Top American Airlines executives say that theyre confident their plan… (Michael Nagle, Bloomberg )
Reporting from Dallas — American Airlines Inc. has secured alliances with some of the world's best airlines. It has restructured its network to focus on major cities. It is replacing its fleet. It avoided bankruptcy when many of its competitors fled to Chapter 11.
What it has not done, however, is make money.
In the 10 years ended Dec. 31, 2010, American's parent company, AMR Corp., lost $11.5 billion. Its last profitable year was 2007. It has lost money in nine of the last 10 quarters, eight of the last 10 years.
For much of the last decade, many of its major rivals also lost money. But when almost every other U.S. airline made money in 2010, AMR still posted a large loss.
AMR is projected to lose money in 2011 and 2012, while its major U.S. competitors are projected to make money.
For a publicly traded company, that's not a good thing. Top company executives say that they're confident they have a plan to turn the company around but that it will take time.
Simply put, AMR believes that beefing up service at five major U.S. cities and partnering with international carriers will pay off in stronger revenues. It also thinks its current cost disadvantage will disappear over time as other carriers sign new contracts with their labor unions.
"I believe with the strategy we have in place, we'll be fully competitive," said Gerard Arpey, chairman and chief executive of AMR and American.
"Near term, obviously, we have challenges. We have a cost disadvantage. Everybody knows why we have it and how it came to be," said Tom Horton, the companies' president. "And we have very high oil prices right now. I think if oil prices hadn't done what they've done, many might be talking about the recovery of American Airlines rather than the challenges we face."
But industry analysts have questioned AMR's strategy and its explanation that its plans will close the gap with other airlines — with the chorus growing louder in recent months.
"Waiting for the other airlines to sign generous labor contracts does not fix AMR," Avondale Partners analyst Bob McAdoo said in a May 16 report. "Hoping your competitor will take a particular action is not a strategy."
"In my opinion, the franchise is still strong; it's still savable," said Ray Neidl, senior aerospace specialist with the Maxim Group. "But pretty quickly they're going to have to come up with new ideas, either this management or new management, on what to do with the company."
In the 1980s and 1990s, American was consistently one of the industry's most profitable carriers. AMR made money in 15 of the 20 years from 1981 to 2000, including $5.5 billion during 1994-2000.
But in 2001, things went wrong, and from a profit standpoint, they've stayed pretty wrong for much of the time since.
A badly timed purchase of Trans World Airlines Inc. in April 2001 came just as the U.S. economy was beginning to slow, a decline that became much steeper after the Sept. 11, 2001, terrorist attacks.
The aftermath of Sept. 11 left the industry and American reeling as the number of people traveling plummeted. AMR soon laid off 20,000 employees but still posted large losses in 2001 and the years afterward.
AMR spent the first half of the decade skirting Bankruptcy Court. Top executives concluded by late 2002 that they would have to cut AMR's annual expenses by $4 billion if it was to stay solvent.
Of that, $1.8 billion had to come from employees, including $1.6 billion from unionized employees. Faced with a potentially worse outcome in Chapter 11 proceedings, unions in April 2003 agreed to draconian cutbacks in pay and benefits and changes to work rules to keep AMR out of bankruptcy.
As deep as those cuts were, other airlines — Delta Air Lines Inc., Northwest Airlines Corp., US Airways Group Inc. and UAL Corp., parent of United Airlines Inc. — cut even deeper.
Between 2002 and 2005, those carriers went into Bankruptcy Court to stay alive. Each emerged from bankruptcy a few years later with lower pay and benefits for employees, trimmer workforces and often with better terms on airplanes, facilities and debt.
Now, Arpey, Horton and other AMR executives say the company is at an $800-million labor cost disadvantage compared with the rest of the industry, and cite that as a major reason it lags behind its competitors in profits.
On the revenue side, American since late 2009 has staked its future on "Flightplan 2020."
The plan carries a strategy to strengthen five "cornerstones" — Dallas/Fort Worth and Miami, two markets that American dominates, and New York, Chicago and Los Angeles, three heavily contested markets — by adding flights that have a terminus in those cities and reducing flights that don't.
Two years ago, only about 85% of American's flights began or ended in those cities. Today, it's 98%.
The strategy has had its share of doubters. Analyst Jamie Baker of JPMorgan has twice urged Arpey to do more to turn around AMR and American.
As of last month, the consensus among airline analysts was that AMR will lose more than $600 million in 2011 and more than $100 million next year.
By comparison, analysts expect Delta to earn $1.2 billion this year and $1.7 billion in 2012. United Continental Holdings Inc. is projected to earn nearly $1.3 billion and $1.7 billion in those two years.
But fuel prices will go a long way in determining the size of losses or profits. A 10-cent change in jet fuel prices can alter AMR's income by nearly $300 million. In 2007, its last profitable year, AMR spent $6.7 billion for fuel; in March, it estimated it will spend nearly $8.5 billion in 2011.
Neidl, the Maxim Group analyst, said AMR is the only carrier among the 15 he covers that he expects will lose money in 2011.
The loss "may not be as big as analysts say, but it still stands out like a sore thumb — why are they losing money?" Neidl said.
Maxon writes for the Dallas Morning News/McClatchy.