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March 5, 2012 4:39 pm
American Airlines has always done things a bit differently. Decades ago the US carrier pioneered the concept of frequent flyer miles, developed the earliest computer reservation systems and was one of the first to adopt two-tier wages for its staff.
It is perhaps no surprise then that after filing for Chapter 11 in November 2011, almost 10 years after many of its peers, in recent weeks American has laid out an unorthodox business plan to carry it through the bankruptcy process.
While airlines have traditionally used bankruptcy to shrink to a profitable core, over the next five years American intends to cut costs by $2bn but also to increase departures from its key hubs by 20 per cent and boost its revenues by $1bn.
“This, in my view, is a different kind of restructuring,” Tom Horton, the new chief executive of AMR, American’s parent company, told journalists after unveiling the strategy. “It’s not about shrinkage. It’s about renewal and growth.”
The plans are certainly ambitious for a company that has spent 10 years searching in vain for a financial turnround. In 2011, American was the only major US airline to lose money, reporting a net loss of $2bn, including restructuring charges.
In spite of their recent success, carriers such as Delta Air Lines are being parsimonious with new routes and new flights, choosing to hold down capacity in order to prop up their pricing power in the face of high fuel costs.
Still, there are good reasons for American’s different approach. In the first place, while previous airline bankruptcies occurred en masse, this time American alone is in Chapter 11. If it scales back, its peers are more than able to step in.
“In order to be relevant to the business traveller American needs to be in important markets. So you could argue that by growing with better, newer equipment AMR can become the carrier it once was,” says one industry banker.
To win over high value-corporate customers and trim fuel costs, American plans to spend heavily on buying new aircraft and upgrading old equipment. The company has reaffirmed its 2011 orders for 460 new jets worth about $40bn at list prices.
Then too, AMR, and the US industry, has already shrunk substantially. Virasb Vahidi, chief commercial officer at American, says the carrier has been slimming down for a decade, focusing its flying on Miami, Dallas, New York, Chicago and Los Angeles.
Indeed, Mr Vahidi argues that in some respects the company is too small, and has been missing out on profitable revenues because of restrictive labour contracts that limit the number of large regional jets it can use to feed its more lucrative international network.
“Our best corporate customers demand that we have frequency of service in key markets because they want to fly when they want to fly. They don’t want to fly when we tell them to fly, so today … they get attracted to [competitors],” Mr Vahidi says.
American estimates that correcting those problems could generate an extra $660m of revenues a year within five years, with the rest of the $1bn in targeted sales coming from international joint ventures and expanded domestic partnerships.
Certainly, American has ground to make up. Since focusing on its five key hubs in late 2009, revenue growth per available seat mile flown at American has lagged behind its peers, trailing as much as 5 per cent in some quarters.
Still, Hunter Keay, analyst at Wolfe Trahan, worries that it may be too late for AMR to respond effectively. At best, he says, the company can hope to match rivals, but not beat them, on schedule or pricing because of its financial frailty.
For the moment, American is focused on its cost-cutting goals. Bill Swelbar, with the Massachusetts Institute of Technology’s International Center for Air Transportation, says the carrier must find $2bn simply to catch up with average industry margins.
In bankruptcy American will have room to force through changes to existing contracts if it can convince a court that such moves are necessary. It is targeting 13,000 job reductions and substantial concessions from the workers that survive the cull.
That may be tough to achieve. Unions have described the plans as “draconian” and the pilots have sued to oppose them. At the very least, the process may further sour the work environment just as the company needs to win over customers.
And if the company does stumble at all, its more profitable peers are ready to pounce. According to people familiar with the matter, US Airways, Delta and other investor groups are all exploring a possible combination with American once it emerges from Chapter 11 protection.
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