American Puts Loss in Rearview Mirror

DALLAS ( TheStreet) -- The world may view AMR's ( AMR) American Airlines as a falling star, losing ground to merging competitors and held back by higher costs.

But the carrier doesn't buy in to reports of its demise.
American Airlines

As expected, American was the only major carrier to lose money in the second quarter. The loss of $10.7 million, or three cents a share, was even bigger than the penny-a-share loss that analysts estimated.

To review, on Monday Delta reported its best quarter in 10 years. On Tuesday, United reported its best quarter in 11 years. On Wednesday, American reported that it reduced its quarterly loss from $390 million to $10.7 million.

It's clear that the industry has long since passed the point that saw United and American battling for supremacy, with CEO icons Steven Wolf and Bob Crandall leading their armies into Europe and South America and snatching up the carcasses of once-dominant Eastern, Pan Am and TWA, even as the two contesting every slot at O'Hare.

Delta ( DAL) passed American in size following a 2008 merger with Northwest. United ( UAUA) will pass them both when its merger with Continental ( CAL) is approved. That means American, long the largest U.S. carrier, will soon be third.

One indication of current perceptions is that on United's earnings call, executives sniped at their biggest competitor for showing only 36% revenue per available seat mile growth in the Pacific. United showed 52%. United's results were "more than 15 points higher than our largest competitor's," said CEO Glenn Tilton. CFO Kathryn Mikells added, "We understand we've got to manage capacity." Perhaps others do not, she implied.

The competitor in question, unnamed throughout the call, is American.

Today's airline industry has evolved into one led by a Big Three, and for the moment, American trails the other two.

Yet the carrier refuses to operate as if it were trailing. Rather, it goes about its business, methodically pursuing its goals while shunning the merger with US Airways ( LCC) that industry observers have embraced.

For example, on Monday, in the first of its barrage of earnings week announcements, American provided details of its partnership with JetBlue ( JBLU) at New York's Kennedy and Boston's Logan airports. The arrangement includes frequent flier mile choice on interline routes that enable connections between 14 international American routes and 18 domestic JetBlue routes at the two airports.

American also had reason to celebrate Wednesday, despite its dour earnings report: A day earlier, after a 14-year wait, the airline received approval for transatlantic anti-trust immunity with partners British Airways and Iberia. Then the carrier announced the continuation of its effort to upgrade an aging fleet, exercising options for 35 additional Boeing 737-800 jets.

The timing enabled Boeing ( BA) to announce something truly unique at the Farnborough Air Show: an aircraft order by a U.S. airline.

Additionally, American announced the promotion of CFO Tom Horton to president, recognizing his efforts in helping to guide the carrier through one of the most difficult periods in its history after Horton rejoined American in 2006.

American's ongoing turbulence

The hub strategy of American and the Oneworld alliance, questioned by some, has both apparent weaknesses and imposing strengths. The JetBlue partnership strengthens the Kennedy hub in the battle for New York, where Delta has a bigger Kennedy hub and United/Continental has an even bigger Newark hub. American and United both have hubs in Chicago and Los Angeles: United is bigger in both cases. American's advantages include the best terminal at Kennedy and the country's largest mid-continent hub in Dallas.

Globally, the picture is brighter, because American/Oneworld has the best hubs in three continents. In Asia, partner Japan Airlines is the biggest carrier at Tokyo Narita. In Miami, Latin America's premier hub, American dominates. In Europe, the best route is JFK-Heathrow, which American dominates with British Airways, and the strongest hubs are Heathrow and Frankfurt.

American's labor picture is an apparent handicap. American claims a $600 million labor cost disadvantage, computed by modeling other airline contracts on American's work, and then weighing the benefits by the airline's size. With US Airways' contract, American would save $1 billion annually, CEO Arpey said Wednesday. But US Airways filed twice in bankruptcy court and each of the other competitors filed at least once. American never did.

Laura Glading, president of the Association of Professional Flight Attendants, said it isn't fair for American to blame its problems on labor, when the lack of anti-trust immunity has diminished revenues while the aging fleet boosts costs.

"Every single quarter, every time the company has to report earnings or the lack thereof, they blame labor," Glading said in an interview with TheStreet. "I don't want the public to think American's woes always have to do with labor costs."

Glading concedes that American's cost per available seat mile is relatively high, but said that in the case of the flight attendants, the difference reflects American's decision to use higher numbers of flight attendants on some international flights. "American has made the business decision to have three-class service to Asia and London," she said. "It works for them, but it also makes flight attendants look more expensive."

More generally, it is clear that that Glading, a 32-year American flight attendant veteran, understands the course that American's executives are following and applauded the approval of transatlantic immunity and the fleet upgrade. And Arpey and Horton said that over the next two years, the $600 million advantage will largely dissipate, as other carriers emerge from contract talks with richer deals.

On the merger question, Glading said, "I think American has made the decision to try to grow from within. I'm not here to second guess -- I hope it works."

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

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