AMR trims losses
Big improvement seen over last year, but more cost-cutting expected
11:20 PM CST on Wednesday, January 21, 2004
By ERIC TORBENSON / The Dallas Morning News
AMR Corp. said Wednesday that it narrowed its fourth-quarter and year-end losses with vigorous cost reductions, but warned again that it needs more cuts if it wants to sustain profits down the road.
The Fort Worth-based parent of American Airlines Inc. lost $111 million in the quarter, a hefty improvement from the loss of $529 million in the same period in 2002.
Removing one-time charges and gains, AMR lost $95 million, or 59 cents per diluted share. That easily topped Wall Street's average earnings expectation of a per share loss of $1.01.
AMR shares rose 83 cents to $14.55 on the news.
The performance marked a stunning improvement from the fourth quarter of 2002, when AMR lost $828 million on a pre-tax basis. That's the comparison American deems most telling.
"We're building great momentum, but we've still got a lot of work to do," said Gerard Arpey, AMR's chief executive, in a conference call.
AMR's labor costs fell 22.3 percent in the fourth quarter as the full effect of $1.8 billion in annual concessions took hold.
"Behold the power of near-bankruptcy," said Jamie Baker, an analyst at J.P. Morgan Chase, in a note to investors. The carrier nearly filed for Chapter 11 protection last year before winning concessions.
Based on the latest results, American's costs are now lower than rival Continental Airlines Inc.'s for the first time in a decade or more. Continental hasn't asked its employees for wage concessions, however. Airline costs are usually measured in how much it pays to fly one seat one mile.
Those unit costs dropped 9 percent last year compared with 2002; they will drop another 9 percent this year, said James Beer, AMR's chief financial officer.
Recovery plans
The results set a framework for AMR's recovery. Though average airfares are still flat or dropping, American sees its costs dipping even further this year to help it improve profitability.
"I know our employees have sacrificed a lot, but the revenue environment remains very tough," Mr. Arpey said on the call. The company's focus will remain on continuous cost improvement, using suggestions and help from employees, he said.
The carrier announced more steps to either trim costs or boost revenue:
• American will restructure its Miami hub in the same way it has changed schedules at Dallas/Fort Worth International Airport and O'Hare International Airport. Instead of seven intense periods of flights arriving and leaving during the day, the airline will use 13 "banks" of flights. That will smooth out the schedule, improve reliability and keep its planes in the air more of the day.
• The airline has a new alliance partnership with Mexicana Airlines. The deal lets each carrier sell seats on the other's flights, and will add 21 new cities to American's network. Frequent fliers for both carriers will enjoy benefits on both airlines.
Mr. Arpey also announced an employee incentive program that's similar to a successful formula used at Continental.
American will pay each employee between $25 and $100 each month. The bonus is based on either on-time performance or how the carrier fares in a survey of customer satisfaction.
American will measure itself against competitors in those areas and pick the category where it finishes higher to see if it will pay the bonus. If the carrier finishes first, employees get $100. The bonuses are progressively lower if the rank drops. Employees will receive something even if the carrier finishes as low as No. 6 in the group.
Mr. Beer estimates the program would have cost American about $40 million in 2002 had it been in place. It could cost the airline up to $100 million if American finishes first in either category each month.
Remaining worries
Although the carrier is enthusiastic enough about its finances to start paying bonuses, there are concerns ahead for the world's largest carrier.
The biggest one is jet fuel, which cost 6.5 percent more year over year in the fourth quarter of last year and has become more expensive this year.
American has fuel hedges in place for just 21 percent of the fuel it needs this quarter, and has virtually no such protections in place for the rest of the year, though it's trying to find ways to get fuel cheaper, Mr. Beer said.
And although American's revenue rose 3.9 percent in the fourth quarter compared with 2002, airfares are still lagging way behind historic levels. Low-cost carriers such as JetBlue Airways Corp. are putting pressure on American's best routes; JetBlue filed Wednesday to start flying from New York's LaGuardia Airport, another potential blow to American's network.
American will add 6 percent more capacity to its schedule this year, most of it internationally, where discount rivals don't fly.
Executives said they're still studying improving in-flight entertainment to compete with JetBlue and others that feature television screens in every seat, but they're wary of spending the money required to upgrade American's more than 700 planes. The cost could exceed hundreds of millions of dollars.
American's impressive performance on costs had some analysts predicting fierce competition for JetBlue and other discounters.
"For anyone doubting the competitive voracity of AMR, look no further than today's earnings release," said Mr. Baker, the J.P. Morgan analyst.
Although many analysts predict AMR will be slightly profitable this year, Mr. Arpey declined to guide investors about the carrier's ability to turn its first profit since 2000.
