AMR Corp.'s new CEO Gerard Arpey and executive chairman Edward Brennan this week will attempt to salvage American Airlines' efforts to avoid bankruptcy that seemed successful before a firestorm last week culminated in Don Carty's resignation from both posts.
The tumultuous past two weeks at American typified what finally could go right in terms of meaningful labor cost reform for the fragile U.S. airline industry but also what could go catastrophically wrong at the most crucial stage.
Carty's departure was coupled with final authorization by pilots, ground workers and flight attendants unions for modified labor contracts. The eleventh-hour deals were part of last-ditch efforts to avoid Chapter 11.
All three unions previously had narrowly approved concession-laden agreements but threatened to leave new contracts unsigned. Revelations of executive compensation and retention packages, detailed in a Securities and Exchange Commission filing as union voting came to a close, enraged unions and prompted a public apology from Carty for his "big mistake." A few days later, he called "truly dreadful" the company's $1.04 billion first-quarter loss.
American's new labor contracts, achieved after much wrangling, represent yet another example--following developments at United Airlines and US Airways--of renewed cooperation between management and labor necessitated by the industry's financial crisis.
"All you have to do is live through it to understand how difficult a situation it is for management and for employees," said US Airways CEO David Siegel, who led his airline through the bankruptcy restructuring process
(see story). "Change is difficult and painful and significant change is that much worse. Ultimately, they will sort the situation out over there but carriers will have greater or lesser success depending on how they manage it." Siegel added that the "template" set by US Airways has facilitated consensual agreements at other carriers with labor unions, lessors and lenders. "That does not mean there may not be more Chapter 11 filings, but clearly we have established the precedent."
"US Airways has relatively aggressively used the bankruptcy code as it is intended. They have substantially lowered labor and lease costs, lowered debt and gotten rid of the pilots pension," said UBS Warburg analyst Sam Buttrick, speaking last month at the Corporate Travel World conference in New York.
Smaller, profitable carriers, where profit-sharing contributes to better employee relations, do not face the same labor problems as the Big Six.
"Southwest is a great model and gives me great hope for decades in the future," said JetBlue Airways CEO David Neeleman, also speaking at Corporate Travel World. That model, combined with the gradual growth of low-cost carriers, dwindling cash reserves and recent labor reform at United, US Airways and now American, is forcing the other large network carriers to seek labor concessions.
"In light of the cost adjustments made at many of our competitors, it is imperative that we reduce our labor expenses so that we can restore Northwest to profitability," said Northwest Airlines CEO Richard Anderson.
United Airlines' labor agreements came within bankruptcy restructuring. Though a few still require final ratification votes by union memberships, the carrier now is in a much stronger position to follow partner US Airways out of bankruptcy court.
Aside from cost control, U.S. airlines have a few other items working in their favor, including a new relief package from the federal government
(see story), expanding alliances
(see story) and an assumption of pent-up demand.
Though severe acute respiratory syndrome spreading from China has crippled demand to Asia, the worst of the Iraq war impact appears to be over.
"From an investment perspective, we think that all that has gone wrong with the industry has already happened during this earnings season," said Deutsche Bank Securities analyst Susan Donofrio. "As a result, we anticipate brighter skies ahead for revenue/cost trends as we move forward."
But those brighter skies were not readily apparent in first-quarter financial figures that, according to analysts, will add up to roughly $3.5 billion in industry losses.
Delta Air Line's overall quarterly net loss reached $466 million. Though unit revenues were on the rise, the carrier said military action in Iraq ultimately drained $125 million in operating revenue. The overall cash-burn rate in the quarter averaged $2.7 million a day.
Including special items, Northwest lost $396 million in the first quarter. Passenger yields were up while unit revenues were down. "The travel downturn that began some two years ago has further deteriorated due to the war and shows no signs of improving," Anderson said. Still, Northwest finished the quarter with a strong liquidity position of $2.34 billion.
Northwest partner Continental Airlines all told dropped $221 million in the quarter and experienced lower unit revenues after a boost in the previous quarter. Yet, its passenger yield showed improvement for the second quarter in a row, daily cash-burn came down to about break-even and the airline said advance bookings are looking stronger. It finished the quarter with $1.18 billion in cash and short-term investments. "We're going to make it across the finish line," said Continental CEO Gordon Bethune.
Alaska and America West airlines each posted quarterly losses near $60 million. US Airways and bankrupt United have not yet reported first-quarter figures, but heavy losses are expected.
As usual, the sole carrier among U.S. majors to avoid red ink was Southwest Airlines. In posting its 48th consecutive quarterly profit, Southwest widened gains from $21 million a year ago to $24 million. Operating revenues, traffic, capacity, passenger yield and unit revenues all increased year over year. Yet, Southwest CEO Jim Parker noted, "disrupted" recovery trends and an "uncertain" outlook. "Since the war began, bookings for second-quarter 2003 have softened further," he said. "We expect only modest revenue growth, if any, compared with last year's second quarter."
Also in contrast to the Big Six, AirTran and JetBlue continued their profitable streaks.
As a group, lower-cost carriers now compete in more than 80 percent of American's markets. That fact, which the carrier's management has harped on for months, now appears to be the least of American's immediate concerns.
Regardless of the approved labor concessions, Arpey and Brennan still face a possible bankruptcy filing as early as today. Arpey, who has held a variety of financial positions at American since 1982, including CFO for a five-year stint, served as Carty's operations chief and right-hand man since 2000. Brennan, an AMR director for 17 years, had been chairman, president and CEO of Sears, Roebuck and Co. until his retirement in 1995.
Carty's resignation ends a 20-year career at American. In 1998, he replaced hard-driving Robert Crandall as CEO and chairman. "It is now clear that my continuing on as chairman and CEO of American Airlines is still a barrier that, if removed," Carty said in a statement, "could give improved relations--and thus long-term success--the best possible chance."