American, labor and a number toss

I won’t go into the details of the recent frenzy of speculation over a potential Chapter 11 filing by American Airlines. Many with an intellect far broader than mine have weighed in on the odds since AMR’s stock plunge on October 3.

 

AA@DFW.jpgWhat is interesting is managment’s dialogue regarding a new push for “transformational” labor deals that will improve its competitive position.  Here’s the latest rationanle — all of the other building blocks to right the ship are in place — a massive fleet revamp to bring American’s average fleet age well below its peers, joint business agreements with its oneworld partners across the Atlantic and Pacific and the “cornerstone” strategy that funnels about 98% of American’s flying to Chicago, Dallas, LA, Mimai and New York.

So what’s missing?  It is what American has long-argued is the basis for its competitive disadvantage — legacy labor costs that result from its philosophy to use Chapter 11 as a last resort. It has never sought bankruptcy protection.

Obviously American does have a labour cost disadvantage compared with its legacy peers. But here are some numbers I want to toss out — for the first nine months of 2011 American’s salaries, wages and benefits totalled $5.3 billion or about 29% of its $18 billion in revenues. Its fuel costs comprised about 35% of its revenues.

Interestingly enough, Southwest, which has largely been profitable, has similar numbers. Its $3.2 billion in salaries, wages and benefits comprised 27% of the $11.5 billion in revenue recorded for the first nine months of the year while fuel accounted for 35%.

On the unit revenue front American’s 8% growht in mainline PRASM for the third quarter outpaced the 6.4% recorded by Southwest, which was record growth for the carrier.

So what makes me curious is why American’s performance remains lackluster?  I know comparing American and Southwest is far from an apples to apples comparison. 

But what if comes down to productivity?  Generally speaking it is likely safe to say Southwest’s employees are largely more productive than American’s — perhaps differing work rules at the carrier dictate that scenario. 

So maybe American’s push isn’t so much to get cost competitive labour deals — but changes to work rules that lower costs.  I find this nip for American CEO Gerard Arpey interesting.

  And so as we think about these agreements, we’re trying to think about them in the transformative way that we thought about that fleet deal. And so whether it relates to productivity or work rules that don’t make sense or a new competitive framework for new hires, eliminating restrictions on the way we conduct business and just a wide range of the other elements in our contracts, trying to bring them more in line with the realities of the marketplace

It’s anyone’s guess what will ulitmately transpire with American and its labor groups. What is certain is managment is pounding the drum to forge new labor deals harder than ever.   

 

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