American’s New Business Plan Looks a Lot Like the Old One But With a Lot More Outsourcing

February 1 was a big day at American. It was the day that the airline went over its (not really) new and improved business plan with employee groups, and that meant detailing the cuts it was going to ask for. As you can imagine, this brought some outrage but also a lot of sadness. American is asking for very deep cuts from employees (and elsewhere), and it’s not really presenting anything new. This seems like the same plan it’s been operating under, just free of some employee contract limitations.

American's New Business Plan

Admittedly, American hasn’t shared all the details of its plan. That wouldn’t be very smart at this point, I suppose. But it’s shared enough at a high level so that it can make its case for massive cost reductions. You can read CEO Tom Horton’s letter to the troops with the high level plan to “not just to compete, but to win.” There’s the “win” phrase again. Ugh.

In short, Tom outlines a strategy of increasing revenue by $1 billion a year while cutting costs $2 billion a year, more than half of which ($1.25 billion) will come from employees. This is the magic plan. Let’s take this one side at a time.

Plan to increase revenue by $1 billion a year
The revenue plan has three parts to it. The $1 billion a year is expected to come from “network scale, fleet optimization, and product improvements.”

Network Scale
American has laid out an ambitious (and quite likely overly aggressive) plan to increase departures by 20 percent over five years from its cornerstone markets of LA, New York, Chicago, Miami, and Dallas/Ft Worth. That’s right. TWENTY percent. For the relatively mature industry we have here in the US, this seems to be very aggressive. I was going to guess that much of this would be from smaller airplanes with fewer seats, but then I saw Tom tell Terry Maxon that the increase would be more in the international arena than domestic. That makes me think that it’s less about regional jets and more about larger aircraft growth. That could mean some serious capacity growth. It’s starting to sound like the days of old when airlines mistakenly chased market share only to hurt themselves and everyone else in the process.

This isn’t just about the 20 percent increase under the American brand, however. This is also about increasing codesharing. Right now, it can’t grow its domestic codesharing business but it has proposed eliminating those shackles. Hello, JetBlue.

Fleet optimization
At first, this seems like a cost savings and not a revenue savings, right? I mean, the airline keeps talking about adding newer, more fuel efficient airplanes and retiring older ones. That has nothing to do with revenue. But that’s not what I think the airline is talking about here. This is really American talking about growing its regional fleet. Today, there is a very tight cap on outsourcing of flying on aircraft with more than 50 seats. American has maxed it out with 47 CRJ-700s, and that’s the only aircraft American has between 50 and 136 seats.

That’s a huge disadvantage for American versus Delta and United, both of which operate about 200 to 250 regional aircraft with more than 50 seats. American is getting aggressive, shooting for the right to outsource a boatload of flying on airplanes all the way up to 88 seats. In a minor bright spot for American’s own employees, American has also ordered Airbus A319s that will give it an option below 136 seats (maybe in the 120 seat range). That’s what American means by fleet optimization, having more aircraft in between the 50 and 136 seat range that it can use to better match seat supply with demand.

Product improvements
This is something that really has nothing to do with bankruptcy. American has already suggested it would improve the onboard product, but what can it do to actually goose revenues? Well, the new flat beds that it’s putting in business class on the 777-300ER aircraft are a good start. Hopefully that expands to the rest of the international fleet, because people aren’t willing to pay a premium for the inferior product in business class today. The new premium economy section could help as well, though that also reduces the number of seats so it relies on American being able to generate a good premium to make it worthwhile.

So that’s what we see on the revenue side. Bankruptcy should allow for more liberal codesharing and regional flying contracts. That’s really it. Now let’s look at the flip side.

Plan to decrease costs by $2 billion a year
Of the $2 billion in annual savings that American wants to see, $1.25 billion will come from employees. The rest will come from a variety of things that allow American to reduce costs – get out of expensive contracts, reduce rates for suppliers, ditch assets it no longer needs, etc. But as expected, American rests the bulk of the weight on employees.

The basic proposal (and it’s only a proposal at this point) is for every work group to give up 20 percent of compensation. That doesn’t mean salaries get cut by 20 percent, but it’s a combination of all types of compensation from benefits to productivity. The cuts vary by each group, and you can read all the union term sheets here.

Some will see pay reductions, all will see pensions terminated, and benefits will cost more for the employee if American has its way. There will also be major increases in productivity. For example, for flight attendants, American wants to increase the maximum monthly hours from 77 (domestically) to 100 which will result in an average of 80 to 90 hours scheduled per person month. I won’t get into the details of each workgroup’s proposed changes, but you should definitely take a look.

In return, what will employees get? There will be company-wide profit sharing that starts with the first dollar of income. Of course, that’s for the employees that don’t get a pink slip. American will be laying off 13,000 employees, about 15 percent of the airline’s total today, and it will come from all groups. We’ll see 1,400 management positions gone, 2,300 flight attendants, and 400 pilots.

But the biggest cut comes to mechanics and fleet service workers – more than 4,000 each. Those deep cuts will come thanks to more outsourcing. American will shut one maintenance base (Alliance, in Ft Worth) and it will start to outsource a lot of work so that it doesn’t need all these employees anymore. The TWU represents both these groups and leadership sounded downright sad in its conference call discussing the proposed cuts. The pilots and flight attendants, on the other hand, sound more angry. At least the pilots don’t sound surprised. The flight attendants strangely acted like they didn’t see this coming.

Let’s back up for a second. Twenty percent more departures in five years but 15 percent fewer employees? Seems strange to think about it, but it really is all about outsourcing.

We do need to keep in mind that these are not final. There will be negotiations and the ultimate resolution will undoubtedly be less dramatic than what we’re seeing here. Regardless, the employees that remain will need to be more productive and they won’t be compensated as well for the work they do. There will need to be more flexibility with work rules, including codesharing and regional flying.

In the end, this doesn’t sound much like a turnaround plan at all. It sounds like an airline continuing to push forward with its same old strategy, just with a new fancy lower cost structure to help it stumble into profitability. I find it hard to really become a believer in this plan, since it’s nothing really new at all. If anything, US Airways, Delta, and other potential buyers should be thrilled to see the current team not really proposing anything game-changing. It gives them a bigger opening to walk through.

46 Responses to American’s New Business Plan Looks a Lot Like the Old One But With a Lot More Outsourcing

  1. Didn’t AA declare bankruptcy with lots and lots of cash in the bank? Now they want to dump all their pensions on the taxpayer? I hope the PBGC and the courts find a way to stop that…

    • Carl S says:

      Sounds like PBGC might be up for the fight. 9 billion dollars is a big hit to take from someone with a ton of cash in the bank and who got 1 billion in pension help in 07

    • CF says:

      Yes, they had a lot of cash but they also had a very large number of obligations coming due. So it was more of a temporary cash-rich situation at the time they filed. Still the PBGC is fighting AA tooth and nail on this one.

  2. DC says:

    Step 2 is magic because it’s bAAnkruptcy.

  3. Derek says:

    They need someone willing to make decisions that are going to change the game. Whether that be someone from outside AA/Industry or US (Parker/Kirby) or UA(Smisek), I don’t know, but something has to be done.

  4. Carl S says:

    I guess the orginal cornerstone theory didn’t pan out so let’s do it bigger!
    The more I hear from Tim and AA, the less I think AA will still be flying ten years from now (on its own). A few sentences about revenue growth and then a few paragraphes about cutting costs. Outsourcing isn’t some magic bullet that blasts sunshine and lollypops…

  5. Fred says:

    Does the AA contract forbid large props or just jets? (Although anything could be changed now) We might start seeing more 78 seat Q400s like when flying CO or AS which have lower costs as well.

  6. Richard says:

    Brett,

    Could you explain or maybe do a story about what it takes to make an airline profitable? For example on a JFK-LAX flight with 130 passengers how much should an average ticket cost in order for the airline to break even? $400? $700?

    Thankfully I’ve never been in the airline business but from what I’ve seen and heard FAs (at least most new hires over the last few yrs) are pretty low on the pay scale. I guess I find all this outsourcing distasteful and not good for anyone in the long run.

    I often hear the excuse about high fuel costs but that has been the case for quite a few years now and anyone who thinks they will come down dramatically is living in a false reality.

    I”m just trying to understand what should be a reasonable cost for tickets in order for an airline to pay its people and not lose money.

    Thanks.

    • Richard try and catch a repeat of a MSNBC show done on AA. They spent a week with them, and the show reruns every so often.

      The show starts out on a JFK-LAX 767 and at the end the reporter gives the number for that flight on costs to operate and ticket/cargo sales. The flight only made a $200 profit which if one less ticket was sold they wouldn’t have made any money which they said happens often on flight.

      • Jim M says:

        That was a good show. With your profit margin being that thin I can’t beleive any airline stays solvent. That being said I think the spread in fares paid was $0 (frequent fliers) to someting crazy like $800 (last minute).

      • Richard says:

        Thanks. I’ll try to find the show.

        Personally I just think airlines need to start with a new model of operating. As Jim mentioned about any airline staying solvent, well almost all of them have been bankrupt and most will do so again without a dramatic change in modes of operation. That is why I was asking about the costs.

        Things such as commuting to work on airlines, hrs per month, only getting paid for time in the air, etc. all need to be thrown out. Obviously unions and contracts, etc. will get in the way. I just think there needs to be a way for the airlines to make some money when operated correctly AND for the employees to have decent benefits and salary. Currently it is just not working for most airlines.

        Trying to squeeze more and more people in an airplane isn’t going to work and there are limits to fees that people will pay. Personally I’m surprised businesses still do as much flying as they do since much of that could be done via video conferencing, etc. but some habits are hard to break (such as not using open source sw).

        As many have stated the best way to make money is to bet against airlines in the stock market.

    • CF says:

      The problem with profitability is that it’s hard to truly nail it down. Here’s a brief example to explain what I mean. Let’s say you have a flight from LA to Dallas/Ft Worth. You have a lot of connecting traffic on that flight, so how much do you allocate to the LA-DFW flight versus how much do you allocate to connections? And if you cut that one flight and lose connections, then what does that do to profitability on the other routes? So because it’s a network like that, it’s tough to look at a single route in isolation perfectly.

      But the margins in this business are very slim, though been getting better in the last couple years.

  7. Sanjeev M says:

    Epic winning :)

    E+ is good. AA needs CSeries and turboprops now. Closing Fort Worth maintenance is a good idea with two other bases in Tulsa and MCI.

    This is getting ridiculous though. PBGC has something (liens?) on AA’s foreign assets so no dumping pensions so easily. I’m starting to think US and Doug taking over might be a good idea…

  8. A says:

    Cranky can you define what you would see as a “game changing” strategy? I don’t think AA is proposing anything that’s too far from the playbooks that DL, NW and UA used in recent history. #1. Cut costs in payroll, and #2. Outsource high cost maintenance. I’m going from memory here but I’m pretty sure these are common BK tactics for airlines. The difference is that 2012 is an entirely different game than 2005.

    • CF says:

      Since I don’t have access to American’s books, I can’t speak to what exactly I’d do. But I did talk about this before when I looked at why I want to see US Airways take over American.

      Other airlines have played to their strengths for the most part. American seems to be throwing its efforts at everything, strong or not. As I said in that other post, I would think that American should seriously consider walking away from LA and New York where it’s unlikely to really be a true leader. Chicago is different in that there are fewer competitors, but it is still #2, so it might want to rethink its position there. There is no room in this industry for pride, but I think that and history have probably prevented American from looking at its options from a good place.

      US Airways was very smart in this respect. It walked away from where it wasn’t strong and it focused the operation where it was. American should do the same instead of trying to “win” everywhere.

  9. The courts can bust all contracts so that would allow AA to use more regional type aircraft which could be in their plans.

    Wanting the F/A’s to go from 77 to 100 hours is confusing since not sure what exactly is involved in their work hours. Since they may go on a three day trip is that why the hours (77) are low to kind of make up for being on the road for three days? Most people work a 40hr week which is 160hrs a month but get to go home each night.

    Whatever AA says now means nothing since it is still early in the game for their trip in bankruptcy.

    I wonder if AA held out so long before filing bankruptcy to see how it went with their fellow big boy airlines (UA/DL) so see how it turned out for them before filing themselves?

    • Ana says:

      We are paid only for flying time. Not boarding, deplaning, sitting at the gate, going through Customs & Immigration or going to the next gate from flight to flight. The ratio of paid time to duty day is aproximatedly 1:2 so a 77 hour schedule actually is about 154 hours of duty time a month exclusive of layover time which works out to about a 38 hour week. A 100 hour schedule is a 50 hour workweek which will mean that you will never be home when you add in layover time. You will be exhausted on those days off that you will have because of the peculiar effect of our work environment where you are going from sea level to 7000 cabin pressure several times a day which accounts for the exhausting effect of air travel even for passengers who are seated the whole time.

      • Ana that doesn’t seem right. Your work day should be like everyone else and start at a certain time and end at a certain time. Things like sitting at the gate etc means you are still on the job to me and other people and should be paid since you have no choice but to be there as part of the job. Sounds like the industry needs to be revamped into a more normal way of paying its workers.

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  11. longhorns says:

    You left out about holders of AA debt-bonds/notes. Will AA default on them or start paying interest on them and pay interest retroactively? This is BIG.
    As for all the cash that AA (supposedly) has. Is that really AA’s money or borrowed money which must be repaid?

    • That’ll all be part of the bankruptcy reorganization plan. Usually the debt-holders get equity and/or take a big haircut on their debt. (e.g. They get debt that is worth $0.40 for every $1.00 of debt.)

  12. Arcanum says:

    Isn’t there an old business saying along the lines of “We’re losing money on every sale, but we’ll make it up in volume”?

    Sounds a lot like AA’s Network Scale plan to me.

  13. Old Fart says:

    My concerns are (in rough order): The AA employees, those remaining and those pink-slipped without a Golden Parachute. The elimination of their DBF pensions is nothing short of criminal. Sure, PBGC will step in, but they provide only cents on the dollar. Next, the outsourcing (off-shore) of major major maintenance activities. This kills not only a lot of jobs but also a huge reserve of “Institutional Knowledge.” It can and will also lead to safety issues, particularly a few years down the road. I also believe that AA’s emphasis on growth (20% over five years?) is pie-in-sky thinking, especially when they emphasize international departures. The AA international product, as delivered on AA metal, is not competitive when measured against (most) foreign carriers and AA has shown no evidence of their willingness to signifigantly improve the product. They simply cannot improve market share when alternative products are obviously superior and priced about the same – across ALL classes of service. (To put it bluntly, AA’s international products and services SUCK.) Laying the majority of the cost reduction load on their employees is again, nearly criminal. At the very least, they should have implemented these awful changes for new hires, while maintaining the obligations to current employees, many of whom have given 20-30-40 years of loyal service to AA. I am glad that I don’t work for AA and I feel truly sorry for those who do. Even sorrier for those who could have retired a few months ago and did not, but that’s another subject. So, when will I fly AA, AA’s metal or a codeshare? Only when there is no other choice.

    • CF says:

      I don’t disagree with much of what you say, but I think it’s important to clarify two points.

      1) The PBGC will pay full pensions for many people. It wouldn’t be cents on the dollar, though some certainly wont’ get everything.

      2) American has recently seriously talked about its international product. The plan for the 777-300ER is great and finally fixes many of the problems. Now, whether or not this expands to the rest of the fleet is unclear.

  14. JayB says:

    The more I see the words “codesharing” and “regional contracts” as related to a business model, the less interested I am in ever flying AA, or what I remember as AA. Actually, the whole industry might just stop the charade and form one company, “Generic Airlines Inc.,” all flights code-shared, all flights operated by a contractor.

  15. CP says:

    Cranky, thanks for the analysis.

    By point of comparison, I’d love it if you wrote a follow-up piece with a few thoughts as to what you would have preferred to see from American. Or, alternatively, an analysis of why the mergers of CO/UA, NW/DL, etc. had a sounder post-merger business plan.

    • CF says:

      I tried to talk a little about this above, but there is comparison to the CO/UA and NW/DL mergers. Those were done outside of bankruptcy and were really about gaining scope in the route network, reducing costs, and cutting capacity.

  16. Derek says:

    Not sure how many listened to the US earnings call, but one of the veiled shots that US took at AA (at least it seemed so to me) was the fact US re-iterated that it was #1 in of all of its hubs and that it was difficult sometimes when you were not. AA is not #1 at ORD and is not #1 in NYC (EWR/LGA/JFK collectively) and I don’t have the breakdowns at LAX. Something to think about on why the cornerstone strategy is not working for AA, but may be working for someone like US.

    Thanks.

    • Sanjeev M says:

      I believe AA is #2 at LAX behind United.

      Another thing is that US Airways doesn’t nearly have the kind of premium demand that AA does. AA historically has been the airline to win the corporate and Hollywood business through wining and dining. PMUA was similar.

      I think transcon widebodies for AA have to go. It’s just not working for them. They did cut ORD-DEL, which is a great move. I also would like to see a solid plan. Brett, if you could go into a more solid plan (i.e. armchair CEO for a post), it would be great.

      • Jim says:

        The difference is that US’s hubs are in small markets where there is little competition. Who wants to fly to Charlotte or Phoenix? AA’s hubs are in the top 3 largest metropolitan areas in the country.

        • US’s hubs are not in “small” markets. PHL is the fifth largest city in this country, Phoenix is 6th (it was 5th before the recesssion) and D.C. is up there, too. By the way, Southwest does not “dominate” Phoenix as some on other airline forums suggest. They have roughly equal market share. We in Phoenix get the best of all possible worlds in many ways by having two “hub” carriers here.

          But here’s the rub, Jim: AA’s hubs in the country’s three largest metro areas are weak at best, with no strategic advantage in any of them. That could be why the cornerstone strategy (very much the same strategy US Airways has employed) hasn’t panned out as well as some might have hoped. But it’s also quite possible that it hasn’t had time to do so. I think it’s possible for American to find a profitable niche in markets as large as NYC, Chicago and LA. I hope it does.

          • Jimbo says:

            I think Jim is referring to metro area population, which is a better comparison of the local market than city population. For instance, even though Phoenix is pegged at nearly 2 million, the metro area is only 4 million. Just by comparison Atlanta city limits is only around 500 thousand but metro area is 5.4 million…..number 10 in metro area size vs. Phoenix being number 13.

          • A says:

            I would argue metro population matters less than high profit business O/D traffic. You can have a “big” city in population but lacking the right national/international local businesses that can be profitable for an airline.

            MSP is a relatively small market but a hugely profitable hub for DL primarily because of the business climate in the metro. I know multiple poeple that fly weekly all over the world out of MSP because their employer’s Fortune 500 HQ is here.

  17. Zack Rules says:

    What I do not understand is why they are not moving to cut losses on particularly bad routes. I recall almost a year ago, there was an analysis on AA’s network and many of the “prominent” routes are probably still losing money out the yingyang. ORD-Beijing, JFK-Los Angeles/San Francisco, JFK-London, ORD-London, and MIA-Buenos Aires come to mind. Yet, we have only heard that they are cutting Delhi. Why don’t they retire those 767-200′s and put in renovated 757′s with flat beds in First, standard domestic business class seats, and premium economy (call it AdvantagEconomy or something). How about moving the ORD-Beijing to DFW? Or cutting capacity on these routes?

    • Justanotherblogger says:

      Unfortunately, you can’t just look at one route in isolation. Large business clients that fly AA might switch carriers if you decided to cut ORD-PEK.

  18. I’m kinda curious about an analysis of their creditor’s committee, I can see those folks as having a huge amount of weight to throw around, and if I were US/Parker I’d be spending a whole bunch of time wining and dining them.

    • Oh, the other thing, the split Boeing/Airbus order likely means that they’re not going to get support from either (or on the flip side they’ll get support from both of em.

    • CF says:

      What’s really interesting about that is that the employees have a few seats on the creditor committee. So this proposal from management might very well make them rethink their support for that team versus something else. I just don’t see AA employees mounting a “Keep AA My AA” campaign as the Delta folks did.

  19. I hope AMR can turn things around with or without a merger. But it looks like it hasn’t got the memo about capacity discipline. Adding capacity to already crowded overseas routes (Delta’s retrenchment is telling) may not be the best idea.

    I feel AMR should focus on reinforcing its strengths and getting its costs and operational flexibility (i.e. SCOPE, code sharing, work rules, etc.) in line with its competitors. That’s why I feel the “cornerstone” strategy has been wrongly maligned. Focusing on those markets where it has a strategic advantage (i.e DFW and MIA) and finding a profitable place in NYC, Chicago and LA should be the focus of AMR’s restructuring, not growth for growth’s sake.

    That doesn’t mean AMR shouldn’t seek out new or underserved markets or spend wisely to improve its product. It should do both (and on the product side, at least, it looks like it is). But AMR needs to go on a strict diet and “rationalize” itself to fit the realities of today’s and tomorrow’s air travel marketplace.

  20. FRANK says:

    bummed, article takend down…but said.

    On Wednesday, February 1st, American Airlines announced that it will take the advice of Mitt Romney’s firm, Bain Capital, and lay off 13,000 workers -15 percent of its workforce-…

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