Last year, we launched an aggressive restructuring plan to position the airline to be competitive in the marketplace. The plan focuses on streamlining our operation while capitalizing on the strength of the AA network, our product and our service. We want to preserve and build upon our unique brand proposition, which allows us to enjoy 71% customer preference. Our plan is not to become another Southwest, which only enjoys a 41% customer preference.
The plan focuses on:
· Scheduling efficiencies, including depeaking
· Fleet simplification
· Streamlined customer interaction
· Pricing and distribution modifications
· In-flight product changes
· Operational changes
· Administrative efficiencies
To date, through our plan we have identified more than $2 billion of the estimated $4 billion we need in cost savings. We have launched hundreds of initiatives to streamline our operations, improve our productivity and reduce costs.
Given the urgency of the situation, we are moving as quickly as possible with our ongoing restructuring efforts:
· We today announced the closing of two of our 10 domestic reservation offices: Norfolk, Virginia and Las Vegas, which will unfortunately impact approximately 910 reservation representative positions.
· We also will be seeking to obtain accommodations from a number of our other stakeholders, including aircraft lessors, lenders and suppliers,
Our cost premiums versus the competition can be no more than 30 to 35 percent if we are to be competitive in the future. To meet that target, we must reduce our structural operating costs by an estimated $4 billion a year.
The air travel industry has changed dramatically in recent years, with higher costs for security and insurance, new competition from low-cost carriers and falling revenues as a result of a deep drop-off in corporate travel and a new cost-consciousness on the part of travelers. As recently as 1996, we received an average of 70-80 percent more in revenue than low-cost carriers. But low-cost carriers commanded a much smaller share of the industry then and did not compete with us in many large business markets. Today, low-cost carriers are setting fares in 82 percent of our markets, and competition from bankrupt carriers is driving down fare prices as well.
In response to labor’s request, the company determined the portion each work group would contribute towards American’s recovery. To be fair and as equitable as possible, the portions were based on a combination of factors, including an alignment with our strategic restructuring plan, the competitive landscape and a review of industry labor costs.
We hope to work with labor leaders and our employee groups as part of the active engagement process to determine how each group will deliver its target share through a combination of wages, benefits and improved productivity.
4. Will there be new layoffs?
We hope to engage in a collaborative process with union leaders and employees to determine how each employee workgroup will achieve the financial targets we have outlined. Keep in mind that our restructuring plan incorporates the use of new automation and technologies that could affect jobs, as could any change in work rules to improve productivity. These changes will be discussed as part of our active engagement process with unions and employees. That said, we have made clear that in order to be competitive we will have to be a smaller, leaner, more efficient airline.
Today, as a part of the painful but necessary restructuring process, we announced plans to close reservations offices in Norfolk, Va., and Las Vegas as of April 4, 2003, which will unfortunately impact approximately 910 reservations representative positions. After the office closings, all calls will be routed to the eight other reservation offices.
In addition, 750 WARN letters were recently sent to flight attendants – again, an extremely regrettable but necessary action.
5. Why are you coming to employees for cost savings?
We have approached employees as a last resort, and only after an aggressive effort to reduce costs across the company through our restructuring plan. If we are to be competitive going forward, we must bring our employee costs more in line with the industry. Our employee costs now account for more than 40 percent of our operating costs, which will be the highest in the industry after United and USAir complete their restructuring.
Be assured that management will continue to do its part. All levels of management and support staff will participate in the target cost savings. These cuts come on top of a second year of across-the-board pay freezes for all management employees and a 22 percent reduction in management and support staff positions, which has resulted in over $200 million in savings to date.
The new fiduciary and investment manager for the AMR Stock Fund recently notified employees that, effective 1/29/03, they may no longer buy or transfer AMR stock within the $uper $aver Company Stock Fund. U.S. Trust Company, a private company, made the decision based on the company’s financial difficulties and the volatility of AMR stock. The action is intended to protect AMR employees from losing retirement savings.
The AMR Stock Fund, offered since July of 2001, invests only in common stock of AMR and some cash for liquidity purposes. Employees could never invest more than 10 percent of their savings in AMR stock.
Payroll deductions directed to this option will automatically be deferred to the Credit Union Fund. The AMR stock purchase option available through the American Airlines Credit Union is not affected. This action is not related to the recent decision to end the Employee Stock Purchase Plan, a decision driven by low participation and the costs of administering the plan.
The next step is to work with our union leaders and employee groups through a process of active engagement. We hope to work collaboratively to identify savings and improve productivity in our labor agreements, a critical element in our ability to compete effectively against low-cost carriers and our bankrupt competitors.
We believe bankruptcy is avoidable, but recognize that it will require quick action, effort and sacrifice. Recent history has shown that the bankruptcy process can be very painful for a company and its employees. At both United and US Airways, cost cuts imposed by courts and creditors were necessarily deeper than those proposed before the companies filed for bankruptcy. Our hope is that, through a process of active engagement between management and employees, we can work together quickly to avoid bankruptcy and ensure a steady financial footing for the airline as we move forward.
Because we are borrowing money just to meet payroll and purchase fuel, there is no time to waste. Our losses are clearly unsustainable.
11. What role is Eagle playing?
While Eagle also posted a loss for 2002, the company’s current cost structure is in line with regional industry standards and the magnitude of change required at American probably won’t be required at Eagle. While Eagle is not asking its labor unions, agents or support staff to take pay or benefit reductions at this time, Eagle President Peter Bowler is asking Eagle’s officers to take pay cuts, consistent with the AA management pay reductions. In addition, Eagle will continue to look for additional ways to save money and run the most efficient operation possible.
12. What about our international operations?
At this time, this request does not address our international operations. In Latin America we have a number of open agreements and will attempt to make changes through that process. In our European operations, we already have made some pay plan adjustments.
Our chief focus is the recovery of American Airlines. Many in Washington will debate the merits of the Railway Labor Act -- a national issue with important ramifications for the airline industry and its employees -- but that debate is in no way related to our current recovery efforts.
Because pay is just one part of labor costs. Labor costs also include benefits and work rules. Our discussions with union leaders and non-union employees will include a look at all of these areas — pay, benefits and work rules — to see how they fit in to the larger goal.