AMR Braves $1 Billion Revenue ‘Question Mark’ After Job Cuts

In a blueprint that includes eliminating 13,000 jobs, Chief Executive Officer Tom Horton didn’t specify how he would reach the revenue goal beyond boosting departures from five U.S. hubs by 20 percent over five years and expanding international flying.

“That’s the big question mark,” Ray Neidl, a Maxim Group LLC analyst, said yesterday in an interview. “All airlines have set these new revenue targets during restructurings or mergers, and it’s very hard to achieve because you can’t always control all the variables.”

Generating new revenue will be more difficult than identifying AMR’s $2 billion in proposed savings, Neidl said. About $1.25 billion will come from labor, including the job cuts and contract changes to improve productivity. Fort Worth, Texas- based AMR also will seek to end its four pension programs.

Horton, 50, portrayed the plan as a move toward exiting Chapter 11 as a stand-alone airline. He told employees in a letter that a merger, as some analysts have suggested, wouldn’t be in AMR’s best interest as the company reorganizes in federal bankruptcy court.

“This is a different kind of restructuring,” Horton said on a conference call with reporters. “It’s not about shrinking. It’s about renewal and growth.”

Annual Losses

AMR rang up four annual losses before a Nov. 29 Chapter 11 filing. American slid to third place in the U.S. by traffic from No. 1 in the world in 2008 after sitting out a round of mergers that vaulted United Continental Holdings Inc. (UAL) and Delta Air Lines Inc. (DAL) into the top two spots in the global rankings.

Revenue at AMR totaled $22.2 billion in 2010, the latest available annual figure, and probably was $23.9 billion in 2011, based on the company’s first three quarterly reports and analysts’ estimates for the last three months of the year.

“New revenue is the hardest part, no question,” said Jeff Straebler, an independent airline analyst in Stamford, Connecticut. “And if there’s $1 billion they can find, then so should everyone else, so there is no competitive advantage.”

Straebler said one possibility is raising fares on American’s main jet operations if flights are cut at the American Eagle commuter unit, whose future won’t be announced for a few weeks.

‘Low-Hanging Fruit’

“There are opportunities out there, but all of the low- hanging fruit has already been picked” through fees for services such as checked bags that were added several years ago, Straebler said in an interview.

While American didn’t say how the smaller workforce would affect available seating, the job losses were so sweeping that future flying will take a “big” trim, said Michael Derchin, an analyst at CRT Capital Group LLC in Stamford, Connecticut. American’s capacity changes this year will be “relatively minor,” Horton said.

Maxim’s Neidl said American’s plan implied a 10 percent pullback in capacity, and “you can’t cut much more without losing viability.”

Published schedule data shows AMR poised to pare system- wide capacity by 1.7 percent over the next three months, according to Hunter Keay, a Wolfe Trahan & Co. analyst in New York. Some “dramatic changes” on individual routes may show up on airline schedules in the next two weeks, Keay said yesterday in his weekly report on the airline’s available seating.

Delta Capacity

One of AMR’s larger rivals, Delta, has “no growth projected” for the foreseeable future because of persistently high fuel costs and the uncertain economy, President Ed Bastian said today at a Raymond James airline conference. He reiterated the Atlanta-based carrier’s plans to trim capacity by as much as 3 percent this year.

“You’re not going to see growth from Delta in any region of the globe” this year, Bastian said. Delta’s capacity is down 15 percent since 2007, he said.

AMR said its turnaround plan includes better matching plane size to the markets and demand, and winning more “high-value customers” by spending several hundred million dollars a year to upgrade products and services. The airline ordered 460 fuel- saving Boeing Co. (BA) and Airbus SAS (EAD) jets with a list value of $38.5 billion in July.

Network Changes

Customer service on American will come to rival that of British Airways and Qantas Airways Ltd. (QAN), Horton said, citing two carriers known for attentiveness to passengers.

Adding $1 billion in revenue is “doable given the size of the firm once they stabilize,” CRT Capital’s Derchin said in an interview. “It’s going to take network changes, product changes, probably trying to regain some lost market share.”

AMR’s assets include an attractive route system with hubs such as Miami, a jumping-off point for Latin America; Dallas- Fort Worth, where American dominates flying; and New York, Derchin said.

History has shown American the perils of counting on future revenue gains that may prove elusive, said Robert Mann, a former executive at the airline who is now president of aviation consultant R.W. Mann & Co. in Port Washington, New York. In 2003, the airline won $1.6 billion in concessions from union workers to help avoid Chapter 11, only to end up in court protection eight years later.

“There were strong expectations of revenue improvement, and that didn’t materialize,” Mann said in an interview. “A validity check needs to be made on whatever the assumptions are here.”




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