NEW YORK (CNN/Money) -
American Airlines said Tuesday it will cut 7,000 jobs by next March and reduce its capacity 9 percent by November as it tries to cut rather than grow its way back to profitability.
"We must get our costs down in order to compete and must focus on the products our customers want and are willing to pay for. Our decisions going forward will be framed around those objectives and geared toward positioning American to succeed and be profitable," said a statement from Donald Carty, CEO of American Airlines parent AMR Corp.
|American is cutting its schedule of flights and staffing in order to try to return to profitability.
Shares of AMR Corp. (AMR: up $0.35 to $8.71, Research, Estimates), the world's largest airline, were about 4 percent higher in midday trading Tuesday following the announcement.
American and other major carriers traditionally have operated a global network of flights in order to cater to and capture the greatest number of lucrative business customers. But a sharp decline in business travel and customers willing to pay full-fare prices has been hurting airline results for the last 18 months, pre-dating the Sept. 11 terrorist attack. Neither American nor most of its competitors has posted a profitable quarter since the end of 2000.
In the wake of the attack American and most major carriers cut their schedules to meet reduced demand. American had 10 percent less capacity in the second quarter than a year earlier, while the percentage of seats filled slipped only 0.3 percentage points. But the average amount paid by passengers for every mile traveled fell 9.5 percent at American, and because of that AMR and its major competitors had wider losses. And though losses are expected to be narrower on a year-to-year basis in the third quarter, analysts now expect them to continue at least through 2003. AMR did not offer any new earnings guidance or target for a return to profitability Tuesday.
"I'm not going to suggest that the things announced this morning will fix our profitability problem," said Chief Financial Officer Jeffrey Campbell in a conference call with analysts Tuesday. "They're just steps along the road. We're going to find more."
The moves come the day after US Airways Group Inc. (U: Research, Estimates), the nation's No. 7 carrier, filed for bankruptcy court protection. Analysts expect UAL Corp. (UAL: down $0.94 to $2.86, Research, Estimates), owner of No. 2 United Airlines, could follow suit by the end of the year.
American is not seen in the same financial crisis as United or US Air. Lehman Brothers analyst Gary Chase estimates that AMR is burning through about $4 million cash a day, but its $2.6 billion in cash and $6.0 billion in unencumbered assets as of June 30 give it breathing room that US Air and United apparently do not have.
Still, Carty had signaled Tuesday's changes in a message to American employees last month, saying the airline was losing its key business travelers to low-cost carriers such as Southwest Airlines (LUV: up $0.43 to $13.15, Research, Estimates), and that American and other major carriers no longer could hope for an improved economy to return it to profitability. He also predicted at the time that the airline would need fewer employees in the future.
Carty said then and again Tuesday that the airline had to focus on improving efficiency rather than simply capturing the greatest revenue no matter the cost.
The airline already had experimented with schedule changes at its O'Hare International Airport hub in Chicago, having aircraft come in more continuously throughout the day when they can be handled more efficiently, rather than at peak periods that reduced layover times business travelers traditionally demanded. It said Tuesday it now will expand that kind of schedule to its main hub at the Dallas-Fort Worth airport.
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As part of the cost-reduction effort, the airline is trying to reduce the number of different makes and models of aircraft in its fleet. It will retire its 74-jet Fokker fleet, defer delivery of 35 aircraft in 2002, and work to standardize the various models of Boeing aircraft in its fleet. The airline hopes the simplification will allow it to schedule, substitute and maintain aircraft more easily.
American also said it plans to reduce capacity by 9 percent by November amid worrisome economic and consumer news. Campbell said that goes far beyond the 2 or 3 percent reduction that could be expected due to seasonal declines in demand, and Campbell did not rule out further cuts down the line.
"The 9 percent is a pretty stark reduction, to be honest," he said. "We have a pretty clear line of sight on what we think right step is for winter. I honestly don't know what right level will be for next summer. We're going to watch what industry does and where demand goes and make adjustments up or down."
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He also said that the 7,000 job cuts announced Tuesday will only be the first step in further reductions. The elimination of some aircraft types announced Tuesday won't take effect by next March, when the 7,000 cuts are to be completed, and Campbell said that further schedule changes are planned as the airline completes these latest announced changes.
"The reality is we're going to find a way to run our business with fewer people than suggested by that 7,000 number," he said.
Campbell said that American's initiative to have fewer seats and more leg room in coach is safe for the time being, but can't be guaranteed long term, despite what he says is a good reaction from customers.
"There are no sacred cows and everything is on the table, including more room in coach," he said. "If we thought the right thing to do was spend a lot of money to put a lot of seats back in planes, we'd be announcing it today, and we're not. But I don't know what answer will be a month, three months, a year, or three years from now. The environment we're operating will continue to evolve."
Part of that reduction includes accelerating to November the retirement of the nine 767-300 aircraft acquired as part of its 2000 purchase of bankrupt Trans World Airlines.
Employees affected by the job cuts will be notified once the new October and November schedules are in place. The cuts, which equal about 6 percent of its overall staff at the end of the second quarter, will be made through a combination of voluntary programs, leaves and part-time schedules. Staffing already was 13 percent below a year earlier on June 30. The reductions are expected to save American more than $1.1 billion annually, the company said.
The fleet changes are further expected to save more than $1.3 billion in capital spending in the future. American already has cut or deferred an additional $5 billion in capital spending since early 2001.
American expects the changes announced Tuesday to boost liquidity. It said it has "significant" untapped financing, including several billion dollars in both aircraft and non-aircraft assets. In July, American completed a $500 million tax-exempt financing at John F. Kennedy International Airport in New York, further adding to its cash balances.