AMR Heads Toward Profit
October 18, 2010

By MIKE ESTERL
FORT WORTH, Texas—American Airlines parent AMR Corp. is expected Wednesday to report its first quarterly profit in two years, a sign that the tide is turning for a beaten-down industry laggard.

The Texas-based carrier is riding an industry-wide surge in air travel, which already lifted its more cost-efficient rivals back into the black earlier this year after the recession receded. Bolstering its prospects, American is poised to reap higher revenue from lucrative international routes in the coming year.

After dropping to the No. 3 U.S. airline by traffic from No. 1 over the past two years amid mergers by rivals, American says it isn't ruling out a possible deal of its own. Industry analysts have named US Airways Group Inc., Alaska Air Group Inc. and JetBlue Airways Corp. among potential targets.

"We don't rule anything out. All options are on the table," Thomas Horton, American's president, said during an interview. He declined to comment on any specific merger or takeover candidate.
But American executives also insist that new international alliances and strengthening the carrier's hubs in the biggest U.S. cities will allow the airline to prosper on its own, and that they feel no pressure to make a big-bang acquisition.

Earlier this month, after more than a decade of failed attempts, American launched a joint venture with British Airways PLC to boost trans-Atlantic revenue. Regulators also gave American a tentative green light in October to deepen its alliance with Japan Airlines Corp., which is expected to give it a bigger foothold in Asia.

American estimates it will generate at least $500 million in new annual revenue through its joint ventures with British Airways and Japan Airlines, as well as a more modest cooperation pact it recently signed with JetBlue domestically. It said earlier this month that it is recalling 800 furloughed employees.

In the U.S., the Texas-based airline increasingly is focusing on its hubs in the country's four most-populated metropolitan areas: New York, Los Angeles, Chicago and Dallas-Fort Worth. It has a leading presence in Miami, its springboard to Latin America, where American is the largest U.S. airline.

"You want to be big where it matters," said Beverly Goulet, American's vice president of corporate development.

American is now behind United Continental Holdings Inc., which became the No. 1 U.S. airline measured by traffic after UAL Corp.'s United Airlines closed its merger with Continental Airlines Inc. this month. Delta Air Lines Inc. is No. 2, having overtaken American when it acquired Northwest Airlines in 2008.

American has a lot of catching up to do. It is saddled with high labor costs and older, less fuel-efficient airplanes than its rivals now have. The carrier likely will be unprofitable again in the full 2010 year, alone among major U.S. airlines. AMR last posted a full-year profit in 2007. The company's stock price has plunged 20% this year, even as shares of competitors have risen.
Many industry analysts expect American to book a full-year profit in 2011, although its operating margin is likely to lag competitors for another year or even longer.

Labor remains a big hurdle for American. Its labor cost per available seat mile in the first half of 2010 was 4.30 cents, highest among the 10 largest U.S. airlines. United and Delta's labor costs were 3.60 and 3.51 cents, respectively, according to the Bureau of Transportation Statistics.
Part of the reason for the difference is that American didn't land in bankruptcy court during the past decade, unlike several rival carriers, which slashed wages and benefits more aggressively. American estimates competing airlines on average enjoy a $600 million annual advantage in labor costs.

Jonathan Root, an airline credit analyst at Moody's Investors Service,
said the airline also has bought itself time "because of its good liquidity" after raising $6 billion in financing last year as capital markets thawed. American, which has about $2.5 billion in debt maturities next year, ended September with an estimated $4.8 billion in cash and short-term investments.

There also are signs of a potential improvement in relations between American and its unions, which are fighting for higher pay in federally mediated talks after making concessions to keep the airline afloat in 2003. David Bates, who took over as pilot-union president this summer, recently met with American Chief Executive Gerard Arpey, something Mr. Bates's predecessor refused to do.

"Both sides have tried to reach out and repair the fractured relationship,'' said Sam Mayer, a spokesman at Allied Pilots Association, the union representing American pilots.

American is pushing for higher productivity and greater flexibility in all its labor contracts. Among its targets: an earlier agreement with its pilots that caps the number of 70-seat jets it can fly through regional partners at 47, limiting its service on certain routes.

Some of American's unions asked the National Mediation Board earlier this year to allow them to strike, but their requests have been turned down thus far.

"We have continued to make progress every time we meet" with unions, said Jeffrey Brundage, American's head of labor relations.

Management also expects industry labor costs to continue to converge as bankruptcy-era contracts expire at rival airlines, forcing them to negotiate new deals that are likely to be more costly. Unions often also secure pay increases when airlines merge.