American Airlines plan targets $2 billion in savings, cuts 13,000 jobs

By Caroline Salls

Pittsburgh, Feb. 1 - American Airlines outlined a business plan to transform the airline and restore it to industry leadership, profitability and growth, with an annual financial improvement target of more than $3 billion by 2017, according to a news release.

The improvement target includes $2 billion in cost savings and $1 billion in revenue enhancements.

American said the additional cash flow will enable it to renew its fleet and to invest several hundred million dollars per year in ongoing improvements in products and services, according to the release.

The company said the improved cash flow will also allow American to further reduce its debt and become financially stronger in the years after its emergence from the restructuring process.

"American Airlines is moving forward decisively," chairman and chief executive officer Tom Horton said in the release.

"The plan we are outlining today provides the framework for a new American Airlines, positioned to succeed in an intensely competitive industry that has been transformed by our competitors' recent restructurings."

"Change will be difficult, particularly as we will be ending this process with fewer people, but it is a necessity. American is ready to compete and win," Horton added in the release.

Horton said the company plans to hold negotiations with economic stakeholders and union representatives in connection with the implementation of the business plan, as well as to seek necessary bankruptcy court approvals.

American said it plans to build on initiatives already in place that reduced costs significantly over the past several years, including major changes to its route structure, network, capacity and fleet.

Using the benefits of the restructuring process, the company said it intends to realize additional savings over the next six years by restructuring debt and leases, grounding older planes, improving supplier contracts and undertaking other initiatives.

A central element of American's transformation is the overhaul of its fleet, which the company said will reduce fuel, maintenance and financing costs and provide improved profitability and growth over time by enabling the airline to better match the right equipment to the right routes.

Employee cost reduction

According to the release, a fundamental element of American's plan, which is designed to allow it to exit restructuring and vigorously compete and win, includes employee cost reductions across all work groups.

The company said it informed employees earlier today that all groups, including management, must reduce their total costs by 20%.

American said these reductions would result in average annual employee-related savings of $1.25 billion from 2012 through 2017.

The company's business plan and proposals encompass a total reduction of roughly 13,000 employees, the company said in the release.

The expected result of a previously launched redesign of American's management and support staff structure that will reduce 15% of management positions is included in the total employee impact.

Business plan terms

Consistent with the approach taken by other major airlines in their restructurings, American said its plan also includes:

• Outsourcing a portion of American's aircraft maintenance work, including seeking closure of the Fort Worth Alliance Airport maintenance base, as well as some airport fleet service clerk work;

• Removing major structural barriers to operational flexibility, such as restrictions on codesharing and regional flying;

• Introducing work rule changes to increase productivity;

• Seeking bankruptcy court approval to terminate its defined benefit pension plans. If the plans are terminated, American said it will contribute matching payments in a 401(k) plan;

• Seeking to discontinue subsidizing future retiree medical coverage for current employees. The company said it will offer access to these plans if employees choose to pay for them; and

• Implementing common medical plans and contribution structures across all active employee groups.

"These are painful decisions, but they are essential to American's future," Horton said in the release.

"We will emerge from our restructuring process as a leaner organization with fewer people, but we will also preserve tens of thousands of jobs that would have been lost if we had not embarked on this path.

"By reinvesting savings back into our business, we will support job growth, including growth at our suppliers and partners over the long run," he added in the release.

Revenue improvements

With financial and operational flexibility and an improved cost and capital structure, American said it also plans to drive revenue growth by renewing and optimizing its fleet, investing an average of about $2 billion in new aircraft per year.

By 2017, American said its mainline jet fleet will be the youngest in North America, resulting in more profitable flying because of markedly improved fuel and maintenance costs and higher revenue generation.

In addition, the company said, it will build network scale and alliances by increasing departures across its five key markets by 20% over the next five years, as well as by increasing international flying.

American also plans to modernize its brand, products and services by investing several hundred million dollars per year in enhancements to the customer experience.

To reward employee performance, the company said it envisions putting a profit-sharing plan in place that, beginning with the first dollar of pre-tax income, would pay awards totaling 15% of all pre-tax income.

AMR Corp., the Fort Worth, Texas-based parent of American Airlines, filed for bankruptcy on Nov. 29 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 11-15463.

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