In the early days of commercial aviation, American Airlines used boldness and
innovation to build its business and move the industry forward. Now, however,
the storied franchise is fighting for survival, and only the rebirth of its past
innovation and daring can lift the airline above the turbulence. Shares of
American's parent AMR Corp. (NYSE: AMR ) have taken a beating already this
week, falling more than 10% on Monday on news that its pilots' union, with
whom it's been negotiating since 2006, rejected two contract proposals. Amid a
broader downturn in the market on Wednesday, the stock is now down more than 19%
for the week. The airline faces ferocious headwinds including high costs, a gas
guzzling fleet and labor trouble. The Allied Pilots Association board voted late
Tuesday to reject American's latest offers, which would have paid pilots of
smaller jets 40% less than their peers, farmed out more flights to other
airlines under "code-share" arrangements and required pilots to work more
hours. While wages and hours are critical, the biggest sticking point might be
the future of health benefits and pensions costs that American must slash in
order to survive. New pilots joining American would be offered 401(k) plans
instead of pensions. The airline also wants to stop paying health benefits when
retired pilots turn 65 – which likely explains a 10-fold increase in pilot
retirements during August and September. AMR's stock fell 34% on the
retirement news, which markets interpreted as a sign of an impending bankruptcy
filing. As bad as things are, American Airlines isn't in its final death
spiral. Here are four things AMR must do to pull out of the tailspin: 1. File
For Bankruptcy Protection. Competitors like United Continental (NYSE: UAL ),
Delta (NYSE: DAL ) and US Airways (NYSE: LLC ) filed for bankruptcy protection
in the mid-2000s, and emerged stronger. But that option isn't as favorable
today as it was for the carriers that filed six or seven years ago, and American
officials have long said that bankruptcy is neither a goal nor a preference. But
in the wake of the failed pilots' talks, it now may be a necessity – and the
only way to retain some measure of control over its destiny. 2. Merge With
Another Carrier. Airlines have benefited from recent mergers. Consider
United-Continental, Delta-Northwest and Southwest (NYSE: LUV )-AirTran. AMR
missed out on gaining market share and efficiency through that recent flurry of
major mergers; its last acquisition was of TWA a decade ago. Although that deal
ultimately weakened AMR financially, it could be a rough blueprint for a merger
with another major carrier – most likely, US Airways (NYSE: LCC ). That
airline has repeatedly said it's looking for the next big merger deal, would
be the logical choice to hook up with American. 3. Sell Off American Eagle. The
airline's much-reviled regional unit is a drain on its earnings, operations
and reputation. American Eagle's recent $900,000 federal fine for 16 tarmac
delays of three hours or more represents yet another fire the beleaguered AMR
must scramble to put out. Divestiture is easier said than done, however, since
it would be competing for buyers with Republic's (Nasdaq: RJET ) more
attractive Frontier Airlines' unit, which is also on the block. 4. Win Back
Wall Street With Bold Innovation. American first premiered the first airport
lounge in 1937 and co-developed the first computer-based reservations and
ticketing system with IBM (NYSE: IBM ) back in 1960. If the airline is going to
buy time to bounce back, it will need to get creative and float a turnaround
plan fast before panicked investors take the matter out of its hands. Cisco's
(Nasdaq: CSCO) aggressive strategy earlier this year might be the best recent
case study. When its earnings sunk nine months ago, the company immediately
moved to cut $1 billion in costs, shutter 10 business units and reduce its
payroll by nearly 13,000 employees. Read about the positive impact here:
http://www.investorplace.com/2011/11/bet-on-cisco-csco-tech-stocks-to-buy/. As
of this writing, Susan J. Aluise did not hold a position in any of the stocks
named here.
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