Walkout was inevitable, analysts say To cut costs, carrier had to stand ground


In the go-go days of the 1980s, American Airlines became the epitome of expansion and acquisition. Spending $20 billion during the decade, it tripled its fleet, launched hundreds of new flights, opened hubs and added international service. Ultimately, it became the nation's largest airline, handling one out of every five domestic passengers.

In the 1990s, however, the carrier's growth strategy collapsed under the weight of fare wars, a prolonged recession and intense pressure from short-haul, discount carriers.

If American Airlines epitomized growth in the '80s, it has more recently come to symbolize a retrenchment pervasive in the industry.

During the past 18 months, the Fort Worth, Texas-based airline has laid off thousands of workers, trimmed its routes, parked planes and canceled options to buy more. At hubs such as San Jose, Calif., it has simply retreated, yielding once profitable routes to upstart, low-cost carriers such as Southwest and Reno airlines.

Earlier this year, American, with 96,000 employees, announced it would lay off 5,000 more workers by mid-1994 and ground 38 more jets.

In such a cost-cutting environment, American had little alternative, analysts say, but to face a strike this week from its 21,000 flight attendants rather than agreeing to a three-year contract with a total 15 percent wage increase and without the significant work rule changes the airline wants.

"All airlines have to stake their ground now and fight to get the costs down," Rose Ann Tortora, an airline analyst at New York's Donaldson Lufkin & Jenrette of New York, said yesterday. "The company has no choice."

The walkout is the first labor strike against a major airline since machinists struck USAir for five days in October 1992. American is the second-largest carrier at Baltimore-Washington International Airport, behind USAir, with 17 flights a day accounting for 10 percent of the airport's traffic.

Since 1989, the airline has lost $1.2 billion, prompting feisty, often explosive Chairman Robert L. Crandall to say recently that his high-cost airline had become a dinosaur in value-conscious America.

Higher costs

American's seat-mile cost -- the measure of how much it costs to fly one seat one mile -- is 8.5 cents, compared with no-frills Southwest's 7 cents.

Nevertheless, American's cost-cutting strategy appears to be working.

In the third quarter, AMR Corp., the airline's parent company, posted a $118 million profit, its second consecutive quarterly profit and its largest quarterly profit in more than three years. During the three-month period, the company's revenue was $4.2 billion, up nearly 13 percent over the third quarter in 1992.

While the potential financial impact of the strike remained

somewhat unclear, the Allied Pilots Association said yesterday that two-thirds of scheduled flights on Thursday were either canceled or departed without passengers.

It estimated the airline has lost between $20 million and $25 million in revenue so far. If the strike continued for the full 11 days threatened, lost revenue could exceed $250 million, the APA said.

AMR's stock, after seesawing most of the year, closed yesterday at $68.25 a share, down 75 cents, and off from its 52-week high of $72.625 on June 1.

Standard & Poor's Corp. said yesterday that the walkout probably would not affect the company's BB+ senior credit rating, particularly since the airline's pilots voted last night not to honor the picket line.

"With $1.3 billion of cash and investments and $1.8 billion of committed credit lines as of Sept. 30, AMR can sustain considerable losses without endangering its liquidity," S&P; said.

Industry bellwether

Airline analysts, who view American as an industry bellwether, said this year's financial gains have signaled a turnaround in the airline industry, which has lost $11 billion since 1989.

Not only has American Airlines cut costs, it has also been making money by capitalizing on its strengths. As traffic waned on trans-Atlantic routes, American increasingly focused on its South American and Caribbean flights.

In addition, it has been using its sophisticated computer system -- one of the expansion goodies of the '80s -- to analyze which flights to scrap and where to shift planes.

"What they've tried to do is move capacity to markets where there is better, more consistent demand," said Alex C. Hart, an analyst for Ferris, Baker Watts Inc. in Baltimore.

But it hasn't been enough, say Mr. Hart and others.

"The third quarter was still a drop in the bucket after years of losing millions," Ms. Tortora said. "There's only so much they can do and then they come to labor costs and productivity."

The current labor strife has its roots back 10 years.

In 1983, Mr. Crandall pushed through a two-tier wage system that gave employees entering the company a separate wage scale. The two pay scales currently merge after nine years, but the union is proposing that they merge after five years.

The flight attendants' union says its members have suffered a 40 percent decline in real wages over the past decade and are now being asked for more concessions -- just when American is starting to make money again. The median annual salary of flight attendants is $23,000, the union said.

"In 1983, we agreed to huge concessions in order to help the company grow and prosper," said Ray Abernathy, a spokesman for the flight attendants. "Now they want concessions when concessions are no longer needed."

In spite of layoffs and givebacks by workers, labor is still the largest cost at American and most airlines, accounting for nearly 35 percent of operating expenses.

15% wage increase

The attendants are seeking a 15 percent wage increase over three years, while the company has proposed a total of 10.5 percent over six years. In addition, the airline is seeking concessions in health benefits and work rules.

"What management is attempting to do is gain more flexibility," Ms. Tortora said. "This is not just an airline thing anymore. It's a U.S. thing. It's a labor and management thing everywhere."

S&P; was pessimistic about what the strike signaled. It pointed out that UAL Corp., the parent of United, and Delta Air Lines Inc. are facing similar problems of high labor costs and have also failed to reach an agreement with its unions.

"American's proposed flight attendant contract does not attempt achieve a long-term solution" to its high-cost problems, S&P; said, but instead seeks "the more limited interim goal of slowing upward pressure on labor costs.

"Therefore, the current confrontation appears to be only the first of many difficult labor negotiations in the airline industry."



AMR chairman: Robert L. Crandall

AMR employees: 118,851

American Airlines employees: 96,149

Number of flight attendants: 21,000, at 14 airports

Number of pilots: 9,989

Hubs: Chicago; Dallas-Fort Worth; Miami; Nashville, Tenn.; Raleigh-Durham, N.C.; and San Juan, Puerto Rico

9-month income: $143 million, $1.30 a share

9-month revenue: $12.23 billion

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