Edit Metric
|
||||||||||||||||||||
Details
|
||||||||||||||
American Airlines (AMR)Stock (Airlines Industry, Transportation Industry)
 AMR Corporation (NYSE:AMR), through is main subsidiary of American Airlines, is the world's largest passenger airline by passenger miles flown[1]. Like most airlines, American faced serious financial trouble as a result of the reduction in air travel following the September 11th attacks. While American managed to avoid bankruptcy, the company found itself at a competitive disadvantage to others in the industry, with respect to labor costs and indebtedness. At the end of 2007, American led the industry in both labor costs and indebtedness; At 2.5% of revenue, American's interest expense is the highest among the legacy carriers, and there is no relief in sight for the company on the labor front, as management’s outlook predicts continued difficulty in containing labor and pension costs[2]. The company's Pilots, in particular, are demanding a 50% increase in compensation [3]. The airline has also been disproportionately affected by the rise in oil prices and increases in government oversight. The older aircraft operated by American are less fuel efficient than those of its competitors, which means that American’s operating expenses face more pressure from the unprecedented increase in fuel expenses. The aged fleet has proved a further detriment to the company’s finances, as it has required the grounding of 300 of the airline's 685 aircraft during April 2008 in order to comply with mandated FAA inspections[4]. The reliance on older aircraft will result in enduring financial difficulty for American, as the company debt load, the highest of the legacy carriers, will make it difficult for it to invest in new planes.
[edit] Business FinancialsAs of April 2008, American Airlines operates flights to approximately 170 global destinations, many of which are routed through the carrier’s major hubs in Dallas/Fort Worth, Chicago O’Hare, Miami, St. Louis, and San Juan[5]. AMR Corp. also owns American Eagle, a regional carrier. In December 2007, AMR announced that Eagle will be sold or spun off in 2008. A decision has not yet been made on the form of the divestiture; company leadership continues to evaluate the options available[6]. American’s revenue has grown every year from 2004 through 2007, led primarily by an increase in revenue passengers following the September 11th attacks. However, the industry recovery began to stabilize in 2007, as evidenced by a reduction in the year on year increase in operating revenue during the period from 2006 to 2007 [7]. American’s revenue per available seat mile rose by an average of 7.5% per year from 2003 to 2007, buoyed initially by higher load factors, but starting in 2006 through higher ticket prices[8]. The airline’s operating income has proved to be much more volatile during the three year period analyzed. American did not achieve profitability until 2006, due in large part to higher revenues and not a reduction in expenses[9]. In fact, operating costs have increased every year from 2004 through 2007, due primarily to the continual rise in the price of aircraft fuel. American has attempted to offset overall expenses by reducing fuel consumption through fewer flights, increasing the depreciable life of its aircraft, and decreasing food service costs. However, the rise in fuel prices has outpaced any reductions through these strategies, and when compounded with the high price of maintaining and retiring American’s aged fleet, has resulted in a continued rise in the airline’s operating expenses[10].   
Operational terminology unique to the airline industry includes available seat miles (ASM), revenue per available seat mile (RASM) and cost per available seat mile (CASM). The three metrics are determined as follows: 
[edit] Key Trends and Forces[edit] Rising Fuel CostsFuel expenses represent one of the most variable costs faced by airliners. From 2004 until 2007, fuel costs have climbed from 21% to 30% of American's total operating expenses[14]. Hedging strategies have reduced the pain of oil price increases during 2005, 2006, and 2007, decreasing total fuel costs by $64 million, $97 million and $239 million, respectively[15]. However, continued oil price increases will pressure the carrier's profitability, given that its 2008 purchase contracts offer only a limited 24% hedge against higher oil prices. [16]. Moreover, the growing cost based nature of the airline industry prevents American from immediately passing on these price increases to customers [17]. Because of the fixed cost nature of flying a plane regardless of its load, higher oil prices are causing airlines to outright cut routes from their operations. As of early May 2008, American has already started to cut flights. It has stated that it will end service to Oakland and is cutting flights throughout the west coast of the United States.[18] [edit] Consolidation Across the Airline IndustryDelta and Northwest announced in April 2008 that they will be pursuing a merger of their two companies. While the proposed consolidation still faces the hurdles of a shareholder vote and government approval, if completed, it encourage further consolidation within the industry[19]. Moreover, American management has expressed fears that any combination of U.S. carriers would require a revision in corporate and business strategy, since any post-merger airline would exist as a stronger competitor with greater financial resources, lower cost structures, and more extensive networks[20]. [edit] Higher Labor Costs than CompetitorsNumerous U.S. legacy carriers (Delta, Northwest,US Airways, and United) have been forced to declare bankruptcy due to price competition from discount airlines and overall decreased demand for air travel. While American has managed to avoid bankruptcy, the company is now at a competitive disadvantage to others in the industry, particularly with respect to labor costs. The carriers that entered Chapter 11 protection have managed to cut expenses through negotiations with unions. As a result, these airlines have emerged as stronger and more serious competitors. Conversely, American's ability to restructure outside of bankruptcy is limited, and as a result, the company continues to struggle with high labor costs and large pension funding requirements[21]. In the short term, these high costs make it quite difficult for the airline to conduct a pricing war with the discount carriers that compete with American on 80% of its domestic routes[22]. [edit] Increased Government RegulationsThe Federal Aviation Administration (FAA), an agency of the federal government, is charged with providing oversight for airlines operating in the United States. During the early portion of 2008, it was revealed that the FAA was not sufficiently active in ensuring airline compliance with safety inspections. As a result, there has been a strong Congressional backlash, which will likely force the FAA to become stricter in guaranteeing airlines perform safety checks. This has already forced the grounding of 3,100 of American’s flights during a one week period[23]. The lost revenue from these flights is only the beginning of the problem, as the increased intensity of inspections will probably result in an enduring increase in expenses for the airline and the industry in general. [edit] AMR leads the industry in indebtednessWith nearly $26B in in debt and pension obligations, American Airlines led the industry in indebtedness. The had a net interest expense (interest expense - interest income) of $577MM or 2.5% of revenue. To put this in perspective, this is 25%-60% higher than its legacy competitors. Moreover, given airlines' thin profit margins, only 2.2% for AMR in 2007, can make a difference between profitability and a loss. [edit] Competition and Market ShareRASM and CASM respectively allow for comparisons across airlines for unit revenue and unit costs. In the battle between low fare carriers and legacy airlines, companies like Southwest and Jetblue have found ways to reduce CASM (through lower maintenance costs from a more uniform aircraft fleet type and a “no frills” customer experience) while legacy airlines continue with their historically higher CASM operating strategy. Thus, even if both types of carriers manage to fill seats and achieve similar RASM, the low fare airlines will achieve greater profitability from their lower cost structure. [edit] Market ShareAmerican is the largest airline in the United States, capturing 15% of the domestic commercial airline market. The top fifteen U.S. airlines by market share are ranked below, where market share is measured in terms of domestic revenue passenger miles.
 American Airlines2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
|
The Shelf
|
Edit
History
Bookmark
