Will AMR’s Layoff Lead to Takeoff?

by Jim Woods | February 2, 2012 1:38 pm

AMR Corp. (PINK:AAMRQ[1]), parent of iconic aviation firm American Airlines, announced Wednesday that it plans to lay off 13,000 employees[2]. The move is the latest by the bankrupt carrier to streamline operations and cut costs. The company said it wants to reduce labor costs by $1.25 billion a year, or about 20%. This includes cutting its work force by nearly 15%, implementing new productivity measures and outsourcing a portion of its maintenance operations. AMR also plans to eliminate its four underfunded pension plans.

The announcement by AMR to cut expenses didn’t come as a big surprise to industry observers. The airline was expected to make bold cuts in order to emerge from bankruptcy leaner and meaner, and to allow the company to takeoff financially again.

The nation’s No. 3 airline as measured by traffic, AMR has faced significant financial headwinds since the terror attacks of Sept. 11, 2001. The company has lost approximately $12.5 billion since then. The accumulated losses, along with the financial metrics in the industry, prompted AMR to file a flight plan[3] with a destination of bankruptcy court last November. In order to exit bankruptcy stronger, AMR has to find significant savings, and cutting the workforce by 15% is the first step in doing just that.

Of course, bankruptcy reorganizations are nothing new for the airline industry. Competitors like United Continental (NYSE:UAL[4]), Delta (NYSE:DAL[5]) and US Airways (NYSE:LLC[6]) filed for bankruptcy protection in the mid-2000s, and all came out the other side in better financial shape.

These carriers restructured and/or merged under court protection in recent years, and on average they were able to slash labor costs by 42% and cut their full-time-equivalent employees by 45%, according to Bill Swelbar, an airline researcher at the Massachusetts Institute of Technology. American needs to cut another $1.5 billion in labor costs and nearly 14,000 jobs on top of the changes it made back in 2003, Swelbar told the The Wall Street Journal[7].

AMR’s business plan calls for cost savings of $2 billion from restructuring debt and leases, grounding older planes, improving supplier contracts and of course, employee-related changes (i.e., layoffs). The plan also calls for $1 billion per year in revenue improvements through network scale, fleet optimization and product improvements.

AMR may also need to sell off regional unit American Eagle, which has been a drain on earnings, operations and reputation. Last year, American Eagle was fined $900,000 by federal aviation officials for 16 tarmac delays of three hours or more.

If AMR can implement these plans, its shares could once again soar. However, it has a very long financial runway to taxi down before that can happen.

As of this writing, Jim Woods held no positions in any stocks mentioned in this article.

Endnotes:
  1. AAMRQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAMRQ
  2. plans to lay off 13,000 employees: http://investorplace.com/2012/02/amr-corp-american-airlines-jobs-microsoft-amazon/
  3. AMR to file a flight plan: http://investorplace.com/2011/11/american-airlines-amr-corp-chapter-11-bankruptcy/
  4. UAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=UAL
  5. DAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DAL
  6. LLC: http://studio-5.financialcontent.com/investplace/quote?Symbol=LLC
  7. The Wall Street Journal: http://online.wsj.com/article/SB10001424052970204740904577197122405984872.html?KEYWORDS=american+airlines

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