Monday, January 24, 2011

AMR CorporationAmerican Again Fights the Good Fight

By Ted Reed 01/24/11 - 08:00 AM EST

DALLAS (TheStreet) -- Hardly anyone in the airline industry doubts that American Airlines is fighting a noble battle against against global distribution systems, vast computer systems that book and sell travel accommodations.

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It’s just not a battle than any of American's peers want to fight.

And so, once again, American will go it alone, at least for a while, even if it has a short-term cost to pay, which analysts contend it does. "In the short run, AMR's ongoing battle with GDS middlemen favors its competitors, who are displayed on all GDS and most on-line travel agency systems," wrote CRT Capital Group analyst Mike Derchin, in a recent report.

This is familiar territory, of course, for the only major U.S. carrier never to have declared bankruptcy -- a strategy that has enabled high profits at peers who were able to dramatically reduce costs. American will likely be the only major carrier to lose money in the fourth quarter.

But again, American stands on principal. "This company stands for something, more than just any old company," CEO Gerard Arpey declared in a 2010 interview. "Gradually, it will emerge as a successful company that honored its commitments and its pension obligations and that was guided by principles of doing what's right.

"We take a long-term view," Arpey added. "We presume that we'll still be running the company a long time from now and the shareholders with us now will be with us then, and the shareholders will judge (what) we've done for the company and the other constituents."

Of course, American stands to gain financially from eliminating the middle man in its ticket sales. Cory Garner, director of distribution strategy, said the various GDS systems charge the carrier hundreds of millions of dollars a year for distribution. Travel agents use the systems -- Amadeus, Saber and Travelport -- to book tickets. "We want to cut out the middle man between us and the travel agents," Garner said, in an interview. "We want to distribute in a less expensive way that can also accommodate optional services."

At the same time, Garner noted, "the global distribution systems are outmoded." In many ways, technology has passed them by. Today, customers can find their own low fares on the Internet and American can more easily distribute tickets to travel agencies. "We want to deal directly with travel agents," Garner said. "We want to deal with global distribution systems, but as technology providers rather than gatekeepers."

Even before it shunned bankruptcy, American was charting its own course, leading an airline industry that did not necessarily follow. Of course, American's 1992 battle to alter the fare structure was unsuccessful, and perhaps unwise.

But in 1981, American invented the frequent flier program. Later, it pioneered yield management. In 2002 it decided to charge for the first bag. Initially resisted by the industry, the move has produced billions in industry revenue. For the matter, in the 1960s American teamed with IBM to create Saber, the first GDS, which was later spun off.

In a recent report, Stifel Nicolaus analyst Hunter Keay was among the bulls on American with a buy rating and a $9.50 price target. Keay said American needs to make changes to be profitable, noting "We assume these changes take place because AMR management historically has not shied away from commercial risk, a trait we admire and some investors underrate."

On the Delta earnings call, CEO Richard Anderson was asked what steps Delta has taken to reduce its distribution costs.

Anderson reminded that Delta has terminated contracts with a dozen online travel agencies, has changed how online agencies can bundle its fares with other carriers' fares, and has otherwise sought to control distribution of its tickets. "If you look at what we've done, we've been -- while not as aggressive as American -- we've been pretty aggressive," he said. "You can expect us to continue that trend." Delta said it spends about $300 million a year with global distribution systems.

Nevertheless, when Arpey was asked if American is working with other carriers to solve the problem of excessive distribution costs, he responded: "We do not have a unified front with other airlines, nor would we be permitted to do so.

"We have been thinking about this subject for a long time," Arpey said. "We have no unified front because that's not the way we work."

For American, that is the way it has always been.

-- Written by Ted Reed in Charlotte

To contact the writer of this article, click here: Ted Reed

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