American aims to gain $850 million

By Adrienne Nettles

Star-Telegram Staff Writer

FORT WORTH - Executives at American Airlines hope to boost the company`s bottom line by $850 million this year through a series of cost cuts and money-making initiatives, according to a message sent to pilots last month.

If successful, the effort would go a long way toward offsetting the high cost of fuel and heavy competition that plagued the Fort Worth-based airline in 2004. On Jan. 12, American is expected to report a steep fourth-quarter loss, possibly as high as $500 million.

That would put its 2004 losses at more than $1 billion -- a serious disappointment for an airline that had hoped to reverse its fortunes with its first cost-cutting wave, which included $1.8 billion in employee concessions approved in May 2003.

``If not for the price of fuel, even with the very weak domestic revenue environment, we would be in the black,`` Mark Rubin, an American captain and director of flight for the airline`s Miami hub, said in an internal ``state of the airline`` memo to pilots last month.

Rubin, part of the airline`s management team, said a variety of efforts will help close the gap, ranging from removing in-flight meals to renting portable entertainment systems to passengers. The airline has announced most of the initiatives, but executives haven`t disclosed their financial impact.

The memo, posted on an internal company network site and obtained by the Star-Telegram, ``is an example of our commitment to communicate with employees,`` American spokesman Tim Wagner said.

For example, Rubin said, American can raise $200 million next year with new fees for booking flights over the phone and at ticket counters instead of online. The fees are $5 over the phone and $10 at ticket counters.

An additional $90 million in savings has been targeted with a fuel conservation program. And $56 million can be saved by charging passengers for meals and snacks on domestic flights.

Other ongoing efforts ``will continue to further reduce our operating cost and allow us to reach our goal,`` Rubin said.

American also plans to save millions from thousands of layoffs. For example, Rubin said, the maintenance and engineering departments plan to cut 1,000 employees by early next year,and the airline`s management will be cut by 8 percent compared with 2004.

The situation is dire for American and other major hub airlines despite several years of cost-cutting, said William Warlick, a bond analyst for Fitch Ratings in Chicago.

Going into 2005, the airlines ``find themselves in a more precarious financial position than any time since the weeks immediately following`` 9-11, Warlock said in a recent investment report.

Airlines have explored a variety of strategies to cope. Delta Air Lines, for example, may cut fares by 60 percent and slash ticket fees and requirements to lure consumers away from discount airlines, according to a recent report in Time magazine.

Delta and United airlines have recently moved to freeze their costly pension plans, and many analysts believe that American and others will eventually do the same. But Rubin`s memo indicates that, at least for now, American is focused on squeezing savings from its operations wherever possible.

He said, for example, that American has improved the productivity of its aircraft to the same level as the notably efficient Southwest Airlines.

``The simplification plan is working, saving money, by reducing system complexity,`` Rubin said.

A major short-term challenge, he said, is American`s cash reserve. The airline reported last week that it had about $2.6 billion in unrestricted cash on hand at the end of the year. That`s about the same level as a year ago but down substantially from the end of the third quarter, when the airline reported $3.1 billion in unrestricted cash on hand.

``Cash on hand is our most immediate challenge,`` Rubin said. Because American has borrowed so much money in recent years, ``we cannot finance our losses through continued asset loans or sales.``

He described the airline as being ``cash critical`` through May.

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