Pontifications: Twelve Years of Turbulence at American Airlines

By Scott Hamilton

Jan. 22, 2018, © Leeham Co.: American Airlines was the last of the big US legacy carriers to enter bankruptcy, in 2011.

Executives put up a valiant battle to avoid being dragged into Chapter 11, despite having two airplanes hijacked on 9/11. One was flown into the World Trade Center, the other into the Pentagon.

Only two months later, American lost a third airplane in an accident.

Delta, Northwest, US Airways and United airlines all filed for Chapter 11 after 9/11; there were several other airlines to do so. Not all survived.

American did, merging with US Airways as part of the former’s bankruptcy reorganization.

AA’s former general counsel, Gary Kennedy, teamed with the aviation reporter for the Dallas Morning News, Terry Maxon, to tell the story of Twelve Years of Turbulence, The Inside Story of American Airlines’ Battle for Survival.

The book is available now.

9/11

Kennedy was named general counsel in 2003, at a time when American was still reeling from the effects of 9/11. He led the airline’s legal teams through that dealt with the consensual financial restructuring after 9/11, through the bankruptcy 10 years later and through the lawsuit by the US Department of Justice to block the merger with US Airways.

Through it all, Maxon followed the story.

Together they stitch together a fascinating inside look at the events of those 12 turbulent years.

Kennedy begins his story pre-9/11, in 1984. He joined American as a junior member of the legal department shortly out of college. It was a time when American was on financial ropes as a bloated airline beset by rising fuel prices and with an old fleet of jets. The period was shortly after a bruising battle with rival Braniff Inc. that ultimately left Braniff in bankruptcy and out of business and American licking its wounds.

Bob Crandall was president and COO to Al Casey’s CEO. Kennedy relates, in brief recounting, the stories that are well-known to airline aficionados of how the hard-charging Crandall turned American around and positioned the carrier for dramatic growth.

Crandall retired in 1998, more than a decade after becoming CEO. His lieutenant, Don Carty, succeeded him. Two months before that fateful day in September 2001, Carty named Kennedy general counsel.

Carty hadn’t yet arrived at work on 9/11. Gerard Arpey was the senior officer present with flight 11 was flown into the World Trade Center. While still digesting this, a United Airlines aircraft hit the other Twin Tower and American 77, out of Washington (DC), went missing, out of radio contact and off the radar. Within minutes, Arpey gave the order to ground American’s entire fleet. Carty, Kennedy wrote, affirmed the order and then took a phone call from the head of the Federal Aviation Administration. Asked his advice, Carty recommended that the FAA ground the entire US air transportation system. The order went out from the FAA minutes later.

Avoiding bankruptcy

Carty resigned shortly after winning nearly $2bn in concessions from employees when an Securities and Exchange filing outline retention bonuses for the executives and key management personnel in the event of a bankruptcy.

The rank-and-file felt betrayed. Kennedy writes that Carty divulged the essence of the plan to labor early, but at the same time, Carty delayed filing the SEC document until after the concessions were granted.

The optics stunk and Carty had to go.

Taking his place was Arpey.

Even after the concessions, some in American argued in favor of filing for Chapter 11. Arpey, Kennedy writes, opposed the filing on principal. Doing so would betray the labor groups but Arpey also felt strongly American had an obligation to other stakeholders—lenders, vendors, shareholders—to pay their bills and protect shareholder investments.

Arpey prevailed, for the time being.

Great recession

But the clock was ticking, Kennedy writes.

With American’s big competitors all having gone through bankruptcy (Southwest Airlines was an exception), AA’s labor costs were out of kilter. The competitors also offloaded their pension fund obligations to the government, another huge imbalance American faced.

Finally, the Great Recession began in September 2008. Effects continued for years.

By November 2011, events caught up. Kennedy writes that Arpey philosophically still couldn’t go along with bankruptcy and resigned. He was succeeded by Tom Horton.

Kennedy tells the story of working through the early days of the bankruptcy and conflicts with the Unsecured Creditors Committee. American fully intended to emerge as a stand-alone company.

Enter US Airways

Yet it was no surprise, really, when US Airways emerged as a suitor. CEO Doug Parker and his team made a run at Delta during its bankruptcy, but lost. A previous effort to merge with United also failed. American was the last chance for Parker to combine with a major carrier.

Parker’s team, led by president Scott Kirby, struck Conditional Labor Agreements with American’s unions, perhaps the one surprising element of the effort, in advance of making a definitive offer.

Kennedy outlines American’s initial skepticism, opposition and then acceptance of the US Airways deal.

Finally, just when a resolution to the bankruptcy reorganization appeared at hand with the merger, the US Department of Justice sued to block the deal.

The strategies of AA and US to overcome this last-minute development are reported by Kennedy.

Unlike the 444-page, small-type book about Delta’s post-9/11 saga, Glory Lost and Found, including US Airways’ attempt to merge, Twelve Years is a short story, just 208 pages. Glory was a tough but interesting read. Twelve Years is an interesting but easy read.

Gary Kennedy

One criticism: like Glory, Twelve Years has no pictures of the key players with whom the readers can attach a face. I know most of the airline people Kennedy cites, but many readers won’t. There’s not even a book jacket photo of Kennedy or Maxon—and, as it happens, Kennedy is not someone I know. Putting a face to the name would have been nice.

Savio Republic, Posthill Press. $26. Available on Amazon and other Internet locations.

15 Comments on “Pontifications: Twelve Years of Turbulence at American Airlines

  1. SCOTT
    Thanks for the Danny Dutch re-tweet. Woke-up my family LAUGHING!!!
    With the ‘Shut-Down’, we’re all marching on The Nation’s Capital tomorrow wearing strange costumes, carrying idiotic signs, and protesting something or
    other. Please join us if you’re free.
    Dr. Norm

    • Hello Dr. Norm,

      Did you get a chance to march in you strange costumes and carry your signs before the shutdown was shutdown? I imagine that it would be quite a let down to go through all that preparation and then have the party canceled.

      For anyone outside (or inside) the US who is wondering what the “shutdown” talk is about, see the link below. It looks like the USITC’s party for Boeing and Bombardier on 1-25 (final vote on the case) should now proceed as scheduled.

      https://www.nytimes.com/2018/01/22/us/politics/government-shutdown.html

      For anyone outside th eUS who may be wondering what

      • Had just reached cruising speed/altitude in USA-built BIG Gulfstream….
        Government’s just ‘kicking-the-can-down-the-road’. Arnold S. remarked “We’ll be B-A-C-K!” lol
        Dr. Norm
        Neuroproctologist – Retired

  2. Somehow AA has never been my airline. Probably because of the BA team. Not useful in continental Europe (DE or FR).

    I command them though on trying to avoid bankruptcy as they did. Clearly there was a focus on the employees as implied by Scott’s summary. But it did cost them. They are really behind now.
    Not sure i like the moral of that story but it is what it is.

    ps: I used to take USAir quite a but while at Carnegie-Mellon in Pittsburgh. Funny how a regional airline (they were really one) finally took AA over.

  3. American did a disservice to its owners when it delayed the bankruptcy out of loyalty to the unions. Ultimately, this cost them when US bought them, and almost every ‘side’ was frustrated/hurt in the process.

    https://www.dallasnews.com/business/airlines/2015/09/08/tales-from-the-beat-the-bankruptcy-of-american-airlines

    Most of this info is already out there in the public realm in various articles. AA, DL, UA, SWA have all had their turn in the union blenders. It would be interesting to know Chinese carrier labor cost structures relative to US ones, particularly given the recent VLA (A380) push there. I’ve theorized that the reason there is no United States-based EK/Pan Am today of international travel is probably due to the pilot union costs.

    • Another example of how a company can’t compete (on a costs level) with competitors that have significantly lower costs thanks to bankruptcy and getting tax payers to pay for the pensions instead of the company that’s supposed to.

      How do Americans feel about that?

      • My understanding is that the tax payer is not involved.
        The (former) beneficiary of those pensions involved is directly hit. ( getting nothing instead of… )

        • Hello Uwe,

          Regarding: “My understanding is that the tax payer is not involved.”

          According to Wikipedia, the pension Benefit Guaranty Corporation, on which the bankrupt major US airlines dumped their pension obligations, is an independent agency of the US government whose deficit increased to $76 billion USD in 2015, in which year it paid out $5.6 billion USD in benefits. See the excerpt and link below. Note the benefits cap of $60,136 a year as of 2016, which means that while most flight attendants or ticket agents who retired from airlines who dodged their pension obligations in bankruptcy court got their full pensions, many pilots had their pensions cut by half or more. I read that the affiliates of many US major airlines are now having difficulty finding pilots. I find it hard to believe that they get any applicants at all given the major airline’s history of using bankruptcy court to avoid having to pay the benefits they promised. For the same expenditure of time and money it takes to be an airline pilot, you could instead go to medical school and become a radiologist or heart surgeon, be making $400,000 a year, and not to have to worry about the suits taking away your pension (you finance your own retirement plan), and have sufficient funds to buy your own airplane if you really, really, want to be a pilot. Alternatively, you could go into investment banking where junior analyst positions requiring a BS degree have a starting salary of $100,00o to $150,000 vs., starting pay of $20,000 to $40,000 for regional airline pilots. If you get lucky, you might someday make it to a major like Delta, where you could start at $55,000 a year, and with 10 years experience be making $173,000 a year as a captain with a pension that the airline might take away from you someday if its need the money to boost their profits or improve return for shareholders. See links below.

          “The Pension Benefit Guaranty Corporation (PBGC) is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, PBGC’s insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at 65 ($60,136 a year as of 2016).[1] The benefits payable to insured retirees who start their benefits at ages other than 65 or elect survivor coverage are adjusted to be equivalent in value.

          In fiscal year 2015, PBGC paid $5.6 billion in benefits to participants of failed single-employer pension plans. That year, 69 single-employer pension plans failed. PBGC paid $103 million in financial assistance to 57 multiemployer pension plans. The agency’s deficit increased to $76 billion. It has a total of $164 billion in obligations and $88 billion in assets.”

          https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation

          http://www.careers-in-finance.com/ibsal.htm

          https://www.pea.com/airline-pilot-salary/

          https://www1.salary.com/radiologist-Salary.html

          http://www.mailtribune.com/news/20171006/horizon-air-pilots-make-their-frustrations-public

          http://money.cnn.com/2016/02/26/news/companies/pilot-shortage-bankruptcy/index.html

          • AP: Thank you, new info to me as to the structure.

            I am glad the lower earners get their retirement, Pilots make more than enough to fund their own pension plans aside from any company.

            I think the bigger issue is the cost to become an airline pilot and what you have to go through. Been there, done that and gave it up.

            I think its the up front cost and long term return that hurts.

            Back in the day they hired promoting candidate (some with basic training, others with military) put them through the training and paid a salary and then put them to work if they passed.

            I was shocked to find a Naturalpathc cost $250,000 to get their training. Not sure why anyone would do that short of their parents paying for it (or scholarships)

            The system is getting broke and they need a way to fix it.

            Airlines are so used to getting something for nothign (US Military pilots ) that they can’t see their problem (or won’t)

  4. “Within minutes, Arpey gave the order to ground American’s entire fleet. Carty, Kennedy wrote, affirmed the order and then took a phone call from the head of the Federal Aviation Administration. Asked his advice, Carty recommended that the FAA ground the entire US air transportation system. The order went out from the FAA minutes later.”

    I wish I had a $1 for every “decisive” US airline executive who claimed credit for the decision to ground the entire fleet on 9/11.

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