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.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
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.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
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.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV