"An Airline in Crisis"

A Message from Chairman, American Airlines Don Carty

First, I’d like to thank you for everything you do for our customers and our company – especially during these difficult times. I remain confident that we, as a company, can pull through what is undoubtedly the most serious threat to our survival that we have ever faced. But it will not be easy, and that’s why it is vital that we all know exactly how serious our situation is.

American Airlines is a company in crisis in an industry in crisis. We’re laying off thousands of people, shutting down routes, taking food off a large number of flights, closing service centers and retiring nearly 50 airplanes – all as we start a slow recovery from the devastating effects of the Sept. 11 terrorist attacks.

The losses we face are truly staggering. They exceed anything we ever imagined at American. Right now it is survival, not profitability, that is our core challenge.

The sad truth is this: Our recovery will be slow – and it won’t be accomplished with the government assistance that came through late last week or with any of the painful steps we’ve taken so far. In fact, the $900 million we received from the government, while certainly a lot of money, won’t even offset the $1 billion in cash that we went through in the month of September alone. That’s why we are busy arranging additional financing so that we can keep the doors open.

The Toughest of Times

In the past, during bad years, we frequently had the ability and the time to anticipate a downturn and take steps to prepare for it. Even this year, although the downturn in the first and second quarters hit quickly, we were still able to respond. We had initiated a hiring freeze. We had stopped spending on many big projects. We had retired aircraft and adjusted schedules. And, we had asked managers to stop any discretionary spending that could wait.

Then Sept. 11 changed everything.

When we did open for business again, it was painfully clear that customer demand – which was already on the decline – would not rebound to even pre-Sept. 11 levels. Millions of would-be customers were simply not ready to fly yet. And many are still not prepared to get back in the air.

What We’re Doing

We acted quickly to stem our losses as much as possible. We immediately reduced our schedule by 20 percent. In the United States, we reduced our flying in several high-frequency business markets, eliminated some late banks at our DFW and Chicago hubs, suspended service at Dallas Love Field, and canceled service from Los Angeles to Oakland and Phoenix.

Internationally, we are reducing service in some markets with multiple frequencies, such as JFK- Heathrow. And we’re canceling some flights whose traffic can be served via other gateways, such as San Jose-Paris. All these moves will help cut costs and eliminate unprofitable flying.

A smaller schedule obviously requires a smaller fleet and in the aftermath of Sept. 11, we accelerated the retirements of five MD80 aircraft American acquired from Reno Air, nine DC9s acquired as part of the TWA transaction, and our 50 remaining 727 aircraft. This, too, will save us money over time.

In addition to these structural changes, American has reduced costs by cutting back on food and beverage and other in-flight amenities, and by streamlining airport processes that either complicate or intensify the need for security. These steps will save money, some immediately and others over time.

Tragically, the impact of all these initiatives – and even an infusion of dollars from the government – is not enough to prevent the need for substantial job reductions. And, as you know, the company has been forced to eliminate more than 20,000 jobs throughout American, American Eagle and TWA.

Where Are We Now?

At the moment, we are operating 80 percent of our previous schedule, but the drop-off in traffic finds us operating a system-wide load factor only in the 50 percent range. That’s the equivalent of operating the old schedule with a 40 percent load factor. That simply translates into too little revenue to cover our very high costs.

And the result is the severe financial crisis on our hands today.

The Cash Issue

You’ve heard over and over again that American has one of the strongest balance sheets in the airline industry. Simply put, that means we’ve typically not been over our head in debt, and that we’ve had enough cash on hand that most bankers would say we were handling our finances very responsibly. We’ve generally been considered a good credit risk and haven’t had trouble raising money to purchase aircraft or build facilities.

Indeed, prior to Sept. 11, we were in a relatively strong position, with roughly $1 billion of cash on hand, plus a large fleet of aircraft that we own outright, that we can use to borrow against to raise additional funds if we have to. Unfortunately, not even American, with that kind of strong financial position, can last very long when our revenues fall far short of what is required to cover our costs.

But, as we wait for our passengers to come back to us, we must continue to reduce costs wherever we can. And we must find other sources of cash, so we can pay our bills, continue to operate and continue to employ as many people as we can.

Conclusion: What Can We Do?

Now is not a time for despair. American can and will survive this crisis. But everyone must understand that it is a very real crisis and that we can only make it if we all work together. The government help and the steps we’ve taken so far are important first steps, which have slowed, but not stopped, the bleeding – the steady drain of cash.

If we fly empty – or even half empty – aircraft, our revenue dries up, while our costs remain largely unchanged. Every day that our costs exceed our revenues eats further into our cash balance. And, if we run out of cash, we can no longer operate an airline.

While much of what has happened during the past two weeks may seem incomprehensible, it is critical that all of us understand the seriousness of our financial predicament. And we hope this explanation has helped in that understanding.

But, now we need to take action. We – the employees of AA, TWA and American Eagle – need to start flying again. We also need to encourage friends, family, business associates, key accounts, everyone, to fly. And, we need to assure them that the lines are not long and that every conceivable step is being taken to assure safety.

Moreover, we need everyone’s ideas on how we can reduce costs, increase efficiency, and run a better operation. We need ideas on how we can persuade our fellow Americans to return to the air.

With your understanding of just how critical a situation we are in and with your help as we work through it, we can emerge again as a strong and dynamic airline. We are counting on you to help get American back on its feet and healthy again so we can reclaim the mantle of leadership in this industry.