American Airlines (AAL)

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On the morning of April 15, 1926, a young aviator named Charles A. Lindbergh stowed a bag of mail in his little DH-4 biplane and took off from Chicago for St. Louis. Later that day, he and two other pilots flew three planeloads of mail from St. Louis to Chicago.

At the time, Lindbergh was chief pilot of Robertson Aircraft Corporation of Missouri, which was the second aviation company to hold a U.S. airmail contract. It was one of scores of companies that eventually consolidated to form the modern-day American Airlines.

The consolidation began in 1929, when The Aviation Corporation formed to acquire young aviation companies, including Robertson. In 1930, The Aviation Corporation's airline subsidiaries were incorporated into American Airways, Inc. In 1934, American Airways became American Airlines, Inc., which began trading on the New York Stock Exchange in 1939.

American acquired three major companies over the years, Trans-Caribbean Airways in 1970, Reno Air in 1998 and Trans World Airlines in 2001. Today it is the world’s largest airline.

Although prosperous throughout the mid- and late 1990s, American’s finances were thrown into a tailspin along with the rest of the airline industry by the September 2001 terrorist attacks. Rising security and fuel costs, low cost competition and a recession caused the airline to lose $8.1 billion from 2001 to 2005. Thanks to $1.8 billion in employee concessions, however, American avoided filing bankruptcy in 2003 and instead launched a Turnaround Plan that called for:

•  Cutting domestic capacity, including downsizing the former TWA hub in St. Louis.
•  Expanding more lucrative international routes.
•  Adding seats on MD80, 737, 767 and 777 aircraft.
•  Charging passengers for in-flight meals.
•  Converting maintenance operations into a profit center.

The plan enabled American to cut 21,200 jobs from 2003 to 2005  and set the stage for a fiancial turnaround. For the first time in six years, AMR reported profits in 2006. Despite an $800 million rise in fuel costs, American earned $231 million, compared to a loss of $857 million in 2005. Revenues climbed 8.9 percent to $22.6 billion – or 30 percent above their level when the Turnaround Plan was launched.  

In the fourth quarter of 2006, key metrics such as mainline load factor, yield and passenger revenue per available seat mile, were all on the rise. American was even able to sell $400 million in common stock in the second quarter.

FLTops.com members can view the financial performance for each major airline for the past five years by visiting the financial page.

Pilots played a major role in the recovery by giving up $660 million in annual wages and benefits, or more than any other employee group.  Their union ratified the concessions package with 69 percent support, compared to 52.7 percent for flight attendants. Pilots took 23-percent pay cuts as part of the cost-savings package.

As part of the last-minute changes to the agreement, the duration of the contract was shortened slightly, and future pay increases were tied to management incentives rather than to the company's bond rating. Pilots and American's other employees will participate in a profit-sharing plan as part of the restructuring agreement.
 
The restructuring has created stress throughout the AMR Corp. system. There is still deep rancor over an executive retention bonus program that included bankruptcy-proof pension payments for executives. Today, more than 2,800 pilots are still on furlough at American. That is more than at any other U.S. airline. 

Pilots at American Eagle, the nation's largest regional airline operation, remain upset because some mainline pilots have the ability to bump American Eagle pilots from captain slots, while some Eagle pilots gave up the chance to interview at the mainline in exchange for some furlough protection at the regional affiliate. The Air Line Pilots Association represents American Eagle's pilots.

Despite its resurgence, American Airlines remains under intense competitive pressure. Delta and Northwest Airlines were poised to emerge from Chapter 11 bankruptcy in 2007 with sharply reduced debts and costs. Delta Airlines, United Airlines and Northwest Airlines also got special treatment from Congress that gives them seven more years to meet the funding requirements of the defined benefit pension plans. 

American will also be under intense pressure from its unions, which are eager to win back the $1 billion in pay and benefits they sacrificed in 2003. Fuel costs, over which American has no control, could play the biggest single factor. While they declined sharply in the fourth quarter of 2006, another spike in prices would eat up profits quickly.

Investors, meanwhile, will remain demanding. The consensus of securities analysts who follow American is that its earnings will grow fivefold in 2007 to $5.21 per share.  

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