The Brancatelli File



January 19, 2006 -- Monty Python said there'd be days like this. You know, days when you just need to put a handkerchief over your head, call yourself Mr. Gumby and moan, "My brain hurts."

Of course, my brain hurts whenever the Big Six airlines begin discussing their quarterly financial results. And this week's river of red ink not only includes last year's fourth quarter and an overview of the entire year of 2005, it also has some astonishing extracurricular activity on the axis-of-excess front.

The bankrupt and near-bankrupt fraternity of the Big Six continue to spew forth losses and they have also resumed the heinous practice of rewarding the incompetence of their top executives. Worse, the price of oil hit a four-month high this week and there are troubling indications that we're about to begin another steep climb into the fuel-cost stratosphere. Worst of all, Southwest Airlines recorded another astonishingly profitable quarter and not a single boob at the Big Six seems to understand that Southwest knows something about making and selling air travel that they don't.

Now I know you've heard this all before. That's one of the other reasons my brain hurts. I'd prefer to write--and you'd probably prefer to read--about something else. Anything else. Compared to talking about Big Six finances, discussing the comfort of 31 inches of seat pitch in coach is a proverbial walk in the park. But, trust me, fellow travelers, this financial stuff is important. It goes a long way toward explaining why our lives on the road stink.

So, please, bear with me as we go through some of this stuff. I promise. Next week we'll talk about something fun, like United's impending exit from bankruptcy. That should be a real laugh riot.

Continental Airlines, which once said it would return to profitability in the second quarter of 2002, recorded a fourth-quarter loss of $43 million. That seems almost palatable until you realize that the loss includes a one-time gain of more than $100 million from the sale of stock in Copa, a Latin American carrier. With all the one-time losses and gains included, the 4Q loss was $128 million. And the airline is predicting a "significant" loss in this year's first quarter after its $205 million loss in 2005. The reasons for Continental's woes seemed to come as a shock to chief executive Larry Kellner. "The price of oil still hovers at record high prices [and] JetBlue has invaded our Newark hub," he exclaimed.

American Airlines has lost about $7 billion since 2001 and it reported another dreary fourth quarter: $604 million in losses. Although some special charges were involved, that's actually worse than the airline's performance in the fourth quarter of 2004. Yet a bonus program for about 1,000 American executives could pay out about $70 million at the airline's current inexplicably high stock price. American chief executive Gerald Arpey, who isn't part of this particular bonus pool, nevertheless defended its existence. The AA executives deserve the bonuses because they "have seen a substantial reduction in overall compensation" in recent years.

Meanwhile, back in bankruptcy court, United Airlines convinced its ever-credulous judge, Eugene Wedoff, to approve a bonus plan for the airline's 400 top executives. Despite being in bankruptcy for more than three years, racking up record-high bankrupt-related costs and shifting billions of dollars of balance-sheet liability to U.S. taxpayers, airport authorities, unsecured creditors and employees, the executives will receive 8 percent of the stock in the new company. The New York Times called the plan "insanity squared" and some estimates say it's worth as much as $480 million. Chief Executive Glenn Tilton's package when the carrier finally exits bankruptcy next month has been valued as high as $40 million. "It may well be that we have a culture in this country that overcompensates management," Wedoff opined from the bench as he approved the stock grab. Of course, none of this is as piggish as it sounds. United's executives originally cut themselves in for 15 percent of the company, then graciously settled for 8 percent after negotiations with creditors.

Finally, we come to Southwest Airlines. Its fourth-quarter earnings rose to $86 million, including a $24 million surprise charge from the Transportation Security Administration, which the airline is fighting. For the full year of 2005, Southwest earned $548 million, its gazillionth consecutive year in the black. How does Southwest do it? Unlike Continental, which never misses an opportunity to raise fares, Southwest keeps prices low and the fare structure simple. Unlike American, which has invented a slew of new fees and has been pursuing an aggressive program of what it calls "unbundling elements of products and services and making them available for purchase," Southwest eschews the ups and extras. And unlike United, which now offers dozens of confusing and hard-to-manage in-flight cabins and levels of service, Southwest offers one product at every seat on every flight on every route it flies. You may or may not like Southwest's model, but there is one undeniable fact: What Southwest does works. The airline's management is disciplined, its workers are dedicated and the carrier delivers both the products and the profits it promises.

You think the Big Six could learn some lessons from that? Nudge. Nudge. Wink. Wink. Know what I mean? Know what I mean?

Copyright 1993-2006 by Joe Brancatelli. All rights reserved.