The downward spiral of American Airlines

We’ve been watching with dismay the downward spiral of American Airlines.

This once-great carrier is hardly recognizable any more. It is perplexing to us how a management team that got its training under Robert Crandall and helped create such a great carrier could have gone so wrong.

Crandall retired in 1998 and was succeeded by Don Carty. We have to admit we preferred that Bob Baker, the EVP of Operations, succeed Crandall but Baker already had battled cancer and was viewed as probably on a shorter life span given the nature of his cancer. Unfortunately, this assessment was correct and Baker died a few years later.

Carty, on the other hand, was Crandall’s number two (to Baker’s number three) in the company. But Carty had also been CEO of Canadian Airlines and frankly, we were never too impressed with his leadership there. It was this that gave us trepidation when he succeeded Crandall.

The Crandall team also included Gerard Arpey, who subsequently succeeded Carty after Carty so screwed up labor relations that he had to go. Carty acquired Reno Air, a small MD-80 operator with a hub in Reno (NV) and in the course of doing so, created immense discord with the AA pilots union, having failed to lay the ground work with them for the acquisition. Reno Air brought zero to American and less than zero when the labor relations debacle is considered.

Carty also acquired TWA. This airline had only one domestic hub, in St. Louis, a mere 250 miles from AA’s massive Chicago hub. The proximity of the two hubs made the acquisition puzzling but that rationale at the time was that American couldn’t grow in Chicago so St. Louis served to give American more capacity through the Midwest. (This was at a time when market share was a priority among airlines.)

The only problem: Southwest Airlines also had a hub (though WN didn’t call it that) at St. Louis and there was no way American could compete against WN’s cost structure.

TWA’s operation and international routes out of New York JFK were by then nominal and brought nothing to American’s JFK international operation.

Carty’s timing couldn’t have been worse. The transaction was closed shortly before 9/11. The fall-out caused American to eventually completely close the St. Louis hub operation and lay off virtually all of TWA’s employees. The TWA Kansas City maintenance base was eventually closed. American got nothing out of acquiring TWA and all the expense.

We knew all three from our 11 years headquartered in Dallas during our co-ownership of Commercial Aviation Report magazine. We interviewed each many times.

Labor relations between Carty and the unions got so bad that he had to go in exchange for concessions following 9/11. Arpey succeeded Carty and initially was viewed as a breath of fresh air. Arpey led American through the post-9/11 era but resisted seeking bankruptcy reorganization like all of his legacy competitors.

Arpey firmly believed that American had an obligation to its employees to protect their pensions, to lenders and lessors to keep them “whole” (albeit with negotiated concessions) and to the vendors and other suppliers. It was an admirable philosophical effort but after all the legacy carriers went through bankruptcy (except Continental, which had done so twice before prior to 9/11 and this already had cost advantages), American was now at a big disadvantage.

Arpey also took the position that American wouldn’t order airplane until finances improved and until pilots granted more concessions. We understand the argument but the end result was that American’s MD-80s, once an economical airplane, now had become the world’s least efficient jets in today’s fuel environment. The aging airplanes also became costly to maintain.

The FAA found fault several times with American’s maintenance procedures. Customer service declined. Penny pinching increased. And labor relations deteriorated.

Tom Horton, the CEO today, came in as Arpey’s CFO and participated in the decisions that put American and its final downward spiral toward bankruptcy. Arpey resigned rather than put the carrier into Chapter 11, clinging to his belief that American was too proud to enter bankruptcy. Even his mentor, Bob Crandall, said American should have gone into bankruptcy after 9/11 as did the competitors, and Crandall in the 1990s had declared “American would never seek bankruptcy” at a time when 40% of the US capacity was in Chapter 11.

Horton is firm that American won’t merge while in Chapter 11 and it’s pretty clear he doesn’t want to merge at all.

We have no confidence in Horton at the helm, nor in American’s management. If American is to survive, they have to go.

19 Comments on “The downward spiral of American Airlines

  1. thnx for sumarizing the AA story. From a distance I always saw AA as a quality airline, with healthy assets, strong home markets and stable working relations. After, and as you state also before 9-11 everything changed. Pitty to see a great carrier loosing terrain. I have good memories on TWA sad to hear so many people where fired. For me AA strategy is unclear at this moment, I’m not aware of a long term strategy..

  2. “Tom Horton, the CEO today, came in as Arpey’s CFO and participated in the decisions that put American and its final downward spiral toward bankruptcy.”

    You rehash all the mistakes of Carty and Arpey and this is the sum total of your criticism of Horton? Seems to me Horton is undoing all the past mistakes of his predecessors and it is too early to make the judgement against him that you do.

    Not wanting to merge with US Airways is a sign Horton actually knows how to run an airline. Soon he will have the most competitive labor costs of any legacy carrier.

    The pilots’ union foolishly had their contract abrogated. No more sticking with a contract that existed in perpetuity and could only be amended. It is gone.

    Labor is unhappy? Who cares? The were never happy even with Crandall.

    • “Labor is unhappy? Who cares?”

      Perhaps you haven’t noticed but the unhappiness of the pilot group with AA’s managment team has led to no small amount of operational disruptions in recent weeks. Do you really think you can run a successful enterprise when all of your employees hate the company they work for?

      • Nobody cares if labor is unhappy, by that I meant the labor unions. Yes, I do think American can run a successful airline with unhappy union hacks. Bob Crandall comes to mind.

        It remains to be seen if Horton will be innovative now that he no longer needs union permission to improve our work rules (i.e. inter base and split sequence trading). John Hale, what are you doing?

  3. After 9-11 Carty figured the slowdown in air travel would last only until spring and then pick up again, 2 1/2 years later he came to the workforce asking for concessions “to keep us out of bankruptcy”. During the ground workers vote to give up pay, holidays, work rules, and a longer work day (which came to 21%), it came to light that the executive offshore pension and golden parachute funds had been funded prior to the threat of bankruptcy. We agreed to honor our vote if Carty stepped down
    Some of us may not have been happy with Crandall, but most of the workers bought into his vision of where the airline should go, not so with Carty. Arpey tried to win back labors trust, but in my view the problem with him and also with Horton is they are both former CFO’s, numbers guys, they have no vision all they know is numbers. It is my opinion AA should have gone after market share by cutting back the number of flights in the hubs and stretching the length of existing flight into other markets (say Chicago to Seattle to Spokane to Chicago).
    I say the blame lies with the Board of Directors

  4. Gary,,
    it is clear that you think a company can grow and survive on the greedy people who steal paychecks from the little guy ..we ..yes, I work hard to supply money for these corporate [edited as violation of Reader Comment rules] who are using planatation tatics to run a company …if you think that a company can pay workers 8.50 hour give no benefits and get the best work ethics from it ..you too live in a bubble that affords you a anal view of the world around you ..it is abusive when people make wages like that ,and executives can walk away with millions in bonuses for doing badly …. even a dog knows when to bite back …….

    • Mee Lin Yuck, please cut the Bolshevik nonsense about American stealing paychecks. They paid me $200,000 last year. It is the APA the steals my dues money each year. They will never learn, at least Horton will eventually be held accountable if he fails.

      • Gary :
        Mee Lin Yuck, please cut the Bolshevik nonsense about American stealing paychecks. They paid me $200,000 last year. It is the APA the steals my dues money each year. They will never learn, at least Horton will eventually be held accountable if he fails.

        Did Mee Lin Youk say anything about stealing paychecks? Shouting “Bolshevik nonsense” without a) explaining what exactly in Mee Lin Youk’s post reeked of Marxism/Leninism or b) even so much as acknowledging (never mind addressing) any of the points he made doesn’t seem very conducive to a meaningful debate (nor does using expletives as I’m sure you noticed in Mee Lin Youk’s post).

        Congratulations on your 2011 salary in any case.

        Be all that as it may, I am very curious to find out what “being held accountable for failure” is going to constitute in Horton’s case.
        Based on what tends to happen in these cases, I wouldn’t be surprised to see the following: If AA fails outright, Horton still won’t need to worry about not being able to pay off his children’s tuition fees (just an example – not even sure if he has kids). Contrary to many AA employees that would lose their jobs.
        If AA eventually does merge with anybody, Horton will find himself with either a bonus to ease his stepping down (and to reward him for his loyal services to the company in either facilitating or at least not obstructing the merger) and/or a position on the board to ensure he is not going to fall into hardship.
        There may be the odd disgruntled employee suing him, but it’s going to be hard to prove any deliberate misconduct, so it would be a surprise for any such case to go very far at all.
        There’s of course the possibility that, despite what everybody appears to be expecting, Horton succeeds, in which case he’s going to be fine anyway.

        • “Did Mee Lin Youk say anything about stealing paychecks? ”

          Try reading her short message again and maybe you can find it.

          Horton will be fired if he fails, I can’t fire my union and I am not allowed the freedom to contract the terms of my labor with my employer. The union politburo negotiates the terms of my employment, I have no free agent option.

  5. Much of the labor bitterness of the pilots at American Airlines started under Bob Crandall when he introduced the ‘B Scale’ lower wages & benefits for newly hired pilots. Almost all of the senior pilots who are at American Airlines now started as ‘B Scale’ pilots and they have not forgiven or forgotten the ‘B Scale’.

    Another trend that started during the Crandall years was the concessions by employees and corresponding increases in executive pay that have continued to the current time. To be fair, this trend has been identical thoughout the entire USA. I think executives throughout much of American business have little understanding of employees and how long employees remain disgruntled once they feel (rightly or wrongly) that they have been treated unfairly.

    Mr. Crandall was a great airline executive, but he was not perfect and he certainly lacked the understanding of the importance of employees that Herb Kelleher of Southwest Airlnes possessed.

    Certainly, American Airlines would have been much better had Mr. Crandall stayed than it has faired under his progeny.

    • We lived in Dallas at that time and followed all this for the magazines we wrote for then. The B scale fueled the growth plan that eventually made American the largest airline in the world save for Aeroflot. The pilots union agreed to the concept (and then bitched about it forever after). The deal meant thousands of jobs for the pilots and other work groups. It was a way to bring the average costs down to complete with Southwest Airlines and a growing number of LCCs as well the the reorganized Continental Airlines.

      New hires knew what the wages were. We have little sympathy for those who hire into the system that was agreed to by APA and then crab about it. It’s like those who move next to an airport than complain about the noise.

      • leehamnet :
        New hires knew what the wages were. We have little sympathy for those who hire into the system that was agreed to by APA and then crab about it. It’s like those who move next to an airport than complain about the noise.

        As a new hire you surely know your own wage and may or may not be happy with it, depending on how much you have spent on your education and how many jobs there are actually out there. How happy/unhappy you are with your salary then further depends on what you find out your fellow employees with comparable skillset are earning.

        So just by accepting a job you don’t in my view forego the right to be discontent with your wage, management decisions and communications, etc.
        And in that sense I think it’s quite different from somebody moving next to an airport and then complaining about the noise.

  6. it is a simple equation if you put a banker to run a people oriented business you will have them see the most valuable asset of the company, in liabilities. Their perspective of numbers and not people! And what once was a principal source of profit will act as a source of waist. Hope the next team of administrator have , more sensitivity and imagination to deal a respectful and fair contract w/ their front line workers or like many great other airlines American will became just a name left in the desert like an old airplane.

  7. Well, once piece of information that is crucial is the agreement in 1983 to create a “B” scale with all the unions and non union workgroups. The key was to hire more “B” scale employees and expand the airline. Average your labor costs down and you have a fine plan. Except, unlike IBM, AA never had a plan to excellorate the senior employees to retire early or leave at all. So during the Carty years, he got labor peace by merging the two pay scales thus sealing the companies fate forever. Ask Crandall, he doesn’t mention it, but I was there and so was he. Alot of fine management left for other jobs and the talent pool is left with a bunch of guys that couldn’t run a lemonade stand.

  8. AA got NOTHING from the TWA merger? Really? You left out the major reason they did the deal to begin with. It was for access to LONDON HEATHROW! It was never about STL.

    • Bob Crandall bought LHR-ORD and other key London routes from TWA when Carl Icahn owned the airline. If buying STL-LHR was the reason, this was a dumb purchase.

  9. Yes Horton has to step down, but parts of his plan have to be acknowledged. There needs to be more scope and less Eagle/
    Skywest in some markets for instance no more eagle hou to lax, ord to lax. At the same time, new aa pilots should also start on routes from hubs on 100 seaters. Quit all the outsourcing, reign in the unions protecting some the problem employees. Just get the merger done before capital dries up, let Parker Kirby and Virasb Vahidi run the new combined airline. Oh yeah, Horton needs to step down.

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