American Airlines Fights Bankruptcy
BY BRAD FOSS 02/04/2003 10:24:17 EST
American Airlines is burning through $5 million a day with little relief in sight, making
industry experts nervous that the world's largest carrier is increasingly at risk of
following United Airlines and US Airways into bankruptcy court.
The financial problem at American is fairly simple to understand: the money it takes in
from passengers is down sharply, but the company has not cut expenses fast enough
to keep up. What is difficult to gauge is whether executives at American can wring
enough costs in the coming months, particularly from employees, to avoid Chapter 11.
The situation has put employees and shareholders under intense pressure, while fliers
have had to adjust to more limited flight offerings from the Fort Worth, Texas-based
carrier.
Analysts anticipate sharp conflicts between labor and management, and the
uncertainty has pushed the stock price of American's parent company, AMR Corp.,
below $3 a share - a level that implies a bankruptcy filing is a real possibility. A
company's stock typically becomes worthless during the bankruptcy process.
For the moment, the company's saving grace is the $2 billion in unrestricted cash it
has on hand. But even chief executive Don Carty has repeatedly said that American,
which lost a record $3.5 billion in 2002, is operating at a level that is "unsustainable."
"The key thing is their employees," said Ray Neidl, an airline analyst at Blaylock &
Partners in New York, summing up the popular wisdom on Wall Street.
Without combined savings of about $2 billion, or 25 percent a year, from its various
labor groups, AMR "could be in bankruptcy by next winter, or even sooner," Neidl said.
That's roughly the case AMR executives have been making during regular meetings
with representatives for pilots, flight attendants and mechanics. No across-the-board
demands have been made yet and unions have not offered to make any changes in
wages and benefits.
In fact, employees do not believe the airline has done all it possibly could without their
help. For instance, labor leaders remain unconvinced that the company followed
through with a promise to shrink the size of management by 22 percent.
The next meeting between management and labor is scheduled for Tuesday morning.
One issue is whether employees will give up the 3 percent raise they are due this
year.
Even without drastic labor savings, two scenarios might save American from
bankruptcy court: a strong economy in 2003 or, a more likely possibility, the
liquidation of United Airlines.
Analysts say an improved economy could result in increased travel demand and allow
carriers to increase fares, if only slightly. A prolonged war in Iraq, meanwhile, could
cause a sharp enough rise in fuel prices and a steep enough decline in air travel to
force United's parent company, UAL Corp., to sell its assets and exit the business.
Still, analysts said either scenario would only provide a temporary boost to American,
since it faces growing competition from low-cost, low-fare airlines such as Southwest
Airlines and JetBlue Airways. The company said it now competes with budget airlines
on 82 percent of its routes, compared with 75 percent a year earlier.
"Really, American needs cost restructuring either way, with or without United flying,"
said Philip Baggaley, airline analyst at Standard & Poors in New York.
To compete in the tight economy, American can't charge more than a 30 percent
premium on routes it shares with low-cost carriers, said company spokesman Bruce
Hicks. In the past, when the economy was roaring, American could charge as much
as 80 percent more than these rivals and still woo customers.
Factors that could accelerate the pace of labor talks include a war in Iraq, which would
put added strain on the entire industry, and the possibility that AMR would fall short of
the terms of an $800 million loan, hastening the need to repay it.
AMR says it has already identified ways to slash annual expenses by $2 billion but
that it is running out of ways to save much more, short of significant labor
concessions.
"Most of the low hanging fruit has already been identified," the company's chief
financial officer, Jeffrey Campbell, said in a conference call on Jan. 22, when AMR
reported a loss of $529 million for the fourth quarter.
The company has overhauled flight schedules at hubs to use planes and employees
more efficiently, simplified its fleet to cut maintenance costs and even lowered certain
fares aimed at business travelers.
David Stempler, president of the Air Travelers Association, said fliers can expect to
see even fewer flights per day in smaller markets and the use of smaller planes.
Yet he said employees may offer better service. "Even though many of them may be
upset, they know that their careers depend on every flight," Stempler said.
Reno Bianchi, who analyzes AMR's bonds for Salomon Smith Barney, is critical of
AMR for approaching the labor issue "very gingerly" and disagreed with the company's
apparent strategy of waiting to see what happens to United before really putting the
heat on its employees.
"Our sense is that AMR runs the risk of running out of time and we would much rather
see management taking a more direct approach on this crucial issue," Bianchi wrote
in a recent report.
Shares of AMR rose 5 cents Monday to $2.95 on the New York Stock Exchange. |
