Second, with large fixed costs -- aircraft -- and an intensely competitive environment, no carrier could survive being grounded by a protracted strike, which limits management's leverage in bargaining with unions. But, then, unions understand that a strike could kill their employer.
Third, the nation now has a two-tier airline industry -- the legacy carriers, and the younger low-cost carriers, the most successful being Southwest, which invented the second tier and now leads the industry in daily departures. The second tier, composed of newer airlines that never put in place huge legacy costs before deregulation unleashed price competition, limits the top tier's ability to pass along costs to customers. Hence the top tier's temptation to bankruptcy.
Two considerations, Arpey says, determine the choices of most air travelers -- schedule and price. The Internet has simplified comparing prices over every route, and, he says, a price difference of even $3 will drive people elsewhere, "no matter how strong your brand, or how good your product." As American competes with airlines that got substantial cost relief from bankruptcy, Arpey says, "I hope the companies that do that will have consequences."
He adds, "Our results don't look that different than United's, which was three years in bankruptcy." This, even though post-bankruptcy United has a $1 billion annual labor cost advantage.
Having had an unhappy experience as an airline investor (with US Airways, which has been in bankruptcy twice), Warren Buffett says: "I have an 800-number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: 'My name is Warren and I'm an aeroholic.' And then they talk me down."
Still, in 2003 American's stock fell to under $2 a share, and the company's market capitalization was under $500 million. As of this writing, the stock is over $37 and shareholders have $8 billion in equity, and in 2006 American had its first annual profit in six years. The Wright brothers' machine might work out after all.
Obamacare Designer: You Can Probably Keep Your Doctor...If You're Willing to Pay A Lot More | Guy Benson