Airline demonstrates to rival US majors how labour concessions could lead the way back to profitability
American Airlines' $166 million net loss in the first quarter - a vast improvement over its more than $1 billion loss a year earlier - is being hailed as a dramatic turnaround, and should add impetus to other carriers' efforts to cut costs.
That the turnaround at the world's largest carrier, traffic-wise, has been achieved without resorting to bankruptcy or launching a low-fare operation is likely to strengthen management arguments that reductions in labour costs are central to returning the US airline industry to profitability.
Largely as a result of $1.8 billion in concessions wrung from its unions last year, American's operating costs are now among the lowest for network carriers, and only 20% above those of low-cost leader Southwest Airlines, down from over 50% a year ago.
With Delta Air Lines blaming continued heavy losses on its industry-leading pilot salaries, and US Airways trying to extract a third round of concessions from its unions to stave off a re-entry into bankruptcy, the fact that labour cost cuts have put American on the road to recovery could strengthen management's hand in difficult negotiations.
The first three months of the year, traditionally a difficult season for US airlines, marked American parent AMR's third consecutive quarter of positive operating income, achieved despite a $55 million increase in fuel expenses year-on-year. As revenues rose 10%, mainline unit costs dropped more than 16%, says American, and the year-over-year decline would have been almost 18% if fuel prices had stayed at first-quarter 2003 levels.
"AMR is likely to be the only major network carrier to report a positive operating margin," says Michael Linenberg, airline analyst at Merrill Lynch. American's 1% positive operating margin for the quarter compares to a negative 21% a year earlier - evidence that the carrier's turnaround plan is working, and "all the more impressive given the fact it occurred in the seasonally weak March quarter", he says.
"Our success in removing costs from the operation has paved the way for our improved results and has given us the ability to stand and fight rather than retreat and shrink," says chief executive Gerard Arpy. But there is still "a lot of work to do" to achieve sustained profitability, he says.
During the quarter American cut labour costs, its largest expense, by 22% thanks to concessions agreed last year by the airline's three unionised employee groups. Union leaders say the onus is now on AMR's management to turn the carrier's reduced first-quarter loss into substantial future gains.
"We'd like to see innovative thinking coming out of management to make the most of our very significant investment in the airline's future," says American's Allied Pilots Union. "It was our investment in the airline that yielded a lower cost structure."
Labour concessions helped especially as American struggles with increased competition from low-cost airlines, which have begun to affect pricing in virtually every domestic market in which the network carrier operates. "We must compete with low-cost carriers in 80% of our markets," says American.
The airline has steered clear of launching a low-fares operation like Delta's Song or United's Ted, instead adding seats to its Airbus A300s and Boeing 757s to increase capacity in leisure markets and "depeaking" flying at its major hubs to improve efficiency, and attributes its ability to keep costs competitive with low-costers to the "sacrifices" of its employees.
This is key to Delta as it tries to extract similar deep concessions from its unions. The airline - which posted a steep net loss, albeit lower year-on-year, of $383 million for the first quarter - is trying to get its pilots to agree to a 30% pay cut. The pilots, who now lead the industry in pay thanks to a contract signed just before 11 September 2001, have offered 13.5%, which includes forgoing a 4.5% increase planned to kick in this month.
New Delta chief executive Gerald Grinstein says the airline must achieve a competitive cost structure to survive, and argues the pilots' offer "doesn't come near enough to close the gap". The Air Line Pilots Association (ALPA) counters that Delta "has shown no evidence of a business plan that will enable it to compete effectively within the airline industry" - an allusion to its response to the threat posed by low-costers.
The central plank of Delta pilots' resistance to deeper concessions is their belief that "labour alone cannot turn the tide". Pointing to the losses at American, United and US Airways, ALPA says: "Even those network carriers that have obtained worker concessions have yet to become profitable."
American's recovery, if it unfolds as analysts expect, could seriously undermine that argument and allow Delta to achieve its goal of agreeing cost cuts and not resorting to a bankruptcy restructuring to force them through - something American achieved where United and US Airways did not.
US Airways is still struggling, posting a net loss of $177 million for the first quarter, but is widely regarded as having emerged from bankruptcy protection too quickly and having secured too little - just over $1 billion - in the way of employee concessions.
If, as Linenberg forecasts, AMR reports a net profit for the second quarter, the pressure on pilots at Delta and workers at US Airways to agree to deeper concessions will increase. At the same time, the still-struggling US network carriers will have to come up with other strategies, beyond employee sacrifices, to increase revenues and reduce costs.
| US Major airline results in q1 2004 | ||||||
| Airline | Revenue ($m) | Change (%) | Net result | Change (%) | Unit cost (¢) | Change (%) |
| American Airlines | 4,512 | 9.5 | -166 | 84 | 9.49 | -16.7 |
| Continental Airlines | 2,269 | 11 | -124 | 44 | 9.76 | -4.8 |
| Delta Air Lines | 3,292 | 4.3 | -383 | 18 | 10.71 | -3.6 |
| Southwest Airlines | 1,480 | 10 | 26 | 8 | 7.82 | 4.3 |
| United Airlines | 3,732 | 17.2 | -459 | 66 | 10.18 | -11.2 |
| US Airways | 1,701 | 11 | -177 | not applicable* | 11.68 | -2.6 |
| Unit cost in cents per available seat mile Comparison with Q1 2003 figures * result affected by reorganisation | ||||||
| AMERICANAIRLINES RESULTS2001-4 |
| ||
| Date | Revenue | Net result Unit cost | |
|
| ($m) | ($m) | (cents) |
| Q1 2004 | 4,512 | -166 | 9.49 |
| Q4 2003 | 4,391 | -111 | 10.25 |
| Q3 2003 | 4,605 | 1 | 9.49 |
| Q2 2003 | 4,324 | -75 | 10.18 |
| Q1 2003 | 4,120 | -1,043 | 11.39 |
| Q4 2002 | 4,225 | -529 | 10.73 |
| Q3 2002 | 4,524 | -924 | 10.38 |
| Q2 2002 | 4,508 | -495 | 10.78 |
| Q1 2002 | 4,163 | -1,563 | 11.3 |
| Q4 2001 | 3,804 | -798 | 11.1 |
| Q3 2001 | 4,816 | -414 | 11.21 |
| Q2 2001 | 5,583 | -507 | 10.98 |
| Q1 2001 | 4,760 | -43 | 11.21 |
| Unit cost in cents per available seat mile, excluding regional operations | |||
GRAHAM WARWICK / WASHINGTON DC
Additional reporting by Rebecca Rayko
Source: Flight International
