American Airlines Is Losing $3.3 Million A Day

Every day, American Airlines gets up in the morning, looks in the mirror, thinks about the $3.3 million dollars it lost yesterday, brushes its teeth and gets ready to lose another $3.3 million. Fortune says the hemorrhaging began in January, and while red ink is no stranger to the airline industry, they’re running out of things to cut.

Fortune interviewed American Airlines’ CEO Gerard Arpey, who had this to say:

In this climate, Arpey won’t rule anything out. If Delta were able to complete its purchase of Northwest, American would be toppled from its perch as world’s largest carrier. And a combined United and Continental would be even larger. That would leave American in arguably the weakest position among the network carriers. But Arpey says the size of his company doesn’t matter as much as the strength of its assets. “We believe we will remain competitive irrespective of any consolidation that occurs,” he said. “The real challenge is being profitable.”

Later, as we were walking down the jet bridge, Arpey paused. “There is no business,” he said, “that can go on forever selling its product for less than the cost to produce it.”

Meanwhile, the Wall Street Journal notes that the airlines are finally starting to raise ticket prices along with the increased fees and surcharges. Travel blog Jaunted says:

Mergers would allow airlines to trim routes and, by reducing capacity, further raise prices, though carriers say that’s not the plan. (Riiiiight.) This is all good news to one company, though. Virgin America is keeping fares low by burning through investor cash…

Enjoy that while it lasts.

American Airlines loses $3.3 million a day[Fortune]
Airlines Finally Passing Higher Costs on to Passengers [Jaunted]
(Photo:Zonaphoto)

Comments

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  1. boomerang86 says:

    The legacy carriers (United, American, US Airways, et al) can raise fees, then declare bankruptcy ad nauseum and they STILL won’t be able to shed all the overhead they’ve accumulated over the past couple of decades since deregulation led to the rise of Southwest, JetBlue and Airtran. They’ll probably go the way of the dinosaur soon.

  2. CaptZ says:

    I see an American Airlines/Southwest marriage in the near future. Enemies now……bff in a year. It would be a good match.

  3. Good god, why don’t they just raise ticket prices?

    OIh…no one has any money to buy a $400.00 ticket between SF and LA? Oh well.

    You see, this is where the economic pickle we’re in gets very interesting.

  4. Angryrider says:

    Can’t wait for the bailout.

  5. Verdigris says:

    I don’t really understand how it came to this. Maybe I’ve been out of the loop for awhile.

    Shouldn’t things become less costly over time? Why does the cost of flying cost more?

  6. Snarkysnake says:

    You and I handed the airline $15 Billion (with a B) right after 9/11. Service got worse. Prices went up.Fees went off the charts.
    Employees went bye-bye. (Lots of ‘em).
    “Customer service” is a cruel joke.
    In “fortress hub” cities, the incumbent carriers act like the monopoly that they are,while trying to choke off competition.
    If a flight has 257 passengers,odds are they paid 257 different fares.

    Frequent flyer programs have evolved into a cat and mouse game between sharp accountants and frustrated passendgers (thus defeating their original purpose)

    Southwest makes money and has a great safety and on time record.

    How is this not a record of poor management ?

    Gerald Arpey. Look in a fucking mirror for the source of the problem,you dumbass.

  7. azntg says:

    I hope the airlines should be happy that they don’t exactly have a reasonable competitor in terms of transport services.

    Otherwise, they’d better start reading up about the general demise of rail travel in the USA in the 20th century.

  8. ARP says:

    Large legacy airlines are very similar to banks and automotive companies- they’re in a permanent game of chicken with the US government- and they always win. If any get too close to failing, the government will bail them out. Of course, this means the don’t have to make any meaningful changes to their operations, customer service, etc. And they really don’t have to pay their executives any less for losing obsene amounts of money.

  9. lincolnparadox says:

    Maybe the collapse of the airline industry will revitalized Amtrak?

    I’d rather see the passenger train system get a few billion from the feds than another airline bailout. At least the trains move people to work along the eastern seaboard and have been for 75 years. If we could expand that to add train routes along the west coast, the Midwest and the South, we might not need air travel as much.

    Sure it takes longer to get anywhere, but they rarely cancel trains.

  10. RedShirt says:

    What makes Southwest and JetBlue profitable is its non-union work force. Even at that they’re likely making a very slim profit.

    The industry as a whole, these planes were not designed to fly at $120+/barrels of oil. They have to raise prices, like another 10% or something of the like.

  11. ARP says:

    @lincolnparadox: You haven’t dealt with Amtrak in a while, have you.

    In all seriousness, we need to adopt the european model where we emphasize high-speed rail should for regional travel and airlines for longer haul travel. Of course, if you want to pay a premium to fly from New York to Boston, it’s your money, but we’re not going to subsidize it anymore.

  12. Geekybiker says:

    high speed rail would be awesome.

  13. Pylon83 says:

    @Verdigris:
    The cost of fuel has gone through the roof. When a 737 burns hundreds of gallons per hour, a $.50 increase in fuel adds a lot to the cost per trip. Not to mention rising insurance rates.

  14. @Snarkysnake: You forgot about the employees who took pay cuts. Then they took paycuts again.

    And CEOs like Gerald Arpey got hair cuts. Bad ones.

  15. @Verdigris: Well, if the price of fuel stayed constant….and airlines never bought new airplanes…and employees never retired…then maybe prices would decline over time.

    The biggest problem is that airlines kept forecasting growth while it was clear to anyone paying attention that fuel prices would continue to rise beyond manageable levels. Without massive fare restructuring (also called being honest with the public), there’s no ways the airlines will survive.

    And so you have airlines losing $3.3M a day, even though the jets are packed to the gills.

  16. bloodhound96 says:

    The problem with high speed rail is that we need to lay down new tracks. The rail infrastructure is old, and needs to be completely revitalized if it was to adapt the the european model. Also, it will only work in certain areas of the country, such as NY/BOS/PHI area, or maybe SF to LA. Along the coasts, where cities are somewhat close to each other. The middle of the country is just too spread out, and would need all new rails. Costs outweigh the benefits, unless everyone switches to traveling by rail instead of driving or flying.

  17. Buran says:

    @boomerang86: If they’d do what makes Southwest and Jetblue profitable, they could survive. But they have no interest in admitting that the new guys got it right and they didn’t.

  18. bnet41 says:

    @bloodhound96: I couldn’t say this any better myself. Rail is a great idea, but it won’t be persued. You can’t even get many cities to take light rail serious let alone high speed stuff. The problem is rail transport requires laying new track. The existing track is full or too old or has bad routing.

    To do that you need to tear through many neighborhoods and community’s. It would take 20 years to complete just the lawsuits. I’m not saying we shouldn’t try, but don’t expect a overnight or even 5 year solution.

    It seems like everytime this stuff finally starts to get momentum gas prices or something changes to basically stop it until next time. It stinks because I would love to see rail take off here in the midwest. I lived in NYC and saw just what light-rail can do, nevermind the subway.

  19. Notsewfast says:

    There’s an old adage about airlines…

    The fastest way to become a millionaire is to buy $1 billion worth of airline stock.

  20. Why worry about losing money when politicians can bail you out?

  21. romeohifi says:

    A few months ago a so called financial expert on the one of news paper or TV which I forgot was telling people that airline stocks are now a good buy. Now that I think about it maybe he was telling us to buy to keep the stock up while he and people like him were selling them. Do not listen to so called experts.

  22. ludwigk says:

    @CaliforniaCajun: Executives do make too much money these days, and in my opinion, they’re experiencing some kind of weird power spiral. They get paid so much, they need to keep increasing their salaries to retain them. And if business goes south, they need to increase their salaries to retain them! Somehow in corporate america, the response to “Great performance” and “Poor performance” became the same thing.

    As obscene as their salaries are (and it is entirely obscene. It is no different from a military dictator raping his nation, building palaces while the common people starve), the weird thing is, even if you didn’t pay these guys, it wouldn’t be enough to turn things around. Arpey’s compensation package from 2007 was $6.6M. Let’s assume they pay him a total of $0 for all of 2008, which is a great idea considering how in the toilet their company is. That only covers two days worth of operating losses.

    In other parts of the world (i.e. Swiss bank UBS), a CEO would step down, or be ousted when performance is poor. Apparently, our executives aren’t classy enough to do such a thing.

  23. humphrmi says:

    @Verdigris: Also it’s important to note that in reality, the price of flying is still a fraction of what it was decades ago. And if we ever see those (1970’s and early 80’s) prices again, it would go back to the few elite who can afford to pay $2000 to fly from NYC to SFO (yes that’s what it used to cost).

    Then we had deregulation, and while carrier’s prices were no longer fixed, they had more options to fly more routes domestically, charge less per seat but fill more planes (at least, that was the plan) and save money on regulatory overhead.

    The problem is that the cost savings that carriers realized with deregulation have all been used up, and now (as others have pointed out) fuel costs are becoming a huge problem. And they just plain mis-managed the route growth. They ran routes that didn’t make sense because their competitor ran that route (i.e. American flying out of Love just to compete against Southwest).

    There is no finer example of a losing business model than airlines. If you take all the profits that airlines earned since the first airline started flying, and then subtract all the losses during the “down cycles”, you would end up with a negative number. In other words, while Southwest makes money, industry-wide their profits are dwarfed by huge losses by other carriers. I think now it’s all coming to a head, and I only see one of a few things happening:

    1. Airlines consolidate down to just one “flag carrier” for international and long-haul domestic flights, and small discount carriers pick up the short-haul business.

    2. Airlines raise prices so much that it reverts to the times when only the wealthy fly, except for people who save up for years to fly (i.e. a family vacation to Europe).

    In both scenarios, carriers would still be pressured by fuel price increases and I can envision a day when there are a lot fewer choices for air travel.

  24. @ludwigk: I understand. I don’t blame executive compensation for the faults of the airlines, but it is a symptom of what is wrong with corporate governance.

    All the same, I fly American often for work (I don’t have a choice) and looking at Arpey’s goofy smile and goofier haircut in American Way magazine exacerbates the annoyances of flying an old-line carrier. The fact that he props himself on a giant model of an airplane in his photo (and that there’s a separate airline-published magazine for first class with rich people stuff in it) just screams arrogance and hubris.

  25. @humphrmi: Another factor, related to route competition, is that airlines have been (and still are) buying smaller jets and flying with higher frequency.

  26. @humphrmi: Option #2 would cause a crash in overall durable good orders as Boeing’s order sheet craters.

    There’s really no other option but another bailout – so we’re going to be paying those higher ticket prices by financing that debt with the Chinese, buying fuel from the Saudis, taking a small cut as it passes through our gas tanks, and ending up further behind than when we started.*

    Thanks to Friedman for the visual.

  27. Amiga says:

    JetBlue is not profitable.

    One thing missing from this post is that Arpey and 1,000 other American Airlines / AMR executives split around $70 Million this past year while fuel prices have been creeping up.

    The CEO union is this country is to blame for this matter. Yeah, that’s right, the CEO union, the guys who killed Eastern and Pan Am. All these same clowns have their hands in the current industry. They killed the others, left with golden parachutes, now they can get more money. They’ve set it up that if any of these airlines go under, they have lifetime pensions and also healthcare. Man, wish I could join their union.

    My partner and many others took a 33% pay cut for Arpey to save the world.

  28. spinachdip says:

    @ARP: Well, not Amtrak as know now, but the Boston-NYC-DC Amtrak. If someone had the political testicles to do a makeover on Amtrak, with huge infrastructure overhaul on potentially profitable routes that would be 1-to-2-hour flights (SF-LA, Chicago-St. Louis), I think Amtrak can be viable, if not completely profitable.

  29. Parting says:

    @spinachdip: I’ve read that current rail system in North America is overloaded, and so it causes a lot of traffic on rails.

    So unless there are big investments into rail system, it’s not the most efficient way of travel nowadays.

    It would be interesting to calculate, how much Amtrak would be better if all investments made to ”save” airlines from bankruptcy were re-routed into Amtrak.

  30. ludwigk says:

    @CaliforniaCajun: I just don’t understand big business, all these numbers going around, with the upper crust in the top 500 highest paid people in America, and the company hemorrhaging millions every, laying off thousands, freezing pay for pilots, and charging you $10 for a defrosted sandwich.

    I’m not trying to contradict or correct you in any way, I’m just expressing amazement at their predicament.

  31. Parting says:

    @CaliforniaCajun: Considering how much debt is already in Chinese hands, it’s time to start studying Mandarin, so we can get a job later.

  32. spinachdip says:

    @Victo: Yeah, Amtrak shares the rails with freight, and freight has right of way, IIRC.
    New tracks would be needed anyway, I think, since most of the tracks were put down over a century ago, and they’re not deisgned for high speed trains.

  33. hardisonthefloor says:

    they should just hurry up and invent practical flying cars.

    problem solved.

  34. t325 says:

    @CaliforniaCajun: Which is what I don’t understand. They have those crappy 50 passenger regional jets flying multiple times a day per city. Seems to me that it would make sense to do fewer flights between destinations a day, but use actual planes (not washing machines with a jet engine strapped to the back) that can hold a couple hundred people, and it seems like it would be cheaper.

    The problem with Amtrak on shorter routes is it gets expensive if you have multiple people going on the trip. I live in St. Louis, and looking at Amtrak’s prices, the cost of a ticket would be about the same as the amount of gas I would put in my car to get to Chicago. But if I’m going to Chicago, I’m probably going to be going with a friend, significant other, family, whatever. For Amtrak, the cost keeps increasing for each person. $50 round trip and 4 people is $200 on Amtrak. But $50 in gas is $50 in gas whether it’s me or me and whoever else I can fit in my car (and if I’m going to make them split the cost of gas, it’s really cheap). I guess Amtrak is great for some, but I’d just rather drive.

    And FWIW, I think flying a short trip like St. Louis to Chicago, unless you’re catching a connection, is even more a waste of money than Amtrak. Besides, by the time you factor in check in, security, waiting for takeoff, flying, landing, waiting to deplane, waiting for luggage, and waiting for either a rental car or public transit, you could probably drive it quicker.

  35. ffmariners says:

    “Already, Delta and its competitors have been significantly affected by soaring prices for jet fuel. According to the Air Transport Association, the industry’s trade group, each 1-cent increase in the price of fuel, now over $1 a gallon, costs the industry $180 million.”

    Airlines Are Looking at a Long, Hot Summer
    By MICHELINE MAYNARD
    Published: April 15, 2004
    [query.nytimes.com]

    This is from the NY times in 2004. One cent cost them $180 million THEN.

    I saw an article more recently from the NY Times that said one cent equated to a cost increase of $300 million or so… I am looking for it now.

  36. ffmariners says:

    “UAL, United’s parent, lost $537 million, or $4.45 a share in the first quarter, more than triple its $152 million loss a year earlier. Its quarterly fuel bill rose $534 million.”

    So, their loss was pretty much the rise in the fuel bill. And with the price of a barrel of oil forecasted to keep rising well past $125 a barrel there is not a single airline with a sustainable business model. Even Southwest who has had profits for the past 17 years straight was in the red this past quarter.

    This isn’t price gouging (as the Consumerist seems to believe every time they post an article on rising prices)… it is a necessity that is a direct result of American’s desire to go bigger and faster.

  37. the lesser of two weevils says:

    @t325:
    The reason the airlines prefer to fly multiple times a day with smaller planes is that customers complain when they have to wait hours at the next airport for their connecting flight. They’d risk losing business to another airline flying the same route at a different, more convenient time. I used to live in Bend, Or. and United and Alaska both flew multiple flights a day (most to Portland and Seattle) on tiny airplanes. One airline would risk losing passengers if they only flew once or twice while the other claimed several daily flights. The price difference would have to be pretty drastic for fliers to sacrifice a less convenient time.

    One of the main reasons I never flew out of the Bend airport was because it was expensive and when you took into account how, including driving to the airport, waiting there, and finally flying, it was as long as driving to PDX and about twice as expensive. Car travel really does make the most sense for traveling under 200 miles, although I think rail service between major regional cities is a needed service. Invest tax dollars into more rail infrastructure, not bailing out failing airlines. Im pretty sure anyone who loses their jobs in the airline/airport industry could find a new job in the similar rail industry.

  38. JustThatGuy3 says:

    @Buran:

    JetBlue and Southwest are losing money now too, FYI.

    As to what JetBlue “did,” the #1 portion of their model was hiring new people without seniority and not having to pay pension benefits.

  39. East_Coast_Midwesterner says:

    I used to fly the Boston to NYC route.

    Then I realized with all the security it would be quicker to take the greyhound. That and the GH costs 15 bucks each way.

  40. stinerman says:

    @CaliforniaCajun:

    Exactly.

    It may be that operating an airline company isn’t all that profitable anymore when oil is hovering around $115/bbl.

  41. smoothtom says:

    Use high-speed rail for the regional connections, and reserve air travel for the really long-haul stuff. I live near Columbus, but I can’t take a train to Chicago. It’s a one-hour flight. That’s the kind of route that should be covered by a railroad.

    If the airlines can’t make money with long-haul domestic flights, after the regional stuff has been trimmed out, then I’m in favor of abolishing the private air travel industry and replacing it with a subsidized government corporation. The ability to travel is a social good, but the means of conveyance (highways, railroads, air) cannot cover their expenses through fares alone.

  42. Wormfather says:

    Hey airlines. Lets make a deal. You go ahead and raise ticket prices, rais ‘em 50% if you have to. I’ll still fly and happily pay for it. In exchange you start acting like a reputable (sp) buisness, ya know accountability and all that good stuff. Stop siphoning off of the government. Start doing that, get profitable and hell, I’ll even invest in you!

  43. Wormfather says:

    @stinerman: Yeah $115 a barrel sucks, but there’s no one to blame but the fed. The value of oil hasnt gone downt he value of the dollar has shrunk. Lower rates make dollar sad, it takes more sad dollars to buy happy oil.

    Hopefully when they raise the rates in 9 months (I think it’ll be that long before they decide to so), it wont be too late.

  44. JustThatGuy3 says:

    Here’s your factoid for the day (Warren Buffett likes to bring this one up):

    The US airline industry has, over its history, lost money in total.

    Yup, if you add up the profits and losses generated by the entire industry over its history, you get a negative number.

  45. JustThatGuy3 says:

    @Wormfather:

    It’s not just the Fed, otherwise the price of oil wouldn’t have changed in Euro terms. In fact, it’s gone up in Euro terms as well.

  46. jamar0303 says:

  47. jamar0303 says:

    Someone really needs to get a high-speed rail network going in America. Doesn’t need to cover every city, just the major ones (normal rail can be built to accomodate the rest). It should look like an O- west coast side runs up California, Oregon, and Washington State, eastward to Massachusetts, down the east coast to Florida, then westward back to California (and maybe branches to accomodate the midwest and south).

    Yeah, it’s going to cost a LOT. But better than throwing money at dying airlines.

  48. jamar0303 says:

    (comment eaten, one more try)Someone really needs to get a high-speed rail network going in America. Doesn’t need to cover every city, just the major ones (normal rail can be built to accomodate the rest). It should look like an O- west coast side runs up California, Oregon, and Washington State, eastward to Massachusetts, down the east coast to Florida, then westward back to California (and maybe branches to accomodate the midwest and south).

    Yeah, it’s going to cost a LOT. But better than throwing money at dying airlines.

  49. jamar0303 says:

    (or not- sorry for the double post, hat the commenting system)

  50. unklegwar says:

    “they’re running out of things to cut.”

    Erm, how about the giant salaries and bonuses of the upper management for running an airline that’s in the red so badly!

  51. Thorkel says:

    If they want to save money, why don’t they cut the millions and millions of dollars they pay every year to high level execs who do nothing but lie to stockholders?

  52. CRNewsom says:

    @unklegwar: “they’re running out of things to cut.” should read “They’re running out of things they are willing to cut.”

    There are many things in the airline industry that need to be streamlined, but, as has been said earlier, it needs to start with corporate compensations.

  53. sarahandthecity says:

    @RedShirt: I don’t know about JetBlue, but Southwest employees are indeed unionized. They just don’t fight with their unions and end up striking.

    Poor American Eagle pilots have a union but are forbidden from striking, which sounds like its even more toothless then no union at all. No surprise co-pilots and flight attendants with kids are eligible for welfare.

  54. BrockBrockman says:

    Obviously a bad business model.

  55. Jenng says:

    @JustThatguy and Redhirt

    Not sure where you are both getting your info from but #1) SWA is in fact Union and all its ground ops peeps are in full contract negotiations right now. #2) SWA is in fact still profitable as seen in their Q1 earnings.

    Airlines have more to pay for than just fuel costs (SWA Hedges their fuel costs so they don’t pay current market rates as do other airlines), they have to pay the airports they chose to “rent” space from, maintenance, employee salaries, employee benefits, workerscomp (which in places like CA is off the charts, advertising, etc.

    While I’m not trying to defend the airlines I agree that a lot of it has to do with leadership for each airline as well as the government constantly bailing them out. My husband works for SWA and we actually got a letter from the CEO about how this is going to be an extremely tough year for them and they need to cut costs etc. Funny how several of their unions contracts expire this year and you can bet your behind that comp is going to be a major issue. I told my husband the CEO should come work for his pay in CA and see how long he can survive.

    Should make for an interesting year across the entire industry and all of us will enjoy jammed packed flights as well.

  56. JustThatGuy3 says:

    @Jenng:

    1. Never said SWA wasn’t union.
    2. I stand corrected – they did a bit better than expected in 1Q08, and managed to generate a profit. Consensus had been for a loss.
    3. As to fuel costs, SWA has some of the best hedging around, but fuel costs were still up 20% YoY in 1Q08 (went from effectively paying about $1.60/gal to $2/gal, and they’re going to rise even more in 2Q08 (expecting about $2.35/gal). That’s serious coin.