AMR Seeks More Overseas Flights as US Airways Circles

AMR Corp. (AAMRQ)’s American Airlines would shift more seating capacity to overseas flights from U.S. routes to narrow a revenue gap with rivals under a plan to exit bankruptcy as a stand-alone carrier.

International trips would have 44 percent of available seats by the end of 2017, up from 38 percent now, American told employees in an e-mail today. Latin America, where the airline leads its U.S. peers, would get more service via Miami and Dallas under the plan.

American gave more details of its strategy as US Airways Group Inc. (LCC) steps up pressure for a possible takeover bid. While American seeks support on the unsecured creditors committee in its Chapter 11 case, US Airways has won the backing of three large unions on the panel, and is setting up meetings with bondholders, people familiar with the effort have said.

“Other carriers will be somewhat relieved that American’s plan does not involve boosting domestic capacity,” said Jeff Kauffman, a Sterne Agee & Leach Inc. analyst in New York. “In areas where American has shrunk, particularly Latin America and Chicago, it makes sense to build those back up.”

Routes outside the U.S. are prized because the lack of discount competition lets airlines charge higher fares. More revenue from each flight would help Fort Worth, Texas-based AMR end annual losses dating to 2008 that led to a Nov. 29 bankruptcy filing listing $29.6 billion in debt.

American Competitors

The 2017 target for more international flying would still leave American short of its two larger U.S. rivals, United Continental Holdings Inc. (UAL) and Delta Air Lines Inc. (DAL) In 2011, United and Delta had 49 percent and 47 percent of their seating capacity on overseas routes, airline traffic reports show.

Specifics of American’s plan were released in response to questions that followed executives’ testimony last week in U.S. Bankruptcy Court. The airline has already shared some information with sell-side analysts, and more with the creditors committee, people familiar with the matter said.

Chief Executive Officer Tom Horton had previously discussed publicly only the outline of AMR’s strategy to leave Chapter 11 as an independent company and then consider possible mergers. He has set a goal of $2 billion in annual cost savings, of which $1.25 billion would come from labor, and $1 billion in new revenue, while expanding capacity by 20 percent over five years.

An American spokesman, Andy Backover, said he had no comment about the contents of the airline’s recovery plan beyond the statement to employees.

Overseas Growth

American’s capacity would grow four times faster on international flights than on domestic trips, according to the people familiar with the matter, who spoke on condition of anonymity because those details haven’t been made public. There would be no net expansion of U.S. flying until 2014.

Under that plan “there should not be much, if any, disruption in industry pricing power domestically assuming even modest economic growth,” said Jeff Straebler, an independent airline analyst based in Stamford, Connecticut. Success in Latin America “would be very dependent on strong economic growth in the region.”

More fliers would be funneled onto Latin America flights at Miami International Airport and Dallas-Fort Worth International Airport. Those are the only two of American’s five U.S. hubs where it is the dominant carrier.

International Partners

American’s current international airline partners, with which it can jointly plan and market routes, would be used to help expand its New York gateway for Europe service and its Los Angeles hub for Asia flights. Those alliance members now include British Airways (IAG) and Japan Airlines Co.

Adding overseas flying, especially to Latin America, would provide a financial lift. American gets more revenue for each seat flown a mile in the region than United or Delta, and has more seating capacity there as well, according to data compiled by Bloomberg.

The data also show that industrywide international fares averaged more than twice as much as domestic flights. The disparity is even greater on first- and business-class tickets, the type often bought by last-minute corporate fliers. Domestic, non-premium fares averaged $477 in March; a premium seat between the U.S. and Asia was $6,201, the data show.

On domestic routes, new marketing accords with other U.S. airlines to put booking codes on each other’s flights would help collect more passengers for overseas travel, adding revenue without increasing expenses.

Chicago Shift

In Chicago, larger regional jets would take over some routes from American’s main fleet. Matching planes to demand would cut costs and boost revenue for each seat flown a mile, helping American compete in that market against Chicago-based United, the carrier said.

Domestic code-sharing and the Chicago strategy would both require changes in American’s pilot contract, which the airline is seeking in bankruptcy court in Manhattan.

American calls New York, Los Angeles, Chicago, Dallas-Fort Worth and Miami “cornerstone” cities. It decided to keep all five after an analysis showed that dropping any of them as hubs would hurt its network, executives and advisers said last week in bankruptcy court, without giving details of the plan.

Exclusive Right

While American holds the exclusive right through Sept. 28 to present a restructuring plan in U.S. Bankruptcy Court, the creditors committee can ask Judge Sean Lane to end the privilege if the panel concludes there is another viable option. The group includes planemaker Boeing Co. (BA) and bondholder representatives.

US Airways says a merger would produce $1.2 billion a year in savings and new revenue, and preserve 6,200 jobs targeted for elimination in American’s Feb. 1 plan for cutting 13,000 union positions.

The prospect of mounting a takeover bid for American has helped more than double the shares of Tempe, Arizona-based US Airways this year, leading gains among U.S. airlines. The stock rose 3.7 percent to close at $11.10, the highest since January 2011.

American’s $725.7 million of 8.625 percent pass-through certificates due October 2021 rose 0.53 percent to 106.56 cents on the dollar at 11:27 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Leasing Expense

American’s plan is based on growth projections in line with industry outlooks from other sources including the Federal Aviation Administration and Boeing, and the expectation that competitors will respond. American will continue to tweak its approach based on economic and demand changes.

Part of American’s cost cutting includes tentative agreements to lower aircraft-leasing expense by $1 billion over six years, an effort that covers 185 planes. This involves rejecting some leases and restructuring others in court. It’s also reworking contracts with vendors and suppliers for additional unspecified savings.

American said last week that amendments to its job-cut plan would preserve 2,600 union jobs once due to be lost. That change hinges on approval of a new contract with the Transport Workers Union, which begins voting May 10. An additional 700 workers would get a chance to move to other positions.

AMR also is negotiating cost savings with unions at its American Eagle regional carrier. Efforts to divest Eagle through a spinoff or sale were shelved by the bankruptcy filing.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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