American brings its costs down in the first quarter.

Posted Sunday, May. 05, 2013  comments  Print Reprints
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American Airlines has taken a step in the right direction.

Based on its first-quarter results announced last month, industry analysts say the Fort Worth-based carrier is improving its cost structure. Wages and benefits dropped 17 percent, evidence that its new cost-saving labor contracts are in effect. And total operating expenses dropped 1.3 percent, even as fuel prices grew slightly in the quarter.

“We don’t yet have all of the savings ground into our numbers from the restructuring. You’ll see more coming on line throughout the year,” American Chief Executive Officer Tom Horton said when the earnings were announced April 18. “But I think we’re very much on track and I think it’s, in our view, a very quick and an effective restructuring of the company.”

Renegotiated airport leases and new fuel-efficient aircraft will come on line throughout the year for American. And it expects to close its merger with US Airways in the third quarter.

Although American’s bankruptcy cost reductions are not as dramatic as at other airlines that slashed expenses in bankruptcy court, analysts say American’s new cost structure will allow it to be competitive with United Continental and Delta Air Lines, particularly as costs rise at those carriers partly because of new pilot labor agreements.

“We’re not seeing the significant difference in labor cost that we’ve seen in past bankruptcies,” said Bill Swelbar, an airline researcher at the Massachusetts Institute of Technology. “But now it’s an industry that will compete less on labor costs going forward and will compete on service.”

A drop in costs

When American filed for bankruptcy in November 2011, the carrier said its labor costs exceeded competitors’ by as much as $800 million a year. The airline then asked its labor unions to accept contracts that cut costs by 20 percent.

But as it was negotiating with its unions, Delta’s pilots inked a new contract that included large pay increases. Analysts say the Delta pilot contract allowed American to reduce its cost-cutting requests to 17 percent while also forcing United to give its pilots a more expensive contract than the Chicago-based airline had intended.

As a result, the first-quarter results show a narrowing of labor costs between the three large legacy carriers. American dropped its wages by 16.7 percent, while United’s and Delta’s wage costs rose by 12.1 and 8 percent, respectively.

“American’s labor costs have gone down for six quarters in a row and all the other carriers have gone up from quarter to quarter, and that’s significant,” said Bob Herbst, founder of AirlineFinancials.com.

American’s cost per available seat mile (CASM), excluding one-time items, has also improved compared to its competitors. In the first quarter, it was the only airline to see its CASM drop, down 3.2 percent to 9.27 cents. And instead of having the second-highest CASM figure in the industry, as it did in the first quarter of 2012, American is now in the middle of the pack. Herbst said that figure should continue to improve throughout the year as more of the cost-saving initiatives from the bankruptcy process are implemented.

A need to increase revenue

As American moves closer to emerging from bankruptcy, analysts say the carrier needs to focus on improving its revenue performance.

The carrier used to have a revenue advantage about a decade ago when business travelers chose American for its extensive network. But as its rivals grew bigger, American lost that edge.

After merging with US Airways, American has the opportunity to regain its status as a preferred airline if it is able to improve its on-time performance, customer service and amenities with its newer fleet, said Henry Harteveldt, travel industry analyst with Hudson Crossing.

“If American is able to extract a revenue premium above its peers, American has a chance of being very successful,” Harteveldt said.

In the first quarter, American’s revenues grew 1 percent compared to the same period last year. Its merger partner, US Airways, grew its revenues 3.5 percent in the quarter.

Even with its costs shrinking, analysts say the merger with US Airways is necessary for the new American to create a network that can compete with United and Delta and generate the revenues it needs to return to profitability.

“American has every opportunity to not only be competitive with the other network carriers and Southwest domestically. They have the opportunity to become the strongest and the most profitable airline in the industry,” Herbst said.

Andrea Ahles, 817-390-7631 Twitter: @Sky_Talk

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