A crisis is a terrible thing to waste, the saying goes, so maybe American Airlines can make the most of it.
The bankruptcy talk that tanked the stock price on Monday should create a sense of urgency for labor and management in their long-running battle over new contracts. A breakthrough that rallies employees and, more important, slashes the gap in American's labor costs is crucial to avoiding Chapter 11.
The current state won't do. If both sides can't strike a deal that gives American a fighting chance at sustainable profits, everybody loses -- and that's the takeaway from Monday's stock shock.
This reality has been looming for several years. American spends up to $800 million more on labor than its peers, when pensions and benefits are included. Rivals Delta, Northwest, United and Continental already went through bankruptcy reorganization and emerged with much lower costs than American.
They then compounded their advantage through a pair of mergers that produced stronger global networks and higher revenue. Throw in the Great Recession and the threat of a double-dip, and American is on its heels. It has been losing money almost continuously for a decade, and another $1 billion in red ink is projected for 2011.
This is not news, so it's unclear what triggered Monday's sell-off. The stock price of parent company AMR Corp. fell by a third to the lowest level since early 2003. Much of the lost ground was recovered after analysts produced a stream of reports saying that bankruptcy is not imminent. The stock (ticker: AMR) closed at $2.39, up 41 cents, or nearly 21 percent Tuesday.
With $4.2 billion in unrestricted cash, Chapter 11 may not be imminent, but it may be inevitable unless the status quo changes. American has already made several moves to stay afloat and boost long-term prospects, including debt offerings, global alliances and an aggressive fleet order. The elephant in the room is the same as it ever was: no labor agreements.
Get that, get competitive, and AMR will have new life on Wall Street. Employees might even be able to focus on growth, instead of just survival.
One analyst wrote that the stock price "should have a sobering effect on both sides of the table, averting the need for a bankruptcy." But in an interview, he seemed less sure about a consensus: "I don't know how they'll find common ground," said Roger King of CreditSights, an independent research firm.
Jamie Baker, a J.P. Morgan analyst who's been critical of AMR management, wrote: "Does this light the fire?"
"We do think the market underestimates the potential for labor deals," he added.
One irony of this week's bankruptcy talk is that pilot negotiations have improved significantly. The Allied Pilots Association issued a carefully worded statement that tamped down speculation and even revealed some optimism. A few years ago, the union chief might have called for firing the CEO.
In the past two months, 240 pilots retired, about 10 times the usual number. Some observers suggested that pilots wanted to collect their pensions in a lump-sum payment, because much of that retirement would be lost in Chapter 11. But the union said that its financial advisers reported no liquidity crisis at American and that it had respectable cash reserves.
The more likely explanation, according to the statement, is that pilots wanted to lock in a higher stock market value on another piece of their retirement. They're allowed to "look back" to one fund's price from 60 days earlier and cash out at that higher value. Given the sharp drop in the stock market since midsummer and employee balances that can reach $1 million, the savings could be substantial.
In addition, a large number of pilots are approaching age 65 and they're making individual decisions on when to retire, the statement said. Such logical, deliberate explanations are a good sign. The union is saying "stay calm," not yelling "fire!"
Negotiations between pilots and management resumed Tuesday, as previously scheduled. Union spokesman Sam Mayer said many small matters have been resolved, which represent progress. The toughest issues -- pay, pensions, work rules and scope -- are still unsettled.
"We all know that we have to figure out a way to make this company healthy," Mayer said.
At least American executives are not talking bankruptcy. In 2003, they barnstormed much of the country, imploring workers to cut pay and benefits to avoid Chapter 11. The company actually sent an official to the courthouse steps before calling him back when a deal was reached.
It may seem tempting to use that threat again, but it can backfire. If unions believe a filing is coming, they can choose to keep their higher pay until the court intervenes. And they don't risk two pay cuts - one before Chapter 11 and one after.
"They're not even mentioning bankruptcy," Mayer said about American execs.
If there's not a deal, they won't have a choice.
Mitchell Schnurman's column appears Sundays and Wednesdays. 817-390-7821