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Airline stocks are on watch after the WSJ reports that American Airlines (AAMRQ.PK) plans to...
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Tuesday, July 10, 2012, 3:02 PM ETAirline stocks are on watch after the WSJ reports that American Airlines (AAMRQ.PK) plans to step up merger talks in the coming weeks and will initiate the process by sending non-disclosure agreements to select carriers and P-E firms. Delta Air Lines (DAL -3.5%) and United Continental (UAL -1.1%) are the companies considered to be in the hunt along with US Airways (LCC +2.1%).
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1. Jets, jets, jets
2. Terminals in major cities, including the largest and newest terminal at JFK
3. Hangars in many airports.
4. Domestic and world-wide passenger and air-freight routes.
5. A modern flight school
6. Some of the best trained mechanics in the industry.
7. Contracts with airlines worldwide to service, maintain and rebuild aircraft.
AMR is not a turkey. It is a victim of 9/11. AMR is a victim of airline deregulation decades ago. And it is a victim of trying to maintain decent workers and decent salaries while the lesser airlines cut away at everything.
The aviation world will mourn the day AMR gets acquired.
Companies that invest in their people prosper. Those that fight their people eat the seed corn and fail.
You really don't understand what happened with Crandall at the helm. He was innovative to the 10th degree. He's the one with these original ideas. Admiral's Club, hub and spoke, ASM (available seat miles) and RSM (revenue seat miles) which produced record profits, frequent flier miles, and the dreaded "B scale" which resulted in people like myself hiring on in 1985 at B scale wages but promised during hiring that it would only be temporary which it was and made captain in 6 years. Our current first officers are still copilots after 16 years!!!! Why? No more original ideAAs. No more Crandall. Unions have nothing to do with it. They are there to put a check on safety, work with the FAA, represent you at hearings the few times there's an incident, accident, etc, and negotiate the best contract possible. AA pilots have one of the worst pay scales in the industry FYI. I used to make $220,000 a year as a wide body captain and retired last summer making a bit over $180,000. The guys flying now will probably take at least another 20% paycut and work 5 more days a month, basically getting 8 days off a month. The superintendent of skoolz here in northern VA hauls in just shy of a half a MILLION a year and retires with 6 figure income for retirement. Let's compare the skills required and the lives at stake between a captain of a $200 million dollar airplane and 300 lives in the back navigating through treachous weather over the Atlantic all night long and some educrat who drinks Starbucks every day in his air conditioned office, driving home in his BMW or Porsche after a hard day at the office trying to figure out a new way to add 2 plus 2 or......... some high skool grad in charge of collecting taxes in a community of about 100,000 people who is paid $150,000 a year plus unbelievable benefits. Next time you step foot on a regional RJ take a look at your first officer who makes enuf money to qualify for food stamps. Starting pay about $14 grand a year. $24 grand by about the 3rd year. I don't get on those airplanes. NEither should you. You get what you pay for Mark.
All your points are correct in their time, but the industry has changed... and will continue to change. AMR was paying a billion a year to pensioners, that were producing nothing. A big piece of your giveback was to fund your non-working buddies. As a result, AMR is stuck with continued bad relations with unions. As for customer service , you can't do it with outdated equipment as AMR milked their 300+ MD-80's as far as safety would allow.
Why does it work for Southwest and JetBlue? It is clear by your vehement response that the AMR won't solve the core problems that the company has. The unions came back to American several times over the last few years to reinstate givebacks, even as the company lost more and more money. AMR has never found the balance between ticket prices, employee wages and shareholder/bondholder returns. Unfortunately, I don't think they will in the future either. The legacy airlines are stuck as Jetblue and Southwest and others continue to grow and take away routes and slots from the other airlines. AMR has to hope that by jettisoning the pensions, it can lower ticket prices enough to attract enough passengers to make the whole thing work.(BTW, last month reported 85% loading)
Looking forward, the pilot shortage hits in 2014, look out for massive increases in salaries then, especially for the new guys. I am telling my sons to get their pilot tickets before then.
It's a cop-out. And Crandall was the head cop.He's to blame, and the managers around him are to blame. But they all jumped out of the plane with their golden parachutes and left the workers to take the blame and the fall.
Until top executives take responsibility for mistakes -- full responsibility -- and until laws are enforced against management completely, including jail time for those who violate the law -- I'm not going to get mad at any union "boss."
You assert that laws were broken. I am not aware of any serious, fact based, assertion that AMR broke any laws. The only such assertion on-line was on an unattributed sign held up at a union rally. American has, legally, in bankruptcy, gone back to the unions to break contracts and gain further concessions from the unions. Unions are calling this union busting, and are going to other judges to get relief, but no judge has given them relief, because what they are doing is legal.
Your assertion of law breaking is serious as the company is in bankruptcy and the judge handling the proceedings needs to know about them. As an investor in AAMRQ, if management did anything materially illegal it needs to surface. Please backup your assertion.
So you condone unions pulling out of negotiations, when the only outcome is bankruptcy? Tell that to the children of the 13,000 American Airlines workers that are losing their jobs. Tell that to the 40,000 retirees that will lose up to 60-80 percent of their pension checks and are too old to make the money back. You condone union bosses engaged in activity designed to hurt people and make union leaders wealthy at the expense of the members and their families.
To those who blame the union, I give a big Bronx cheer. Why do I care so much about AMR???
My father was an avionics technician for AA in one of New York City's major airports. He loved the airline and loved working on the different aircraft from the DC6 and DC7, to the prop jets, to the Jumbos.... He watched the industry grow. Yes, he was one of those retirees who benefited by the pensions that seem to be despised by so many.
My father, when he retired, told me that he did not vote for the new contract, although it was passed and he benefited from the pension.
Why didn't he vote for the new contract? He felt the two-tier system was unfair to the new mechanics coming in and he also thought it would be bad for the airline. His reasoning was more than altruistic. My father believed that it was important to have mechanics and technicians who loved their work, and took pride in the the role they played in the airline's success. He insisted that unhappy mechanics would make an unhappy airline and perhaps even an airline that was less safe. By not treating the skilled worker well, more pressure would be put on on a worker whose responsibility is to ensure the safety of the aircraft so it always gets from point A to point B. They would have other things on their minds, like their family's financial future. Not good to worry when repairing an airplane. Nor is it beneficial for a vital employee to come in tired from working another shift elsewhere. My father never felt the pressure that today's workers feel to work another job just to bring home less in relative pay than my father did.
Think about all the people who check, analyze and repair the radar, communications, electrical, and mechanical components of each and every aircraft, every day of the year. These people help you fly safely.
The two-tier system was the beginning of many givebacks to the airlines. The airlines didn't get it for free. They offered the great pensions in exchange for the two-tier system. And now they all want to take it back in "bankruptcy protection." It's funny how everyone who is against labor tends to have collective amnesia. The unions, through their workers who voted on the contracts, agreed for all sorts of givebacks. All of Americans workers generously agreed to pay freezes and cuts and less benefits after the 9-11 tragedy in order to help the airline in its time of need. Unfortunately management agreed to no compensation cuts and generously lined their pockets with bonuses galore.
It is ironic that the day my father went into the hospital was the same day American announced their bankruptcy filing.
Sorry for being so vehement. Its just that just because you "knew" our CEOs means nothing. Being out on the line, flying the routes, I see first hand how this company operates. You veered into a big part of the reason why AMR has fared so poorly. CHANGE!!! This company hasn't been willing to change its corporate culture. Simple as that. You also didn't mention what I believe is the NUMBER ONE reason why AA is in the position its in. The pensons are actually funded quite reasonably compared to its peers and our friends in DC who throw money around like its monopoly money. Here's what happened. Maybe you know but want to blame the pilots and not any other factors. Pilots earn at AA way less than other pilots due to a myriad of reasons including AA's inefficient scheduling and utilization of aircraft. But the problem is this. EVERY major airline has been able to sucessfully pull off Chpt 11 reorganization without a hitch leaving their employees and creditors holding the bag. Say you and I sell baseballs. We both charge $10 a ball. Our total costs are $9 yielding us a $1 profit margin (10%). We pay our employees handsomely with very nice benefits, i.e. medical, dental, vacation, pension plan, etc. But you have all kinds of inept management causing financial woes for the company. You also give a huge wage increase for a big chunk of your employees. Your costs skyrocket not only due to that but other stupid things you do. So instead of just going under the government allows you to recreate your business, including dumping all pension plans, slashing salaries, making your workers work 60 hour weeks for less pay than before, and eliminating many of the previous benefits. DId I mention you also stiff your creditors along with stock holders. You lower the price of your baseballs to $8 while your new costs are now $6.50. But I still must meet all my financial obligations. But if I continue charging $10 for my baseballs, guess where everyone will go to get their baseballs?? So I lower the price to match yours. My baseballs now sell for $8 but my costs are still at $9. I start to bleed, and bleed bad. The reason being that every single manufacturer of balls have also run to the government trough of chpt 11. So eventually I must also. That's what has happened Mark. AMR could no longer compete not only financially but also organizationally. With the merging of all 4 of the majors, AMR's competitor's route structure covers just about the entire globe. Meanwhile AA has a few cities it flys to in Europe, a smattering in S America, a few to Asia. That's it. AA's competitors not only fly all over the place, but they have a greater frequency for business travelers as well. As for Southworst, apples and oranges. They do one thing and do it well. They have one type airplane that flies strictly domestically. International flights have all kinds of additional burdens that SWA doesn't have to deal with. One type airplane lowers various logistical issues. They don't have to figure out what airplane to fly to what city, a whole lot less training costs for not only pilots but mechanics, flight attendants, less maintenence costs, etc.
One last note, I got a note from AA this afternoon. They are changing the reward structure for the AAdvantage program and giving legacy holders of non-expiring miles a 25 percent bonus. This could be good or just a giant piss off factor.... More on this later....
There was no trade for the implementation of B scale. I hired on just when that began. Pilots had pensions even at that time. The exchange was early upgrade to captain for the pilots at least, because of the huge growth which was to take place due to the massive airplane order involving the Super 80 which Crandall got one of the best deals ever in recorded aviation history. About $20 million for each of them. Know what a new 737 costs today which holds the same 140 passengers? So though you started off with a rediculous low salary, by year 6 you'd be making more than what you would have had you stayed a copilot for 12 years. B scale was ended around year 10 or so if my memory serves me right, though the pension aspect was significantly impacted.
Your comments show why American is now likely to merge with another company. I am a Platinum AAdvantage member since 1982 and the program has eroded away year by year. The whole concept of non-expiring miles is the result of a lawsuit when they started to monkey around with the benefits. AA is consistently one of the hardest airlines to get good frequent flyer tickets on.
Remember that AA gets a BILLION dollars of revenue locked in through people using their credit cards. My AA Citibank credit card business has gone to near zero. It doesn't sound like a lot, but that means that AA is getting about $3,000 less from me before I even step on a plane. Inferior Frequent Flyer programs decrease loyalty and allow competitors to move onto your turf. Look at the incursions by JetBlue and Spirit at DFW. Who would have thought that these guys could have come into the market 15 years ago? American would have killed them by doubling miles and matching discount fares.
Demeaning competitors is not a good idea and definitely not a good mindset for the employees of American. As an investor, and a business consultant, I have learned to respect where companies can really do it, not show the arrogance of saying that they can do it. AA suffers from the arrogance of saying it can do it. The problem I see is the same problem many of the other airlines in bankruptcy have, is that they survive the first bankruptcy without the major cultural changes required to sustain the new competitive advantage. Sadly, most other airlines have had to have multiple bankruptcies before they really change.
Yesterday i booked my family to Florida at Christmas on SouthBEST and got all the tickets during the high week for an average 10,000 miles a segment, and my son is my companion and therefore is free. I am a member of a number of Frequent flyer blogs and Southwest is by far the easiest to get tickets at the lowest number of points.
As for the future of the industry, I have told my sons that it is time to get into the industry as a pilot and that they should consider being a pilot as a career. In the rear view mirror, the industry was dominated by pilots produced by the military. Going forward, starting in 2014, everything changes and there will be a pilot shortage that has to be addressed by the airlines. They are going to have to step up to training pilots de novo, or suffer cancelled flights. This is a permanent change since Bill Clinton grounded a third of the planes in the military. Going forward as the military focuses on unmanned aircraft, the problem will get worse.
This is supposed to be an investment blog, so I suggest we look forward, not repeat situations that don't exist anymore.
Investing in the airlines has never been a very good idea for your commoner type like myself other than short term. Most of the money in outstanding airline shares is institutional. It would be interesting to find out why institutions invest in airlines. ITs incredibly capital intensive. A new 737 Max jet now is around $100 million a copy. Something that is so capital intensive usually ends up being run by the government which pools much of the nation's economic resources so that the costs are spread out among a larger group of players. This is another reason for not investing in airline stock. If the outsourcing that I mentioned does NOT occur I expect a nationalization of the airlines B4 too long because of the extreme costs in running a transportation system. IF the government runs the air traffic system, why not the airlines? As far as a pilot shortage, I think that again will be outsourced. The pay will NOT being going up anytime soon given the current conditions. There's one more possibility.......a restructuring of the industry. We might see a few domestic carriers such as Southwest and Jetblue run the domestic routes while international carriers transport passengers globally. As mentioned previously when an airline has multiple type aircraft it introduces complexity and cost into the financial equation. Perhaps having agreements between domestic airlines and international carriers might play a role in customer loyalty with this kind of arrangement. In any case, with as much uncertainty that lies ahead in this industry, investing and involvement in the airlines is not a very wise idea.. The best option for aspiring young want to be pilots in my view, is either corporate flying or the Air Force, first choice being either the Reserves or ANG. The Reserves and ANG do more of the flying for the DOD than active duty and gives pilots greater flexibility when moving over to the civilian world. Flying for the corporate world can be a great career, but the investment required for obtaining one's training to get the qualifications needed is quite high for such a risky enterprise. College degree, private pilot's license, commercial, multi-engine commercial, probably a CFI (certified pilot instructor rating) along the way, plus an ATR (air transport rating). All this about 300-$400,000. You'd need to pull in a lot of change to offset this kind of expense. With salaries being what they are, I would find it quite mind boggling for someone spending that kind of money to get a job a be on food stamps. The airlines need to at the minimum DOUBLE the current pay for pilots to even make someone think about being a pilot. If that happens, say good bye to cheap airfares, say hello to empty airplanes and airlines running to the bk courts once again.
I made big money on both the AirTran take-over and the AA bankruptcy. Going long in this industry for the long term is stupid. I will take my 12-14% return, thank you.