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AA's CEO says impact from groundings likely in tens of millions of dollars

American Airlines' chief executive, Gerard Arpey, said Thursday he took responsibility for the grounding of the airline's 300 workhorse MD-80 jets this week and he apologized again for the havoc and inconvenience.

The airline estimates that another 570 flights will be canceled on Friday. About 2,500 flights have been canceled so far this week.

"We're doing everything we can to accomodate our customers," Arpey told reporters during an afternoon briefing.

Arpey wasn't critical of the Federal Aviation Administration for ordering the planes grounded for a new round of inspections, after determining American wasn't completely compliant with rules during an earlier set of inspections focused on wheel well wiring.

"We obviously failed to complete this airworthiness directive to the precise standards of the FAA, and I take personal responsibility for that," Arpey told reporters.

He said the airline has 123 MD-80s back in service, and 10 are awaiting FAA inspection.

American has cancelled thousands of flights this week after the FAA's order.

Arpey said it was too early to know the extent of the financial impact on the company. But he said it will be substantial, and likely in the tens of millions of dollars. He said it's hard to say whether this will have any lasting impact on the company's reputation.

Arpey praised American's mechanics.

"Our mechanics are absolutely not to blame," he said. "They are the finest mechanics in the world."

Arpey noted that American worked with Boeing to put the FAA's current airworthiness rules on the MD-80 together.

The directive is "extremly complex" and not black and white, Arpey said. "In this latest recurrence, the FAA found we weren't in precise compliance, and we need to be."

In no cases have the inspections yielded evidence of chafing of wires, Arpey said. He did not criticize the FAA.

"I am in no way being critical of the FAA," Arpey said. "The FAA has always held airlines to strong safety standards. The FAA is under their own set of pressures."

Asked what's changed in the climate where airlines in recent weeks have been forced to ground planes and cancel flights over questions about proper inspections, Arpey said, "it would be fair to characterize as the FAA stepping up surveillance and doing their job. I believe the FAA has always set a very high standard for safety."

Even though American wasn't in compliance with the FAA's rules, Arpey asserted the MD-80s are safe.

"Reasonable people in good faith can reach different conclusions on the method of accomplishing the goal," he said of American's procedures.

"I put my kids on these airplanes all the time," Arpey, a father of three, said. "Irrespective of FAA oversight, noone would put a plane in service that wasn't safe."

American canceled 900 flights systemwide on Thursday.

The airline scrambled to cope with the grounding of its MD-80 fleet for the third day, offering travel vouchers to thousands of stranded passengers, mobilizing teams to inspect parked jets and assuring customers that its airplanes are safe to fly.

More than 140 flights were canceled at Dallas/Fort Worth Airport Thursday morning, according to Flightstats.com, which tracks flights. And more cancellations are likely Friday, airlines officials said.

This comes after 1,094 flights were canceled systemwide Wednesday and 460 that were scrubbed Tuesday afternoon and evening.

The discount airline AirTran Airways said it would operate an additional flight from D/FW to Atlanta this evening to help passengers stranded by the American meltdown. That flight will depart at 7:05 p.m., according to the airline.

More than 300 departures at Dallas/Fort Worth Airport were canceled Wednesday, according to Flightstats.com. American operates about 2,300 flights a day worldwide.

American officials estimated that more than 100,000 passengers were affected Wednesday by the decision to ground the planes, which came after the FAA determined wiring bundles in the wheel wells weren't properly secured despite a previous round of inspections and repairs.

"We're extremely sorry for this great inconvenience," said Dan Garton, American's executive vice president of marketing, during a media briefing in Fort Worth. "This type of interruption is truly unacceptable."

Arpey was in Los Angeles on Wednesday. He apologized to customers in a statement early in the day.

The carrier, the world's largest airline, said it would give vouchers worth $500 toward future airline tickets to any passenger stranded overnight. It is also reimbursing passengers for hotel, meal and ground transportation costs.

The airline's stock plunged more than 11 percent as worried investors dumped shares. Some analysts began to fret that the growing furor over aircraft inspections, and a congressional investigation into the relationship between the airlines and the FAA, could damage the weakened airline industry.

Shares rebounded somewhat Thursday morning. At 10:20 a.m., they were trading at $9.77 per share, up 60 cents, or about 6 percent.

"I have never in my life seen regulation more out of control than it is right now," said Darryl Jenkins, a longtime industry analyst and consultant. "The price to the industry and to the traveling public is going to be enormous."

Garton insisted that American's jets are safe to fly. He said the airline had complied with the safety directive two weeks ago, but that some technicians had taken "certain latitudes" with repairs, which the FAA now deems unacceptable.

"In the past we have had certain latitudes to adjust to the realities of the aircraft," he said. "It appears there is a [new] focus on extremely strict adherence to specifics" at the FAA.

It does appear that the FAA is taking a harder line with airlines in recent weeks. The original 2006 safety directive that required airlines to bundle and tie the wires gave carriers up to 18 months to comply, suggesting that even loose wires weren't considered an immediate threat.

But officials with the carrier's pilots union said they consider the wiring problem a major safety issue.

"It's beyond me how American can claim this isn't safety-related," said Karl Schricker, spokesman for the Allied Pilots Association. "You don't ground planes if it's not a safety issue."

About half of the 300 MD-80s are expected to be back in service by the end of today, Frizzell said. American is hopeful that the inspections will be completed by Saturday.

It was the third major disruption of American's network in the past month. On March 18, the airline canceled 1,000 flights after a series of storms blew over D/FW airport, stranding thousands of passengers overnight.

On March 26 and 27, American canceled nearly 500 flights when it grounded its MD-80s for new inspections of wiring in the airplane wheel wells. The problem emerged amid an FAA audit of inspection records at airlines nationwide. The FAA told American that ties that fasten wire bundles to the side of the wheel well weren't properly spaced an inch apart.

Earlier this week, after a spot check of planes, the FAA found additional problems with the wire bundles, and on Tuesday, American grounded all 300 of its MD-80s for another round of inspections and repairs when necessary.

Terry Trippler, a travel analyst and owner of TripplerTravel.com, said the cancellations put American at risk of losing some of its most important customers -- business travelers who fly the carrier frequently.

"You have some of these hard-core road warriors who were caught up in all three of these events," Trippler said. "That's someone who might be looking to United or Southwest next time."

William Greene, an analyst with Morgan Stanley, said the issues could lead to higher maintenance costs and even affect travel demand.

"When customer concerns about airline safety coincide with economic weakness, the impact on airline financials can be serious," Greene wrote in a report Wednesday.

Garton said it is too early to estimate the cost of the fleet groundings and cancellations. It may be disclosed next week, when American reports its first-quarter earnings.

But he added that the costs are likely to be "substantial." Shares of AMR Corp., American's parent company (ticker: AMR) dropped $1.15, or about 11 percent, to close at $9.17 per share.

The last time the carrier grounded an entire fleet of planes was in June 1979, after an American DC-10 crashed at takeoff in Chicago, spokesman John Hotard said. The fleet was parked for 18 days while structural problems with the planes were corrected.

Pilots whose flights were canceled will still be paid under provisions in their contract. American is considering paying flight attendants as well, even though their contracts don't have any protection for canceled flights, Frizzell said.

The concerns over aircraft inspections stem from an investigation by the House Transportation and Infrastructure Committee, which began last year. Several FAA inspectors, acting as government whistle-blowers, told investigators that the FAA office in Irving had maintained a "cozy relationship" with Southwest Airlines that resulted in lax safety standards.

After the committee scheduled a hearing on the issue, the FAA levied a record $10.2 million fine against Southwest for flying dozens of planes that hadn't been properly inspected for fuselage cracks. Southwest has suspended three employees amid its own internal investigation, and grounded dozens of planes for additional inspections.

Earlier this week, the FAA official who oversees the Southwest region for the agency was reassigned to a position that doesn't include safety oversight.

The FAA also began an intense audit of inspection records at all airlines. The first phase of that audit at American identified the initial problems with the spacing of ties on the MD-80 wiring bundles that grounded planes March 26.

The second phase of the audit included a spot check of 10 American planes Monday night. FAA inspectors concluded that nine of the 10 airplanes still weren't in compliance with safety rules for the wiring. Not only were some of the ties still improperly spaced, but inspectors had problems with the direction that retention clips and lacing cords were facing.

American officials asked if they could keep the planes flying and inspect them as they became available, a process that would have taken about a week.

That request was denied, airline spokesman Roger Frizzell said.

"I think the entire industry is under a lot of scrutiny right now," he said. "And it's our responsibility to meet that scrutiny."

U.S. Rep. James Oberstar, chairman of the House Transportation Committee, criticized the FAA for being too close to the airlines it regulates in recent years.

"FAA needs to rethink its relationship with the airlines and the other aviation entities which it regulates," he said during last week's hearing. "FAA needs to clean house, from the top down, and take corrective action."

He added that "I believe it is no mere coincidence that this audit began just after news of our investigation became public, and just prior to us holding this hearing."

AMERICAN'S RESPONSE

Compensation available to passengers affected by canceled flights:

  • Travelers stuck overnight are eligible for a $500 voucher for future travel.
  • Affected travelers can receive reimbursement for lodging, meals and ground transportation.
  • Passengers in affected cities can change reservations through Friday without penalty.
  • Information on vouchers, reimbursements and travel changes can be found at www.aa.com
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