New, efficient aircraft part of plan to reduce American Airlines losses

DALLAS — American Airlines is in bad need of an upgrade.

The airline posted a $162 million loss on Wednesday, and has lost money in 14 of the last 16 quarters. Shares of parent AMR Corp. dropped 7.5 percent, and they have fallen 66 percent this year as investors worry that the company could be headed for bankruptcy protection.

AMR has nearly $5 billion in cash, more than many of its rivals and enough to avoid bankruptcy anytime soon.

But American needs to solve its labor problems, bring costs under control and provide better service to passengers if it is to pull out of a long financial nosedive that has resulted in the loss of more than $12 billion since 2001.

Here’s what American must do, experts say:

Control labor costs. AMR says its labor costs are $600 million a year more than other airlines — even more if pensions are included. Partly it’s because other airlines dumped pension and other costs when they went through bankruptcy in the past decade.

American’s unions hotly dispute AMR’s figures and are seeking pay raises.

Management and the pilots’ union recently stepped up talks and appear closer to a deal than ever — negotiations started in 2006. American wants pilots to fly more hours per month, much like they do at competitor Southwest Airlines Co.

Deals with pilots, flight attendants and ground workers could save AMR $300 million to $400 million a year, analysts estimate. That wouldn’t cover an expected $1.2 billion loss this year, but it would close the gap with competitors.

“Getting competitive about labor costs is critical for them,” says Michael Derchin, an analyst with CRT Capital Group. “That would be a good start.”

Improve service. American needs to improve its service to keep attracting passengers, who have many airlines to choose among. That means arriving on-time more often, which is especially important to business travelers. Its American Eagle subsidiary cancels a high number of flights.

“American used to be the industry leader,” says Henry H. Harteveldt, a travel industry analyst with Atmosphere Research Group. “Now it’s in the middle of the pack and falling.”

Harteveldt said American must upgrade seating in coach, add lie-flat beds in business class on international flights, and expand amenities such as in-flight Internet service and power outlets.

Dump gas-guzzling planes. American has announced plans to upgrade its fleet by buying 460 planes from Boeing and Airbus. Chairman and CEO Gerard Arpey says the new planes will transform American by reducing maintenance and fuel costs — the manufacturers claim the new jets will use 15 percent less fuel than current models — and giving customers a better ride.

However, those planes don’t begin to arrive until 2013 and will be added gradually over several years.

American used to be a leader. It was the world’s biggest airline, an innovative company whose ideas — from frequent-flier rewards to baggage fees — were loved or hated by passengers; but either way, they were copied by other airlines.

Lately, American’s creativity seems to have run dry. Investors have publicly challenged Arpey and other executives to come up with fresh thinking “beyond new flights to Helsinki,” as one analyst put it.

Despite such restiveness, there are no clear outward signs that a change in leadership is imminent. “That’s not going to happen. This management is in charge,” said Ray Neidl, an analyst with Maxim Group LLC, who only a month ago referred to management as “a caretaker of a deteriorating asset.”