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‘Let’s Go Fly, for God’s Sake.’ Behind American Airlines Chief’s All-In Strategy - The Wall Street Journal

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FORT WORTH, Texas—Airline leaders have two choices today, neither good: Spend scarce cash to get back in the air despite Covid-19 health perils or hunker down and risk surrendering market share later.

Doug Parker, American Airlines AAL -7.37% Group Inc.’s chief executive, decided to go all in this summer.

“Let’s go fly, for God’s sake,” he said in an interview last week. “If it doesn’t work, we’ll pull it back.”

From June to July, American added the equivalent of an entire airline to its schedule—as many flights as JetBlue Airways Corp. flies on a typical day. American has brought back about half the 410 jets it parked this spring when travel demand plummeted. This week, it is offering more than twice as many seats as United Airlines Holdings Inc. and nearly 50% more than Delta Air Lines Inc., according to data provider OAG. Dallas-Fort Worth International Airport vaulted ahead of airports in Atlanta, Chicago and Chengdu, China, to become the world’s busiest.

Travel demand is languishing at about a quarter of last year’s levels. Covid-infection rates are skyrocketing in much of the U.S., and some cities and states are imposing new travel restrictions.

American told employees Wednesday that demand hadn’t rebounded as quickly as executives had once hoped, as new Covid-19 cases rose in some places American had been betting on. The airline said it anticipated being overstaffed by more than 20,000 people when federal aid runs out Oct. 1 and is starting to send notifications of potential furloughs to nearly 30% of its front-line employees. Passenger revenue in June fell 80% from a year earlier.

Mr. Parker is staying the course despite the growing storm around him. American’s fly-more strategy is targeted for the summer and designed to be flexible, American executives said. It is grounded in his belief that travel will eventually recover and American can be ready for it by adding flights when it sees opportunities.

‘If it doesn’t work, we’ll pull it back,’ says American Airlines CEO Doug Parker.

Photo: Cooper Neill for The Wall Street Journal

American is still deciding how big the airline will be come fall, American executive said. It is easier to cut flights than to add them, they said, so the strategy preserves options.

The coronavirus’s trajectory will determine whether American’s approach will turn out to be judicious or reckless. All U.S. airlines have said they must shrink to match demand that is likely to remain diminished for years. The question is how much, for how long.

Mr. Parker said the crisis has no precedent in its decimation of travel demand and is an unwelcome return to the volatile days he believed the industry had left behind. “I just hate this,” he said. “There’s not enough demand to support the people we have.”

Pilot training and other factors make it hard for airlines to quickly fly more, so decisions carriers make now—how much staff to keep, how many planes to fly—will determine their market share next summer. United has said it might need to cut as many as 36,000, nearly half its U.S. staff.

Airlines that cut too much could lose share to rivals in a recovery. Those not cutting enough could drive themselves closer to going bust.

American Airlines operation center in Fort Worth, Texas.

Photo: Cooper Neill for The Wall Street Journal

American is in a particularly vulnerable situation, having entered 2020 as the world’s largest airline by traffic but with hefty debt and profit margins trailing peers’. Extra flying could sap American’s cash, leaving its finances more precarious if demand dives again, analysts said.

“They’re either going to look very prescient or very foolish,” said Wolfe Research analyst Hunter Keay. “They’d better hope the traveling public gets comfortable pretty quickly or that there’s a vaccine.”

One unknown is whether American will bring enough revenue to justify the number of flights. Its customers are now mostly tourists looking for cheap vacations, not business travelers paying top dollar.

American Eagle planes at Dallas-Fort Worth International Airport last month.

Photo: Cooper Neill for The Wall Street Journal

Investors “struggle to understand the point of an aggressive capacity plan” amid historically low demand, said Duane Pfennigwerth, an analyst at Evercore ISI. Even as many people still fear air travel, American lifted its seat limits, joining some other carriers that let flights take off full. An American spokeswoman said the airline has safeguards in place, including requiring face coverings and “enhanced cleaning procedures” for planes.

Southwest Airlines has increased flights more than American but has some advantages, such as a mostly domestic network and a simple fleet—only Boeing 737s—that keeps costs down. United and Delta have been more cautious.

In an internal memo in June, United said some competitors were operating an “inflated schedule” that would waste money. United CEO Scott Kirby in an interview late last month declined to comment specifically on American but said: “Market share during the pandemic is almost irrelevant…. People aren’t going to travel in the same volume and the same type of travel, until they feel completely safe, which probably means a vaccine. And in that world the only strategy from our perspective is to wait and be patient, minimize cash burn.”

Delta CEO Ed Bastian said on an earnings call Tuesday that with reopenings on pause and new travel restrictions going into place, and while the business travel that typically accounts for half its revenue isn’t back, the airline will take “the industry’s most conservative approach to capacity.”

American says its gambit is working so far. Its domestic flights were close to 70% full on average in June, and cash is rolling in. “When you choose to play by a different playbook, it confuses outside observers,” Mr. Parker said. “It was the right decision, and it is working extremely well for us.”

‘There’s never been a situation like this,’ Mr. Parker says.

Photo: Cooper Neill for The Wall Street Journal

Taking a big swing in a crisis is comfortable, even enjoyable, said Mr. Parker, 58, who twice pulled off mergers with larger airlines going through bankruptcy. His deal-making culminated in the combination of US Airways Group Inc. with American into the world’s largest airline. He said he hoped the pandemic could be a reset for American, leveling the playing field with competitors.

American started 2020 with $33.4 billion in debt, more than any rival, after spending $23 billion on new planes in recent years and spending more to repurchase shares than other domestic airlines. It was coming off a difficult 2019, when a dispute with mechanics threw its operation into disarray, leading to canceled flights and outraged customers.

The airline promised 2020 would be better, but investors were restive after years of lagging profits and share performance—some began discussing among themselves shaking up the airline’s management and reached out to potential replacements for Mr. Parker, including current and former executives at rival airlines, said people familiar with the discussions, though some of the talks didn’t advance far.

“It was a hard year,” Mr. Parker said. But “I didn’t feel particularly pressured.” John Cahill, American’s lead independent director, said the board wasn’t approached about any such plan and never considered a management change.

In March, airlines had been grappling with the virus in China but didn’t expect a global crisis. Even into late February, some American executives believed the epidemic could be an opportunity because the airline’s network is more heavily weighted toward domestic flights than rivals’. After airline CEOs met with President Trump on March 4, Mr. Trump said no one requested aid.

On March 11, Mr. Parker said, Treasury Secretary Steven Mnuchin called him warning that in two hours Mr. Trump would announce restrictions on European travel. Within days, American said it would cut its international flying by 75%.

Around that time, a flight attendant approached Mr. Parker on his way to Nashville, Tenn., where he was flying to move his daughter from college, asking: “Are we going to be OK?”

“I gave him the most assurance I could,” Mr. Parker wrote in an email to the company’s senior leadership describing the encounter. “So now I’m really committed.”

Mr. Parker, who became CEO of America West Airlines 10 days before Sept. 11, 2001, and staved off bankruptcy with government-guaranteed loans, said he recognized airlines would need financial help to avoid catastrophe during the Covid-19 pandemic. Because of its higher debt, American had kept more cash on hand than other airlines but needed still more.

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Airline executives camped out in Washington for weeks. Mr. Parker said he stepped out of meetings with CEOs to make personal entreaties to people such as Bank of America Corp. chief Brian Moynihan, Citigroup Inc. chief Michael Corbat and Goldman Sachs Group Inc. President John Waldron trying to wrangle a $1 billion credit line.

After spending years trying to improve the airline’s relations with front-line workers, Mr. Parker said he is reluctant to resort to mass layoffs. Mr. Parker appealed to Sara Nelson, head of a powerful flight-attendants’ union, as divisions emerged between the companies and unions over conditions on the $25 billion in direct federal grants both wanted in order to pay workers. She hurried to the headquarters of Airlines for America, a trade association, to meet airline executives. The group hashed out a framework to maintain a united front.

“He got us on the same page,” Alaska Air Group Inc. CEO Brad Tilden said of Mr. Parker. Ms. Nelson said: “Doug was the only airline CEO who had been through anything like this before.”

In late March, Mr. Parker’s wife and daughter tested positive for Covid-19, which he disclosed to other airline executives he had met with in Washington. Five days later, he informed them he had tested negative.

Airlines got their aid. But in April, U.S. air passenger volumes dropped by 96% from a year earlier. Mr. Parker was getting daily cash-balance reports.

He initially resisted pulling the plug on projects he believed would pay for themselves once the industry rebounded, he said, including a $250 million hospitality center on its Fort Worth campus for visiting employees.

American Airlines campus in Fort Worth this month.

Photo: Cooper Neill for The Wall Street Journal

American should avoid cuts that sapped morale and left it weaker, he believed. “I didn’t want to stop anything,” he said. American eventually cut $14.5 billion in spending this year, including stopping work on the center, partially finished outside windows where senior executives sit.

Meanwhile, the price of credit-default swaps on American’s bonds—a form of insurance against default—rose sharply from March to mid-May, reflecting Wall Street’s bankruptcy fears.

When Boeing Co. CEO Dave Calhoun told the “Today” Show in May that a major U.S. airline could go under—without naming one—industry attention turned to American because of its debt. Mr. Parker called Mr. Calhoun to complain.

The view was more optimistic within American. By May, it had started to see signs of pent-up demand for travel in Sunbelt states where it has a strong presence. American’s president, Robert Isom, that month called Mr. Parker into a glass-walled meeting room at its new Fort Worth headquarters. Brian Znotins, vice president of network and schedule planning, diagramed on the whiteboard a plan to double American’s flight schedule.

American operates some of the nation’s largest hubs for connecting flights. With low fuel prices and the government footing most of the labor bill through the grants, airplanes didn’t need to be that full to make flying more appealing than parking planes, Mr. Znotins explained. It could be worth operating flights just 20% full, at least temporarily.

“You can collect lots of little pockets of demand and all of a sudden fill a 737 with it,” said Vasu Raja, American’s chief revenue officer and one of the strategy’s architects, who was in the meeting. Before the pandemic, American had been trying to build more connections to its hubs. “That’s still our best hand to play,” he said.

‘We wish we’d have put more flights in July,’ says Mr. Parker, here in Fort Worth on Thursday.

Photo: Cooper Neill for The Wall Street Journal

Within 10 minutes, Mr. Parker said, he was sold: “It was completely contrary to what others were saying at the time, but it sounded really smart.”

The 737 MAX’s grounding since March 2019 served as a dry run, Mr. Raja said, helping American learn to manage big changes in condensed time frames that would have been “preposterous” a few years ago. It was a calculated risk with little downside, the executives believed. “It’s like the bigger cost is just to wait,” he said.

Managing on-time performance has become simpler with American operating at around half its typical pre-pandemic schedule. There are new metrics, including a daily mask-compliance report, and how many people switch to less-crowded flights when given the chance. Mr. Isom said he spends more time hunting for clues to the future, conferring with business partners’ executives to understand consumer spending and other elements of travel.

Unions have generally been supportive of the strategy. American’s pilots, while wary about potential job losses, have been encouraged by the more robust flying, said Dennis Tajer, a spokesman for their union. Flight attendants are pleased American is trying to be more aggressive but still want more federal oversight of issues like mask requirements and social distancing, a spokesman for American’s flight attendants’ union said.

Most airline executives expect another reckoning this fall when vacation travel wanes. They don’t expect corporate customers to return in big numbers. When government payroll funding runs out after September, many executives aren’t banking on getting more. American said Wednesday it is supportive of a union push to get more government funding, which could avert furloughs until spring when it believes demand will be better.

United said last week net bookings immediately dropped at its Newark hub after New York, New Jersey and Connecticut imposed new travel restrictions. It pared back plans to expand flying in August, already more modest than American’s. Delta has cut back on flying it had planned to add this summer, citing the stalled recovery.

American executives said demand has weakened, but Mr. Parker said for now he doesn’t envision a significant pullback, though some adjustments are possible. American has enough cash to outlast the demand crisis, he said. Once its next government loan comes through, American will have a $15 billion war chest, and its cash burn rate at June’s end was $35 million a day versus April’s $100 million.

“We need to have an environment that encourages creativity…. There’s never been a situation like this,” Mr. Parker said.

“What I know is this: We wish we’d have put more flights in July.”

Write to Alison Sider at alison.sider@wsj.com

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