American Airlines to file Bankruptcy to get their Labor and Pension Costs under Control

Posted by PITHOCRATES - December 4th, 2011

Week in Review

American Airlines is hurting.  They’ve lost about a billion dollars for each of the last 10 years.  Because of high fuel costs.  And high labor and pension costs (see American Airlines files for bankruptcy protection by DAVID KOENIG, AP, posted 11/29/2011 on Yahoo! News).

The parent company of American Airlines filed for bankruptcy protection Tuesday, seeking relief from crushing debt caused by high fuel prices and expensive labor contracts that its competitors shed years ago…

AMR Corp., which owns American, was one of the last major U.S. airline companies that had avoided bankruptcy. Rivals United and Delta used bankruptcy to shed costly labor contracts, reduce debt, and start making money again. They also grew through mergers.

American — the nation’s third-largest airline and proud of an 80-year history that reaches back to the dawn of passenger travel — was stuck with higher costs that meant it lost money when matching competitors’ lower fares…

AMR, however, wants to push ahead with plans to order 460 new jets from Boeing and Airbus and take delivery of more than 50 others already ordered. New planes would save American money on fuel and maintenance, but the orders will be subject to approval by the bankruptcy court.

The two greatest costs of an airline are fuel and labor.  Which have to be paid for by passengers buying tickets.  Airplanes are expensive but they’re fixed costs amortized over time.  Their other costs are relatively fixed and aren’t volatile.  It’s fuel and labor that will make or break an operation.  During good times unions demand generous pay and benefits packages.  Which airlines can pay during good times.  It’s either that or face a strike.  The problem is the bad times.  And there are always bad times.

Bad times are when people aren’t flying and airlines have to cut ticket prices to encourage them back onto their planes.  And high fuel prices.  Fuel costs are such a large percentage of an airline’s costs that spikes in fuel prices results in marginal routes losing money.  Put the two together and it’s impossible to pay those generous pay and benefits packages any more.

The losers will be American Airlines employees and AMR stockholders.

Shareholders almost certainly will be wiped out. The stock had already lost 79 percent of its value this year on fears of bankruptcy.

AMR has lost more than $12 billion since 2001, and analysts expect it will post more losses through 2012. Speculation about an AMR bankruptcy grew in recent weeks as the company was unable to win union approval for contracts that would reduce labor costs. The company said it was spending $600 million more a year than other airlines because of labor-contract rules — $800 million more including pension obligations.

On Tuesday, Horton said no single factor led to the bankruptcy filing. He said the company needed to cut costs because of the weak global economy, a credit downgrade that raised borrowing costs, and high, volatile fuel prices. The price of jet fuel has risen more than 60 percent in the past five years.

If you’re losing $1 billion a year you’re doing something wrong.  Either you’re not charging enough for tickets.  Or your costs are too great.  Competition sets the price of tickets.  So it’s not that.  Which leaves costs.

Approximately 80% of their losses are due to labor and pension costs.  And math doesn’t lie.  So it’s the labor and pension costs.   But wait a minute, you say.  What about that 60% increase in fuel costs?  Well, that could be a problem.  If it wasn’t for the fact that all the airlines are paying 60% more for fuel.  So you can’t blame the fuel costs.

You see, those other airlines can afford that 60% hike in fuel prices because they already went through a bankruptcy to get their labor and pension costs in order.  Which is what American Airlines needs to do.  If, that is, they want to keep flying airplanes.

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