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Labor, execs at odds over American’s stock awards – 4.17.07

Labor, execs at odds over American's stock awards

Unions protest, but AMR to reward execs for outperforming rival airlines

10:31 AM CDT on Tuesday, April 17, 2007
By TERRY MAXON / The Dallas Morning News
[email protected]

When 874 executives and other key employees of AMR Corp. and subsidiary American Airlines Inc. get more than $160 million in stock Wednesday, it will be a reward for surviving as much as for thriving. AMR reported net losses totaling $1.62 billion in 2004 and 2005, and its $231 million profit last year was its first annual profit in seven years. Its balance sheet remains heavily leveraged.

But AMR has lowered its costs without going into bankruptcy while three major competitors filed for bankruptcy and other high-flying airlines came down to earth.

The result: The managers will divide up about 5.4 million shares, even as union employees spend today and Wednesday protesting that they aren't sharing in the airline's improving finances.

The Association of Professional Flight Attendants will set up picket lines today at Dallas/Fort Worth International Airport and a number of other airports served by American.

On Wednesday, the Allied Pilots Association will hold a rally at its headquarters near American's Fort Worth headquarters, then march down Amon Carter Boulevard to carry their message to AMR chairman and chief executive Gerard Arpey's front door.

It's not as though Mr. Arpey and other AMR executives aren't aware that the employees are unhappy. The labor groups protested a smaller stock award last year and increased their complaints throughout most of 2006 and into 2007.

But AMR has stuck by the plan originally approved by its board of directors in 2004, saying it's part of a reasonable bonus plan for executives who have a good part of their compensation at risk. 

Wall Street has given AMR good marks for turning around its fortunes while a number of its competitors did not do so well during the same period.

"They've done an extremely good job in looking in the abyss and avoiding it," airline analyst Ray Neidl of Calyon Securities said Monday. "This has been helpful to everybody, especially to investors and employees as well as management."

If AMR had been forced to file for bankruptcy protection, "the equity investors would have been wiped out, unsecured creditors would have taken a haircut and employees would have probably had to take deeper salary cuts and would have lost part of their pension plan," Mr. Neidl said.

"Everybody at the company should be commended for saving the company and bringing it back. It's got a long ways to go, but they kept it from going over the abyss," he said.

How did AMR stock outperform its peers? One has only to consider the airline industry over the past four years to view the carnage.

Facing bankruptcy, American pushed through big pay cuts, work rule concessions and reduced benefits that its three major unions grudgingly accepted in April 2003 and were imposed on other employees. Its stock has gone up tremendously since then.

AMR shares climbed 23 cents Monday to close at $30.57 in New York Stock Exchange trading.

Other struggling airlines weren't able to negotiate cuts so big, or the concessions came too late to save them.

•Delta Air Lines Inc. failed in its efforts to reorganize its finances and cut its operating costs without a visit to bankruptcy court. It sought protection from creditors in September 2005.

The result: Its stock is worthless.

•Northwest Airlines Corp. also tried to avoid bankruptcy court through voluntary steps, and failed. It filed bankruptcy papers the same day Delta did.

The result: Its stock is worthless.

•US Airways Group Inc. entered this decade as one of the highest-cost carriers in the U.S. industry. It emerged from bankruptcy in March 2003 but kept losing money. In September 2004, US Airways again filed Chapter 11 papers.

The result: Its stock was wiped out a second time.

America West Holdings Corp. in 2005 merged with a downsized US Airways. America West took the US Airways name.

The other three airlines couldn't keep up with AMR's shares, either.

•JetBlue Airways Corp., which began flying in 2000, saw its finances and its share price plummet. After earning $204 million in 2002-04, JetBlue lost $20 million in 2005 and $1 million in 2006. Its stock price, adjusted for stock splits, fell by nearly half between the start of 2004 and the end of 2006.

•Continental Airlines Inc.'s stock has stayed up with AMR's. However, the AMR stock plan averages the stock prices for the 90 days prior to Jan. 1, 2004, and prior to Dec. 31, 2006. Using that methodology, AMR shares gained 127 percent, while Continental's gained 116 percent.

•Southwest Airlines Co. has remained consistently profitable, but its stock hasn't been able to gain altitude for several years. Its stock averaged $17.75 for the three months before Jan. 1, 2004; it averaged $15.75 for the comparable period in 2006.

Union leaders say it was their sacrifices that saved AMR and helped its stock prices go up. The protests are to remind top AMR officials of that, both to scold them and to pressure them to spread the wealth.

"It just astounds me that they don't see that there's going to be lasting impact," said Tommie Hutto-Blake, president of the flight attendants' union, "when you have convinced all these different elements that we're a partnership, we're a team, we're going to have transparency, we're going to work together, we're going to change the corporate culture – and then just a small number of the leadership team are reaping rewards."

Pilots' union president Ralph Hunter acknowledges that at this point, employee protests aren't going to convince the executives to abandon the stock plan by Wednesday. But employees need a legal outlet for their anger, and the march and other demonstrations will give them that, he said.

"At some point, this will change their future behavior," Mr. Hunter said. "It has to. You can't sit there and ignore a rapidly growing number of employees willing to take the trouble to do what you're seeing" in the protests.

Rank-and-file AMR employees participate in a profit-sharing program that kicks in when pre-tax profits exceed $500 million, a threshold that industry analysts expect AMR to blow past in 2007. That would provide payments to eligible employees next year.

The company also granted employees options to buy 38 million shares of AMR stock after the 2003 concessions.

But amid unhappiness over the management stock awards, unions are looking into other ways to increase their share of the profit pie.

American's senior vice president for human relations, Jeff Brundage, said the company would be willing to listen to any proposals to let employees share in American's profit.

"We're open to any compensation system that at the end of the day meets the needs of our employees and allows the company to be competitive long term," he said after another flight attendant rally last week. "That's the key to success. That's a good compensation system."

Mr. Neidl said investors don't care about the dispute inside AMR – to an extent.

"The only thing we care about is it is a service business. We want it to continue to offer a good product," he said.

In addition, "unit costs have to be controlled," Mr. Neidl said. "American is getting a little out of whack with many of its peers coming out of bankruptcy on the unit-cost side. So they'll have to be very conscious of unit costs."

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