published Thursday, July 19th, 2012

American Airlines turning around

  • photo
    American Airlines baggage handlers help passengers check luggage at Dallas-Fort Worth International airport in Grapevine, Texas.
    Photo by Associated Press /Chattanooga Times Free Press.

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American Airlines affiliate American Eagle has three flights daily from Chattanooga Airport to Chicago or Dallas-Fort Worth.

DALLAS — Eight months into a bankruptcy that was years in the making, American Airlines is showing signs of finally turning itself around and regaining its lost glory.

American's parent company, AMR Corp., reported Wednesday that revenue set a record in the second quarter as fares rose and more passengers filled its planes. And it turned an operating profit, minus the millions it spent on bankruptcy lawyers and severance pay.

The airline is cutting costs and making progress in labor negotiations. It's even losing fewer bags.

But the nation's third-biggest airline still faces huge challenges to succeed against United and Delta, which are similar to American in structure but much bigger. They're also profitable.

Analysts say American must expand and improve its route network to attract high-paying business travelers. It's weak on both the East and West coasts. It ranks below average in government ratings for on-time flights and consumer complaints.

US Airways CEO Doug Parker says the best way for American to grow its network is by merging with his airline. Many Wall Street analysts agree. American's unions support a potential US Airways takeover because they believe it will mean fewer layoffs and other concessions.

AMR CEO Thomas Horton has preferred a go-it-alone strategy, although he said last week that AMR will examine merger possibilities. Bankruptcy creditors will decide between Parker's proposal, Horton's independent path and any other plans that pop up.

To control its own fate, AMR will have to prove to creditors that it can do better on its own than it would if paired with US Airways. Its report Wednesday on second-quarter financial results might bolster its case.

AMR narrowed its second-quarter loss to $241 million from $286 million a year ago. But excluding bankruptcy-related costs ranging from employee severance obligations to legal fees, AMR said it would have earned $95 million -- its first operating profit for the early-summer quarter since 2007.

Revenue rose 5.5 percent to an all-time high of $6.46 billion. The company credited an increase in corporate-travel accounts and its revenue-sharing ventures with British Airways, Iberia and Japan Airlines. Average fares increased 7 percent over last summer. But even while they charged more for tickets, American and regional affiliate American Eagle sold 85.1 percent of their seats, another company record. And by a closely watched measure of revenue per seat, American is improving faster than its rivals.

Horton called the quarter "exceptional improvement." He said the restructuring was just beginning to take hold, and that momentum would build until "American re-emerges as an industry leader."

AMR's case to creditors also will be stronger if it can show the ability to control costs. The company wants to cut annual spending by $2 billion a year -- it was $25 billion last year -- with more than half coming from labor. American employees are not the highest paid in the industry, but AMR argues that inefficiency and cumbersome work rules result in labor costs that are hundreds of millions too high.

In late June, American was struggling to get its union on board with the cost-cutting plan. It had agreements only with a few groups of ground workers. Then it scored a breakthrough: Directors of the pilots' union narrowly approved an American contract proposal and sent it to the airline's 7,500 pilots for a ratification vote that will end Aug. 8.

American says the deal would cut spending on pilots by 17 percent or about $315 million a year even with pay raises.

Union President David Bates said the union's financial and legal advisers recommended the offer largely because the pilots would own 13.5 percent of the new AMR that emerges from bankruptcy.

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