Bloomberg News

American Seen Shrinking About 10% With Focus on U.S. Flight Cuts

December 13, 2011

Dec. 2 (Bloomberg) -- AMR Corp.’s American Airlines may shrink flying capacity about 10 percent to reduce operating costs and pare unprofitable routes in bankruptcy, according to analysts surveyed by Bloomberg.

Cuts probably will be deepest in domestic operations, and may be greater should American combine with a rival before exiting court-supervised reorganization, some of the six analysts said. Fort Worth, Texas-based AMR hasn’t specified any reductions since filing for Chapter 11 protection on Nov. 29.

American faces a balancing act between paring flights to save money and keeping its route system large enough to retain business travelers. The third-largest U.S. carrier has fallen behind United Continental Holdings Inc. and Delta Air Lines Inc., which both expanded through mergers since 2008.

“I don’t expect them to come out and say they’re going to slash their network because that would raise questions on how viable this entity is,” Hunter Keay, a Wolfe Trahan & Co. analyst, said in an interview. “Something in the range of 5 to 10 percent is possible.”

AMR Chief Executive Officer Tom Horton said after the filing that job and flight reductions are “likely.” The company isn’t commenting yet on how its network or workforce may change, Andy Backover, a spokesman, said yesterday.

Capacity is measured in the number of available seats each flown a mile, and can be adjusted by parking jets, flying them less often or switching to smaller aircraft. Such reductions are typical in airline bankruptcies, because the pullbacks save on fuel and payroll.

United, Delta

A United predecessor, UAL Corp., trimmed capacity 8 percent in the months after its December 2002 filing. Delta reduced domestic capacity by 16 percent in 2006, its first full year in Chapter 11, before it emerged in April 2007.

American’s pullback may reach as much as 15 percent, said James M. Higgins, an analyst with New York-based Ticonderoga Securities LLC.

“They’ve got too much trans-con capacity, too much capacity in some of the northern Atlantic markets,” said Higgins, using the industry shorthand for trans-continental routes. “Some of the building they’ve been trying to do on the West Coast is not working to their advantage.”

Since September 2009, American has focused domestic flying in New York, Chicago, Dallas-Fort Worth, Miami and Los Angeles. It identified those cities as important to business travelers, who typically pay the most for tickets.

Annual Losses

The strategy wasn’t enough to stem annual losses that began in 2008 and are projected by analysts to persist through 2012. International routes are more profitable than domestic flying, because of a lack of low-fare competition, making American most likely to emphasize cuts in the U.S., the analysts said.

Jamie Baker, a New York-based JPMorgan Chase & Co. analyst, sees a pullback of “no less than” 10 percent. Michael Derchin of CRT Capital Group LLC in Stamford, Connecticut, forecasts at least 5 percent, while Jeff Straebler, an independent analyst also in Stamford, expects the cuts won’t exceed 10 percent.

“If they are planning on remaining independent, they can’t afford to shrink too much in order to maintain corporate accounts and sufficient international feed,” Straebler said in an interview.

American would shrink more if it merges with US Airways Group Inc., Straebler said. That airline, the fifth-largest in the U.S. by traffic, is seen by analysts as the most likely partner for a combination. It isn’t commenting on American.

Robert McAdoo, an Avondale Partners LLC analyst in Prairie Village, Kansas, expects initial capacity cuts at American to be only 1 percent to 2 percent, and said it’s too early to say how large the reduction might be when AMR emerges from bankruptcy.

“Even if you want to cut, just because of the process you have to go through, to think about rescheduling people, where and how to do maintenance, all that takes awhile,” McAdoo said in an interview. “A lot of the flying you have laid out for summer already has people on it. Big cuts I don’t think happen soon.”

--With assistance from Heather Perlberg and Suzanne O’Halloran in New York. Editors: Ed Dufner, John Lear

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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