OUCH! Carty brutalized by NY Times!

[Guest Airmail]

A Market Revival, and Less Turmoil, at American Air

October 10, 2003

By EDWARD WONG

New York Times

Gerard J. Arpey has been gliding through a long, sweet honeymoon. In the six months since he became chief executive of the AMR Corporation, parent of American Airlines, the company has quelled a worker revolt, sharply

cut operating expenses and bolstered cash reserves.

Instead of worrying about the airline filing for bankruptcy, investors now expect that it could come close to a profit in the third quarter, recently ended. And since late March, its stock price has skyrocketed, rising more than eightfold.

But while many people in and outside the company acknowledge that American is in much better shape now than it was in the spring, they cannot agree on whether Mr. Arpey is responsible. And the true test is still to come, when he has to confront the traditionally slow winter travel season and the company's huge pension deficit.

"They say luck is 90 percent of your career," said Raymond E. Neidl, an analyst at Blaylock & Partners, an investment bank in New York. "He came in just at the right point, just at the very low point, at the end of the Iraq war and at the bottom of the economy. It's easy to make a reputation in an up market rather than a down market."

Certainly, American, the world's largest airline, is a different beast from what it was when Mr. Arpey took over the top job from Donald J. Carty. It has reversed course and is now offering less legroom in coach on many flights.

It will soon route fewer flights through St. Louis. And it has begun selling food at some gates at three airports.

Employees are cashing smaller paychecks - if they avoided the several rounds of layoffs that have reduced American's work force by about 10,000, from 109,000 at the end of

March.

And investors are rejoicing at the surge in the value of the shares, which closed at $14.85 yesterday, up $1.50, and way above a price of $1.58 late in March. Some analysts are again recommending purchase of AMR shares - something unthinkable a half-year ago.

It is evident that the single biggest factor contributing to American's resurgence are the $1.8 billion a year in labor cost cuts that took effect on May 1. Those cuts, though, were won by Mr. Carty, even if he almost scuttled the deal by not telling the unions during negotiations that the board had approved retention bonuses for senior

executives and that the company had made a large payment to an executive pension fund. The uproar that followed led to Mr. Carty's resignation in April.

Lower costs, including $2.2 billion in annual savings beyond the labor deals, and the improving economy have given Mr. Arpey some breathing room. But he faces significant problems, several experts say. The most

pressing are the continued reluctance of business travelers to pay high last-minute fares and a substantial shortfall in the company pension plan. Mr. Arpey has yet to address either problem in any broad manner, the experts said.

Mr. Arpey, as is his custom, declined to be interviewed for this article. A spokesman said he wanted to wait until AMR's third-quarter conference call on Oct. 22 to talk to

reporters.

The most prominent initiatives Mr. Arpey has pushed through so far have been repudiations of Mr. Carty's treasured ideas. This month, for example, the airline is adding two rows of seats to economy class in almost a quarter of its aircraft, generally those on routes popular with leisure travelers. This change, which will squeeze legroom by several inches, acknowledges that Mr. Carty's "more room in

coach" marketing campaign - where coach seats were removed in all planes - failed to generate revenue.

Dan Garton, executive vice president for marketing, said American had no plans right now to add seats back on the rest of the fleet. But industry experts said they thought

that the airline was almost certain to pare legroom in all its planes.

"Carty, I like as a friend, but he made some critical errors," said Darryl Jenkins, director of the Aviation Institute at George Washington University. "I kind of see Arpey as someone who wouldn't have made these mistakes, who's perfectly willing to make a very tough decision and do it quickly. Everything that's going on right now is a correction of something that was done wrong previously."

Travelers, especially those who fly a lot for business, are not likely to welcome Mr. Arpey's move. But Kevin Mitchell, chairman of the Business Travel Coalition, a fliers' advocacy group, said the removal of the extra legroom was probably necessary, given the two-year slump in air travel.

Mr. Arpey's other prominent initiative has been to reduce operations at a St. Louis hub that American acquired in its buyout of T.W.A. in 2001. During the acquisition, American indicated that T.W.A.'s home base in St. Louis would continue to serve as a hub. But in July, the company said it would route most of the St. Louis connecting flights

through Chicago and Dallas-Fort Worth, cut half of the 420 daily flights from St. Louis, close a ticket office in the city and eliminate more than 2,100 jobs. The new flight

schedules will take effect on Nov. 1.

American has also begun selling food at the gates of some airports rather than give away hot food on board, as it did before the attacks on Sept. 11, 2001. At Kennedy International Airport, for example, it offers a full breakfast for $7 and a roast beef sandwich or a salad for $10. The concessionaire keeps all the revenue, but American hopes that the service will build loyalty among its passengers. It is too soon to tell whether the food sales have made any difference.

Some of Mr. Arpey's changes are not evident to passengers.

He is, for example, more of a team builder than previous chief executives, said David L. Boren, a board member and president of the University of Oklahoma. At a recent board

meeting, Mr. Arpey brought along half a dozen other senior executives to give a slide presentation of a new business strategy and invited them to expound on the ideas - something that happened rarely under Mr. Carty, who preferred to give presentations alone. "It's an approach that really invites the management team and the board to openly share thoughts and ideas, and it's very refreshing," said Mr. Boren, who was the only director to publicly call for the resignation of Mr. Carty in April.

"What I see as a board member is more strategic thinking about the future going on from the leadership than we've seen in recent years," he added. "Some of the strategic thinking, trying to blend practices of low-cost carriers while maintaining our service niche, is much more creative than in the past."

Trying to lead by example, Mr. Arpey said at the annual shareholders' meeting in May that he would not take a salary increase or stock awards this year despite his promotion from chief operating officer. Still, he has come

in for some criticism from labor unions.

The Transport Workers Union, which represents mechanics and other ground workers, urged its members last month to bombard Mr. Arpey's office with e-mail messages asking him not to close any of American's maintenance bases. The

company had said it was adding work at its base in Tulsa, Okla., but is still trying to decide what to do with those in Fort Worth and Kansas City, Mo.

George Price, a spokesman for the Association of Professional Flight Attendants, said the union has asked American to give cabin crew members longer breaks between flights. The union had agreed to a shorter minimum rest

period in the concessions, helping American squeeze more work from each attendant, he said, but many flight attendants found themselves worn out. American will recall 390 attendants as it increases flights, Bloomberg News reported, quoting a recorded message from the union to members.

Mr. Price did praise Mr. Arpey for agreeing to have senior executives meet regularly with union leaders, something he said did not occur under Mr. Carty.

Some industry experts said Mr. Arpey could have moved quickly over the summer to wring out more productivity changes from labor and from other parts of the company, but failed to do so. An industry consultant, Robert W. Mann, of Port Washington, N.Y., said Mr. Arpey should have figured out months ago how to cut back on the maintenance bases.

Looming even larger are the challenges of dealing with the airline's complex fare structure and its big pension debt. Recent surveys show that businesses are still unwilling to spend as much as they did on air fare in the late 90's boom. Business travelers have taken to low-cost carriers in

droves because their fares are simpler and their last-minute tickets less costly. Mr. Garton, the marketing executive, said American was very aware of the threat from

low-cost rivals and was investigating whether "there are different pricing regimes that will improve revenue."

Like other airlines, American is grappling with an underfunded pension plan. In July, the company reported that its pension liability as of late April was $8.345 billion and that it did not have funds to cover 36 percent of that - a gap of more about $3 billion. The surge in its stock price in the last two quarters will have narrowed the

gap somewhat. The company has also said it would pay $120 million to the pension plan in the third quarter, and $500 million to $700 million in 2004.

But those payments will drain cash, and besides pension expenses the company will have about $760 million in debt due next year. In mid-July, it reported $2.7 billion in

cash. Last month, it raised $300 million through a convertible-bond offering.

"I would point to looming cash obligations as a source of continuing concern for the company," said William T. Warlick, of Fitch Ratings. The pension liability, he said, is "a serious problem - not as serious as some of the other airlines, but definitely something worth flagging."

[Guest Patrick Bergen]

Wow do these issues ever sound familiar. It will be interesting to see if American is able to progress. Will this challenge the notion that in order to survive nowadays you need to be a Southwest?

[Guest Airmail]

Makes CAD$1.3 billion sound a helluva lot more manageable!

[Stickle]

In realtive terms not really. You make it sound like ours is manageable. If it was RM and his cronies would have found a solution already.

It's really easy to ignore a problem like this when you are making the kind of $$$ they do.