Bankruptcy Judge Sean Lane did not impose Section 1113 terms per American Airlines’ request on pilots yesterday but don’t think that that was a win for the pilots.  Judge Lane found two small areas where he disagreed with need.  The first was unlimited codeshares and the second was an overly large number of furloughs.

American Airlines will revise its proposed terms and hand them back to the court in days and something will be decided.  The pilots can crow victory for labor all they want, this wasn’t a win for them on any level.  American Airlines is going to get fundamentally what they want and the judge signaled that, so far, he sees nothing out of line with the forming business plan despite the specious arguments made by pilots that it was unsustainable.

The business plan isn’t pie in the sky.  I honestly don’t think they have made a strong business case for a long term view either.  The continued focus on costs ignores the revenue problem which, despite AA PR, remains pretty bad.  Costs are much easier to quantify and therefore generally remain in focus during bankruptcy.  Revenue is based on a plan and projections that fundamentally rely on business conditions that are assumed and the ability to execute the plan.

My reservations about American Airlines are based on two fundamental observations.  First, the executive team in place today is in no way fundamentally different than the one in place for the past decade.  Over that past decade, the executive team has not shown itself capable of executing a plan to success.  As a result, the company has lost more than $10 Billion over 10 years.  That is not a company proving itself.

Second, business conditions in the industry are too volatile for making sound projections.  Delta Airlines exited bankruptcy with a business plan based on $80 / barrel oil prices.  Within months they were faced with $130 / barrel oil prices.  The airline industry is subject to strong influences from a variety sources that are entirely outside of the airline industry’s control.  The sum of American Airlines’ plan for revenues is “the other guys are doing this and we therefore think that with reduced costs, we can do that or better.”

The problem with that is you only know how the other guys are doing today, not how they’ll be doing tomorrow.  The other guys have other issues to cope with that aren’t always the same issues that AA is presented with.  Delta fixed many of its issues with a merger and built an unparalleled network as a result.  Then they doubled down and did a deal to capture the NYC market.  United did its merger in the reality that to compete with Delta, it needed scale and it remains to be seen that the ContiUnited merger is a true success.  There is evidence that they’ll succeed, we can’t declare it a success quite yet.

My problem with American is that, so far, the business plan seems to ignore weaknesses that are inherent in the system today.  In part, the Cornerstone Strategy relies upon capturing market share in very competitive markets.  Anyone who follows this industry knows that in light of the capacity restraints that airlines have shown, American Airlines has been the least effective in this and hasn’t shown much restraint.  Furthermore, to gain that market share means getting it on price (which sets off an industry war on fares) or on service.  American Airlines continues to do virtually nothing to improve service and demonstrate that it has a handle on service issues and can get its employees to assist in raising the customer experience level.

I think American Airlines needs a team that can execute a revenue and service plan.  That team sits at US Airways, not American Airlines.

Filed under: Airline News by ajax