Accounting & Investing Info for San Antonio A & M
Pleae read this excellent column by George Will about American Airlines. AMR is burdened with many of the same legacy costs at GM and Ford. But AMR is up from $3 a share to $37 in the last few years. This is a good example of the problems of the union contracts and their costs I have discussed in class. And it illustrates the cost reductions forced by the transparency of rates on the internet.
DLE
I don’t know what else to say other than I would like to shoot my financial advisor from talking me out of buying this stock three years ago when it was at $8 a share. After reading this article my ideals of the CEO (Arpey) were true. His interest are real and he is working hard to turn American Airlines around. If I remember correctly, the board for AA tried to give Mr. Arpey a Bonus for his good work and he would not except it. How many CEO’s do we know that will turn down a rather handsome bonus like that to help benefit the company? I myself cannot real name any.
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Actually what he should have talked you into would have been the bonds of American Airlines, Jim Rogers was buying Airline Bonds as the price of oil finally started down. IN bankruptcy, remember, the stockholders get nothing but the bondholders become stockholders, so you could have earned interest at 12% or so as the bonds were trading at a terrific discount, and made the difference in capital gain on the bonds. At worst you would have ended up where you wanted to be, with AMR out of most of its problems had it taken bankruptcy which was clearly the concern of your adviser.
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There is certainly not one corner of the airline industry that isn’t suffering an economic challenge. Manufacturers like Airbus and carriers like American Airlines as we have read from the articles by George Will are not the only ones. Airports with their extremely high costs are very much apart of this challenge.
DFW has just spent billions on Terminal D but is receiving fewer passengers than it once did. In addition to cutting costs they are seeking more innovative ways to bring about further revenues.
Fox 4 news just aired a segment on such proposals with an interview with DFW’s, vice president of commercial development, John Terrell. DFW Airport is considering construction of a 450,000 sq/ft shopping center and reserving 30,000 sq/ft for restaurant space. They speculate that this should generate 10’s of millions of revenue dollars.
On top of this proposal there is also another unique source of revenue that is taking place from the use of their property. DFW International Airport is currently sitting on top of large pockets of natural gas. An energy company has paid the airport 186 million for the right to drill. In addition to this fee they will also supply the airport with 25% of the royalties. According to Terrell these royalties will vastly exceed the 186 million. Drilling will begin this spring expecting more than 500 gas wells.
DFW is fortunate in that it is the second largest airport in the nation (next to Denver International) possessing 18,000 acres—half of which are unused. Our Airport just may be finding ways to sustain employment and create space for its growth. This is quite important considering the increasing trade with countries like Mexico and China. Logistics will play a major role for the North Texas economy in the years to come.
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I think that Stephen has a point. DFW is one of the top 5 logistically concentrated markets in the US. DFW airport is a strong foundation for the economy here in North Texas.
However, I feel that the airport will regain its dominance if the airlines are forced to restructure. I think the airport is the 2nd largest in land area, but only the 9th busiest for cargo/passenger traffic. If I was the mayor of either Dallas or Ft Worth I would certainly pay attention to the aforementoned statement. Many of the forwarding companies located in Grapevine, that rely solely on the cargo traffic from DFW freight, were forced into layoffs after 9/11 for obvious reasons. People were scared to ship in the air. They still seem to be scared. Ask FedEx Express and UPS….they are getting killed on the air freight side. The ground is keeping them alive and running.
But were there other things that would have hit the legacy carriers had 9/11 never had happened? Maybe 9/11 opened our eyes to more than terrorism. Have any of the legacy carriers even come close to posting profits since that awful day? Were they really posting huge profits before 9/11 to begin with? Correct me if I am wrong, I am still pretty young.
If you ask me they were all in trouble before 9/11, masked by the record economic growth we saw under Clinton in the 90’s. Bottom line for the “legacy carriers”…you can’t operate the same strategy under deregulaton as you did under regulation. That’s why you continue to lose money. 9/11 put the nail in the coffin, in the US airline industry…it already had one foot in the grave before that day.
There is a new sheriff in town, he/she offices out of Love Field, and they are kicking your backside American. Uncle…Uncle!!!!
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I think that all of the airlines need to look at Southwest as the benchmark for competing in that industry. Southwest is extremely anti-union and has good reason to be that way. Herb Kelleher knew that would be the end of the discount airline. This is a real no-brainer….once operating costs increase, what do have to do to keep the same margins? Increase revenue. What happens when you can’t increase revenue because of a cost war? You lose money. What happens when you can’t reduce labor costs because of union contracts? You lose….money! What happens when variable costs like fuel increase and you have not hedged any of that financial stress? You lose money. There seems to be a pattern here. All of the legacy airlines are hurting financially because they are swamped with increasing wages (labor unions), fluctuating fuel costs, and /or “legacy costs”. These costs have been exposed for decades upon decades and they have never been addressed like I feel they should…..eliminate them and start over fresh. New philosophy….new financial plan. Do I know how to? Absolutely not.
Southwest has managed to avoid these long-term liabilities by simply not allowing them to exist. If you ask me, Southwest has written the book on airline management, as well as, God forbid……airline hospitality. Have you ever flown with a nice AA flight attendant? I sure haven’t, and I have a lot of experience crossing state lines via the “blue skies”. Let me get this straight…I pay less for the seat and I receive less attitudes from the attendant. If I want that beer or champagne I can buy it on the plane. Not worry about it getting added into the cost of my seat even though I don’t want it. I can bring my own food aboard and will not have to eat the airline’s drama that we all know tastes so darn good.
I ask this question: Can you really run a commercial airline successfully, and not be a discount airline?
I don’t think so and I never will. Not in this day of increased competition and deregulation. How many airlines have posted profits over the past 4-5 years? Heck..the past 10 years? Can any of us name one besides Southwest? No matter how much you think that the majority of the world wants luxury in an airline, most of us would not want to pay $100-$400 more per seat to have the first class addition figured into the cost of our ticket. It just doesn’t make sense. It never will. Especially for a business traveler.
For instance, would I want to pay $10 to ride the DART bus to downtown Dallas with the addition of a meal and server? Heck no! I’ll bring my own food and still pay less. Do I really find it that much of a value on a 20-minute ride? Give me a lower fare…. not an up sale that I will never appreciate….or more importantly don’t need!
However, I will address the issues of the article. I certainly applaud the CEO of AA for doing what he can with the pile of problems he was dealt. If he really thinks that he can make this airline profitable more power to him. I think that he may be on the right track for short term profitability, but what is going to happen when they become profitable again? Will the unions ask for increased wages? Has he hedged any of the fuel costs that seem to flip profitability each quarter in the airline industry? Where is the long-term goal for all of the “old school” airlines? I almost appears that they are “band-aiding” the problems, cashing-out, running way, and then saying…”you fix it….I don’t know how!”
Yes, Southwest has acquired some legacy costs over the past few years, but are they in any way associated with those that the “legacy carriers” have incurred? Probably not even close. I think that the Chief of American has done well so far, but he doesn’t have much to work with to begin.
Bottom line: The associates in top corporate positions need to quit worrying about their villas on the Spanish Riviera, and start worrying about building villas for their stakeholders. Their long term objectives will be met if they take that position. Unfortunately in today’s business world, most top associates don’t have long term goals for the corporation. Furthermore, employees value their job when the company had a sound and effective mission up and down the corporate ladder. That seems to be a strong issue in Corporate America today. Not very many associates are “buying-in” like they used to, and that will ultimately destroy any business institution.
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Actually Warrne Buffet wrote an article pointing out that airlines in their entire history of passenger travel have not made a profit as an industry, he says that when he is tempted to buy an airline stock he dials aeroholic, and they talk him out of it. SW Air LUV has union labor
DLE
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My apologies you are correct. SWA…LUV does have union employees (as ramp agents I believe?) There’s always the devils advocate for union labor though
As a manager I have never seen the benefit to it. Even to the union members. I think that they had a time and place many years ago…but their principles are being sold to the delegates in the wrong manner.
On the financial side, I am impressed with any corporation that can increase the value of their stock with the company in such dire disarray. Kudos to American’s CEO. I do commend him for not filing and at least trying to rebound. Maybe that is why I am a student and he is the CEO of large corporation. Ha ha…
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Professor Elam 
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