AMR's Sweeping Changes Could Set Industry Trends (AMR)

Douglas A. McIntyre

AMR Corp. (NYSE: AMR), the parent of American Airlines, has announced some sweeping changes at its annual meeting of shareholders today.  More importantly than just how this affects AMR, these changes will likely set the trend of what investors and passengers may expect to come from the legacy carriers in the U.S. under the current environment.

For starters, AMR was already going to lower its flight capacity but the new plan will be flight capacity cuts of 11% to 12% in its mainline domestic flights.  That means that empty plane routes and unprofitable routes will be cut off at the head.

The company is also hiking its fees for telephone service centers, extra luggage fees, and even higher fees for taking your pet Fido or Fifi on trips.  The first checked bag fee will now go to $15.00.

It will retire 75 regional and mainline aircraft as well.

All of these actions are likely to create facility closures and will create the opportunity for more layoffs and less new hires.

The truth is that all major airlines are in real trouble now.  The old “value stock” screens that were picking these up for “valuation” at the end of 2007 and start of 2008 were nothing more than value traps.  As far as guidance, it really doesn’t matter at all now for 2008.  It’s already losing money and that will be something to get used to. These airlines are going to all be at-risk with the flight trends of a weak economy and the incredibly higher fuel costs.

A few suggestions for airlines now to regain profitability from is as follows:

  • lower the minimum flight capacity requirements for a flight to depart to a minimum of 75% load on each flight;
  • cut flight attendants to one or two per plane;
  • make all of your water and drink cart items come with a fee or just go to vending machines at the back of the plane;
  • put a dollar pay-slot to get into the bathroom;
  • cramp more seats into an already crowded plane;
  • put corporate advertising on the back of the plane seats;
  • add $100 fuel surcharges to tickets;
  • begin charging an on-time service fee of $20.00 per ticket.

And by the way, if airlines choose to implement these they better go ahead and include a mandatory Air Marshall on each flight.  As passengers are going to become significantly more irate and suffer from more air rage, someone will be needed to keep the peace and maintain order in the skies.

If you think that airlines are going to be more well-received after this, the actions so far speak differently.  AMR shares reopened for trading and are now down 12% to $7.20.  Its 52-week trading range is $6.81 to $29.32.  At the start of 2007, the stock was as high as $40.00.

May Day!

Jon C. Ogg
May 21, 2008