Arpey to get $8M dollar bonus come April - Dallas Morning News - 1-7-07
Sunday, 07 January 2007
This Star-Telegram article points out that American is "Cleared for Profit" and that as a result Gerard Arpey is to get approximately $8M dollars in cash and stock as part of the company's "Performance Share Plan," which is about to pay out as much as $191M this coming April.
Jan. 07, 2007 Cleared for profits American is likely to post its first annual profit since 2000, but the carrier still faces challenges By TREBOR BANSTETTER STAR-TELEGRAM STAFF WRITER
American Airlines will end the worst losing streak in the company's history this month, when it posts its first annual profit since 2000.
The much-anticipated return to black ink comes after a five-year period in which the world's largest airline lost $8 billion, was nearly pushed into bankruptcy, asked employees for $1.6 billion in yearly concessions, grappled with aggressive low-cost rivals, and staggered under a crushing increase in jet-fuel prices.
So executives with Fort Worth-based American can be forgiven for a few fist pumps and "woo-hoos" in late January, when they report earnings for 2006 and the fourth quarter. Although the results aren't yet public, analysts are predicting that American will earn $200 million to $470 million for the year, compared with an $861 million loss in 2005.
But industry experts caution that the tide has not yet turned for American or the rest of the industry, which is expected to be profitable overall for the year.
A modest profit isn't a guarantee of future performance, and it creates some new challenges.
"Profits are always good; it's a lot better than getting a kick in the butt," said Darryl Jenkins, a longtime industry consultant based in Virginia. "But they still haven't ensured their long-term survivability."
The profit, driven in large part by higher airfares, will help American reduce its debt and might improve the airline's credit rating in the financial markets. It will also likely improve the value of the carrier's stock, which has increased substantially in the past few years.
The financial results might also help the airline's executives justify their compensation, which has shot up with the company's performance and become a lighting rod for employee criticism.
But the return to profitability will likely push union leaders to take tough positions at the bargaining table next year, analysts say.
American is negotiating a new contract with pilots and is expected to begin talks with flight attendants and ground workers next year.
"That's going to be a real challenge," said William Warlick, a credit analyst for Fitch Ratings in Chicago who follows the airline industry. "There is going to be a lot of pressure from the union side, while management is going to have to be focusing on keeping labor costs down."
Overall, it should be a good earnings season for the industry. Ray Neidl, an airline analyst with Calyon Securities in New York, predicts that the airlines will report $2.3 billion in profit in 2006, compared with a $5.9 billion loss in 2005.
The fourth quarter might be more of a disappointment. Revenues are expected to be lower in part because of weather that hurt holiday travel. Analysts are predicting a small profit for American, but some have forecast a loss.
Still, the overall outlook is positive for 2007, although it's early. Analysts are forecasting an even larger profit for this year, as long as revenues remain strong and costs -- including fuel prices -- are stable.
Despite the positive results, industry observers warn that American still isn't turned around.
"The industry isn't fixed, despite some of the hype you'll hear," said Henry Harteveldt, a travel-industry analyst for Forrester Research in San Francisco. "One year does not a track record make."
Harteveldt said discount airlines, like Dallas-based Southwest Airlines and JetBlue Airways, are continuing to buy new airplanes and expand their route networks. Just last week, JetBlue began its first service at Chicago's O'Hare Airport, where American operates a hub.
And the major hub carriers need to maintain the discipline they had in 2006, when they scaled back their domestic capacity and generally avoided runaway fare wars, Harteveldt said.
"The airlines have shown a lot of discipline," he said. "But they need to stick with it."
Another strong source of revenue in 2006 -- international routes -- might soften as more airlines add overseas flights and low-cost startups like MaxJet and Eos airlines lure international travelers.
Jenkins noted that American and other airlines continue to carry an enormous amount of debt, which is how they financed the losses of the past five years. At American, the $19 billion debt load will be a drain on cash for years to come.
"American has this enormous debt hanging over their heads," Jenkins said. "I don't know how they sleep at night."
But for American, the biggest short-term challenge is likely to come from unionized employees, who agreed to $1.6 billion in annual pay and benefit cuts in 2003 to keep the airline out of bankruptcy.
Many union leaders say they expect to have at least some of that returned now that the airline has returned to profitability.
They also point out that management compensation has soared, thanks largely to a stock-based bonus plan that paid out $95 million in stock and cash to about 1,000 top managers last year.
At the current price of American's stock, the value of those bonuses will double this year, according to an analysis by the Allied Pilots Association.
Gerard Arpey, American's chief executive, is slated to receive stock bonuses and deferred shares valued at nearly $8 million, according to the union.
The final amount of the stock awards won't be known until April.
Mickey Mellerski, chairman of the union's chapter based at Dallas/Fort Worth Airport, told pilots recently that it would take a 16 percent raise to bring them back to 2003 pay levels.
"We end this year farther behind in pay and benefits than we were last year," he wrote in a letter to union members.
Meanwhile, he said, "Senior level managers will be enjoying their hugely increased compensation, by far the highest in the history of American Airlines."
Still, the profit report will be an opportunity for executives and employees to bask in a rare and much-anticipated moment of success.
"Everyone likes to see a profit," Harteveldt said. "But these guys are keenly aware that the next downturn is coming at some point, and they want to be ready for it."
What it means to you
American Airlines will no doubt be cheered by its first profit since 2000. But the black ink has wider implications:
For investors
The profit could push American's stock price up further, continuing a trend that has rewarded investors for more than a year.
For employees
Union leaders will use the financial success to argue for pay and benefit improvements -- something that management is likely to fight.
For travelers
Higher prices were a large part of American's success this year, so the airline is unlikely to slash fares in 2007.
