AIRLINE BIZ

Robert W. Reding, American Airlines executive vice president of operations, disclosed Friday that he sold 22,497 shares of AMR stock for $204,818 on Wednesday, an average of $9.10 a share.

He still owns 208,065 shares of AMR stock, worth $1,907,956 at Friday's closing share price of $9.17.

Don't be alarmed if you see dozens of ambulances, police cars and fire trucks speeding to Dallas/Fort Worth International Airport Saturday morning between 7:30 a.m. and 11:30 a.m.

The airport is conducting its "Lifesaver 2008" simulated emergency drill that includes all aspects of an airplane and terminal explosion, fire, rescue and recovery.

Officials are staging the mock disaster to see whether the emergency plan filed with the Federal Aviation Administration works the way they think it does.

To do that, they'll have between 80 to 90 volunteers who are done up in elaborate makeup and moulage to appear as disaster victims, plus 15 different ambulance companies from around the D-FW area, emergency helicopter services, several fire trucks and police companies participating.

Representatives from the American Red Cross, Transportation Security Administration, FAA, and local law enforcement and emergency response agencies will also be on hand.

Nine evaluators will be timing response by emergency crews and making sure protocols are followed.

The main action will take place near the old American Eagle annex, north of Terminal A on the airport's east side, and visible from International Parkway, Terminal A, and the Skylink airport train. D/FW's emergency operations center, family assistance program and airport operations center will also be involved.

D/FW is required to conduct a drill every three years as part of its federal safety certification.

Follow me on this.

First: The Allied Pilots Association in January urged American Airlines to join it in asking for a federal mediator. American refused, saying it would slow down talks to have to wait for a mediator.

Second: The union and airline accepted the National Mediation Board's offer to "facilitate" talks without full mediation. The five weeks of talks ended in April.

Third: The union again asked for a mediator, and the NMB appointed Mike Tosi to mediate the contract talks.

Now: The union isn't happy. Says the APA in a Thursday hotline:

In management's latest delay tactic at the bargaining table, they informed us this week that they are refusing to conduct any negotiating sessions without the presence of the National Mediation Board mediator. This, despite APA's stated willingness to continue conducting unmediated negotiations and permission and encouragement by the mediator to do so.

Management's refusal to meet with APA unless the mediator is present will significantly reduce the number of negotiating sessions each month and impair our ability to reach a timely agreement.

In its negotiations update, management says we told you so:

When the five weeks of facilitated discussions came to a close on April 10, American's negotiators were hopeful that sessions would continue under the facilitation framework. The APA disagreed and resubmitted its request for formal NMB mediation, stating that involving a mediator from the NMB would be "in the interests of both APA and management" and an "essential" part of reaching an agreement. ...

Because the APA has indicated on multiple occasions that negotiations would be unproductive without NMB guidance and has rejected outright very reasonable company proposals, the company looks forward to holding future negotiations with Mediator Tosi's assistance. As the Company indicated to APA prior to its application for mediation, when either party requests mediation the NMB assumes control over the process.

Dallas Morning News reporter Dave Michaels is reporting that American Airlines says it got mixed messages from federal regulators about whether it could continue to fly its fleet of MD-80 aircraft in April while it made fixes.

The Fort Worth-based carrier also said that the maintenance issues did not justify the cancellation of some 3,300 flights.

The details about what happened leading up to the April cancellations were revealed today in a letter sent to DOT secretary Mary Peters.

The FAA says the blame was American's.

The April cancellations crippled American and its biggest hub, Dallas/Fort Worth International Airport, displacing some 300,000 passengers.

Read Dave's story here.

Delta announced earlier this week that it will allow members of its SkyMiles program to transfer miles this month without paying the $30 processing fee.

The offer applies to miles transferred between May 1 and May 31. Customers will pay $0.01 per mile transferrred, plus any applicable taxes.

Here's more of the fine print:

Up to 30,000 miles can be transferred in increments of 1,000 miles at a cost of $0.01 per mile. A maximum of 300,000 miles can be transferred into any individual SkyMiles account per calendar year. Up to 150,000 miles can be transferred from your account per calendar year. Transfer Miles may only be donated and received by SkyMiles accounts that have been established for at least 60 days and have a Total Lifetime Balance greater than zero.

Miscellaneous:
Transferred miles do not count towards Medallion® or Million Miler™ status. Mileage transfer transactions are nonrefundable and may take up to 7 days to post to the recipient's account. Taxes and fees for award travel are the responsibility of the passenger and must be paid at the time the ticket is booked. Award travel seats are limited and may not be available on all flights or in all markets. All SkyMiles program rules apply. To review the rules, please visit Membership Guide & Program Rules. The sale or barter of miles is prohibited. Offers subject to change without notice. Additional restrictions may apply.

1. I'm going to miss Herb Kelleher after he steps down as chairman of Southwest Airlines on Wednesday. For that matter, I've missed him since he gave up the CEO and president jobs in 2001 and largely disappeared from the earth.

2. The road of indecision is paved with flat squirrels.

3. I'd like to have the airplane painting contracts for United Airlines and US Airways. How many times have they changed their designs since 1990? And if they merge, they'll have to repainted again with their new US United Airwayslines name.

American Airlines isn't saying anything about what it has offered the Transport Workers Union, but an online forum, US Aviation, has a poster with some alleged details, with the language slightly cleaned up:

• Two year contract with NO RAISES Two year pay freeze
• $3100 bonus after first year
• $2500 bonus after second year
• One more sick day for a total of six
• All sick days at full pay
• 3 of the five vacation days a year returned to be used as "floaters"
• 2 holidays with Holiday pay at 2x

In the words of the poster: "So in other words nothing."

AMR chairman and CEO Gerard Arpey supposedly told union leaders that the airline would try to do something for the TWU but that the current industry situation made it difficult to offer much.

Without really refuting any of a CBS News report, a coalition of regional air carriers is criticizing the CBS story that knocked the Essential Air Service program.

The EAS program is a federal program to keep service to small communities that otherwise would have lost their airline service. Regional Airline Partners says it is worth its costs.

The CBS story noted that taxpayers are paying big subsidies to keep air service to small communities, even on routes where there are few passengers who want to fly:

The government's Essential Air Service pays airlines millions to serve more than 100 small towns-many can barely scrounge a few passengers even after years of trying.

A million dollars a year keeps planes flying into Lewistown, Montana-often empty. The subsidy works out to $843 a passenger.

How about the $2 million a year to fly a handful of people from Macon, Georgia to Atlanta-just 83 miles away?

The Regional Aviation Partners coalition said "we completely disagree with the premise and inaccuracy of the story line." It added:

RAP said the 106 communities in the EAS program carried 1,093,114 passengers in 2007 for a subsidy of $108,198,135, or an average subsidy of $98.98 per passenger:

While it makes an eye catching headline, it is completely disingenuous to knowingly tell the public that the EAS program is paying more than $843 per passenger to fly empty planes to and from small communities at taxpayer expense when it is not.

Actually, what the CBS story said was that the Lewiston, Mont., flights averaged a subsidy of $843 per passenger, not that the EAS program averaged that much. At least, that's what CBS is saying in its online version of the story.

Membership in RAP is largely made up airports, chambers of commerce and areas that get Essential Air Service flights, with a few airlines and others thrown in. Among the members is Mesa Air, whose Air Midwest announced Tuesday it was going to quit operations and end EAS service to 20 U.S. cities by mid-year.

After Aloha Airlines went out of business March 31, United Airlines lost its code-share partner in the Islands. Now, Hawaiian Airlines will work with United, a real boost for Hawaiian.

Hawaiian already has seen a 26 percent increase in passengers in April post-Aloha. This will add some more.

In the United announcement, Hawaiian Airlines senior vice president of marketing and sales Glenn Taniguchi said:

This new marketing partnership between the largest carrier to Hawaii and the largest carrier within Hawaii strengthens our franchise as the airline of choice between the Hawaiian Island. We look forward to providing United's customers with a new level of service and seamless connections throughout our home state."

United said it expects to begin putting its code on Hawaiian flights by the end of summer.

Official Airline Guide says that the number of domestic flights have dropped 3 percent this month in the United States, off 22,900 flights and 1.51 million seats.

On the other hand, low-cost carries will increase their flights and capacity by 4 percent, up 6,661 flights and 752,392 seats. We can extrapolate from that that the large network carriers are cutting their flights and capacity more than 3 percent.

OAG says growth in flights worldwide in May will be 3 percent compared to May 2007. In April the growth rate was 5 percent year over year. Like in the U.S., the low-cost carriers are growing, up 14 percent in flights and seats.

OAG chief operating officer Steve Casley said in OAG's press release:

Financial burdens caused by economic uncertainties and rising fuel prices are starting to take their toll. For those reasons we have seen a higher than usual number of airlines folded in recent weeks and we are seeing several other carriers looking to restructure, find partners or even consolidate with competitors to ensure their long-term survival.

Yet, OAG's statistics indicate continued and growing consumer demand for air travel, albeit at a slower rate than previous months, and the airlines are responding with increased capacity in many markets. Airports, too, are reviewing their operations to cope with this demand.

So far this year, we've seen at least four major international hubs expand their facilities, namely Singapore Changi T3 in January; Beijing T3 and Shanghai Pudong T2 in March, and Heathrow T5 last month.

If you combine this with the 35 percent increase in aircraft orders, it indicates that despite current financial pressures, the industry as a whole is gearing up its investment for long-term sustainability.

Various newspapers and news agencies are reporting that United Airlines is talking about an alliance with Continental Airlines separate from its potential merger with US Airways.

Well, that would throw a bit of a monkey wrench into the talked-of alliance among Continental, American Airlines and British Airways, one that would include a request for antitrust immunity to cooperate on Atlantic routes.

The Associated Press, Bloomberg News and the Houston Chronicle quoted Continental spokeswoman Mary Clark as saying: "As we've said over the last few weeks, we are examining our alliance relationships as we think it's important that we be a major player in one of the three major global airlines alliances."

Continental announced two weeks ago that it had decided against merging with anyone, but was reexamining its alliances. It currently is in SkyTeam, which has two other members, Delta Air Lines and Northwest Airlines, that plan to merge.

American and British Airways are in a second global alliance, Oneworld, and United is a lead member of the third group, the Star Alliance.

A high-ranking U.S. Department of Transportation official discussed the airline industry and mergers therein before a House committee. He didn't speak well of mergers.

Michael W. Reynolds, acting assistant secretary for aviation & international affairs, said mergers have to result in lower costs for them to pay off. In remarks prepared for the House Transportation And Infrastructure Committee's aviation subcommittee, Mr. Reynolds said:

One stated goal of this merger is the reduction of costs through operating efficiencies and synergies.

In the current environment of record high fuel prices and a slowing economy, however, mergers are unlikely to ease the short-term financial pressures on carriers for a number of reasons.

While mergers might help reduce capacity and cut costs in the medium- to long-term, they are unlikely to be a short-term solution to the industry's current challenges unless the merging carriers plan to immediately and drastically reduce capacity and increase fares.

Even if the merging carriers take such action, short-term results would be limited because capacity comes out of an airline's system much faster than costs; while grounded aircraft do not accrue some variable and fixed costs, many such costs remain in the system. Few short-term benefits therefore result from any capacity cuts facilitated by a merger.

In short, past experience with airline mergers suggests that they may bring large, up-front costs while any benefits are not realized until several years later.

Even after a while, the benefits of mergers are dubious, he suggested:

Historically, even over the long-term, past mergers have been expensive and time-consuming, as diverse components including fleets, computer systems, and cultures are combined.

Labor integration has been among the most challenging hurdles to overcome. Merging unions in the past has proven to be difficult and costly, with the most expensive features of each contract becoming the standard in the combined labor agreement.

Though often overlooked, systems integration - the heart of vital airline planning and operating functions - is also enormously costly and complex.

Even the most ardent proponents of consolidation (most notably the hedge fund managers who are less concerned about the long-run financial health of the industry) recognize the significant risks of execution and poor track record of past airline industry mergers.

The value to the carriers in any merger would primarily result from the synergy and cost cutting that could be obtained. Ultimately however, consolidation through mergers as a successful endgame for the legacy carrier segment of the industry must result in lower costs, the ability to profitably charge relatively low fares, better service, a rationalization of high-cost capacity, and hence a more efficient and viable industry.

If a merger agreement does not result in lower costs for the merged entity - in the short, medium, and long term - the merged carrier will still be unable to compete with low-cost carriers, which continue to steadily gain market share as well as enter additional markets.

Transport Workers Union officials representing American Airlines have met twice this month with American chairman and CEO Gerard Arpey, perhaps an indication that we're getting to a critical point in TWU contract talks.

The most recent meeting came Monday, following on a May 1 discussion between TWU and American executives.

"Mr. Arpey's visit was intended to update the TWU leaders on the current economic situation and its impact on American's operations and business, as well as the industry," American spokeswoman Tami McLallen said.

TWU had taken a decidedly different tack on its negotiations with American. Although TWU members and leaders are no less unhappy about stock awards to American executives and key employees, they have been far less vocal about it than the flight attnedants, who have called on Mr. Arpey and other top executives to resign, or pilots, who have picketed to call attention to management mistakes.

Dennis Burchette, the AA system coordinator and international vice president for TWU, told members May 1 that TWU staff met about two hours that day with Mr. Arpey and others in senior leadership jobs.

"It was expressed during the meeting that the Company is interesting in continuing this negotiation process in an attempt ot reach a settlement," Mr. Burchette wrote.

A TWU spokesman was non-committal Tuesday when asked if there'd be any announcement soon from negotiations.

The union has been waiting for American to make an economic proposal, i.e., a pay raise and other improvements in the contract. The amendable date for the contract was May 1.

Asked if the company was preparing to make its economic proposal, Ms. McLallen said only that the two sides will be meeting this week.

"The TWU has worked with American during the last several years to improve processes and productivity that have helped save money, generate additional revenue and improve operations," Ms. McLallen said.

"American remains committed to working with the TWU and our other unions to reach contracts that address key areas of interest and help American compete and succeed in this challenging environment," she said.

On one hand, the airline knows that the TWU has continued to cooperate with the company despite taking deep pay cuts and made other concessions in 2003. On the other hand, Wall Street is expecting parent AMR to lose $1.4 billion in 2008 and nearly $950 million in 2009.

Gary M. Aumann, planner of facility maintenance for American Airlines at Chicago's O'Hare International Airport, and two co-defendants have pleaded guilty to charges they bilked American out of nearly $6 million.

The FBI announced the pleas as it indicted a couple more people in the fraud.

Mr. Aumann reportedly issued checks to his cohorts for work and supplies that didn't exist.

AMR and American Airlines disclosed Wednesday that their creditors on nearly $700 million in debt authorized or outstanding have agreed to waive requirements that its cash flow equal at least 1.4 times its fixed charges.

The cash-flow test goes away until mid-year 2009, then goes back into effect at a less stringent level.

We've got Southwest Airlines raising another $600 million last Friday by mortgaging 21 airplanes and UAL going to its creditors May 6 to get some relief on credit terms as well.

Battening down the hatches does appear to be in order.

UPDATE: An AMR spokesman points me to language in the AMR 10-Q for first quarter 2008 that further explains why AMR/American took the step:

AMR and American were in compliance with the EBITDAR covenant for the period ending March 31, 2008; however, given fuel prices that are high by historical standards and the volatility of fuel prices and revenues, it is difficult to assess whether AMR and American will be able to continue to comply with this covenant for subsequent periods, and there are no assurances that AMR and American will be able to do so.

Failure to comply with these covenants would result in a default under the Credit Facility which - - if the Company did not take steps to obtain a waiver of, or otherwise mitigate, the default - - could result in a default under a significant amount of the Company's other debt and lease obligations and otherwise have a material adverse impact on the Company.