AMR Risks Cash Erosion

Problems such as delays and loose seats could force airline to tap bankruptcy cash fund.

American Airlines risks having to tap its $5 billion bankruptcy cash fund and probably will lose some passengers after on-time arrivals tumbled, cancellations surged and incorrectly installed seat clamps were found on six planes.

The operational obstacles add to questions about whether American, the third-biggest U.S. airline, can successfully emerge from bankruptcy protection on its own or should merge with would-be suitor US Airways Group Inc., said James Corridore, a Standard & Poor’s equity analyst in New York.

“Certainly things are not going well in the reorganization process right now,” Corridore said in an interview. “These are major hiccups.”

The glitches flag considerations that are among the most important to passengers when choosing an airline -- arriving on time safely and convenience of the flight schedule. Concerns that seats are coming loose may lead more passengers to move to a competitor, said Jeff Kauffman, a Sterne, Agee & Leach analyst in New York.

“The seat issue elevates it to a whole new level,” Kauffman said. “Before you’re dealing with inconvenience; now you’re dealing with safety. What else is going to happen?”

The airline and the U.S. Federal Aviation Administration are investigating why the seat clamps failed. The airline pulled 48 of its 102 Boeing Co. 757s out of service on Oct. 1 and 2 for inspections after rows of seats came loose during three flights from Sept. 26 through Oct. 1. All the planes were returned to service by late Oct. 3.

Six 757s were found to have improperly installed clamps that could have allowed more seats to pull away from tracks securing them to the cabin floor. One had a mix of two different types of seats, American said. The airline declined to discuss additional details of the inspections.

Some of the seats recently had been removed and reinstalled to create a higher-price product in the coach cabin, and work was done both by American employees and a contractor, the airline said. Timco Aviation Services, based in Greensboro, North Carolina, did “much” of the work, the Transport Workers Union said. Timco declined to comment.

American, a unit of AMR Corp., inspects the seats monthly even though Boeing only recommends they be checked every 18 months, said David Campbell, vice president for safety, security and environmental.

“We are a solidly safe airline,” Campbell said in an interview. “I have a lot of confidence we are operating a safe airline.”

 

Passenger Loyalty

American returned the 757s to service on Oct. 3, then said yesterday it might delay or cancel some flights while mechanics performed additional inspections on the four dozen jets when they landed at their next destinations.

The airline, which asked mechanics to focus on the lock mechanism that secures seats to the floor, said the work would be completed by Oct. 6.

Jay Sorensen, president of consultant IdeaWorks and a former airline marketing director, said most passengers will stick with American if the carrier provides the most attractive schedule or a lower fare.

“Similar incidents like this have happened with airlines all over the world for some reason or other,” said Sorensen, who’s based in Shorewood, Wisconsin. “Maybe not something as visible as a loose seat, but often things like a broken engine part. If I had to choose between them, I’d choose a loose seat over a broken engine part every day of the week.”

The September delays and seat woes built on labor unrest after Fort Worth, Texas-based American imposed concessions on pilots to help it restructure in bankruptcy and detailed plans to cut more than 4,000 jobs among mechanics and airport ground workers.

About 59 percent of American’s flights arrived on time in September, according to preliminary numbers on 51,511 arrivals tracked by industry researcher FlightStats.com. That fell from 74 percent in August. American canceled 2.7 percent of its September flights, up from 1.8 percent the prior month, FlightStats data showed.

American expects the impact from the operational issues on September unit revenue to be small, Michael Trevino, a company spokesman, said in an interview. The airline is expected to report September traffic results, including revenue for each seat flown a mile, on Oct. 8.

United Continental Holdings Inc., the world’s largest carrier, had an 81 percent on-time rate in September, while No. 2 Delta Air Lines Inc. was at 89 percent, FlightStats showed.

 

Public Reaction

“It costs money when the system is not on time,” Kauffman said. “Whether it’s reshuffling aircraft to different locations or getting new crews or paying for passenger inconvenience, there are a lot of small costs. The biggest one is when the flying public says, ‘Enough is enough.’”

American trimmed as much as 2 percent of its capacity from mid-September through October after late flights began to rise last month. The airline threatened to take legal action against the Allied Pilots Association if it didn’t move to stop the slowdown, which the carrier blamed on a jump in maintenance issues raised by pilots just before flights.

The union denied organizing or supporting any slowdown effort and said pilots were citing legitimate concerns. The airline’s on-time performance improved to 66 percent on Oct. 3 after the Allied Pilots Association agreed to resume talks on a new contract.

“I’m sure there are people booking away” to other airlines, said David Swierenga, a former chief economist at the Air Transport Association trade group who now runs consultant AeroEcon in Round Rock, Texas. “In an industry where profit margins are very thin, one less passenger on an aircraft can mean the difference between profit and loss for that flight.”

Kauffman, the Sterne Agee analyst, said he booked US Airways over American for an upcoming business trip to avoid delays. It may take American as long as 12 months to win back the trust of some travelers, hindering its ability to accurately forecast passenger traffic as it prepares a reorganization plan, he said.

“This is a serious hurt for the company” that could “eat through” part of the $5 billion cash reserve held by American to finance its restructuring, Swierenga said. “There are people who are just going to write this company off and say, ‘I’ve had it.’”

American retains the exclusive right to propose a reorganization plan until the end of this year. US Airways agreed Aug. 31 to exchange confidential financial and operations data with American to better evaluate a potential merger.

 

US Airways

While US Airways already has reached contract agreements with American’s unions conditioned on a merger, American has said it prefers to emerge from court protection on its own and then consider combinations.

If flight delays and other issues are brought under control, American’s creditors committee probably will be willing to move ahead in evaluating the airline’s plan before considering other options against it, Kauffman said.

“But if, in the course of this, I have to ask, ‘Is this being managed properly and is there a better solution,’ then that’s a very different situation,” he said.


 

Bloomberg News

 

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