it is not about content - it is about personalities. When some people's reputation pages are filled with pages and pages of negative votes for one person, it says far more about the people who resort to pushing buttons.

The mark of a democratic society is being able to engage in debate with opposing viewpoints without resorting to violence. The internet simply allows alot of people to transfer the violence they might have used with their arms - figuratively or literally - to the keyboard.

There are plenty of people who manage to participate in this forum and have intelligent debate without having to fill someone else's profile with negative votes because another person wins a round in a discussion. As much as you chastise Josh and others for using stereotypes, you might want to take a look at how many labels you throw at others if you don't agree with them. Most any version of "right" seems to be one of your more popular labels. You might just find by the time the sun goes down tonite that "right" looks a whole lot different than you think - and that you are the one who is significantly "off center".

The post voting system COULD be a very good tool - if it wasn't used by a few people as a tool to club others with. The beauty of the new features of this board - as well as the entire internet - is that everything is transparent. Those who think they are exacting their revenge in private or using pseudonyms might be surprised when they find that those true identities are made public.
Bringing it public is necessary since there are a select few people who are unable or unwilling to resolve issues within the guidelines of what is acceptable for mature adults - which is the standard that should apply to this forum.

While you and a few other people seem to relish in pointing out the duplicate IDs that some people have used on this forum for voting purposes, there remain people who use multiple IDs and yet this board hasn't figured out how to weed out those duplicate IDs. There are people who post back and forth between their own two IDs.

The people of this forum shouldn't be concerned with the personal lives of people unless it is disclosed. But when a few members use the board as their personal tool for getting even with other people, then those people bring their personal issues to the forum.


Back to the pension topic at hand,
AA's 1113 documents filed yesterday say that the PBGC is attempting to work w/ AA to freeze, rather than terminate the pilot pension as long as an agreement can be found regarding the lump sum provisions of the AA pilot plan. It was the lump sum provisions of the DL pilot pension plan that doomed it to termination while all other DL/NW pension plans were frozen.
If AA succeeds at freezing rather than terminating its pension plans, it will come out of BK with even higher levels of pension obligations than forecasted - and those deficits continue to grow while AA is in BK, not contributing to its pension plans, but while AA employees continue to accrue benefits under the plans. The other side of the equation is that claims to creditors will be smaller since frozen pensions do not result in the same size of claims that a termination would yield.

 

[Kev3188]

The mark of a democratic society is being able to engage in debate with opposing viewpoints without resorting to violence. The internet simply allows alot of people to transfer the violence they might have used with their arms - figuratively or literally - to the keyboard.

Hyperbole is the best thing ever!

C'mon, that's over the top, and you know it.

There are plenty of people who manage to participate in this forum and have intelligent debate without having to fill someone else's profile with negative votes because another person wins a round in a discussion.

Wins a round? Like a boxing match? Sounds violent...

As much as you chastise Josh and others for using stereotypes, you might want to take a look at how many labels you throw at others if you don't agree with them. Most any version of "right" seems to be one of your more popular labels. You might just find by the time the sun goes down tonite that "right" looks a whole lot different than you think - and that you are the one who is significantly "off center".

I have zero interest in giving windup artists a burst of oxygen, regardless of who they are.

If by "right," you mean my political bent, I'm not a centrist. That'll surprise exactly no one who's been on this board more than a week.

The post voting system COULD be a very good tool - if it wasn't used by a few people as a tool to club others with. The beauty of the new features of this board - as well as the entire internet - is that everything is transparent.

Exactly, though I'm pretty sure when I said I use it a lot, that was, you know, transparency...

Those who think they are exacting their revenge in private or using pseudonyms might be surprised when they find that those true identities are made public.

Revenge? Violence? Do you really think people are rising up in some sort of grand conspiracy against you? martyr much? Take a deep breath. Like I said, sometimes the most obvious reasons are the right ones.

BTW, correct me if I'm wrong, but the part about making people's ID's public seemed like a veiled threat.

While you and a few other people seem to relish in pointing out the duplicate IDs that some people have used on this forum for voting purposes, there remain people who use multiple IDs and yet this board hasn't figured out how to weed out those duplicate IDs.

I only point it out since in the days before the new rollout, we read multiple posts from you about "accountability," as well as ones dismissing the system. Turns out you put a lot more stock in it than I thought.

There are people who post back and forth between their own two IDs.

That's just creepy, IMO. How do you they exist?

The people of this forum shouldn't be concerned with the personal lives of people unless it is disclosed.

This runs counter to your earlier stance about disclosure. Which is it?

 

[WorldTraveler]

Yes, I am about accountability. I'm about accountability regarding standing up for what you say down the road - kind of makes people think twice before mouthing off if they know someone is keeping a score card and will hold them accountable for what was said. There are too many people who have proclaimed themselves knowledgeable about some things in this industry only to run and hide when they are proven wrong. It is reckless to make statements about companies and people for which you (collective) aren't willing to stand up for.

In fact, some of the people who find themselves among my most active negative voters are precisely some of the ones who made statements that have consistently turned out to be wrong, even though they spared no expense at lambasting me for what I said during the debate, only to later find they were wrong. Instead of admitting they were wrong, they resorted to becoming serial red button pushers.
So, yeah, accountability means standing up for what you write down the road and then having the guts to pay the price for your stand instead of anonymously dinging someone else because they proved you wrong.

It also isn't a huge surprise that some of the people who have made such a big deal about Spectator are the ones who didn't want anyone or anything to stand in the way of the cumulative effects of their negative button pushing. Since others have thought it "cute" to post the number of votes one person gave another, maybe it's time to carry out that same exercise here and then that small handful of people can justify on this public forum why they find it necessary to throw a negative vote on every post that is made by someone. That is not responsible use of the post voting system; that is personal vindictiveness. Those same people who want to disclose other people's "transgressions" might find defending their own actions a lot harder to do.

The internet is a powerful tool and it leaves all kinds of evidence. It isn't near as hard to connect dots as one might think. And the same phenomenon applies on the internet as it does for criminal investigators - most people aren't near as smart as they think they are when it comes to covering their tracks. Talking about subjects in public also allows people to demonstrate their true selves to everyone - and sometimes crack appear.

Keeping personal information personal is part of the same package of being transparent with what is on the board and leaving the rest off of it. Those who want to drag other people's personal information and situations onto the board should not be surprised when their own personal information becomes public.
Expecting that you can pick out some parts of the package of online respect while selectively tossing others that hold you to an equal standard is an invitation for someone else to toss the whole package out. It isn't a threat. It is justice. Hold yourself to the same standard to which you want to hold others. Live with integrity.