American Airlines 2005 Annual Report Download - page 30

27
The Company’s 2004 and 2005 financial results were also adversely affected by significant increases in the price
of jet fuel. The average price per gallon of fuel increased 33.9 cents from 2003 to 2004 and 51.9 cents from 2004
to 2005. These price increases negatively impacted fuel expense by $1.1 billion and $1.7 billion in 2004 and 2005,
respectively. Continuing high fuel prices, additional increases in the price of fuel, and/or disruptions in the supply
of fuel, would further adversely affect the Company’s financial condition and its results of operations.
In response to the challenges faced by the Company, during the past five years the Company has implemented
several restructuring and other initiatives:
• Following the Terrorist Attacks, the Company reduced its operating schedule by approximately 20 percent
and reduced its workforce by approximately 20,000 jobs.
• In 2002, the Company announced a series of initiatives to reduce its annual costs by $2 billion. These
initiatives involved: (i) scheduling efficiencies, (ii) fleet simplification, (iii) streamlined customer interaction, (iv)
distribution modifications, (v) in-flight product changes, (vi) operational changes and (vii)
headquarters/administration efficiencies. As a result of these initiatives, the Company reduced an estimated
7,000 jobs by March 2003.
• In February 2003, American asked its employees for approximately $1.8 billion in annual savings through a
combination of changes in wages, benefits and work rules. In April 2003, American reached agreements with
its three unions (the Labor Agreements) and also implemented various changes in the pay plans and benefits
for non-unionized personnel, including officers and other management (the Management Reductions). The
Labor Agreements and Management Reductions resulted in an estimated $1.8 billion in annual savings and
included a workforce reduction of approximately 9,300 jobs. In addition, the Company and American reached
concessionary agreements with certain vendors, lessors, lenders and suppliers (collectively, the Vendors,
and the agreements, the Vendor Agreements), resulting in an estimated $200 million in annual cost savings.
Generally, under the terms of these Vendor Agreements, the Company or American received the benefit of
lower rates and charges for certain goods and services, and more favorable rent and financing terms with
respect to certain of its aircraft.
• Subsequent to the April 2003 Labor Agreements and Management Reductions, the Company announced the
Turnaround Plan. The Turnaround Plan is the Company’s strategic framework for returning to sustained
profitability and emphasizes: (i) lower costs, (ii) an increased focus on what customers’ truly value and are
prepared to pay for, (iii) increased union and employee involvement in the operation of the Company and (iv)
the need for a more sound balance sheet and financial structure.
• Subsequent to the announcement of the Turnaround Plan, the Company has worked with its unions and
employees to identify and implement additional initiatives designed to increase efficiencies and revenues and
reduce costs. These initiatives included: (i) the return of under-used gate space and the consolidation of
terminal space, (ii) the de-peaking of its hub at Miami, the reduction in the size of its St. Louis hub and the
simplification of its domestic operations, (iii) the acceleration of the retirement of certain aircraft and the
cancellation or deferral of aircraft deliveries, (iv) the improvement of aircraft utilization across its fleet and an
increase in seating density on certain fleet types, (v) the sale of certain non-core assets, (vi) the expansion of
its international network, where the Company believes that higher revenue generating opportunities currently
exist, (vii) the implementation of an on-board food purchase program and new fees for ticketing and baggage
services, (viii) lower distribution costs, (ix) the implementation of fuel conservation initiatives, (x) the increase
in third-party maintenance contracts obtained by the Company’s Maintenance and Engineering group, (xi)
upgrading of flight navigation systems to provide more direct routings and (xii) numerous other initiatives.
• As part of its effort to build greater employee involvement, the Company has sought to make its labor unions
and its employees its business partners in working for continuous improvement under the Turnaround Plan.
Among other things, the senior management of the Company meets regularly with union officials to discuss
the Company’s financial results as well as the competitive landscape. These discussions include (i) the
Company’s own cost reduction and revenue enhancement initiatives, (ii) a review of initiatives, in-place or
contemplated, at other airlines and the impact of those initiatives on the Company’s competitive position, and
(iii) benchmarking the Company’s revenues and costs against what would be considered “best in class” (the
Company’s Performance Leadership Initiative).