American Airlines and What Lies Ahead

The drama currently played out in the court room of US Bankruptcy Judge Sean H. Lane at the Southern Bankruptcy Court of New York, is much more than the mega bankruptcy case of American Airlines. It is a battle of wills, pitting the APA pilots union and higher wage demands, against American’s management and cost cutting moves (inclusive shedding obsolete aircraft leases, synonymous with pilot furlough). Every airline, saddled with high labor costs, will have to face the same problem, sooner than later.

American Airlines leadership must be asking itself “where did all the glory go”? At one time, American Airlines (AA) was the darling and envy of the airline industry, where everyone seeking an airline job, wanted to work for American. That was then, and now is now. Today, the Allied Pilot Association (the largest independent pilot union in the world) represents 11,500 pilots at American, while another 980 pilots remain on furlough, effective December 1, 2011.

The dilemma facing American Airlines, is one of how to remain competitive in the market place, when you have a

fuel bill totaling $6.3 billion (January-September 2011) and a 32.8 % increase over 2010. To be competitive, American has to replace over 200 remaining and essentially less-fuel-efficient, twenty-five year old MD82/83’s. At today’s aircraft prices, this is an impossible feat. Aside from replacing MD80’s, American also needs to replace near 120 twenty-year old plus B757-200’s, and albeit not as urgent, needs to replace 70 of twenty-year old B767/300ER’s, not to mention – the dozen of thirty-year old B767/200″s.

At the same time, AMR’s stock price, trading at a lofty $33/share on December 1, 2007, fell to 8.63/share on December 1 of last year, and trading today at 40 cents. Had you vested your 401K in AMR stock, you would likely be mad as hell and many AA pilots went that route.

Over the years, the Allied Pilot Association has taken on a rather combative position towards Americans’ management. The union has acted almost like a political party, employing lobbyists to the tune of half-a-million dollars per quarter/year in voicing opposition to management decisions on labor, finances, pensions, budgets, international route applications. In 2003 American Airlines CEO D. Carty, under fire by the union for receiving perks quit AMR, paving the way for finance chief G. Arpey to become head at the airline. Last week, after filing for Ch11 bankruptcy, G. Arpey resigned and gave way to CFO Horton to assume American’s leadership throne.

In between, union and management clashed, such as in 2006, when in the process of rewriting union work rules, American asked the courts to impose more restrictive contracts, should cabin crews and machinist reject a proposal cutting $1 billion in concession sought by the airline. In turn, the pilots union successfully challenged executive pay proposals, as well as million in stock pay-outs for American Airlines top five executives through their input at stockholders meetings.

The position of the Allied Pilots Association is simple: “Our members should receive (the) top pay in the industry”. A rather arrogant statement, it means, higher pay than the B747/MD11/B763ER pay at UPS, where a 12 year Captain receives $252 hour based on monthly guarantee of 81 flight hours. Meaning, higher pay than the B777/MD11 pay at Fedex, where a 12 year Captain receives $246/hour based on a monthly guarantee of 74 flight hours. At American, top pay for a 12 year Captain remains at $205/hour and a monthly guarantee of 64 flight hours.

From 2012 on, American (if able to arrange for financing) is expected to receive eight B777/300ER’s, which will help in reducing B777 seat mile costs. But here again, we have a case of too little too late. American Airlines competitors, like Air France, have had a distinct advantage since 2004, flying GE equipped stretched B777/300ER on routes to Europe. Likewise, on Tokyo flights, competitors ANA or Japan Airlines, had an advantage operating the B777/300ER and the ability to carry an additional 50 plus passengers, American could not carry.

To continue operating, American Airlines management along with the Allied Pilot Association must be able to reach middle ground, a decision that is actually made by the market place and not by the players. If not, Sayonara American Airlines.


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