Losing the Cold (Class) War: American Airlines (AAL)

Photo by Quintin Gellar, via Pexels

Logistics issues, labor problems, and a pandemic weary culture will prove too much for some of the world’s best-known companies

A Cold War is brewing. But this time, it’s not a 1960s Soviet Union vs. United States battle for global dominance. Instead, a deep and stubborn (yet not particularly violent) class war is afoot inside the modern enterprise. The battle lines of this social upheaval will not be sketched out by liner neo-19th century cadres of investors, managers, and workers,

Instead, today’s post-pandemic class wars will be fought out over an arid and hostile new terrain of organizational fractures. Conflicting senses of entitlement and behavior between older, baby-boomer workers and younger millennials will create friction. Politics and differing views on today’s obligation to past wrongs will spark bitter debate. The ever-changing statistical categories that cull out workers by race, gender, country of origin, and religion will divide teams even further.

Simple exhaustion is now a major problem in the American office. Teams are weary and socially uncertain after nearly two years of pandemic lock-downs and social deprivation.

Even the most basic real-world problem solving, which is the hallmark of the efficient modern enterprise, will come under intense pressure.

“The solution simply will be different for every single company,” explained Nickle LaMoreaux, chief human resources officer at IBM, at a recent Society for the Advancement of Business Editors and Writers conference. “It must be specific to how you make money in your industry, with your clients. And it must be specific to the values of your company.

Analysis of the effects of this brewing class war reveals that, like any other long-term economic struggle, some companies will thrive. Others won’t. The companies that will struggle – particularly in profit-challenged sectors like airlines, travel, and leisure – will very much include established enterprises with well-known brands and enormous market shares. 

To us, the case-study “cold class war” loser will be American Airlines. 

No Longer Flying the Friendly Skies

It’s not easy getting paid keeping planes in the air these days. American Airlines, like rivals Delta (DE), Southwest Airlines (LUV), and United Airlines (UAL), is slogging through a deeply disrupted post-pandemic travel and hospitality sector. It’s been roughly 6 quarters since any major airline has recovered to pre-pandmic profits. The recent omicron variant of the Covid-19 virus has scuttled full-recovery projections.

Worse, established carriers are facing unprecedented competition from a startlingly large group of smaller disruptive airlines. Hungarian-based Wizz Air (WIZZ) is extending low-cost service into the middle east. The founder of JetBlue (JBLU) received regulatory permission to offer discount service to 19 American cities, via a start-up carrier called Breeze Airways. Recently rebranded Avelo is offering cheap flights to 12 American cities. Various international airlines, like Flyr, Play, FlyPop and EGO, offer discount services to places like Norway, Iceland, India, and Italy. 

Gone are the routes that an established carrier such as American Airlines can safely call its own.

Inside this newly risky airline industry, American Airlines tells a singularly troubled financial story: Southwest Airlines is by far the most valuable carrier, with $34.5 billion in total value of its traded stock. American Airlines is lucky to fetch just $10.5 billion. The thing is, American needs more than $62 billion in balance sheet assets to create that value. Southwest Airlines operates with just $25.6 billion in balance sheet assets.

Said another way: American Airlines needs almost 3 times the stuff to create just a third of the value of Southwest.

American Airlines’ long-term financial obligations are equally foggy. Out of those $62 billion of total assets in 2020, $28 billion of them were bought with long term loans. Add in other long-horizon obligations, like pensions and lease payments that function like long-term debt, and in 2020 the airline’s total non-current liabilities touched $52.3 billion.

That means that three quarters of all of American Airlines’ dramatically inefficient assets were bought with borrowed money. 

American’s operational posture is equally stooped. It essentially ties Delta Airlines for industry-leading annual revenues of about $17.3 billion in 2020. But American requires over 102,000 employees. Delta employs only 74,000. That implies that for the full-year 2020, Delta Airlines revenue-per-employee was about $230,000. American Airlines’ was only $168,000. 

Every single American Airlines worker has to put in 3 extra hours per 10 hour work day to sell as much as Delta Airlines. 

Investors are picking up on American Airlines’ negative prospects. The sum of the value of company stock now trades at roughly $12 less than the sum of the value of the company’s assets. 

American Airlines’ stock has been worth less than its assets for years.

This level of negative book value is on par with the airline industry’s juiciest takeover targets like Trans World Airlines from in the late 1980s.

An Eerie Message From the Flight Deck 

Management seems oddly unconcerned. When we asked CEO Robert Isom, about when his firm expected to show real economic profits, he refused to give specific guidance. “It really does depend on demand returning,” he said. “As that happens, in 2022 I think American Airlines will get back to producing margin that warrants investment in the business.” 

Instead, Isom seemed to duck the concerns of unprofitability by highlighting improvements in a growing family of alternative performance metrics. Isom pointed out that American Airlines reduced its fleet size. It has found savings in $1.3 billion in expenses. Its pilot core has become more inclusive. Planes are more environmentally friendly. 

But these optimistic alternative metrics gloss over the deepening class war that all companies must manage in the post-pandemic economy. American Airlines faced a round of informal pickets and pilot walkouts earlier this year. It must solve its labor problems inside a larger wave of job dissatisfaction. Crowdsourced lists of labor strikes, like those found on WikiPedia, indicate organized labor actions saw a 3-fold increase in 2021 over 2020. 

The rate of non-farm workers leaving jobs – that is the so-called quit rate – reached an all-time high of 2.9 percent in August 2021.

Organized labor actions have essentially tripled.

“We see a lot of anecdotal and survey data on this,” said Lawrence Katz, a labor economist at Harvard University, who studies income inequality, in a published interview. “I think we’ve really met a once-in-a-generation ‘take this job and shove it’ moment.”

Losing the Coming Class War

In another era, investors would view a struggling giant like American Airlines as an opportunity. Fortunes were made when the likes of Apple, FedEx, and even General Motors were given the chance to tell a turnaround story. 

But according to interviews and analysis across dozens of companies in various sectors, it’s clear that American Airlines will not stick such a turnaround landing. 

That’s not because American Airlines’ woes are unique. All businesses now face a the post-pandemic class wars. It’s simply that American Airlines has gotten itself into the awful position of being the weakest operator, in the weakest sector, in the most challenging business environment in a century. Flying Blind, Peter Robison’s deeply researched account of the production errors that lead to the crashes of Boeing’s 737 Max , spell out the challenges ahead for an aviation company, like American Airlines. 

“I was excited to meet the engineers who had created these essential machines and the business leaders that were lionized in bestsellers like Built to Last and In Search of Excellence,” writes Robison in the beginning of his book. 

“But what I found was a company at war with itself.”

Conflicting cultures led to crashes that grounded some of Boeing’s aircraft for over a year and $2.5 billion in penalites and compenstaion.

Robinson then retells the gruesome outcomes of cultural clashes between Boeing’s more safety-conscious original culture and the more penny-pinching employees brought in from the then recently acquired McDonnell Douglas.

The dysfunctions Robison recounts – as brutal as they were – are nothing when compared to the challenges this American will face, as the class war strife broils a business that gets paid to keep planes 35,000 feet in the air.