Dear AMR shareholders:
Sell. Get out. Go away. You're not dealing with a company. You're dealing with a three-card monte table in Times Square.
I'm not saying you can't win. I am saying that you won't win. The latest flap about dealings by executives essentially assures that. There will be no more cooperation between American Airlines parent AMR's (NYSE:AMR) unions and its management.
On Monday, CEO Don Carty apologized for his "recent mistakes in judgment." The apology is fine, but what we have here is not a case of recent mistakes in judgment. What we have here are deep character flaws in the executive team at AMR, ones that were both tolerated and encouraged by a non-interventionist board. Essentially, far from "aligning management interests with shareholders," actions by management ensured that they got theirs, whether or not shareholders, employees, or anyone else received anything.
It's not just an error in judgment; it's a revolting view into the warped sense of self-entitlement that pervades America's boardrooms.
Once upon a time, when companies went broke, managers suffered along with them. Oh, sure, they were generally well compensated while the companies were in operation, but their equities, their pensions, and their ongoing salaries were deeply affected, if not wiped out altogether. Not anymore.
Bankruptcy, as we've seen in the last few years, doesn't have to be traumatic to management teams at all. In fact, they can profit handsomely from reorganization, and once the process is done, they can replace their old canceled equity stakes with new shares and options. Meanwhile, the common shareholders are wiped out, and the retirement benefits and ownership stakes of employees are obliterated.
AMR, like many airlines, has lost billions of dollars since the terrorist attacks on Sept. 11, 2001. Even in the best of times, airlines are a miserable business, with massive fixed costs, highly specialized and unionized employee bases, and heavy competition that, despite enormous advertising and differentiation campaigns, generally come down to price. Add to these things the reduction in air travel, enormous overcapacity, a rapid increase in fuel costs, and rising insurance and security premiums, and it's easy to see that these are not the best of times. In fact, several carriers are already in bankruptcy, several more seem destined to be there soon -- including American.
Its management addressed its powerful unions and gave them a choice: They could keep their current compensation agreements, which would doom the company to bankruptcy, or they could accept deep salary cuts and give the company a chance to survive. Not a great choice, but when a company goes bankrupt, all of its assets are available to creditors, including pension funding. A bankruptcy would put the retirements of current and past employees at risk. So, the unions opted for Plan A. They accepted lower salaries in the hopes of staving off Chapter 11. All told, the concessions total more than $1.8 billion.
Meanwhile, back at the AMR ranch
Even while the unions worked under the assumption that sacrifices would be required to save American, corporate executives took measures to ensure that, come rain or shine, they got theirs.
This took on a three-pronged approach. First, at the end of last year, AMR canceled a plan that deferred compensation for executives. This meant that money the company had retained was paid out to executives in a lump sum. Certainly, it's their money, but this act doesn't jibe with the company's need to retain as much cash as possible to stave off a liquidity crunch.
Second, as was disclosed in a securities filing last week, AMR last October partially funded a secular trust to protect some pension benefits for 45 executives in case of company bankruptcy. These arrangements lie outside the grasp of creditors, while the company's own pension fund does not. And finally, its directors approved retention bonuses for top executives if they remain with the company through 2005, bonuses that range from 150% to 200% of their base salaries.
AMR defends its actions, stating that its executive salaries are below those of its competitors and that the untouchable pension is no different than that of American's pilots. And finally, it pointed out that several executives have in fact departed since the difficulties began -- few retired, one took a job at AT&T (NYSE:T). In all instances, the company has a point. Barely. After all, for most people, the argument of "Well, he's doing it more than me" stopped having much power when we were six.
The proper basis for such actions ought to be: "Is this the right thing to do?" At a time when the majority of employees and shareholders are in danger of losing everything they have in AMR, an answer other than "no" would be unacceptable. Executives taking cash out of a company while they cry that the company is running out of cash is, frankly, unforgivable.
After he was called on his actions, Carty reversed course and canceled the retention bonuses. The cash they took out last year as well as the secular pension remain in place. He further declared that the company was on the "precipice of bankruptcy," and urged unions to move ahead, stating, "The precariousness of our financial condition simply can't sustain any action that would delay or prevent the consensual restructuring measures from taking place on schedule." And he's right. Union members may be angry and they may want to change their votes just to spite them and their greed, but such a victory of principle would come at a massive cost.
An AMR bankruptcy means their equity and pensions would be wiped out, many would lose their jobs, and there would be a chance that the company could not emerge. For the industry on the whole, this wouldn't be such a bad thing -- for American's employees, it would be catastrophic. After all, this is the airline industry -- where would they possibly go for another job? Almost every other company is struggling, and the standout -- Southwest Airlines (NYSE:LUV) -- didn't get to be the king by larding up its employment ranks.
Investors have no such problems. AMR shareholders, for the most part, are not stuck. You're holding a company with miserable economics, one that has high fixed costs in a marketplace that absolutely needs to have some of the excess wrung out before it can ever be healthy. Its management that has -- fairly or not -- presided over the destruction of the company's equity and responded to such by ensuring that its cohort avoids the pain felt by everyone else at the company. And you can bet that its unions are not likely to take anything claimed by management at face value for a long, long time. That means that shareholders will suffer for a long, long time. Don't be one of them.
Fool on!
Bill Mann, TMFOtter on the Fool discussion boards
Bill Mann owns none of the companies mentioned in this article. If he did, he wouldn't for long. The Motley Fool is investors writing for investors.
