News that AMR Corp. plans to cut 5,000 jobs and idle more planes by yearend 1994 had no effect on the company's bonds yesterday, traders said.
The company's chairman, Robert L. Crandall, told a group of airline analysts in New York that AMR, American Airline's parent, must tame labor costs to compete in "low-cost, low-price world."
"We've been doing our best to explain -- to everyone who will listen -- that we have a major labor cost problem, and that unless we fix it and produce adequate profits, the long-term outlook is not very promising," Crandall said, according to a copy of his remarks.
Crandall said customers are increasingly demanding low-cost transportation, something that rivals such as rapidly expanding Southwest Air and newcomers Reno, Midway, Morris Air, Kiwi, and Carnival are willing to provide.
Also, some airlines that had been operating under Chapter 11 were able to "dramatically lower" their labor costs while under the courts' protection, Crandall said.
"Thus we operate in an ever-growing number of markets in which one or more competitors have substantially lower costs and are able to offer substantially lower fares," he said.
Meanwhile, American is saddled with, among other problems, "a stupefying array of arcane and anachronistic work rules" that inhibits workforce productivity, Crandall said.
Ray Neidl, an associate director at Furman Selz who attended yesterday's address to the Airline Analysts Splinter Group, said that considering the cards Crandall has been dealt, he is taking the only steps now available to him.
Neidl cautioned, however, that the chairman must tread carefully in his cost cutting.
"In a downsizing, costs must shrink more than revenues decline," he said.
Crandall must also make sure his efforts to shrink the airline don't alienate his employees, Neidl said. Airlines are service businesses, and customer satisfaction is closely linked to employee moral, he said.
According to AMR spokeswoman Andrea Rader, the 5,000 in cuts includes 200 to 300 of manager job cuts announced earlier. The cuts will be accomplished through a combination of attrition, early retirements and layoffs, she said.
As for the plane grounding, in addition to the 31 DC-10s American slated for retirement earlier this year, Crandall unveiled plans to retire another 11.
Four of those additional planes would be grounded next year, and another seven would be retired in 1996 and 1997. Crandall said.
American would also accelerate retirement of eight 727s from 1995 to 1994, he said.
Yesterday's actions, together with those announced earlier. will effectively reduce next year's available seat miles by about 4.5% compared with this year, Crandall said.
"Unfortunately, these capacity reductions will also require that we furlough a large number of people," he aid. He went on: "After 10 years of providing new jobs for tens of thousands of people, we hate to let employees go. Nonetheless, if we cannot deploy the planes profitably. we cannot justify flying them."
Asked what he thought of yesterdays' cuts, John Stodden, a transportation analyst with Duff & Phelps/MCM investment Research Co. in Chicago, said, "Not only is it a good move for American, but in a certain sense it helps the whole industry because of the capacity curtailment."
New Issues
Federal National Mortgage Association issued $300 million of 4.92% medium-term notes due 1998 at par. Noncallable for two years, the notes were priced to yield 17 basis points more than comparable Treasuries. Morgan Stanley & Co. was the sole manager.
Allegheny Generating issued 100 million of 6.875% debentures due 2023. Noncallable for 10 years, the debentures were priced at 99.679 to yield 6.90%, or 80 basis points more than 30-year Treasuries. Moody's rates the offering Al, while Standard & Poor's rates it A. A group led by Goldman, Sachs & Co. won competitive bidding.
Allegheny Generating issued $50 million of 5.625% debentures due 2003. The noncallable debentures were priced at 98.91 to yield 5.77%, or 45 basis points over comparable Treasuries. Moody's rates the offering Al, while Standard & Poor's rates it A. A group lead by Prudential Securities Inc. won competitive bidding to underwrite the offering.
Federal Home Loan Banks issued $53.2 million of 4.80% notes due 1998 at par. The noncallable notes were priced to yield five basis points over comparable Treasuries. Goldman Sachs was sole manager of the offering.
Rating News
Moody's yesterday raised Time Warner Inc.'s senior debt to Ba1 from Ba2 and Time Warner Entertainment Co. L.P.'s senior debt to an investment-grade Baa3 from Ba2.
It also upgraded Time Warner Entertainment's commercial paper rating to Prime-3 from Not-Prime and confirmed Time Warner Inc.'s convertible subordinated debt at Ba3.
