This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

The Ugly American Story

Updated from 4:40 p.m. EDT

CHARLOTTE, N.C. -- Congress and the Federal Aviation Administration are locked in a nasty dispute, and American Airlines is caught in the middle.

Essentially, the agency charged with ensuring aviation safety is under pressure to show it can be tough with airlines. So it's being tough. The result? American cancelled 922 flights Thursday and about 570 trips for Friday, bringing the total to about 3,000 cancellations since Tuesday.

Hundreds of thousands of passengers have been inconvenienced, and CEO Gerard Arpey says the airline has lost tens of millions of dollars, a result of surrendered revenue as well as costs to re-accommodate passengers, pay displaced crews and meet other expenses.

American now expects its operations will not be back to normal until Saturday. Meanwhile, shares of its parent company, AMR (AMR), traded Thursday at $9.87, up 7.6% for the day. The shares opened the week at $10 and fell as low as $9.12 on Wednesday.

While the disruptions suggest an immediate safety threat was behind the moves, the issue in question is in fact procedural. It involves firmly attaching wire bundles in the right wheel well of American's 300 MD-80s, about half of the airline's fleet. A loose or chafed wire potentially could spark a fire.

Because American is the largest MD-80 operator, it opted several years ago to develop a service bulletin to address the chafing problem. Eventually, that service bulletin became an FAA airworthiness directive or "AD," making the work mandatory for all MD-80 operators.

Last month, while auditing American's compliance with the AD, the FAA found a problem with the spacing of the cords American used to tie down the bundle. In particular, it found the cords were more than one inch apart. American cancelled about 450 flights over two days, enabling mechanics to move the cords closer together.

Then the FAA went through the process again, and found more discrepancies. Primary among them, the positioning of the cords -- as distinct from the spacing -- did not comply with the AD. American was required to ground the aircraft until it was in compliance.

"We obviously failed to complete this AD to the precise standards set by the FAA, and I take full personal responsibility for that," Arpey said Thursday at a media briefing.

But the AD is "not black and white," Arpey said. "It is extremely complex." American's MD-80s, delivered at different times, have varying wheel well configurations. "This is a process of taking the AD, putting it through our engineering staff, translating it for our mechanics, and then implementing it," he said. American's internal directive to mechanics ran 38 pages.

During the first inspection last month, American's primary concern was chafing of the wires, and it found no wear. Additionally, Arpey noted that when the when it originally developed the AD, the FAA gave carriers 18 months to comply. This time, it denied American's request for a slight delay and required immediate compliance.

Asked whether he has seen a change in the FAA's approach in recent weeks, Arpey responded: "The FAA is under their own set of scrutiny and pressures right now. I think the FAA has always held carriers to exacting standards. The FAA is stepping up surveillance and doing their job. Having said that, we hold ourselves to very high standards, irrespective of the FAA."

The current maintenance controversy and stricter rules have also resulted in flights being canceled for inspections at Delta (DAL), Southwest (LUV) and UAL's (UAUA) United, as well as several smaller airlines.

It began when whistleblowers complained to Congressional investigators that an FAA official had allowed Southwest to fly airplanes in violation of an AD in March. Inspectors in that case indicated the official had an overly cozy relationship with Southwest, and many legislators contend the agency has a similar relationship with other carriers.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs