Having survived the post-9/11 industry downturn without entering Chapter 11, oneworld carrier American Airlines now suffers from a disadvantageous high unit cost base as measured by CASM, that was ranked as the highest industry-wide only last year.

Notwithstanding this not-so-glamorous fact, the introduction of 787-9 promises superior economics that will lower cost base for American Airlines, and the airline is hopeful that it can reach an agreement over this with its pilots soon.

“We have said since day one that we are optimistic we will reach an agreement with the APA [Allied Pilots Association] prior to the date AA must notify Boeing of its intent to purchase a 787,” AMR Corporation spokesman Andrew Backover reiterates.

Image courtesy of oneworld.com

According to a February 2010 SEC filing, that “American Airlines and Boeing are currently discussing a revised delivery schedule due to the impact of the overall Boeing 787 program delay on American’s delivery positions. The revised delivery schedule is expected to include terms and conditions consistent with the original agreement and to allow the Company confirmation rights”.

Under the terms set out in the original agreement with Boeing, that American Airlines must notify Boeing of its intent to purchase a 787-9 18 months before the delivery date of that specific aircraft, thereby offering the 2nd largest US carrier significant flexibility.

However, American Airlines confirms that the potential 787-9 agreement has been included in the ongoing negotiations with the pilot union.

“Yes,” AMR spokesman Andrew Backover confirms.

“We’ve said previously that we still have a lot of work to do on a range of important contact issues. Company negotiators have every expectation that when the APA recognizes the benefits of this new aircraft and what it means to our company’s future, we will be able to reach an agreement,” Backover further elaborates.

The Allied Pilots Association (APA) could not be reached for comments.

Indeed, the 787-9 represents American Airlines’ future and will be a key driver in lowering the operating costs of its fleet.

The 8,150nm range of the 787-9 as outlined by Boeing in its annual investor conference 2010 does not take into account planned block point changes which include a considerable amount of weight savings.

Moreover, should these weight savings be fully realised, there is very likely to result in a range and payload increase even beyond its original 8,500 nm target. It is intended that the 787-9 will supplant the existing 777-200ER fleet. The airline has already signed an agreement to procure GEnx engines to power its 787-9′s while it works with both its unions and Boeing to firm up its October 2008 commitment to the airplane.

Still, American Airlines has to address its high unit cost base (CASM) issue and improve its competitiveness.

“What’s more, it’s no secret that because we have taken a different path than our major network competitors — all of whom have gone bankrupt at least one time in their histories — we have the highest labor costs in the airline industry.  That’s certainly not something we can afford to ignore, and we are not.  In an industry where price, and therefore cost, is king, it is challenging to compete when there is a wide gap between the pay and benefits you provide your people versus your competitors,” AMR chief executive Gerard Arpey acknowledged on its annual investor day held in May.

“Today, we are currently at a significant labor cost disadvantage relative to both United and Continental — driven by their multiple bankruptcies.  The history of airline mergers suggests, however, that in the process of merging, the labor costs of a combined United / Continental are likely to rise and move towards ours.  Moreover, most industry labor contracts are amendable by year-end 2011 or earlier, creating more opportunity for cost convergence.   At the moment, we are at an annual labor cost disadvantage of roughly 600 million dollars versus our big network competitors.  We think as United and Continental combine, and new contracts are reached around the industry, the gap between our labor costs and those of our competitors could be cut substantially, improving our competitiveness,” Arpey explained.

The 787-9 will undoubtedly become an important part of the so-called “circuit breaker” that will bring down American Airlines’ cost to an acceptable level – but not all of it.

- Daniel Tsang