American's Views on Restructuring and Rivals

Posted by: Justin Bachman on February 6, 2012

American Airlines’ new CEO, Thomas Horton, makes a compelling case that the airline can prosper after it reorganizes in bankruptcy. His argument, however, is predicated largely on American successfully implementing the type of financial repairs its rivals achieved years ago. It also requires restoring a route network that has shrunk to a detrimental size, and squeezing new revenue from international flying — just as American’s competitors are eager to do — while fending off calls for further industry consolidation.

The order is a tall one.

Horton, the former AMR finance chief, and Jeffrey Brundage, American’s senior VP for human resources, visited Bloomberg headquarters on Feb. 3. It was a friendly, relaxed, candid chat and hit many of the points AMR executives have made to employees and will advance in bankruptcy court:
_ AMR was in a death spiral without a restructuring
_ AMR has inherent strengths it has not exploited
_ A reorganized AMR should be well-positioned to become the last of the Big Three U.S. network carriers, ready and able to absorb a smaller domestic rival

American aims to boost its capacity by 20 percent over five years, focused on five core markets (Chicago, Dallas-Fort Worth, Los Angeles, Miami, New York) where it sees the greatest opportunity. Those are also key international gateways, and it is overseas where American plans to gain much of the $1 billion in new revenue outlined in its business plan. “Our company has shrunk more than the rest of the industry and I don’t think that has served us well,” Horton said. A smaller network with fewer daily frequencies invites business travelers to explore another airline. It’s not hard to envision a successfully reorganized American winning back some contracts from corporate travelers that had migrated to Delta and United.

American also sees itself gaining new flexibility on how it can deploy its regional flying. Currently, Horton said the company uses only 47 jets with 76 seats, a critical size for serving many markets profitably, whereas rivals have multiples of that. Post-Chapter 11, one can probably expect to see many of those popular Embraer jets with 76 and 100-seats painted in American’s colors. The company is also code-sharing far less than its domestic rivals, and plans to do more of that with JetBlue after it reorganizes. “There’s gold to be mined there,” Horton said of code-share deals, in which airlines sell seats on each other’s flights. In addition to all this, AMR has a fleet of 460 new jets on order, with options for an additional 465 planes. Those 460 planes will mean a lower jet fuel bill and several years of lower maintenance costs.

That’s AMR’s story. It will run up against employees embittered by the bankruptcy changes and the possible push by US Airways to combine with American. Delta may also try to argue that creditors are best served by incorporating some of American’s strategic assets into a healthier operation, i.e., Delta. Wall Street remains eager to see domestic capacity rationalized into a handful of legacy airlines and Southwest, leading to higher fares and healthier balance sheets. The flying done by JetBlue, Alaska, Frontier and Virgin America could be consolidated to the entire industry’s benefit and American’s bankruptcy may well be the vehicle for that debate. Is there reason to think the financial results from a restructured, profitable AMR will be dramatically better than the profits at the combined Delta/Northwest and United/Continental? Likely not, although the CEO’s talk of American becoming “America’s flag carrier” indicates that his team thinks their business opportunity is greater than rivals’.

Horton says the company needs to focus on its reorganization and not a merger, and that American is a potential acquirer after its house is in order. (My colleague Mary Schlangenstein explored this theme today.) “It’s not hard to see how we can be a force in the industry,” Horton says. It is not hard to see. But thinking about Horton’s message over the weekend, I was reminded of St. Augustine’s famous prayer: “O Lord, help me to be pure, but not yet.” In a way, this seems to be American’s view of U.S. airline consolidation: Yes, this industry needs it — just not quite yet, please.