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.