Up in the Air
Back in December, you may have seen some headlines regarding “AMR” filing for Chapter 11 bankruptcy protection. The business in question was not Art Materials Retailer but American Airlines, which is often referred to by its stock ticker symbol. (A.A. is not a good nickname for an airline, for reasons that should be obvious.)
About a month prior to the announcement I had heard a reporter on a financial news channel suggest that American might file sometime in the near future, and of course my first thought was about how such a move might affect me. American had for many years been the primary carrier from my home airport, so I had accumulated hundreds of thousands of its frequent flyer miles. Since I rarely fly on American nowadays, those miles have just been sitting there for the past decade.
Fearing that my miles might become the equivalent of Confederate dollars, I wanted to spend them right away. I had already booked all my trips for the next six months, but I was able to use up the majority of my hoard on rental cars. Then when the bankruptcy happened, American issued a statement claiming that the move would affect passengers very little, and specifically stated that it would honor all its frequent flyer miles.
Apparently, American Airlines is engaging in what is referred to as a “strategic” bankruptcy, meaning that they are using the process as part of a long-term plan to become a more competitive company. The past dozen years have been rough on the old line of major carriers, as a combination of reduced travel, union contracts and soaring fuel costs have resulted in huge losses and mounting debt burdens.
U.S. Airways Group, which resulted from a long string of regional mergers and acquisitions, became the first of the big airlines to file for bankruptcy in September of 2002. United followed suit in December of that year and Delta filed in September of 2005.
Shortly after the second-largest airline, United, declared bankruptcy, American threatened that it would file also if it did not get serious concessions from the Allied Pilots Association, the Transport Workers Union and The Association of Professional Flight Attendants. (Are there amateur flight attendants?) The unions agreed to a loosening of work rules, along with pay and benefit reductions that together would provide the airline with a savings of $1.6 billion a year.
The deal made a big difference, taking American from the highest cost structure among the major airlines to the lowest, and allowing it to turn a profit in 2006 and 2007. In the meantime, however, its bankrupt competitors were using the courts to help them impose far deeper cuts. While American had left retiree benefits intact, United et al were able to terminate their pension and health insurance plans.
Those so-called legacy costs were the real crux of the problem, just as they were for GM and Chrysler, and just as they are for Greece, Italy and the U.S. government. Fuel costs are a problem, but they are a problem for everybody. When the recession of 2008 and 2009 hit the travel business, the more nimble new-age carriers like Southwest, AirTran and JetBlue, along with the newly streamlined dinosaurs like United and Delta, were in much better position to compete and survive.
Over the past four years, American has wrung up more than $5 billion in losses, making bankruptcy virtually inevitable, but the timing of the move was always the critical question. Some analysts thought that AMR should have declared back when its competitors did in order to avoid being all alone in an unflattering spotlight, rather than just a part of an entire industry in trouble.
The management of American Airlines had wanted to avoid the stigma associated with Chapter 11, and had thought that being the only non-bankrupt major airline might give it a more appealing image in the minds of the flying public. Ford Motor Company undoubtedly had the same strategy in mind when it chose to avoid the bankruptcy and government bailout path that was taken by the other American carmakers.
At first glance Ford’s decision seems to be paying off, as the company has gained market share, returned to profitability and even announced recently that it will start paying a dividend to its shareholders. Without a doubt, Ford has enjoyed a great deal of positive publicity and public acclaim for standing on its own feet, but it also has to shoulder a $12 billion debt burden that its competitors do not.
More to the point, American consumers have a long-established tendency to identify themselves with the brand of car that they drive, and nobody wants to be associated with government bailouts. Airline passengers generally don’t get their self-esteem tangled up with the image of whatever carrier they happen to be flying, which is usually chosen according to time and money. If they thought that financial condition had something to do with safety, comfort or reliability that would be one thing, but apparently they don’t. Surveys show that most flyers don’t even know whether or not the airline they are flying is broke.
I think people have come to understand that older, larger companies from older, larger industries are saddled with structural costs, namely union contracts, pensions and health insurance, that make it impossible for them to compete in this millennium without restructuring. Take the steel industry, for example, which was once the pride of U.S. manufacturing. After decades of decline and many years of government subsidies to keep our steel makers afloat, they finally took the bankruptcy route to shed their legacy costs and re-emerged as very competitive companies.
But what about our own industry? We are certainly old, but we aren’t very big, and very few companies in the art material business have to worry about union wages and work rules, or defined benefit pension plans. Most companies do provide health insurance, but only for current workers and usually with some degree of contribution from the employees.
On the contrary, the specialty segments that I work with, art supplies, school supplies, crafts and toys, have thus far survived the Great Recession due in part to their low overhead and in part to the flexibility of being independent. Specialty retailers have been struggling with their top lines, and therefore their bottom lines, but all the ones in between are as lean as possible.
That’s great, but frankly it’s also a little scary, since it means that there’s nothing left to cut. I had a conversation recently with a group of manufacturers, and they told me that they are very concerned about their small retail customers being stretched so thin for so long. Some of them think that 2012 could be the year that those threads begin to snap.
On the other hand, it could also be the year that things finally start to improve. I’m not about to call an end to the economic slump, but nothing lasts forever and the surge in sales this past holiday season was very encouraging. There is also something called the “quadrennial effect,” made up of things like the presidential election, the Olympics, leap year, etc. that happen every four years, and it is supposed to be stronger in 2012 than ever before.
Keep ‘em flying.
kfahy@fwpi.com
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