In the early days of commercial aviation, American Airlines used boldness and innovation to build its business and move the industry forward. Now, however, the storied franchise is fighting for survival, and only the rebirth of its past innovation and daring can lift the airline above the turbulence.
Shares of American’s parent AMR Corp. (NYSE:AMR) have taken a beating already this week, falling more than 10% on Monday on news that its pilots’ union, with whom it’s been negotiating since 2006, rejected two contract proposals.
Amid a broader downturn in the market on Wednesday, the stock is now down more than 19% for the week.
The airline faces ferocious headwinds including high costs, a gas guzzling fleet and labor trouble. The Allied Pilots Association board voted late Tuesday to reject American’s latest offers, which would have paid pilots of smaller jets 40% less than their peers, farmed out more flights to other airlines under “code-share” arrangements and required pilots to work more hours.
While wages and hours are critical, the biggest sticking point might be the future of health benefits and pensions — costs that American must slash in order to survive. New pilots joining American would be offered 401(k) plans instead of pensions.
The airline also wants to stop paying health benefits when retired pilots turn 65 – which likely explains a 10-fold increase in pilot retirements during August and September. AMR’s stock fell 34% on the retirement news, which markets interpreted as a sign of an impending bankruptcy filing.
As bad as things are, American Airlines isn’t in its final death spiral. Here are four things AMR must do to pull out of the tailspin:
1. File For Bankruptcy Protection. Competitors like United Continental (NYSE:UAL), Delta (NYSE:DAL) and US Airways (NYSE:LLC) filed for bankruptcy protection in the mid-2000s, and emerged stronger. But that option isn’t as favorable today as it was for the carriers that filed six or seven years ago, and American officials have long said that bankruptcy is neither a goal nor a preference. But in the wake of the failed pilots’ talks, it now may be a necessity – and the only way to retain some measure of control over its destiny.
2. Merge With Another Carrier. Airlines have benefited from recent mergers. Consider United-Continental, Delta-Northwest and Southwest (NYSE:LUV)-AirTran. AMR missed out on gaining market share and efficiency through that recent flurry of major mergers; its last acquisition was of TWA a decade ago. Although that deal ultimately weakened AMR financially, it could be a rough blueprint for a merger with another major carrier – most likely, US Airways (NYSE:LCC). That airline has repeatedly said it’s looking for the next big merger deal, would be the logical choice to hook up with American.
3. Sell Off American Eagle. The airline’s much-reviled regional unit is a drain on its earnings, operations and reputation. American Eagle’s recent $900,000 federal fine for 16 tarmac delays of three hours or more represents yet another fire the beleaguered AMR must scramble to put out. Divestiture is easier said than done, however, since it would be competing for buyers with Republic’s (Nasdaq: RJET) more attractive Frontier Airlines’ unit, which is also on the block.
4. Win Back Wall Street With Bold Innovation. American first premiered the first airport lounge in 1937 and co-developed the first computer-based reservations and ticketing system with IBM (NYSE:IBM) back in 1960. If the airline is going to buy time to bounce back, it will need to get creative and float a turnaround plan fast before panicked investors take the matter out of its hands. Cisco’s (Nasdaq: CSCO) aggressive strategy earlier this year might be the best recent case study. When its earnings sunk nine months ago, the company immediately moved to cut $1 billion in costs, shutter 10 business units and reduce its payroll by nearly 13,000 employees. Read about the positive impact here: http://investorplace.com/2011/11/bet-on-cisco-csco-tech-stocks-to-buy/.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.