Are Legacy Costs Really AMR’s Biggest Problem?
Posted on Thursday, May 22nd, 2008 | In Current Market News, Stocks to WatchRubens writes:
“Can you give some specific advice to the big airlines on how they can cut costs and become profitable? I don’t think you really understand their situation. To compare the big airlines with the budget ones is like comparing a Ford and GM plant with a Toyota one. Ford and GM has massive legacy costs of high salaries and benefits, and so do the big airlines. American is one of the few (or is it the only one?) of the big airlines that hasn’t filed for Chapter 11 in recent years, which would have let them reduce costs and renegotiate legacy employee agreements.”
Thank you for the comment, Rubens.
Unfortunately, it simply isn’t true that legacy costs are the problem for American. In fact, Southwest actually spent more on wages, salaries, and benefits than American did in the first quarter.
As you can see from the Q1 summary below, American’s cost structure is higher than Southwest despite the fact that they spend less than Southwest on compensation expense. The difference in fuel costs is due to Southwest’s hedges (which tapers off over time) and it is too late to hedge those now.
However, AMR operating losses in Q1 amounted to 3.3% of sales, which just so happens to be the difference in “other” operating costs. So, if AMR could simply get their non-fuel cost structure in line with Southwest’s, they would have broken even in the first quarter.
UPDATE: I left off one statistic I meant to include. AMR employs 152% more people (85,500) than Southwest does (33,895) yet AMR only has 125% more in revenue. So staffing levels are another area they could cut to get their revenue per employee ratio down.
Full Disclosure: No positions in the companies mentioned at the time of writing
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 About Chad Brand (http://www.peridotcapitalist.com)
Chad Brand is the Founder and President of Peridot Capital Management LLC, an independent investment advisory firm based in St. Louis, Missouri. In addition to managing investment portfolios for clients, Chad writes "The Peridot Capitalist," an investment blog that has been named one of the best stock market blogs on the web and is regularly quoted on sites such as Forbes.com, TheStreet.com and Yahoo! Finance. Prior to founding Peridot, Brand graduated from Washington University in St. Louis and worked in the corporate finance department at Express Scripts, Inc, an $18 billion per year pharmacy benefits management company. |
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