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.

Congress, which funds the FAA, has vilified the agency. On Tuesday, Democratic leaders of the House Transportation Committee charged three top FAA officials with presenting "inaccurate and misleading" statements, under oath, to the committee during an April 3 hearing. The officials had denied that local FAA agents were ordered to conduct special meetings with regulated entities.

On Thursday, Sen. Jay Rockefeller, D-W. Va., and chairman of the Senate aviation subcommittee, declared: "Moving forward, the FAA needs to take a real good look at itself. The FAA is an agency spiraling downward."

Rockefeller said he sympathized with inconvenienced passengers, but also stressed that the "FAA is not a business. It's a government agency that provides public good" and ought to enforce safety standards more stringently. And, he said, "Sometimes you have to fire people to make a point."

Meanwhile, Standard & Poor's said that the financial impact of this week's cancellations will likely exceed the $20 million to $30 million impact of a major storm at a hub, but AMR's ratings were unaffected.

Avondale Partners airline analyst Bob McAdoo sees a buying opportunity. "News-driven selling has AMR shares to within a dollar of their 52-week low," McAdoo wrote in a research report before the market opened Thursday. He predicts the bad news will pass.

At the same time, he believes, record high oil prices will cool off, or if not, may continue to push smaller, less financially stable, airlines out of business. American "is the largest of the legacy airlines and will be standing when the crisis is over and the weak carriers have disappeared," McAdoo wrote.

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