AMR Steps Back From the Abyss

DALLAS ( TheStreet) -- During four days in February, American ( AMR) was transformed from victim to victor.

On Feb. 9, Japan Air Lines rejected Delta's ( DAL) bid to replace American as its partner. On Feb. 10, the U.S. Transportation Department seemed to check Delta's bid to expand at LaGuardia Airport, which might have threatened American in New York.

On Feb. 12, American and JAL applied for trans-Pacific antitrust immunity, which they will likely get. On Feb. 13, the DOT tentatively approved American and its partners' bid for trans-Atlantic antitrust immunity.
American Airlines

"It pretty much worked out the way we planned it," joked CFO Tom Horton, in an interview.

"The people of this company have persevered through a lot," added Horton, more serious and more reflective. "Go back to the last decade, and it's been a story of challenges for the industry and challenges for the company. It has been through sheer grit and hard work that we avoided bankruptcy, raised a lot of money last year and got fleet renewal on track, and now the alliances are on track."

Wall Street is tuned in to American's story. The carrier's stock is up 23% this year and rose 30% in February. Shares of rival Delta are up 19% this year, including a 4% February gain. The S&P 500 is flat for the year despite a 3% February gain.

American still faces multiple challenges, starting with labor unions that made billions in concessions to avoid bankruptcy. In February, two major unions said they will soon ask for release from mediation as they approach the end game in long-running contract talks. Meanwhile, the airline's on-time performance has been near the bottom of the industry for two consecutive years. "We're not under any delusions here," Horton said. "We've still got a lot of work to do."

It is, however, instructive to reflect on American's bleak situation last fall. In August, Delta and US Airways ( LCC) said they would trade slots and other assets, giving Delta a stronger presence at LaGuardia. Although American claims New York as one of its five focus cities, Delta operates a bigger Kennedy hub and wanted to add a hub at LaGuardia.

In September, Japanese media revealed that Delta was negotiating to replace American as a partner to JAL, which has the biggest presence at Tokyo Narita, Asia's most important airport. For months, Delta was viewed as the front-runner. In October, European Union regulators warned American and partners British Airways and Iberia that their bid for antitrust immunity may violate antitrust rules.

American was "staring at the abyss," said consultant Robert Mann. "The risks were that American was being marginalized in New York and that if American didn't get trans-Atlantic ATI and lost JAL, that would end Oneworld."

Horton said that overstates the threat to Oneworld. "Look around the world -- it's strong in every region," he said. The alliance grew stronger in late February, adding India's Kingfisher, while in the other fastest-growing major market, Oneworld is talking with China Eastern. This is yet another must-win battle for American, because Skyteam and Star already include Chinese partners. A factor, Horton said, is that China Eastern executives "were observing the JAL situation."

The happy ending in Japan, Horton said, reflects JAL's decade-old relationship with American as well as doubts about regulatory approval of antitrust immunity with Delta. "It was a hard-fought battle," Horton said. "Gerard and I made many trips -- I was over there five times in a couple of months." Said consultant Mike Boyd, "For three months, you couldn't find anybody from American or Delta in this country."

Asked if he would have made a similar approach to JAL if he were at Delta, Horton responded: "We and Delta have different operating styles -- I'm not sure we would have done it the same way. I understand why they did it: they have a lot to lose. Let's leave it at that."

In the trans-Atlantic, ATI approval came on the third application, 13 years after American first filed. Heathrow's 2008 opening to all airlines triggered this year's approval, Horton noted. Experts say antitrust immunity benefits American, but questions remain for employees.

Says Mann: "Many employees have real concerns about the joint business arrangements, about how much flying will be taken away," from American and operated by partners.

In general, labor relations at American are not good. Requests by the Association of Professional Flight Attendants and the Transport Workers Union to be released from mediation would trigger countdowns to possible strikes. Boyd said "the TWU is one of the most rational, forward-thinking unions out there, and yet they are at the end of their rope -- American management has to address that."

Horton said that many airlines have open contracts. "Our objective, when the dust clears, is to make sure our labor contracts are fully competitive," he said. "Whether that means the other guys see their rates begin to rise, or we somehow get more productivity, I don't know."

American's on-time performance is also troublesome. The carrier ranked 16th of 19 carriers in 2009, a slight improvement from its 19th place finish in 2008. "It doesn't even seem to be an issue for them," Mann said. Horton noted that industry overall on-time performance has improved. "You've seen us invest a lot in dependability," he said."It's borne fruit in absolute performance even if it hasn't yielded a better ranking."

-- Written by Ted Reed in Charlotte, N.C. .

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