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Vaughn Cordle, CFA

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  • Is Bankruptcy The Best Solution For AMR? [View article]
    Thanks for the very insightful feedback on AMR's high cost maintenance facilities and people. I have not seen any in-depth analysis on this topic. We have examined unit maintenance costs per fleet type. It's clear that AMR has a major disadvantage with key competitors, especially low-cost domestic airlines that have younger employees and no defined benefit plans with heavy health care costs.

    I have pointed out, in various forums and research notes, that the 4 network airlines reduced mainline (domestic-only) aircraft by 1000 or 31% over the last decade. Current domestic market share is about 65%, which is down from 90% 20 years ago. The lower the market share, the lower the pricing power. They have increased the number of commuter operations - 1,300 increase in aircraft over the same decade - that use much lower labor costs. This strategy is defensive as they attempt to fend off lower cost (and fare) competitors like Southwest and Jetblue from gaining market share in fortress hubs. It's basically a labor arbitrage that has resulted in LESS market share loss than what would have occurred otherwise. Unfortunately, it has reduced the number of mainline employees at the network airlines. A real shame given that it boils down to the cost of a young workforce versus a older workforce with lots of retirees to support. A real dilemma for labor leaders who attempt to maintain compensation levels and headcount.

    Average block labor costs at the 21 commuter airlines is under $600 versus $2564 at the networks and $1224 at the (7) low cost airlines. Southwest is now the highest labor cost airline in the low-cost airline segment.
    Oct 20 08:02 AM | 2 Likes Like |Link to Comment
  • Airline Pricing Power And The DOJ's Case [View article]
    I agree.
    Sep 13 09:12 PM | 1 Like Like |Link to Comment
  • Airline Pricing Power And The DOJ's Case [View article]
    Not sure, but as a consumer I would not be happy to see big competitors merge because fewer competitors equal higher prices.

    However, as an analyst I have to go by the numbers and the numbers say these airlines have to be profitable enough to buy new fuel efficient aircraft, which can lower costs. And, the AA+US merger can produce over $1 billion in synergies that can be shared with the consumer in the form of better, more, and lower-cost service. The DOJ's case doesn't take any of this into account.

    The DOJ's argument could be called the "one merger too many" argument. Perhaps they feel that it's good politics to try and stop the last big merger since deregulation.

    I can run the numbers and value financial/operating risk, but I don't know how to measure political risk!
    Sep 6 10:55 AM | 1 Like Like |Link to Comment
  • Airline Pricing Power And The DOJ's Case [View article]
    Hi Carlos,
    I agree that the express airlines have no control over where they fly, and are in fact controlled by the network airlines. The reason I included a unit of capacity HHI is to highlight how the networks have been able to deploy lower-labor cost capacity. The express airlines carry 16% of the system passengers and these fares would be materially higher if they had to pay mainline labor costs.

    Sep 5 04:24 PM | 1 Like Like |Link to Comment
  • Republic Airways: Frontier Dilemma And Investment Outlook [View article]
    There appears to be a disconnect between your expectations and our intention. We have indeed performed a full valuation analysis on RJET but cannot give it all away.

    We occasionally post some of our findings in the more public forums when there is high interest in a given airline story. The key insight that the market assigns little or no value to Frontier was something we thought important to share.

    For more information about our full valuation of RJET, Frontier, and the regional business please contact us by visiting our Ionosphere Capital web site.
    Apr 2 09:41 AM | 1 Like Like |Link to Comment
  • Delta's Aggressive Initiatives Are Undervalued [View article]
    We took more than a few looks at the refinery deal. If there were more to the story we would have commented on it. If you have additional information, please elaborate. Just because someone who helped set up the deal left...that provides no evidence that there is "something more" to the story.
    Feb 20 06:16 PM | 1 Like Like |Link to Comment
  • Is Bankruptcy The Best Solution For AMR? [View article]
    Liquidity becomes a real problem next year if GDP growth comes in at the low range of the estimates and fuel prices stay in the $3 per gal range. Given current CAPEX and maturing debt projections, cash levels will be low enough to force the company to seek protection. The borrowing capacity of the company is now very limited. Moreover, the company will have to update the discount rate and actual plan returns on its defined benefit pension and health care plans at the end of the year.

    I've updated the pension accounting with the current discount rate and actual returns. Required cash contributions will increase in 2012 because of these two changes, which in turn will reduce earnings, cash, and result in a much larger negative net worth. Hence the belief that AMR is likely to file BK sometime in 2012. Large increases in labor costs could also trigger the filing.

    There is the chance that GDP, fuel, discount rates, actual plan returns could be significantly better than estimated, but this only puts off the day of reckoning in my views. The company's strategy of new aircraft and spinning off Eagle is a day late and a dollar short.

    This website is for investors and the perspective of the discussion of AMR is for investors, not employees per say. Employee feedback welcome because it helps both parties understand the different perspectives.

    Management, in theory at least, works for the owners of the assets - the shareholders. The idea is to maximizing firm value, which includes the market value of debt. Labor is on the opposite side of the same investment coin as capital and analysts are focused on determining the intrinsic value of the business based on future cash flow.

    It's easy to understand why employees would think that a security analyst's view is unsympathetic. However, facts are facts and every CEO must manage the business to maximize firm value. This requires satisfying all stakeholders to a certain and sufficient degree.

    When an airline is old it accumulates a lot of legacy debt and costs and it becomes very difficult to compete with younger and lower cost competitors. AMR is very old and it never shed its legacy baggage in a BK like US Airways, Continental, United, Delta, and Northwest.

    One of the biggest problems AMR has is its $16 billion in pension and health care obligations, which will get much worse as it updates accounting at the end of the year. This negative impact has yet to show up in the consensus earnings estimates.

    Our study on sell side research recommendations, and actual returns versus estimates, examined 16 analysts over 10 years. Conclusion: The consensus earnings estimates - driven mostly by sell side analysts - is always too optimistic and represents a major lagging indicator. Great fundamental research, but not too good in terms of helping investors making money.
    Oct 25 09:11 AM | 1 Like Like |Link to Comment
  • Is Bankruptcy The Best Solution For AMR? [View article]
    AMR management does appears to be using the bankruptcy scare as a backdrop to labor contract negotiations. Analysts are discussing the potential for bankruptcy because of liquidity concerns.

    If the company ultimately files for BK protection and emerges, its credit worthiness and ability to secure new aircraft improves. However, the airline will likely continue to be one of the weakest competitors. Hence the business case for a merger post-BK.

    If AMR avoids bankruptcy, it will continue to muddle along and destroy ecomomic value (ROIC-WACC).
    Oct 21 03:08 PM | 1 Like Like |Link to Comment
  • Is Bankruptcy The Best Solution For AMR? [View article]
    Demonizing management and those that point out cost problems may make one feel better, but doesn't help clarify the issues or solve the competitive problems. This takes an un-emotional analysis that is strategic and holistic in nature, and one that considers the required return on capital.

    I've always found that those that don't trust the numbers, don't understand the numbers. And those that don't like the numbers typically bash (or smear) those that present an analysis that doesn't match up with their world view. A real shame.
    Oct 20 08:56 AM | 1 Like Like |Link to Comment
  • Is Bankruptcy The Best Solution For AMR? [View article]
    Data provided are actual data from DOT form 41. No accounting problems here. Many employees tend to confuse hourly wages with block hour costs, which include productivity. And, health care and pension costs must be considered when comparing apples-to-apples labor costs.

    I too took a major hit from UAL's bankruptcy so I'm keenly aware of the the pain that most airline employees have endured. You wrongly assume that I "play with their team" when I write about the industry. The analyses is data driven and is presented from the shareholders' perspective. This is a vaild prespective and one that pilots and other employees should consider when they think about the industry and their airlines.

    Typically, the employees' perspective is one of "them against us". This is a shame because it does not allow an objective understanding of the industry fundamentals and comnpany specfic economics that drive earnings and ablity to pay employees what they deem is fair.
    Oct 20 08:23 AM | 1 Like Like |Link to Comment
  • Is Bankruptcy The Best Solution For AMR? [View article]
    Apples-to-apples comparisons are made by examining each of the regions and fleet types separately. Most only compare system-wide data and this, as you rightly suggest, can be misleading. I post system-wide data because it can be more easily verified. The domestic-only data is more interesting and paints an even worse fare/cost disadvantage for AMR when examined relative to competitors like Southwest,.

    You are also right that maintenance costs are much lower at Southwest. Obviously, older aircraft have higher maintenance and fuel costs. Example: AMR's old MD 80 fleet has a 35% fuel cost disadvantage with the newer B737-800 replacement models. However, this doesn't tell the whole story.

    Higher productivity of Southwest's fleet reduces its relative unit [aircraft[ cost as does higher reliability and lower maintenance costs. In other words, AMR's 20+ year old MD 80 series is more expensive to operate than the fuel-only cost advantage implies.
    Oct 20 07:16 AM | 1 Like Like |Link to Comment
  • Is Bankruptcy The Best Solution For AMR? [View article]
    Perhaps if you dig a little deeper you would discover that:

    AMR's benefit/pension costs per block hour are $794, which is $414 higher than Southwest's $380. If AMR had Southwest's lower pension/health costs its earnings would $894 million a year higher - all else held constant. Compare that number to last year's reported earnings and the cost problem should be more than obvious.

    Southwest's wages per pilot and flight attendant are on average higher than AMR's, but unit labor costs at AMR are much higher.

    Southwest's block hour wages (only wages) are 70% of AMR's and pension/health care costs are 48% of AMR's. Why is this the case? Southwest's employees are more productive and have a lower weighted average seniority. Both of these advantages results in total labor [block hour] costs that are 36% lower than AMR's.

    Bottom line: If AMR had Southwest's labor cost, its costs would be $2.3 billion a year lower. The age of the airline and its hub-and-spoke model gets to the heart of the competitive cost problem.

    Current management came aboard after these problems were established. It's a structural problem that can't be solved without a restructuring of the airline, which includes its commuter unit.
    Oct 20 07:11 AM | 1 Like Like |Link to Comment
  • Is Bankruptcy The Best Solution For AMR? [View article]
    The weak link is too much debt and obligations on the balance sheet, which in turn drives higher operating costs.

    Even the best CEO in the world cannot produce a profit given AMR's set of cost and liability disadvantages. Throw in a disgruntled workforce that wants big pay raises...

    It's not labors' fault the company is in such bad shape even as AMR's pension and healthcare obligations are key reasons the company is in trouble. The industry's composition has changed as lower-cost airlines have gained greater market share.

    AMR is a price-taker and the price it can command is below the cost of capital. Hence the long term solution is to reduce capital. This may not be possible outside of bankruptcy.
    Oct 20 06:19 AM | 1 Like Like |Link to Comment
  • Is Bankruptcy The Best Solution For AMR? [View article]
    AMR has underinvested in competitive resources for too many years, hence the 15 year old fleet. Hard to invest in improving customer service when the company has lost over $12 billion in the last ten years and will lose another $1 billion over the next 12 months.
    Oct 20 06:06 AM | 1 Like Like |Link to Comment
  • Is Bankruptcy The Best Solution For AMR? [View article]
    Management options are underwater and "may" is a function of a sensitivity analysis that includes lots of variables.

    You suggest that a "loud" analyst that doesn't work for a major research house has no credibility. Our work is paid for by buy-side funds that have used our services for 15+ years. We do not provide financial services, make a market, or underwrite securities for the airlines. THis is not the case for the major banks that do provide "sell" side research. Did you ever wonder why these research reports are always too rosy? Every single one of them had a buy rating on UAL, DAL, US Airways and Northwest a year before they filed bankruptcy.

    FYI, the CDS market is calling for a 50% bankruptcy within 12 months, 64% within two, 75% within three, 88% within four, and 88% within five years. This is what the market is saying - not any given analyst.

    AMR could avoid bankruptcy if (1) GDP rebounds, (2) industry capacity is reduced beyond what is currently planed, (3) jet fuel costs spike down, and (4) labor costs at key competitors spike up.

    Are you willing to go long AMR given the odds of not filing bankruptcy?

    I feel your pain (AMR employee?) but don't shoot the messenger because you don't like the message.
    Oct 20 06:00 AM | 1 Like Like |Link to Comment