WSJ article


Dec 21, 2002
Wall Street Journal - If Nothing Changes, American May Be on United''s Flight Path

What''s the difference between United Airlines and American Airlines?
At this rate, about one year.
United and parent UAL Corp. filed for Chapter 11 bankruptcy-court protection in December. And unless the airline manages to slash its debt and renegotiate with its labor union, AMR Corp. and its only unit, American Airlines, will be in about the same boat next winter.
American, the world''s largest airline, has about $2 billion in unrestricted cash. And even though the stock market is treating it like dead meat, with its share price trading near $3, AMR isn''t in immediate danger of filing for bankruptcy protection.
But UBS Warburg''s witty analyst Sam Buttrick, to whom I must credit the one year one-liner, estimates that AMR likely will end this year with only about $1.4 billion in unrestricted cash. For a company the size of AMR, in an industry as shaky as the airline business, that''s not much. Once AMR gets close to $1 billion in cash, it won''t have much left for getting through the slow first quarter, not to mention funding a bankruptcy reorganization. United, a smaller company, filed for Chapter 11 protection with $800 million in unrestricted cash, and it has been criticized for waiting too long to reorganize.
2003 is a make-or-break year for AMR, Mr. Buttrick says.
Other analysts agree with the winter scenario. AMR has borrowed heavily to pay its bills through this fiscal crisis -- buying itself a year''s more time, in essence, than United had. But there''s little left to borrow against -- most planes AMR owns now are heavily mortgaged. A staggering 96% of American''s capital has debt against it. Last year, the company averaged net losses of nearly $10 million a day. This year, it''s still burning through about $5 million in cash each day in the first quarter. AMR will get a $550 million tax refund in the first quarter, which should help, but some big bills lie ahead, too.
AMR''s balance sheet has deteriorated the most [among major airlines] and the current cash-burn rate cannot be sustained much beyond 2003, says Glenn Engel of Goldman Sachs & Co. Unless AMR gets wage relief or an economic recovery gathers steam, AMR could face a liquidity crunch in the winter of 2003-2004.
Bankruptcy lawyers note that there is no real criteria that companies have to meet in order to file for Chapter 11 protection, and most big companies end up timing their filings on strategic issues. If AMR reaches the point where it decides it isn''t going to get relief either from labor or the economy, and it is simply on a path to spend all its remaining cash, it probably will file. A reorganization at arch-rival United that substantially lowers its costs also could pressure American toward bankruptcy.
The winter timetable is based on the best guesses right now. A lot can change over the next 11 or 12 months. A war could deliver a double-whammy to airlines with even-higher oil prices and even-lower international travel. In fact, the Association of European Airlines itself has postponed a February conference because of the prospect of war.
While war, especially if it is prolonged, would likely speed up AMR''s possible bankruptcy-court landing, economic improvement in the U.S. would certainly slow it down. So, too, would relief from its labor unions.
Last year, AMR paid nearly half of its revenue -- 48.5% to be exact -- in wages, salaries and benefits. AMR says it has revamped operations and cut costs wherever it can to save $2 billion in annual costs, but it still needs another $2 billion in savings, and the only place left to turn is its unions. Savings of about $2 billion would be about 25% of AMR''s payroll expense.
Now is the time for shared sacrifices, Chairman and Chief Executive Donald Carty said in a letter last week to the president of American''s pilots union.
Analysts say American actually has done a better job than other carriers on the non-labor cost-cutting front. Even though American''s unit labor costs -- wages spread over available seat miles -- went up 6% in the fourth quarter, total unit costs came down 2.6%, even with higher fuel prices. But American isn''t performing as well as competitors on revenue -- unit revenue fell 7.2% in the fourth quarter. Delta Air Lines, by comparison, kept its unit revenue the same as a year earlier.
American says it is a victim of circumstance on revenue: It was more dependent on business travelers, and since the travel recession has sapped business-travel revenue, American has suffered disproportionately. American also argues that in regions where it is strong, like Latin America and Europe, the travel downturn has been worse than in other regions like the Pacific, where some of its competitors are strong.
What''s more, American says the growth of low-fare carriers is hurting it more than ever. In the fourth quarter, it competed with low-fare carriers on 82% of its domestic routes, up from 75% a year earlier. American is surrendering on some fronts, conceding New York-Oakland to JetBlue Airways, for example.
But there are other problems, too. In hindsight, American''s $742 million purchase of the assets of Trans World Airlines, plus the assumption of $3 billion in leases, has been a drag on the company at a difficult time. TWA stayed afloat for a long time with extremely low ticket prices, and to a certain extent, American has inherited TWA''s pricing problems. American has shrunk the TWA operation and eliminated the lowest of the low-fare tickets, but part of the carrier''s revenue problem does seem to stem from TWA.
American wouldn''t be in this mess today if it hadn''t bought TWA, says Mr. Buttrick. It would still be in a mess, just not as big a mess. TWA has exacerbated American''s cash losses by more than $1 billion, he says.
In addition, you have to question -- and my knees are telling me not to say this -- American''s More Room in Coach strategy. For More Room to work, American had to get a revenue premium from each seat since it had fewer seats on a plane to sell. Costs stay about the same, so to cover that, ticket prices had to go up. But there is no revenue premium. American says More Room has helped it win key corporate accounts, and it''s paying off because customers appreciate it. Not enough to pay extra for it, at least in the current climate.
It is safe to say that American''s gamble has not, as of yet, produced the intended results, says Michael Stepp, an analyst at consultants Morten Beyer & Agnew Inc.
Many airline decisions over the past several years failed to produce the intended results. But it will be the decisions made over the next several months that will determine, for American and others, whether problems get fixed outside bankruptcy, or inside.

Other Articles

Washington Post - ''As United Goes, So Goes Chicago'' (1/30/2003)

New York Times - US Airways Seeks Reworking of Pilots'' Pension Plan (1/30/2003)

New York Times - Two Unions Say United Plans to Create Low-Cost Airline (1/30/2003)

Minneapolis Star Tribune - Northwest Airlines Seeks Cost-Cutting Talks with Pilots (1/30/2003)

Crain''s Chicago Business - Kirkland Sends $2.3M Tab to UAL (1/30/2003)

Washington Post - US Airways Pilots Resist Pension Cuts (1/29/2003)

USA Today - UAL Seeks More Time to Find Lenders (1/29/2003)

Minneapolis Star Tribune - Northwest Airlines Will Cut More Pilot Jobs this Spring (1/29/2003)

Denver Post - Union Decries United Proposal (1/29/2003)

Chicago Tribune - UAL Plans More Cuts in Wages, Workers (1/29/2003)


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