Hotel_junkie

Actually, the real problem with "early retirement" is the actual upfront expense of retiring people. You trade long term salary expense into an immediate cash outlay...sure it's a smaller number, but it has to be paid out now rather than in future years.

Not sure AA could afford to retire that many people with their cash flow issue. At the end of the day, their Labor contracts are dragging them down.

grahampros

At the end of the day it's bad management in general that is dragging AA down. Labor contracts are just one reflection of that bad management. They also have serious revenue issues.

It is increasingly clear BK is coming and the Jan prediction is prob about right.

FreequentFlier

^ I remember a recent article in which Arpey said it wouldn't be very Christian of him to enter bankruptcy and cut wages or even employees.

But then, neither is watching your airline slowly bleed to death while continually taking massive bonuses for yourself and ultimately putting 80,000 people out of work, is it?

grahampros

That is prob part of his problem is praying for god to save the company. We see how that has been working out.

Jacobin777

I wonder what Crandall would do right now with AA...

Maybe you have a figure for those "massive bonuses"?

grahampros

The figure is easily looked up. A lot of this frankly goes back to bad board policy. The management get bonus based on stock price. That model has obviously not worked for AA. The airline industry is notorious for large stock swings in either direction..esp when your at what 5 bucks a share.

It was just a bad plan. Base the bonus on actual profitability or margin now how much the stock swings.

FreequentFlier

Yes, margin and profitability should factor into compensation if it not currently being considered. It's ironic that a good chunk of Arpey's compensation is tied to a stock price he seems to have little ability to move upwards.

He should move to bankruptcy and get this over with. AA is very fixable with a little vision and some sensible contracts in place.

grahampros

What is pretty clear is Arpey is on his way out.. no surprise there. There real issue goes back to board of directors and why the let this drag on so long. When the do go BK which is now likely i expect we'll see most of the board kicked out.

sonofzeus

Anxiously waiting for the press release on his severance deal.

Magic 8 ball says: $5 million +

Not close to Carol Bartz' reward for ineptness...not chump change either.

AAerSTL

Or Michael Eisner at Disney ($90 mm)

AAerSTL

That's a big part of the problem. AA's management hold themselves to high esteem for not filing back in 2003. At the end of day it matters if the company is able to sustain profitability which AA hasn't been able to do for a long time. AA simply has too many employees on their payroll and needs to make the tough decision to let some staff go and outsource more of the operation to be competitive.

At December 31, 2010 AMR has 78,250 active employees. On the other hand DL had approximately 80,000 employees at the same time (only 17% covered by collective bargaining agreements).
I'd like to see AA do the following:

-Outsource substantially all domestic flying <750 miles to plethora of RJ operators (like UA)
-Spin-off overhaul and outsource more work to MROs (UA has done this)
-Outsource ground handling at many stations (Again, UA has done this)
-Reduce or eliminate AA presence on routes like BOS-LHR or ORD-NRT that are sufficiently covered by JBV partners BA/JL
-AA's payroll should whittle down to an appropriate size, roughly 50,000 active employees

"The only social responsibility of a business is to increase it's profits" -Milton Friedman
"The worst crime against working people is a company which fails to operate at a profit" -Samuel Gompers (dubbed father of the US labor movement)

sts603

I couldn't disagree more. Outsourcing adds a middle man (who wants a cut of the revenue) and leads to employees having less of a stake in providing good service and doing their jobs well. UA/US's Express carriers are generally a disaster. One of the reasons for this is the employees have little or no incentive to provide service consistent with the mainline brand. Outsourced ground handling is the same thing - a disaster - even in otherwise nice cities like BNA.

As for eliminating AA's presence on routes covered by the JBV - I agree with you to an extent. They should take advantage of the JBV. But AA shouldn't be a virtual airline (outsourcing short-haul to regional and international to JBVs). There are benefits to the customer to fly AA metal. The alliances are not seamless. Dealing with partner carriers is infininnetly difficult (the two phone calls it took to get a seat assignment on JL for example). Furthermore, for all of its shortcomings - the AA brand has a following. I can't tell you after traveling in Asia for two weeks how nice it was being back to AA at NRT, even with a mediocre J crew (and emergency landing/diversion to MSP en route to ORD). Other passengers want this as well. I'm sorry, I can't see many Texans being happy flying JAL on DFW-NRT.

The solutions you propose are typical financial-focused solutions not business-focused solutions. Good management should only outsource non-core functions. Flying, customer service/ground service and maintenance are core functions of an airline. If they aren't - not sure what is.

edwards183

In this industry it is whoever files for chapter 11 last wins. I think that AA mgmt tried to hold out for the other chpt 11 legacies to stumble and/or have thier own legacy employee costs start to catch up with them. But high oil prices and the global economy have caught up with them.

A good thought out pre-packaged chp 11 would probably put AA in a position to come back strong in the near future. When the bankruptcy judge rewrites those contracts the RJ - 100 seat limitations will go away, the minimum hour on FA's will probably rise to at least 86 hours a month and could be as high as 95. Pension and retiree healthcare costs for the company will be cut and there will be a lot more outsourcing.

Lets not rejoice in this though. There are a lot of good hardworking people who will be hurt by this, along with a bunch of retirees who will have no ability to make up for thier losses.

Jacobin777

1-Then please show us the numbers..

2-Also, you (or others) by your own statements, who claim that Arpey/management is "cashing in" with bonus, etc are contradicting yourselves. If management gets bonus based on stock price, then their bonus is most probably low as AA's stock has been in the "doldrums" for the past 2-3 years.

Apropos, if people bother to look at the facts rather than coming up with unintellectual pablum, they would easily know that compared to other companies the size of AA (in terms of employees, revenues, etc.), Arpey's pay/bonus is low-or at the most "on par" with other companies.

Arpey's Pay/Bonus*

Mr. Gerard Arpey , 52
Chairman and Chief Exec. Officer $764.00k

Individual/Entity Shares Owned as of Trans. Date
ARPEY GERARD J 2,462,064

*-source-Yahoo Finance.

So Arpey makes 3/4 million $ and has about $8 million in stocks/options. Again, not a lot compared to a company of AA's size/revenue.

Pucnit

Forgive me, I started seeing all the discussion on compensation practices and got excited. The CD&A that is produced during the proxy season for publically traded companies helps "speak" to compensation practices of the organization for the up to the top seven paid employees within the company.

Cash Bonus Plans
For short term incentives (annual bonus plan) AA must achieve 5% pre-tax earnings margin for executives and other bonus eligible employees to receive a payout.

Stock Incentive Plans
Performance Shares - Paid out from 0-175% based on Total Shareholder Return (performance of stock price relative to industry peers).

Stock Appreciation Rights - Basically, Stock Options, but it appears the only option is to receive the payout in a share format.

Deferred Shares (Restricted Stock) - Time-lapse full value shares. Basically, these shares are just given to people once the restriction lapses (for AMR it is just time based).


Thoughts
Overall, the management team at AA is very highly leveraged to the stock price (shareholder return) of the organization. While their shares don’t have value today unvested/unexercised most of the senior management would lose $10M+ in potential stock value if the path of bankruptcy is taken.

Bonus - According to page 35, no bonus has been paid out for financial performance of the bonus plan since March 2001. (This doesn't mean retention/special bonuses haven't been approved.)

Performance Shares/Deferred Shares - According to page 26/7 & 35/6, the programs are both setup so that shares are always paid regardless of performance. ("Pay for Performance" - small laugh) For Aprey, while $3.28M in value is shown on the summary compensation table. I would estimate that the effective value will be ~$1.4M-$1.6M.

Stock Appreciation Rights - According to page 38, all of these shares are underwater and have no immediate value.

According to page 47, if Arpey was to: resign he would have $4.7M in value (no cash & almost all for pension), terminated with cause $7.0M (no cash & almost all for pension estimated & estimated stock value), terminated without cause $13.0M ($700k cash, $7.6M stock, $4.7M pension), and if there was a change-in-control (CIC) $30.1M ($4.8M cash, $13.4M stock, $5.1M pension, $500k benefits/outplacement/relocation, $6.3M taxes).
*Overall the only item that is really high/above market is within the CIC. (The cash payout greatly exceeds the 280g guidelines making a huge tax liability too.) I say this because normal employees would expect to keep their pensions and if you have stock options as a normal employee you'd keep those as well till they expired. Terminating a CEO without cause and only paying 1 year's salary is below market and surprising.

Interesting Information

AMR Corporate Governance Website

AMR Investor Relations Website

AMR Ratios - Look at Gross Margin... 7% is abysmal.