American Airlines charts its future
July 22, 2011 10:35 pm
by Jeremy Lemer


Jet fuel in his blood: Gerard Arpey, American Airlines chief executive, joined the company in the 1980s


When Gerard Arpey joined American Airlines in the 1980s as a financial analyst, his arrival coincided with an aircraft-buying spree that would turn the carrier into one of the world’s largest.
Thirty years on and Mr Arpey, now chief executive, has just penned a deal that will in one fell swoop retire many of those same aircraft and chart a course for the US airline for decades to come. On Wednesday, the 52-year-old executive ordered more than 900 jets – counting options – in a deal worth nearly $40bn, badgered a supplier into developing a more fuel-efficient aircraft and stole a march on its main rivals.
Appearing at a news conference surrounded by local dignitaries and top Boeing and Airbus executives was a rare turn in the limelight for someone peers describe as a modest family man, quiet, thoughtful, and even a little cerebral.

Since taking the top job in 2003 – his predecessor was ousted for negotiating a lucrative bonus plan even as he extracted heavy concessions from workers – Mr Arpey has worked tirelessly to save money, cut debt and repair relations with employees, though to little avail.


He sold the company’s executive art collection and replaced it with photos of American aircraft, but net debt remains above $11bn. He set up joint leadership councils with unions, but the monthly meetings are sparsely attended.


Still, the symmetry of the aircraft order is fitting for Mr Arpey, who has spent his entire career at the airline, progressing from lowly analyst through the financial planning department before becoming chief operating officer in 2002.


He has jet fuel in his blood. His father was an airline executive and, as a student, Mr Arpey loaded bags for Delta Air Lines. In his spare time he flies a small Piper aircraft, although steering an airline through fuel spikes and recessions leaves little enough of that.


American in 2011 is a far cry from the carrier it was in the 1980s. Avoiding insolvency in the early 2000s has left it trapped: unable to reduce its debts or fix its labour problems until it makes money – and unable to make money without less debt and lower labour costs.


Then, the airline was spending to grow; now it is spending to survive. Mr Arpey and its team are gambling that, by replacing the old fuel-guzzling fleet and charting a path to growth, they can cut costs and win over disgruntled workers.


“This is something they had to do. With a 300lb jockey, even Sea Biscuit couldn’t win a race,” says Gordon Bethune, who led a turnround at Continental Airlines in the 1990s. Still, Mr Bethune worries that solving entrenched labour problems will be hard.


A chorus of analysts also remain sceptical.


“We understand that American’s fleet (and brand) are tired, but this announcement represents a ton of new capital being put into a failing business model,” one analyst wrote, demanding instant dividends.


Mr Arpey is well aware of the urgency. His office window looks out on the runways at Dallas Fort Worth International Airport and he winces when he sees American aircraft stuck in holding patterns because of bad weather, and burning expensive fuel.


But his preference, and strategy, is for the long term and the big picture. He has focused traffic on “cornerpost” cities, signed joint ventures, and ordered jets that will reduce costs as they enter the fleet. But it will take time to see results.


Whether American gets that time is a moot point. In the second quarter, the company again lost money, increased its debt load and generated less revenue growth than its peers.
Copyright The Financial Times Limited 2011.

US Airways Captain Escorted From Airport



By Ted Reed 07/23/11 - 08:00 AM EDT
CHARLOTTE, N.C. TheStreet) -- The battle between US Airways(LLC) and its pilots over the airline's safety culture is continuing, this time focused on an incident in which a captain declined to fly a transatlantic flight.


LCC On June 16, captain Valerie Wells, a 30-year-pilot, was scheduled to fly an Airbus A330, which can carry nearly 300 passengers, on a flight from Philadelphia to Rome. But she declined to fly because of failures of both the auxiliary power unit, a backup source of electrical power, and the "hot battery bus," a primary source of electrical power.
After the crew and passengers had returned to the gate Wells, in a particularly unusual event, was escorted out of the airport by security officials. Subsequently, a second crew of three pilots also declined to fly; the aircraft was repaired and underwent a rigorous inspection, and a third crew took off about six to seven hours late.


In seeking to publicize the incident, the U.S. Airline Pilots Association took out a full-page advertisement in Friday's edition of USA Today. The ad proclaimed that US Airways put "revenues first, safety second.


"The intimidation of flight crews is becoming commonplace at US Airways, [which] works to maximize their revenues by pushing their employees to move their airplanes regardless of the potential human cost," said the text. The ad referred readers to a website, www.USAirlinePilots.org/SafetyFirst.


In a letter to employees on Friday, Robert Isom, chief operating officer, wrote that "USAPA has embarked upon a smear campaign that in reality is all about contract negotiations, not safety.


"I can tell you unequivocally the union's claims are outlandish, false and a disservice to the 32,000 hard-working employees of US Airways," Isom wrote. "Safety has been and always will be the top priority at US Airways, as it is at any airline."


Union spokesman James Ray said that initially, Wells could not possibly fly the airplane because it lacked cockpit electrical power, but a chief pilot nonetheless encouraged her to fly. He said the incident symbolized US Airways' desire to enhance on-time performance and revenues. "This is not just an isolated incident," he said. "It has been going on on a daily basis, and is the kind of practice we've been fighting for a number of years now."


Airline spokesman John McDonald said the incident is under investigation. He said "the fact that [Wells] was escorted off the property had nothing to do with safety," but declined to elaborate. Ray speculated the airline did not want Wells to tell the replacement crew of the problems she had with the aircraft.

Frequent fliers, attendants share stories of rude travelers



By Kristin Stoller, USA TODAY


"Passengers are cramped, tired and petty," says Goltsch, an electrical engineer in West Caldwell, N.J. "It has gotten to the point now that the people who travel for business just don't enjoy it anymore."


Increasingly, business travelers and airline attendants complain about the lack of respect passengers have for fellow travelers. Among them: Passengers who talk too loudly on cell phones, bring smelly food on board or recline their seats too much in a cramped cabin.


In close quarters, it's almost impossible for savvy, frequent business travelers or infrequent leisure passengers to keep their cool and not become annoyed.


Goltsch, who is 6-foot-4, recalls one Continental Airlines flight from Newark to Puerto Rico.


Having bought a last-minute ticket, he was stuck in a middle seat, and his long legs were pressed against the back of the seat in front of him.


"The passenger in front of me kept trying to push his seat back, but there was nowhere for it to go," Goltsch says. "He got out of his seat, came back to our row and asked me to stop blocking his seat movement."


Goltsch says he explained that he was wedged into his seat with no spare room and wasn't purposely trying to cause discomfort. The passenger suggested Goltsch move his legs to the side. But a passenger sitting next to him protested that he'd be uncomfortable if Goltsch did that.


The passenger who wanted to recline his seat then called a flight attendant and asked her to make Goltsch move his legs. "One look at me wedged into the seat, and she knew there was little we could do," Goltsch says. "She tried to explain that I simply had nowhere to put my legs. He asked for another flight attendant or the pilot to come back, because this was unacceptable to him."


Eventually, Goltsch was moved to another seat: a window seat in first class. That worked out, but not all problems do.


"My expectations for travel have gotten so low that the highest praise I can bestow upon a trip is that it was 'uneventful,'" Goltsch says.


Self-centered fliers


According to flight attendant Kelly Skyles, the No. 1 thing passengers should understand is that they are not the only people on an airplane.


"Passengers come on board, and it's all about them," says Skyles, who is a national safety and security coordinator for the Association of Professional Flight Attendants union. "I realize in our society it has come to be like that, but space is very limited, it's confined and it's shared."


Many passengers, Skyles says, overestimate a flight attendant's power.


"We have limited abilities to fix things immediately," Skyles says. "If your reading light isn't working, it is very unfortunate, but we do not have the ability to fix the reading light. We will definitely write it up, but it's not our fault that we can't fix it immediately."


Skyles advises passengers to treat everyone with respect. They'll get it in return, she says.


Though many business travelers say rookie, infrequent travelers are most likely to annoy them during a flight, others say it's veteran travelers with entitlement issues.


Thom Coughlin of Cincinnati says the rookies are usually the quiet, meek or mild passengers on a flight.


"Business travelers are the most annoying," says Coughlin, a sales manager in the industrial supplies industry. "They feel they have earned the right to be first in line, first for attention, first for overhead space and first to complain."


Elizabeth Toedt, who lives in Olympia, Wash., and works in the aviation industry, says it's amateurs who create the most disturbances, especially when going through security.


"After 10 years of dealing with the Transportation Security Administration screenings, I have to shake my head at the numbskulls who don't have ID ready, still carry liquids, don't know they must remove their shoes, jackets and computers, and treat security like a school lunchroom social hour."


Skyles advises respect for another reason: In addition to being transportation, a plane is also someone's work environment.


"It really makes every flight attendant happy when people walk off the plane and say, 'Oh, man, this was a really pleasant flight,'" Skyles says.


Top 10 pet peeves of frequent business travelers





USA TODAY's Road Warriors, frequent travelers who fly many miles each year, have their gripes. Ten of them:


•Loud cellphone conversations.


•People who disobey the rules and try to carry on too many bags or carry too much liquid through security.


•People who play music so loudly, even with earplugs or headphones, that others can hear it.


•Disrespect that passengers show to flight attendants and gate personnel.


•Parents who don't try to control their children.


•People who think the "turn-off-all-electronics" message is not for them.


•Passengers who carry on and eat messy or smelly food.


•People who board with multiple or oversize bags and fill the bins in the front of the cabin when they're seated in the rear.


•Reclining a seat in a tight coach cabin.


•Leaving a window shade open when everyone else has closed theirs and is trying to sleep.


Flight attendants’ Top 10 pet peeves


Travelers can irk flight crews, too. Here — from members of the Association of Professional Flight Attendants union, which represents nearly 18,000 American Airlines flight attendants — are 10 ways:


•Walking around the aircraft without shoes, especially in the lavatory.


•Changing a diaper in the seat or on the tray table.


•Clipping fingernails and toenails on the aircraft.


•Keeping headphones on when you start talking to attendants.


•Speaking in a condescending and angry tone when it's not appropriate.


•Hanging arms or legs out in the aisle when the food and beverage cart is coming.


•Standing in the galley and restroom areas to stretch and do exercises.


•Keeping electronic devices on after the announcement has been made to turn them off.

•Bringing stinky food on the plane.


•Carrying on a bag you can't lift into the overhead bin.

Jet Makers Crank Up Sales Pitches


By DANIEL MICHAELS, SUSAN CAREY and PETER SANDERS


A potential American Airlines order for more than 250 jetliners holds even higher stakes for the carrier, Airbus and Boeing Co. than the deal's giant size suggests.
Europe's Airbus is pushing hard for American Airlines to buy the A320neo.


Airbus wants to break Boeing's monopoly at American and has assembled a team of lenders and leasing firms to help the European company dangle almost $6 billion in preferential financing, people familiar with the proposal said.
Airbus's offer has a catalog value of almost $23 billion, but that is being heavily discounted, the people said. The unit of European Aeronautics Defence & Space Co., is offering American 130 of the current-generation A320s and 130 of the more fuel-efficient A320neo, the new engine option slated to enter service in 2015.


Boeing wants to keep Airbus out of American hangars but is treading a razor's edge in its offer that won't hurt its bargaining position at other airlines, a person familiar with the talks said. Jim Albaugh, chief executive of Boeing's commercial airplane unit, is expected to meet with American officials on Monday. Boeing is offering 737-800s and 737-900 Extended Range planes, people familiar with the matter said, but the price and financing terms were unclear.


Boeing, meanwhile, also is racing to develop a product strategy for its best-selling 737 model to compete with redesigns of the A320. Boeing faces intense pressure from American and other airlines to decide whether it will update or replace the single-aisle 737, a workhorse of American's short-distance fleet. The carrier already has more than 50 of the 737 on order.


"Right now, Boeing is in a tough situation," said Adam Pilarski, senior vice president at aviation consulting firm Avitas. "They need to try to convince the airline to give them a few more months to announce their intentions for the 737."


The board of American's parent, AMR Corp., might decide the duel as soon as next Wednesday, the people familiar with the matter said.


American must balance its need to replace hundreds of aging planes quickly and inexpensively against the risk of damaging close ties to Boeing, the carrier's sole jet supplier for 15 years. American has "most favored nation" status with Boeing under an exclusivity deal from 1996 that gives American preferential terms in buying planes from the Chicago aerospace company. If American buys Airbus planes, the carrier could lose that status at Boeing.


Adding Airbus A320s, and later A320neos, to American's all-Boeing fleet also would increase the complexity of training and scheduling pilots, handling maintenance tasks and stocking spare parts. But that could be offset by significantly reduced fuel consumption, eventual fleet simplification as American retires older models, and enhanced bargaining power by having two aircraft suppliers vying for orders.


Airbus is willing to offer American sweeter financing than the European company usually offers partly because of a thorny transition at its factories. As Airbus makes the switch to the A320neo, it wants to limit discounting of the final models of the A320, people familiar with the company's thinking said.


Updating jetliner models is dicier than rolling out a new car model or a fancier cellphone because planes are used for decades. Order negotiations for an airliner normally include calculations of its resale value, since aircraft often change hands during their life or are used as collateral for borrowing. But the final units of any model have lower resale value than usual because they will have to compete in the second-hand market with their successors.


Just as retailers mark down discontinued merchandise when a new product line arrives, Airbus is offering American a sweetheart deal to take the A320s, people familiar with the bid said. The package also includes excellent terms on the A320neo, the people said.


That situation presents a dilemma for Boeing because American isn't the only big carrier shopping for single-aisle planes. If American doesn't buy the end-of-line A320s, Airbus could offer them to United Continental Holdings Inc. or Delta Air Lines Inc., both of which already fly A320s and are big Boeing customers. Boeing therefore runs the risk that it could give American—the third-biggest U.S. airline by traffic, behind United Continental and Delta—billions of dollars in financing and discounts and then face the same competitive situation at other large customers.


Losing American's business, or even splitting an order with Airbus, "is not the end of the world for Boeing," said Mr. Pilarski, the Avitas consultant. As financially the weakest of the big U.S. carriers looking to replace their single-aisle fleets in the coming years, American is the least attractive customer, he said. Beyond that, the flip side of losing to Airbus could free Boeing from its exclusivity deal with American, allowing the aircraft maker to charge higher prices and set better terms on American purchases.


Gordon Bethune, a former Boeing executive and retired chief executive of Continental Airlines, said splitting the order "doesn't make sense" because it wouldn't help simplify American's fleet. But he sees American "switching sides for the right deal," said Mr. Bethune, who has no direct knowledge of AMR's bargaining and who once steered Continental into a similar exclusive arrangement with Boeing,


American, based in Fort Worth, Texas, wants to resolve the aircraft order this summer, people familiar with the matter said, and is negotiating intensely with both manufacturers, hoping to get an expedited delivery plan that would allow it to update its single-aisle fleet in about five years. Its directors are expected to meet later this month. It was unclear whether the directors would merely be updated on the aircraft talks or receive an order to approve.


In 1996 American, said it would buy passenger jets exclusively from Boeing until 2018 and began the relationship with an order for 103 jets, a mix of small, narrow-body 737s and 757s and large 767 and 777 long-range wide-body jets. The carrier also secured purchase rights for more than 500 additional jets with as little as 15 months' notice for the narrow-body deliveries and 18 months for the larger planes, a huge concession, as delivery dates typically are assigned to customers years after the order is placed.

Related articles

• Can American Airlines Afford $15 Billion Worth of New Planes? (fool.com)

Can American Airlines Afford $15 Billion Worth of New Planes?



By Shubh Datta
July 8, 2011

Top aircraft carriers in the US are looking to overhaul their fleets. In the face of high gas prices, these carriers are planning to replace their old fuel-guzzling planes with newer more fuel-efficient aircraft.


Not to be left behind, American Airlines parent AMR (NYSE: AMR ) is planning to shell out close to $15 billion to reinvigorate its fleet with narrow-bodied craft.


Re-fleeting the hangars


The nation’s four largest carriers are all looking to add more aircraft to their hangars. Media reports quoting sources said American is planning to buy close to 250 narrow-bodied planes, splitting the $15 billion that it plans to spend between aircraft makers Boeing (NYSE: BA ) and Airbus.


Even the world’s largest aircraft carrier Delta (NYSE: DAL ) is planning to add close to 200 new aircraft by the end of the year. To complete the list, Southwest (NYSE: LUV ) and United Continental Holdings (NYSE: UAL ) are also mulling over adding new planes to their fleet.

The airline industry in the US is currently coming out of a long year in which it has had to face the pressures of high gas prices, capacity cuts, and consolidation in the industry. These factors led to a drop in American's revenues and bottom line and weighed on its financial position.


A look at the numbers


Unfortunately, AMR’s numbers don’t make for pretty reading. Though LTM revenues have increased by 12% to $22.63 billion, costs have shown a simultaneous jump, rising 7% to $17.44 billion. No wonder then that American reported losses of $402 million in the last twelve months.


From a balance sheet perspective, American’s free cash flow stands at a negative $622.3 million. American’s current ratio stands at 0.9 times, which means that it is not in a comfortable position to pay off its short term liabilities. Its interest coverage ratio stands at 1.9 times, hence the company is reasonably placed to pay off its obligations but is not in a comfortable position to assume further debt. The burden clearly can be understood, when we see that American’s total debt has risen to $12.1 billion in the last twelve months.

A string of losses have taken their toll on the balance sheet and the company needs help to finance this huge, $15 billion endeavor. Hence, the deal would require substantial financing from the manufacturers or leasing companies. Just where will the money come from? Given the industry’s volatile nature, I’m not going to be the first one to jump in line to finance this massive project.

Bidding war!


The major question here is whether or not American Airlines will choose Boeing or Airbus aircraft? According to reports, American first approached Airbus without informing Boeing (who currently supplies planes to American) and was happy with the offer it had made. Later, it approached Boeing, possibly throwing down the gauntlet by asking it to better Airbus’ offer.


Airbus has struggled to penetrate the US markets, with US Airways Group (NYSE: LCC ) currently being its biggest customer. Winning the deal would be a huge boost for Airbus. This would be an important step forward as the global passenger airplane market is expected to be worth $4 trillion in the next 20 years.


The future


Despite the deals’ massive price tag, it’s a necessary one. The purchase should eventually translate into lower costs. It should mean lower maintenance costs and considerably lower fuel costs. Plus, planes just need to be replaced.


The Foolish bottom line


If American Airlines can work out the finances and the deal goes through, it will help position the company for the next decade of transcontinental business. As an investment, however, this is not the type of news that gets me excited. Show me a few quarters of strong financial performance and then maybe we can talk.