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Strangely, no one read behind the lines. If employees agree to concessions, CAL may order the 7E7...
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AIRCRAFT ORDER Q AND A
Dec. 29, 2005
Why are we leasing additional aircraft at the same time we are asking for $500 million in annual wage and benefit reductions?
We need to act now to take market share from our weaker competitors. The 757s have become available from Boeing because of the current bankruptcy of ATA, a lowcost competitor. The 737s have become available because American Airlines recently deferred delivery of them due to their financial challenges. Even after lengthy negotiations with Boeing, we were able to keep this opportunity available to us only until
Feb. 28, 2005, as Boeing will not hold these aircraft off the market indefinitely. If we don’t take these aircraft by then, someone else will — most likely a low-cost carrier.
We need to obtain board approval by Feb. 28, 2005, and with your help in making the business case, we can obtain these aircraft. They will help us avoid losing domestic market share to low-cost carriers as we shift our domestic 757-200 aircraft to grow our profitable international network. We don’t want to be forced down the path of our failing competitors, who are shrinking and ceding market share and jobs to low-cost carriers.
The Boeing agreement represents our belief in you and in the airline’s future.
While it is important to act quickly to survive the current industry downturn, we must plan and prepare for the future. We need to grow (we are currently only the fifthlargest U.S. airline) and become stronger to compete in the future. Should consolidation occur, we need to be in a position of strength. Adding international growth helps return us to profitability sooner and cements our position in the marketplace.
In the last seven years, low-cost carriers have significantly increased their market share, while legacy carriers (excluding CO) have shrunk by an average of 10 percent. However, CO has increased its mainline capacity by 25 percent over the same period. Our fleet utilization is already stretched, so to continue this growth, we need additional
aircraft. Prior to today’s announcement, our plans included only five replacement aircraft over the next three years, offering no prospect for any incremental growth.
By flying these 757 and 737 aircraft on high-density domestic flights, we can free up existing domestic aircraft to expand internationally. In addition, the long-range 7E7 represents the platform for further international growth in years to come.
Before we can justify and get approval from our board of directors for a growth strategy, we must first achieve a cost structure, with your help, which allows us to stop bleeding cash.
Is my pay being cut in order to fund the new aircraft?
No. The 757 and 737 aircraft are all being leased with no cash upfront. The 7E7 will not be coming for another four years.
CO needs $500 million in wage and benefit reductions in order to avoid a cash crisis and to remain competitive in the permanently restructured, low-fare pricing environment. The wage reductions will help CO maintain a competitive cost structure that allows us to grow and once again achieve profitability.
If you’re not using my pay cut, where is the money coming from that will fund these aircraft?
Boeing continues to be a great business partner of CO. Because of our strong relationship, CO can lease the additional 757 and 737 aircraft with no cash upfront. This means we don’t have to spend any money to get the aircraft. In addition, Boeing has also agreed to finance the 757 conversion costs, such as repainting the exteriors and reconfiguring the interiors to CO’s standards.
The first 7E7 delivery is four years away. Although Boeing has announced the list price of the 10 7E7s as $1.3 billion, CO will receive a significant discount as a preferred launch customer. We believe that with a competitive cost structure we will be able to finance these aircraft on attractive terms when deliveries start in 2009.
