Here are a few notes from American’s earnings conference call yesterday:
Earnings Re-hash and Capacity Guidance
- American plans to diversify its regional feed away from just American Eagle
- Net loss of $286 million, $11 million in Q2 2010
- Fuel cost was up 30% over Q2 2011, added $525 million to expenses in Q2 and that low only because of $135 million in hedging gains
- AA plans to reduce capacity via trans-Atlantic JVs during Northern Winter 2011/2012
- Plans to discontinue operations at reservations center in Dublin, Ireland; cite dropping call volume with more online traffic
- AA must lower labor costs (duh!)
- Extreme weather @ DFW and depressed demand in Japan reduced revenue by $60 million
- Cancelling non-Cornerstone flying
- Q4 2011 capacity to decrease 0.5%
- For FY 2011, mainline domestic capacity up 1.9%, Consolidated capacity up 2.6%
- To illustrate capacity discipline; since 2006 American capacity down 9%, rest of industry down just 1%, other legacies down 5.5%
- Order book for 777-300ER up to 8 aircraft
- Q2 2011 RASM up 5% on 3% more capacity vs. Q2 2010
- Consolidated load factor was 83%, and passenger yields up 5%.
- Strongest international RASM growth in Latin America
- Corporate revenue up vs. Q2 2010
- Not enough revenue increase to offset higher fuel
- Freight traffic down slightly
- Ancillary revenue up 5.7%
Other Interesting Items
1. Hunter Keay of Wolfe Tran asked the following question:
“Can you just verify that the pilot contract doesn’t allow for the operation right now of the neos, the 777-300ERs, and the 787s? And if so, doesn’t that just give the pilots a significant bargaining chip in these negotiations?
To which AMR CEO Gerard Arpey responded:
“Hunter, I think that using the language doesn’t allow is a bit strong. I think its fair to say that we don’t have rates of pay for the Airbus narrowbody airplanes, but we certainly have the equivalent for 737s, so I think that the fleet plan we announced today should really be viewed as the potential catalyst for a re-structured pilot agreement that will allow American to be more competitive than we are today. So I don’t necessarily come at it the the way you did, though I will acknowledge that we don’t have those rates of pay in the contract. But I have no doubt that by 2013, when we take delivery of the first Airbus, that that issue will be behind us in a satisfactory way.”
Prior to the call, I was wondering the same thing myself. American has not yet negotiated rates for the Airbus and the widebodies. And when negotiations do start, the unions are going to be able to come to the table and say to American: “Look, you’re getting killed on fuel right now (remember $525 million in added expense for Q2), so unless you’re willing to pay us some nice high rates for the A320s, and jack up the 737 rates too, you can keep on flying those old MD-80s and 757s, and take the 767-200s and stick them…” And AA, who is actually losing money purely because of the fuel may have to give in to these demands. So for Arpey to say that he thinks that the new aircraft may be a catalyst for a better labor agreement is a bit of a stretch. American may end up losing some of their gains in fuel efficiency with this new order to a drop in productivity.
2. Another question that came up was in relation to pensions and their future costs to American. Arpey replied that pension costs would make up less and less of American’s total employee cost in the future (decreasing to the range of 5-10%), also opining that future employees would end up costing American less than current ones. I found this interesting, because American has done this same sort of thing multiple times over the course of it’s operating history. Back in the late 70s/early 80s, as American was adjusting to de-regulation; regulation labor rates threatened to break their operation. But Bob Crandall envisioned a solution, pay new hires lower rates (ie: anybody hired after date “x” is paid the 30% lower rate). Then, as the holdovers from regulation slowly retired; AA was gifted lower labor costs. This makes me wonder if there’s some sort of deal in the works for the future, where any employees hired after a certain date get little or no pensions. It certainly would not be out of the question for current employees to shore up their own pensions on the back of future employees.
-Vinay Bhaskara
Twitter: @TheGateVinay