American Airlines to Cut Back
American Airlines on Tuesday unveiled a major overhaul, shrinking itself through layoffs and flight cutbacks while changing the way it operates at its main airports.
The effort is designed to slash costs and stop massive financial losses but ultimately could make flying less convenient and more expensive for travelers, some analysts said.
The nation’s largest airline said it would eliminate 7,000 jobs, or 6% of its work force; reduce seating capacity by 9%; ground certain jetliners to simplify its fleet; adjust the classes of service it offers on international routes; and attempt to smooth the flow of planes at its hub airports at Dallas/Fort Worth and Chicago.
Meanwhile, the chief executive of US Airways, which just entered bankruptcy proceedings, said Tuesday that his airline also would soon trim its flight schedule and announce layoffs. Details of the cuts have not been worked out.
The moves by American and US Airways--if followed by other carriers--could bring notable changes for travelers.
Passengers could see fewer flights, longer waits at airports, modestly higher fares, fewer first-class seats and more restrictions on frequent-flier miles, some analysts said. Such passenger sacrifices might be necessary so loss-plagued airlines can reduce costs and operate profitably, they said.
But others said the effect on passengers could be minimal, especially when it comes to fares. It’s unclear whether most other major carriers will match American’s move, and, until American and others dramatically pare the number of available seats, passengers will have the clout to demand--and get--low fares, some observers said.
The widening use of the Internet, where both leisure and business fliers can see nearly all the fares available, also is giving travelers a new tool to keep a lid on fares. Donald Carty, chief executive of American and its parent, AMR Corp., recently blamed the airline’s huge losses partly on a 15-year low in average fares.
The cutbacks at American come in the face of a travel slump that prompted US Airways to file for bankruptcy protection Sunday and have fueled fears that United Airlines also may seek bankruptcy protection.
American and most other airlines trimmed their schedules--by 15% to 20%--and employment because of the Sept. 11 terrorist attacks, but were in the process of restoring service in recent months. Demand for tickets, however, remains in a slump and the airlines can no longer wait for the economy to bounce back and lift their fortunes.
Meanwhile, the stock of United parent UAL Corp. plunged Tuesday for the second straight day amid mounting concern that the airline--the nation’s second largest--would be forced to seek its own bankruptcy reorganization.
The stock tumbled $1.06 a share, or 28%, to $2.74 on the New York Stock Exchange after analyst Sam Buttrick of UBS Warburg issued a rare “sell” recommendation on the stock.
The “bankruptcy risks at UAL [are] now too high for us,” he said in a report to clients.
Stocks of Boeing Co. and other aerospace firms also fell as investors fretted that airlines’ growing woes could prolong the downturn in aircraft orders. Boeing dropped $3.27, or 8.1%, to $37.23, and aircraft-engine maker United Technologies Corp. lost $5.98, or 8.7%, to $62.47. Both are components of the Dow Jones industrial average, and their slide helped the blue-chip measure tumble 206.50 points to 8,482.39.
American is effectively shrinking the airline to adapt to the travel slump, fend off encroaching lower-fare rivals such as Southwest Airlines and ensure its long-term viability.
AMR’s stock rose 38 cents Tuesday, to $8.74 a share on the NYSE.
American isn’t at risk for a bankruptcy filing, but it has lost $2.8 billion over the last six quarters. The airline says its restructuring ultimately will lead to $1.1 billion in annual cost savings.
They’re “moves to reposition and re-size the airline in light of a continued sluggish economy and changes in consumer flying behaviors,” Carty said in a statement.
He was referring to the fact that passengers are no longer willing to pay the higher fares of the late-1990s, especially business travelers who are coping with the weak economy by not flying or by buying cheaper tickets, analysts said. Efforts by the airlines to raise fares, and thus generate more income, have largely failed.
The big airlines continue to provide more seats than they can fill, which means they’re utilizing more people and equipment than they can profitably absorb. The industry lost a staggering $7 billion last year and has racked up nearly $4 billion of losses in 2002.
American, which long specialized in using complex fare formulas to garner the maximum revenue it could from each passenger, is attacking the problem on another front, by lowering its costs and becoming a more-efficient carrier.
That in itself isn’t a new concept, but American’s new formula calls into question the viability of the “hub-and-spoke” system used by the nation’s five largest airlines, in which they funnel flights to a few hub airports where passengers get connecting flights to other cities. By contrast, some smaller, more profitable airlines, such as Southwest, rely more on frequent “point-to-point” service.
American plans to have a smoother, continuous flow of airplanes into its headquarters hub at Dallas/Fort Worth, rather than having dozens of its arrivals bunched together at peak hours. American said it already has tested this new “de-peaking” system at its Chicago hub with good results--with planes and employees used more efficiently--and that passengers get better flight options because flights are “spread out more evenly throughout the day.”
However, the new system could mean longer waits for passengers making connections at those hubs.
American also is eliminating first-class seats on certain international flights, “which is going to make it harder to use your frequent-flier miles to upgrade your seat” to first class, said Ray Neidl, an analyst at investment firm Blaylock & Partners.
Travelers also might see fares start to rise if American and the other airlines succeed in reducing their size to match the lower passenger demand. With fewer empty seats, the carriers could attempt to push ticket prices higher, some analysts said.
“I think they probably will [do] some of the same things as American, to make themselves more efficient,” said Peter Raven, a marketing professor at Seattle University who specializes in travel. “Prices could probably inch up.”
But others disagree. “I don’t think it’s going to have a dramatic impact on fares,” said Terry Trippler, who runs a fare-tracking Web site, mainly because the two biggest major airlines that are the healthiest financially--Northwest and Continental--have shown they’re not inclined to raise fares and probably will undercut any other major airline that tries.
“Fares won’t go up unless Northwest and Continental want them to,” Trippler said.
And Northwest, the No. 4 U.S. airline with hubs at its home in Minneapolis/St. Paul and Detroit, said it isn’t planning to follow American’s lead.
“We’re satisfied with the hub-and-spoke concept, and our hubs ... work fine for Northwest,” spokesman Kurt Ebenhoch said. He added that “we have been aggressively cutting costs” in other ways since early 2001.
Sam Mayer, a spokesman for the Allied Pilots Assn., the union representing American’s 14,000 pilots, criticized the company for retrenching rather than finding effective ways to generate more income, which he said is what American CEO Carty has said was needed.
“They’ve been telling us it’s a revenue problem,” Mayer said, but now American is pursuing “the same tried-and-true things airlines have done for years, furlough employees and cut costs.”
Times staff writer Peter Pae contributed to this report.
