AA-US Pilot SLI Exhibits of Daniel W Akins On Behalf of the Pilots of US Airways West 1
Outline of Exhibits A. 2003 Turnaround Plan : AA Restructured to avoid Bankruptcy after 9/11 AA was largest US carrier 2001-2008 Was making progress to become profitable 2003-2008 B. 2010 Flightplan 2020 : AA Plan Gets Overtaken By Industry Events AA tries to fix new dramatic competitive deficit The Cornerstone Plan and Transformational Aircraft Order C. 2011 Chapter 11 and the Standalone Plan AA Could Not fix its Structural Network Deficit to UA and DL on its own AA Standalone Plan had potential to destabilize entire airline industry D. 2013 Merger with US Airways Only way for AA to Address Structural Gaps E. 2014 Merger Results Speak for themselves 2
A. 2003- The AA Turnaround Plan and the Post 9/11 Environment 3
AA s Initial Post 9/11 Strategy 4
The Turnaround Plan Enabled AA to Build Back Profitability by 2006/07, but then AA Fell Back to Large Losses Thereafter Annual Net Income* ($ Billions) $0.37 $0.19 -$0.39 -$1.40 -$1.50 -$0.92 -$0.71 -$1.23 -$1.36 -$1.10 -$2.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: AMR/AAL *Note: Excluding Special Items 5
Turnaround Plan Reduced Total AA Departures at AA s Five Hub Cornerstone Markets 720,000 700,000 680,000 660,000 697,516 Total Departures 665,624 640,000 620,000 611,082 621,593 600,000 2007 2008 2009 2010 Source: US DOT Form 41 Data Note: AA Mainline plus Eagle total departure volume total in 5 cornerstone markets (Chicago, Dallas, Los Angeles Miami, and New York metro area airports) 6
B. 2010- Industry Events Had Overtaken the AA Turnaround Plan 7
Billions AA Historical Position as the Largest US Network Carrier Was Usurped By DL and UA Mergers ASMs 240 Mainline ASMs American Delta United 220 200 180 160 140 120 100 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: US DOT Form 41 Data and Intralinks document 25.2 AMR Passenger Revenue Forecast Model Note: United and Delta Forecast Mainline Capacity growth at same rate as American. 8 16
By 2011 AA Was Significantly Smaller than DL and UA by Every Meaningful Measure Cities Served 400 300 200 100 0 Total A/C 1,500 1,000 500 0 50% 36% 2011 Revenue (Billions) $40 55% 47% 374 341 $20 $37 $35 250 $0 $24 UA DL AA UA DL AA 2011 ASMs (Billions) 300 38% 46% 200 42% 32% 1,252 1,325 907 100 219 203 154 0 UA DL AA UA DL AA Daily Flights 6,000 65% 57% 4,000 2,000 5,605 5,341 3,400 0 UA DL AA 2011 Passengers 200 60% 42% 100 142 160 100 0 UA DL AA Source: SEC and AA, DL & UA web sites. Note: Consolidated operating results. ($ in billions) (ASMs in billions and Passengers in millions) (% Represents Size Premium to AMR) 4 9
As a Result AA Fell Behind Its Competitors in Profitability 2005 2011 Industry Profitability Net Margin 4.0% AA Rest of Industry 2.0% 0.0% (2.0%) (4.0%) (6.0%) (8.0%) 2005 2006 2007 2008 2009 2010 2011 Source: SEC Data and AMR Note: Excludes one-time items. Industry includes: CO, DL, NW, UA, and US. 10 7
AA s Suddenly Uncompetitive Network and Tired Products Caused a Loss of High Value Corporate Customers to DL And UA 11
Flight Plan 2020 AMR s Attempt to Regain Profitability through a New Strategy Transformational Aircraft Order Largest in History Cornerstone Strategy Rebuild Hub Presence Alliance Fortification Enhanced Code Shares and JVs with Int l Carriers 12
Speaking at the company's annual stockholders' meeting in New York, chairman Gerard Arpey touted the cornerstone strategy, which American announced in January. The strategy focuses on five domestic locations - Dallas/Fort Worth, Chicago, Miami, Los Angeles and New York - and aligns American with three international carriers, British Airways, Japan Airlines and Iberia. "Our aim is to build not necessarily the biggest, but the most effective airline network in the world, and we firmly believe we are on our way to doing exactly that," Arpey said. Arpey also explained American's new partnership arrangement with JetBlue Airways Corp. Under the arrangement, customers on JetBlue will be able to check through on American international flights. These deals give American a "competitive strength," Arpey said, in a new era of mega airlines created by the mergers of Delta Air Lines Inc. with Northwest Airlines and United Airlines with Continental Airlines. "Take every single U.S. destination that American operates from, and there will be a Continental or a Delta operation there," said Robert Herbst, an airline finance analyst and an American pilot, "which is not a good position for American." Money-losing American Airlines parent AMR touts new tactics By CHRISTINE NEGRONI / Special Contributor to The Dallas Morning News Published: 19 May 2010 10:13 AM Updated: 26 November 2010 02:48 PM After a first-quarter loss of $505 million, Fort Worth-based AMR Corp. tried Wednesday to reassure Wall Street about its prospects. In a regulatory filing, AMR, parent of American Airlines Inc., predicted that its new "cornerstone" strategy and alliances with British Airways and others would bring it more than $500 million in revenue and cost savings annually by the end of 2012.
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Real Indication that AA was in Serious Trouble In 2010 AA Was the Only Large Carrier to Lose Money $2,000 $1,500 $1,619 $1,444 Net Income Millions $1,000 $500 $0 -$500 $459 $447 $252 $97 $39 UA DL SWA US AS JB Airtran AA -$389 Source: US DOT Form 41 16
In 2011 AA Was Once Again the Only Large Carrier to Lose Money $1,500 $1,323 $1,190 Net Income Millions $1,000 $500 $0 -$500 $300 $255 $111 $92 UA DL SWA AS US JB AA -$1,000 -$1,500 Source: US DOT Form 41 -$1,062 17
C. 2011 - Chapter 11 and The AA Standalone Plan 18
On November 29, 2011 AMR Voluntarily Filed for Relief Under Chapter 11 of US Bankruptcy Code AMR was last of the Legacy Network Carriers to File Bankruptcy AMR Entered Bankruptcy with Nearly $5.0 Billion in Cash AMR Had $10 Billion Long-Term Debt And Over $2.3 Billion in Other Off-Balance Sheet Obligations AMR s Restructuring under their Standalone Plan Required: $2 Billion annual cost reductions Including $1.5 B in annual employee concessions Loss of over 13,000 Jobs $1 Billion in annual revenue enhancements High levels of capacity growth 19
AA lacked Competitive Operational Mass at Majority of its Five Domestic Hubs Despite Pre-Bankruptcy Strategy AMR City Market Share of Departures 2011 71% 69% 29% 15% 14% Dallas Miami Chicago Los Angeles New York
AA s Standalone Plan Attempted to Fix Competitive Deficit with Hockey Stick Capacity Growth Which was Problematic for both the Industry and AA ASMs (Billions) AMR Consolidated Capacity (2012-2017) 210 Standalone Plan Growth 200 190 180 170 160 150 2009A 2010A 2011A 2012F 2013F 2014F 2015F 2016F 2017F Source: SEC and Intralinks document 25.2 and 25.66. Historical Forecast 21 11
Key Challenges To The Standalone Plan Reliance on Organic Growth AMR could not catch up to United and Delta through organic growth Even with its high-growth assumptions, the Standalone Plan would leave AMR in the same relative place versus United and Delta in 2017 Assumes No Competitive Response Standalone Plan assumes no competitive response No meaningful capacity growth at AMR until 2015 Disparity between AMR and network carriers increases United and Delta continue to respond with new products and services Unsuccessful Cornerstone Strategy BPM 3.0 and 4.0 both rely on the failed Cornerstone Strategy Despite strategic focus since 2009, AMR has lost market share at NYC, LAX, and Chicago Projected growth in cornerstone markets does not remedy network deficiencies Flawed PRASM Assumption In 2015 2017, AMR s PRASM increases even though its capacity greatly exceeds market demand Defied basic economic principles and logic 8
Even With 22% Forecast Growth by 2017 AMR Consolidated Capacity Would Have Remained Much Smaller Than Current United and Delta ASMs (Billions) 270 AMR Consolidated Capacity 2011 Actual 2012-2017 AA Forecast 250 United 253 230 Delta 235 210 205 190 AMR Forecast -> 170 AMR 150 2011 2012e 2013e 2014e 2015e 2016e 2017e Source: SEC filings and AA BPM. 17 23
Key Challenges To The Standalone Plan Reliance on Organic Growth AMR will not catch up to United and Delta through organic growth Even with its high-growth assumptions, the Standalone Plan leaves AMR in the same relative place versus United and Delta in 2017 Assumed No Competitive Response Unsuccessful Cornerstone Strategy Standalone Plan assumed no competitive response No meaningful capacity growth at AMR until 2015 Disparity between AMR and network carriers would increase In reality, United and Delta continued to respond with new products and services BPM 3.0 and 4.0 both rely on the failed Cornerstone Strategy Despite strategic focus since 2009, AMR has lost market share at NYC, LAX, and Chicago Projected growth in cornerstone markets does not remedy network deficiencies Fuel Price Assumptions In 2015 2017, AMR s PRASM increases even though its capacity greatly exceeds market demand Defied Basic Economic Principles and Logic 10
Key Challenges To The Standalone Plan Reliance on Organic Growth AMR will not catch up to United and Delta through organic growth Even with its high-growth assumptions, the Standalone Plan leaves AMR in the same relative place versus United and Delta in 2017 Assumes No Competitive Response Standalone Plan assumes no competitive response No meaningful capacity growth at AMR until 2015 Disparity between AMR and network carriers increases United and Delta continue to respond with new products and services Unsuccessful Cornerstone Strategy AA s Standalone Business Plan relied on the failed Cornerstone Strategy Despite strategic focus since 2009, AMR had lost market share @ NY, LA, & ORD Projected growth in cornerstone markets would not remedy network deficiencies Fuel Price Assumptions In 2015 2017, AMR s PRASM increases even though its capacity greatly exceeds market demand Defied Basic Economics Principles and logic 13
AMR Could Not Fix Its Structural Network Deficit on Its Own AMR had already failed at standalone strategy pre-bankruptcy RASM and profit decline vs. competitors Loss of Corporate and High value Customers due to incomplete network Loss of market strength oneworld lost competitive advantage vs. Star and Skyteam Competitors gained network scale and depth relative to AMR AA did not have a size problem per se, but a structural problem AMR had poorly positioned domestic East Coast Hubs JFK and MIA are great International gateways, but Geography does not work for domestic connecting traffic at either JFK or MIA As a Result AA had weaker East Coast Position versus Competitors High Value Business Customers prefer LGA/EWR to JFK Slot limits at JFK make it limited vs. EWR and PHL 26
AMR's Revenue Derived From Cornerstone Markets Results of AA s Previous Cornerstone Strategy Were Not Successful 2006 2007 2008 2009 AMR Became Increasingly Reliant on Cornerstone Markets And it Lost in Total Revenue Share in Cornerstones 100% 40% 95% 90% 85% 38% 36% 34% 32% 30% 2006 2007 2008 2009 2010 1H2011 2010 1H2011 AMR's Share in Cornerstone Markets 80% Sources: DOT DB1B. Revenue attributed to market where prorated segment revenue flows directly in or out of the market. Market totals include multiple airports within a common market. Sources: DOT DB1B. Revenue attributed to market where prorated segment revenue flows directly in or out of the market. Market totals include multiple airports within a common market. 27
AA s Standalone Plan Faced Same Obstacles Which Undermined Pre-Bankruptcy Network Strategy Cornerstone Hubs Significant Limitations in Each Hub DFW AMR s main domestic hub is too far west to serve as east coast hub or European gateway Near-term expiration of Wright Amendment meant increased competition from Southwest Airlines MIA AMR s Latin gateway Too far south to serve as east coast hub ORD LAX JFK Only bifurcated network carrier hub remaining AMR trailed United in their home town by a wide margin Organic growth opportunities were limited due to capacity constraints Highly competitive market with no way to build significant share AMR lacked Trans-Pacific network compared to United and Delta LAX is too geographically isolated to serve as a domestic connecting hub Significant competitive pressure from United (EWR) and Delta (JFK) AMR had weak domestic feed network unable to support international flying 14 Standalone Plan assumes JetBlue codeshare and unprecedented LGA JFK slot transfer
Key Challenges To The Standalone Plan Reliance on Organic Growth AMR will not catch up to United and Delta through organic growth Even with its high-growth assumptions, the Standalone Plan leaves AMR in the same relative place versus United and Delta in 2017 Assumes No Competitive Response Standalone Plan assumes no competitive response No meaningful capacity growth at AMR until 2015 Disparity between AMR and network carriers increases United and Delta continue to respond with new products and services Unsuccessful Cornerstone Strategy BPM 3.0 and 4.0 both rely on the failed Cornerstone Strategy Despite strategic focus since 2009, AMR has lost market share at NYC, LAX, and Chicago Projected growth in cornerstone markets does not remedy network deficiencies Flawed PRASM Assumption In 2015 2017, AMR s projecte PRASM increases even though its capacity greatly exceeds market demand Defied basic economic principles and logic 17
AA s Forecast Envisioned Unrealistic Standalone Revenue Growth Twice the Rate of ASM Growth AA s 2011 2017 Growth Standalone Assumptions for Capacity and Revenue 42.1% 21.7% Source: AMR dataroom, Intralinks 25.66 BPM 4.0. Capacity Revenue 30 18
D. 2013- A Merger with US Airways was AMR s Only Solution 31
US Airways Merger Was the Only Way for AA to Bridge Competitive Deficit vs. DL and UA Mainline Capacity ASMs 2012 AA/US UA DL AA SW US JB AS HA VX F9 SP AL Source: US DOT Form 41 Data 32
US Airways Offered AMR The Only Fix To Redress Erosion of Its Domestic Market Position 33
US Airways Makes oneworld more Competitive As the Merger Shrunk Star while Expanding oneworld 34
US Airways Offered AA Complimentary Connecting Hubs, Allowing AA to Compete with DL and UA on East Coast 35
US Airways Shuttle Offered AA Immediate New Means of Capturing High Value Corporate Customers 36
US Airways Offered AA Immediate Means of to Exceed United At Chicago O Hare 37
E. 2014 - Merger Results Speak for Themselves 38
Most Successful Merger in Industry History 100% Recovery by Creditors Preservation of pre-petition equity holder s value Doubling of shareholders value (including 23.5% Employee share) Record Financial Results New Employee JCBA s Lead Industry The Final Piece of Industry Restructuring 39
In the First Year After the Merger AA Posted the Highest Net Income of Any Airline in History 40
In the First Year After the Merger AAL Had the 2 nd Highest Stock Appreciation Among S&P Companies On a one and three year basis, American was a top performer compared to S&P 500 constituents On March 20, 2015 the Company was added to the S&P 500 Index Rank Total Shareholder Return for S&P 500 Companies 1 Year (%) 2014 3 Year (%) 2011-2014 1 Southwest Airlines Co. 126.3 American Airlines Group 1,006.8 2 American Airlines Group 113.5 Regeneron Pharmaceuticals, In 640.1 3 Electronic Arts Inc. 104.9 Delta Air Lines, Inc. 516.1 4 Edwards Lifesciences Corporation 93.7 Micron Technology, Inc. 456.6 5 Avago Technologies Limited 93.2 Southwest Airlines Co. 404.4 6 Allergan, Inc. 91.6 Netflix, Inc. 393.0 7 Mallinckrodt Plc 89.5 Constellation Brands, Inc. Class 374.9 8 Delta Air Lines, Inc. 80.5 Gilead Sciences, Inc. 360.6 9 Royal Caribbean Cruises Ltd. 76.9 Seagate Technology PLC 353.9 10 Keurig Green Mountain, Inc. 76.9 Whirlpool Corporation 335.2 Source: Ipreo as at 12/31/2014 41
AA s Profitability is Forecast to be Billions Above Its Merger Business Plan AAL s Annual Pretax Income in $ Billions AA Business Plan* Current Wall Street Forecast $7.0 $6.0 $5.4 $5.9 $6.5 $5.0 $4.0 $3.8 $4.2 $4.4 $4.2 $4.1 $3.0 $2.0 $1.0 $2.6 $2.2 $0.0 2013 2014 2015 2016 2017 * Source: Consolidated Financial Projections, AAL Disclosure Statement 6 1 2013 ** Wolfe Research, Hunter Key Detailed AAL model 42
Operationally: US Airways fixed AA s Strategic Problems US Airways Hubs at PHL and Charlotte were well positioned as East Coast Hubs AA Lacked US Airways was only merger partner with enough operational mass to restore AA to Largest Airline in the World UA and AA combined complementary network with little overlap Made oneworld more competitive Greatly Expanded AA network scope and competitive market position Preserved 6,200 AA Jobs vs Standalone plan loss of 13,000 Jobs Standalone Plan included loss of 400 pilot jobs 43