By Mitchell Schnurman
mschnurman@star-telegram.com
For more than a year, analysts have been blasting American Airlines for playing it safe and leading the industry in losses. One pointedly reminded the CEO that the definition of insanity is doing the same thing over and over and expecting a different outcome.
They challenged the company to do something big, something bold. So when American pulled off the biggest aircraft purchase in history last week -- and did it without wrecking its balance sheet -- how did Wall Street react?
Many analysts sneered, and investors sent the stock price tumbling to its lowest level in two years.
What a buzz kill. The people on Amon Carter Boulevard were finally feeling pretty good about themselves, only to have the outside world mock them again.
It's not just a perception problem. American reported a $286 million loss for the second quarter while rivals raked in profits. Every airline had to deal with high oil prices and the catastrophe in Japan, yet United Continental earned $538 million.
US Airways earned $92 million and Alaska Air $29 million. Analysts also project profits for Southwest, JetBlue and almost $400 million for Delta.
It's called the bottom line for a reason, so there's no papering over American's disappointing results. In the first six months of 2011, parent company AMR has lost $722 million. That's on top of $4 billion in losses in the previous three years.
That's a lot of red ink, enough to easily overshadow American's progress.
But step by step, American is reinventing its network, renewing its fleet and creating a foundation that could pay off for years to come. Big obstacles remain, starting with meaningful agreements with unions to make American competitive again, but little things are starting to add up.
I'm reminded of the flywheel metaphor used by business guru Jim Collins. There's no single big bang that catapults a company to greatness, he says. Instead, it's a series of initiatives that build on one another.
Employees push and push and push on that giant flywheel, and it starts to turn -- once, then a few times, then it finally kicks in. Whoosh! The wheel takes off and runs ever faster as momentum builds.
On average, it takes a company seven years of pushing before the breakthrough is evident, Collins says.
That's what American is working toward. Events keep intervening, including recession, oil price shocks and a sluggish recovery. Eventually, American will look like a success story.
"They're doing all the right things for the long term, but they're in a business where most investors are looking at the next couple of quarters," said Bill Swelbar, an airline expert at MIT's International Center for Air Transportation. "This a company that's playing poker with a nine high card. It's just a tough hand."
As the only legacy airline to avoid bankruptcy, American is saddled with higher labor costs. Throw in an aging, gas-guzzling fleet, and the economics don't work in an era of triple-digit oil prices.
American also missed out on the industry's merger wave because it couldn't find a partner that would pass an antitrust review. It did form ties with JetBlue, and that could lead to a deeper deal eventually. But American leaders invested time elsewhere.
The order -- 460 planes with an option for 465 more -- is the latest, most visible example. Replacement planes for American's tired MD-80s will use 35 percent less fuel, and they won't be in the hangar too often for repairs and government safety directives. That old fleet is part of the productivity problem at American.
In the second quarter, fuel was a bigger expense than labor, and higher oil prices alone resulted in $525 million in additional expenses. That's the difference between making money and losing it.
Airlines live in that world, of course, and American's challenge is to respond to short-term pressures while building for the long term. CEO Gerard Arpey keeps talking about that big picture, and President Tom Horton keeps making big deals.
They weren't planning to order hundreds of planes. But when Boeing and Airbus kept improving the terms, they went for the whole enchilada. In isolation, it was an impressive move. As part of a broader strategy, it was vital.
Here are some of the other pieces:
Completing joint ventures with British Air, Iberia and Japan Airlines. Trans-Atlantic schedules are now coordinated, and teams are selling combined agreements to corporate accounts. American said more than 200 accounts will move to the joint ventures by the next quarter.
Building on business hubs in Chicago, Dallas-Fort Worth, Los Angeles, Miami and New York. More than 98 percent of American's capacity now touches those cornerstone markets, key destinations for the most profitable passengers.
More focus on premium customers. From breaks on fees to revamped airport clubs and new terminals, American is taking care of its best customers with new vigor. New airplanes, with better Wi-Fi connections, more space and new seats, will add real momentum.
Seeking profits over market share. Since 2006, American has cut capacity by 9 percent, much more than the rest of the industry, and it has steadily shed less profitable routes in favor of its cornerstones
Last week, American said it is spinning off its Eagle subsidiary. That could improve finances and make Eagle and American more competitive. The aircraft purchase also includes midsize jets that carry about 120 passengers, a sweet spot that was missing from American's fleet.
The big question is whether American can get its unions on board. While avoiding bankruptcy preserved employee pensions, it didn't buy lasting labor peace, and the higher costs have been insurmountable.
There's renewed hope for a labor agreement. In a conference call, Arpey talked about switching from pensions to 401(k)-type retirement plans for future hires. He also said healthcare expenses are a bigger factor in the company's cost differential. Discussing such details may mean that a consensus is forming, and the aircraft order could be a catalyst for a union breakthrough.
"There is a real opportunity here for our labor groups, since our interests are aligned," Arpey said. "Hopefully we can capitalize on it."
That might get the flywheel humming.
Mitchell Schnurman's column appears Sundays and Wednesdays. 817-390-7821
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