American’s Threat To Cut Service From 30 Cities Isn’t a Ruse, Just A Convenient $6 Billion Smash And Grab

Matthew Klint asks if American’s plan to drop ‘up to 30 cities’ without CARES Act money is ‘just a ruse’. It’s not, though the timing of leaking the story to Leslie Josephs was clearly designed as a tactic to push for a second government bailout.

  • When CARES Act money expires American will no longer be required to serve cities they served prior to the pandemic (that they didn’t get an exemption from the Department of Transportation to drop)

  • And they’ll no longer be paying employees whether those employees work or not, the major reason that American had a 25% break even load factor. They already had the planes, and were paying the crew and maintenance teams, so they mostly just had to cover the cost of fuel. Without federal subsidies the marginal cost of operating a flight goes up.

When the CARES Act expires American needs more passengers to justify a flight, and they’re legally permitted to drop cities. So of course they’ll drop some routes.

Pointing out that the airline will reduce service without a bailout though is designed as a scare tactic to get the bailout. Of course the cost of that bailout is absurd.

  • This is the most expensive unemployment program in history. For the most part it’s paying people not to work – American says they do not need the employees they plan to furlough because demand for flights is down. But they want the government to pay for people to stay on payroll, and mostly not work.

  • They might furlough 30% of staff, but a ‘clean extension’ of CARES Act payroll support covers around 3/4ths of 2019 payroll.

  • American’s payroll is much reduced compared to 2019 already, having shed around 30% of management jobs ($500 million a year in payroll) and because the people they’ll lay off effective October 1 have the lowest seniority, costing the airline less than the employees they’ll retain.

  • This means the airline is pocketing somewhere between 50% to two-thirds of any clean extension of CARES Act, using it to pay people they’d be paying anyway without a bail out.

doug parker testifying before congress
Doug Parker testifying on the need for subsidies to the US airline industry in 2001

The CEO of Southwest Airlines was reluctant to ask for the money because they aren’t laying anyone off anyway but was pressured to do it by his pilots. American’s CEO Doug Parker originally said his airline wouldn’t ask for the money because they’ll survive without it.

However there’s huge bipartisan support to avoid the loss of tens of thousands of jobs a month before the election, though that hardly moves the needle in the unemployment rate during the current recession.

Of course American Airlines has been meeting with legislators and working the phones. A ‘clean extension’ of the CARES Act means another $5.8 billion for American, a lot more money than they’d save with furloughs, and then we’ll be back to laying off employees again April 1 when it’s no longer election season.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Fact is, they can’t have both deregulation AND taxpayer funded mega-handouts.

    If they wish to become regulated public utilities, let’s wipe out the shareholders and the bond holders and do it right. If they want to be for-profit businesses, with all the risk (and potential reward) that entails, then cut them off immediately to sink or swim on their own.

    And don’t give me some sob story about “letting” a business fail and people losing their jobs. That is America. That is capitalism. You want a guaranteed job? Go to the USSR. (Except there you would have to actually show up for work, unlike at an airline paying many people six figures to do squat.)

  2. I’m confused.

    Are you slamming AA for being crass opportunists, or the government for cramming money down airlines’ throats?

    This article is as clear as mud. Or maybe that’s the point???

  3. You seem to have a fuzzy grasp of the industry’s economics, and throwing out grossly round figures trying to show American management as a bunch of money grubbers just magnifies it. “They already have the planes…” for example: what’s the debt load on carrying those assets, or doesn’t that count in the expenses along with the bloated union payroll that you conveniently don’t discuss in detail (though those bad management ruffians really got their comeuppance, didn’t they, because you specifically mentioned them…)? You do know, don’t you, that close to half of American’s expenses are tied up in labor, right?

    You can’t support expenses with no revenue, plain and simple, and continuing to pay people who sit and don’t produce – no matter who pays for it – is bad business in the long term.

  4. @Jerome Lawrence – “You do know, don’t you, that close to half of American’s expenses are tied up in labor, right?” while the percentage spent on labor varies based on fuel cost and a management’s tendency to buy new planes, you seem to miss the difference between marginal and average cost. Airlines have virtually no MARGINAL cost for labor until September 30. They are required to keep everyone on payroll and that means they aren’t hitting everyone’s mandatory minimum hours. So scheduling additional flights doesn’t mean spending materially more -on labor than if they hadn’t scheduled those flights.

    When (if) the government stops picking up the payroll tab, that calculation changes.

  5. Your particular politics show through pretty quickly here. I actually agree with you, but you make this quickly about how bad AA management is, rather than the economic concerns of doing a bunch of flying that burns cash. It’s fair to call out that without payroll support you’ll have to cut service – of course it’s political, but it’s also accurate.

    You also don’t call out that AA labor groups are the ones who drove this second ask – not management, at least not initially. If Parker is genuinely trying to change the relationship with his unionized members, you think the right answer (from his perspective) would have been to tell them to pound sand because of…capitalism and the creative destruction of markets? You might be right, but that has the convenience and safety of an economists answer, not a CEO’s.

  6. I’m sure the credit card interest I’m paying on my AAMiles Citibank card will bail them out .

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