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Morningstar Airline analyst Basili Alukos and airline consultant Mike Boyd break down what led to American Airlines’ bankruptcy.
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With you later on in the am -- haven't heard by now the big story we're watching here today is American Airlines parent company AMR filing for bankruptcy.
Yes now with more about what it means for the company shareholders and for fliers the -- A look ghosts from Morningstar there in Chicago and in Denver president of Boyd group international he's -- airline consultant.
Mike buoyed sentiment -- to have both of you with us so might like to Begin with you.
We know at bats American Airlines was teetering a very very tough financial situation for for quite awhile something you know twelve billion dollars in debt.
Huge pension liabilities and and comparatively very small -- -- So what time it made American Airlines finally go had to file for bankruptcy.
What was the final.
-- you know and it.
It won't 2003 when they.
Negotiated with their unions they -- that you get by with that debt load today we have fuel -- a hundred bucks a gallon hundred bucks a barrel.
You can't do it so you have a debt load up.
Of twelve billion like you said you have a pension fund.
That they have to -- -- -- competitors don't -- last year they had to shell out 300 million just to fund their pension plan so it's not there operation it's their pension plan.
And their debt.
And this bankruptcy -- will will take care of that and thank god they have enough money -- optical after a bank and get dip financing.
The silly do you agree with that as far as the operation goes that you be yet he'd attention went first -- -- they the only ones that run this sort of defined benefit pension plan in the in the space at this point time.
And the second thing is operationally T and they operate along the same lines the other legacy carriers in a cost effective manner.
You're right from a legacy perspective they have the largest I think similarly -- -- have a small pension.
But you're absolutely right -- labor cost -- -- how I calculated they were running at a disadvantage between one point two to one point five billion.
Compared to the average industry they say it's about 800 million but nevertheless that's cash out the door.
They're expected to make 560 million pension contributions for next year or so you -- that over the past three years -- -- -- about two billion dollars.
In additional cash outflow of the -- secures its peers don't have to pay.
And that puts them at a start disadvantaged I think that's ultimately what force them just come to bankruptcy.
What about the -- because a lot of -- is being made -- this big order from Boeing and I was gonna help them get more fuel efficient planes.
And plays -- require less maintenance.
It's.
-- you're actually right to me that'll take time it's gonna take them a few years before they take delivery you think about the MD eighties they fly think about 30% dwarf.
Fuel inefficient.
And the new planes and also -- estimate they pay a little bit.
More than a 120 million in additional repair and maintenance costs because of the downtime but also flying one fewer hour per day than their peers and that's essentially opportunity cost.
Gone are Mike let me get your take on -- bloated cost structured that American Airlines now as a challenge of streamlining.
In addition to the -- it what does it mean for jobs and -- think -- pension benefits for new employees.
If they -- -- -- -- the point in the future what will look like.
Wealthier new hire you look -- your -- 401K.
So that those those days are over of having a defined pension plan that's that's done you but the real issue is we're not gonna see a whole lot of things done with employees other than what was already plan.
-- -- plan to have reductions in some capacity the big thing that hasn't been mentioned here is.
This gives them the opportunity of shedding most of American Eagle which is a giant millstone around their neck.
With a about a 150.
-- 160.
Financially obsolete airplanes and this is gonna be another thing -- put American back on the track.
-- we've seen so many -- airlines merger mean where it makes sense they get the back office.
Together and you you get cost savings when it makes sense for American that's -- to merge with somebody right now our be bought by somebody right now.
This is the airline business not the junior -- you know.
Necessarily have -- partner -- and the idea of what's left the US Airways and and the Doug Parker one US Airways one of the most brilliant people in this industry.
But US Airways is not a very good vehicle you'd want -- merge with right now other than that there isn't much out there and it you don't really have to -- to survive.
Needed delta and northwest but it might help but there's nothing left for American I think they can move ahead on their -- very very very smoothly after they shed these.
Loss blame that -- we are seeing a big pop and shares of US Airways because I guess that's the -- the loan airline right that hasn't.
An American for that matter to these are did -- to what airlines being talked about here is potential merger.
Candidate so what are your thoughts your reaction to what Mike is saying that you know the two could pretty much standalone the -- do you agree.
-- -- think a little bit of a contrarian view on that.
I think it would make sense for those two airlines to -- I think about kind of the next generation airline and I think it's one where you have.
International carriers such as -- -- operating international routes they have their cornerstone markets.
And US Airways which has done an unbelievable job cutting costs and they're very efficient now almost to the point -- -- maybe.
Cost competitive US Airways allow them to dominate the domestic market in just like Mike said.
-- American Eagle -- get rid of all those obsolete planes.
It's I think that merger makes sense it's just a question of one anti trust that's always a big thing especially given a number of mergers that have occurred in the two pilot integration and we know US there was hasn't had -- great relations.
My one final question from me on this.
I was -- at the opening I got a letter from American Airlines has a frequent -- don't worry about your miles there -- okay is this gonna affect customers or will will this.
This bankruptcy really impact right now.
Always gonna impact up bankruptcy attorneys big way.
But -- for -- mere -- flying we can really rely on the experience of flying going forward being just as inconvenient as it's ever been and it won't affect us at all.
Are right gentlemen let me just get to take quickly.
Will send a -- the silly and you're your take on -- shares AMR down about 29 a surprise.
Regional carriers have always been that are -- these shows -- of the industry week.
In terms of share share purchasing.
-- -- -- shares that are attractive I think yes you know southwest.
To needs to me southwest that's the one I think there's a lot of merger benefits from that AirTran acquisition I don't think the market is considered.
-- currently factor again I think -- a lot of upside in that perspective as a result I think the shares are undervalued.
I appreciate gentlemen thanks for your take your insight and analysis on the American Airlines bankruptcy filing today appreciate it -- wolf and.
