American’s Decade of Fail Culminates in Bankruptcy

I don’t think anyone was surprised to hear that American filed for Chapter 11 bankruptcy protection. The only surprise was that it happened this week. I didn’t think we’d see it so quickly.

For travelers, this truly is a non-event. We’ve all been through so many airline bankruptcies in the last Adios Arpeydecade (Delta, Northwest, United, US Airways . . .) that we all know the drill by now. Airlines restructure behind the scenes while the operation itself goes on. I don’t expect this to be any different.

But looking behind the scenes, this really is the exclamation point on one long decade of fail. It’s been awful, and this is just the proverbial icing on the cake. Despite all the so-called efforts to stay out of bankruptcy, none worked. Let’s look back.

American was the rock star of this industry for years. It innovated with things like the first computerized reservation system, the first frequent flier program, and the first adoption of modern revenue management. Though it’s hard to pinpoint the exact moment when American lost its mojo (didn’t see when Dr Evil stole it), an easy place to start this tale is in April 2001 when American bought TWA.

This merger, like most of the mergers American has participated in during its life, resulted in no real benefit to the airline. But this one was possibly the most harmful because of its timing. TWA, though on death’s door, was supposed to bring this great connecting hub in St Louis that would allow American to focus on local traffic in its stronger hubs in Dallas and Chicago. But wait, connecting traffic is low yield and really not a good base for running a hub at all.

During the good times, however, when fares were high and fuel was cheap, just about anything could work. The good times ended quickly. By the time American bought TWA, the bubble had burst and the economy was heading down. Then, September 11th just made things far more difficult (though it wouldn’t have been a good move regardless). St Louis was de-hubbed a couple years ago. There is just about nothing left from TWA except for a few MD-80s and those rare few employees who managed to avoid getting the axe.

Of course, on September 11, when American lost two aircraft, several crew, and scores of passengers, things could have changed for the airline. Despite the awful nature of what happened, this really was American’s chance to show that it was different. It worked hard with its unions to help them understand exactly what was happening financially. As bankruptcy appeared to be close, a deal was reached and the airline averted that fate. That was probably the high point for the airline’s efforts to stand out in a positive way.

A new era of cooperation was supposedly taking hold at American. Gerard Arpey took over as President in April 2002 and was CEO a year later. He was going to lead the airline to be the shining example of how a big airline could survive without bankruptcy.

But the airline fell flat on its face. When it came to union relationships, American completely destroyed any goodwill it had by defending lavish executive pay plans that weren’t tied to profitability but rather stock performance. Taking those outsized payments while the rank and file dealt with cuts did not sit well. Relations got ugly very quickly and they’ve never recovered.

In fact, its inability to come to an agreement with a relatively moderate pilot leadership recently shows just what a failure current management has been. Throwing in demands for domestic codesharing at the last minute is a great example of how not to get anything done. There’s plenty of blame to heap on to the pilots as well, let me not take away from their poor judgment, but management certainly didn’t make it any easier.

Possibly the most frustrating thing about this whole debacle is that American continues to hammer on the issue being one of higher costs. Instead of accepting blame, it simply says it is hamstrung. In its release, the airline said it needed to file bankruptcy “in order to achieve a cost and debt structure that is industry competitive.” While costs clearly are an issue, as you would expect to be the case when all competitors have gone through bankruptcy, there is a bigger problem.

Time and time again, American has been chastised for its weak revenue performance. I talked a little about this back in July, but it’s not hard to find plenty of other mentions. The airline simply has not done what’s needed to get its fair share of revenue out of the operation.

Not that it needed an excuse, but it now has all the tools it could possibly need to make this airline run better, thanks to bankruptcy. It can cut its fleet, slash wages, restructure debt, etc. But if it couldn’t maximize its revenue opportunity before, what’s going to change now?

One thing that’s changing is Gerard Arpey. The CEO was a lightning rod for the unions, and his time is now done. Apparently he was asked to stay by the Board of Directors (why?) but he decided to opt out. Clearly he’s been thinking about this for awhile, because he’s already lined up a new job with former Continental chief Larry Kellner’s investment firm.

So now we’re going to have some dynamic new leadership to right the ship, right? Bzzt. It’s the same old thing. Tom Horton, who was promoted to President last July, will also take over as CEO. He’s an American guy through and through. He started with the airline in 1985 and except for a couple year stint with AT&T beginning in 2002, he’s been with American since then.

Will he be able to provide the needed spark? Maybe, but he also might not have the chance. With the company in bankruptcy, creditors are angry. They should be. American isn’t short of cash. It just wants to cut back on what it owes. And creditors don’t like when that happens.

If a better offer comes along, then it could be time for a more radical change. I’m sure that Doug Parker, Scott Kirby, Derek Kerr, and the rest of the team at US Airways are putting their plan together right now. This would be the dream result in my opinion. I’ll write more about that tomorrow, but of course, the best option doesn’t always carry the day. Odds are probably on a simple restructuring with the current management team, though I’m no bankruptcy attorney.

Even if management sticks around, we will see some change. We’ll see American shed its MD-80s faster than planned, and I imagine the regional fleet (if not all of Eagle) will be ripped to pieces as well. Labor is going to be pretty unhappy. After years of complaining about not getting enough, labor is going to learn the hard way that things can get worse quickly.

In the end, there is tremendous opportunity here, but what’s to prevent American from squandering it, like it has previously? The last decade has been lost, so there’s no reason to think that’ll change unless there’s a major shift at the top.

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79 Comments on "American’s Decade of Fail Culminates in Bankruptcy"

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Dave English
Guest

Great piece. One comment: you say people were not surprised. Well, all the Wall Street analysts were. Seems 14 of the brokerage firms that cover AMR had a hold or buy rating on the stock before the company filed for bankruptcy protection. Only one, Morningstar, had the fair value of $0.

A3*G
Guest

Great piece indeed.

Personally, now that AA is bAAnkrupt, I think that Alaska AAirlines would be a better result than US AAirways..

Will be interesting to see how things pan out

Nick Barnard
Member

I asked a friend a few weeks ago if Alaska would buy AA. His response: “We don’t want that stinking pile of sh*t.” AFAIK, Alaska is quite happy with their current lot in the world, and they wouldn’t want to rock the boat by making a purchase.

Derek Pugh
Member

A3*G,

Alaska is mainly a Northwest carrier that thrives on the feed it receives from AA & DL. If they merge/buy AA, they will lost all of the DL/SkyTeam feed for their Alaska routes.

Alaska is a niche carrier that has expanded within their means and is very good at what they do. It would ruin a great model to merge it with AA. US on the other hand is another story.

Eric
Guest

Very thoughtful analysis Cranky. While Tom is not Gerry….it is still the same Tom & Gerry show.

I agree with AirlineDork…AS flies what others can not fly profitably. Even a leaner AA cost structure would not match AS cost and contract efficiencies. Plus…given American’s slAAsh and burn merger history, there is no way in hell the political delegation from Alaska will allow their north slope lifeline connection to be put at risk with an international network carrier.

A3*G
Guest

Another thing that I was thinking about was a AA/F9 merger. If Republic buys both, merges them together, and then puts it up for sale, it would be a much more attractive proposition for a buyer than the current F9 ever will be.

Then again, we know how things turned out when they tried that with Midwest..

Nick Barnard
Member

I’ven’t looked through the numbers but the aforementioned friend stated that Alaska really doesn’t need the feed from AA & DL. Its nice but they’d still be happy and profitable without it..

Bobber
Guest

Never quite sure whether Chapter 11 legislation is the mark of a jolly civilised society or shameless anti-competition protectionism…

…either way, not surprised by AA’s descent.

Jason H
Guest
Once.. just once I’d like to see a strong outsider step into the position as CEO of one of the airlines. When you look at what a breath of fresh… ideas can do to a company it can be a game changer. The few outsiders that do step into the lead role at an airline seem to get sucked into the airline’s culture instead of changing it. Look at what Alan Mullaley has done at Ford. That needs to be done at one of the majors as well. A strong outsider who can change company culture otherwise we will just… Read more »
Sanjeev M
Guest
Agreed. Alan Mullaly really turned around Ford by dumping brands like Jaguar that old Ford execs thought were “sentimental”. Maybe Tom Horton is it but given what people have been saying I don’t think he’s the fresh outsider. AA needs a couple of things -Management needs to take a pay cut, even if its just for the goodwill. -Labor (whatever needs to be cut here) -Route development – god I hate their conservative approach. DFW-HKG needs to happen yesterday and some new BER routes to feed AB. Domestically, ORD could be beefed up a bit. Even an AMM route to… Read more »
derek.a.stewart
Member

Yeh, I really can not believe DFW-HKG does not exist…

David SF eastbay
Member
I had heard during the day about AA but didn’t know Arpey was out until watching the evening news. My first thought was he doesn’t have to deal with it all now and how many millions does he walk away with. I’ve never been an AA fan and never liked how they ‘killed’ AirCal, RenoAir, and TWA. Being ex-TWA and knowing a lot of people who lost their jobs at the time of the ‘murder’ was never going to sway me to be an AA fan. But a company like AA provides a lot of jobs both in its company… Read more »
David SF eastbay
Member

I also thought it was kind of funny/interesting that the day Dallas based AA tells the world it filed Chapter 11, Spirit picks the same day to tell the world they are increasing service at DFW and adding four new routes.

Kind of gives the appearance other carriers are ready to swoop in and take business away from scared AA die hearts and force AA to keep fares low.

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[…] reviews the American Airlines bankruptcy and says that the dream result would be US Airways taking over the airline. That makes no […]

DesertGhost
Guest
From my perspective, a very balanced and reasoned piece, Cranky. I think you touched the high points. Like you (I think), I feel the best possible outcome is a merger with US Airways. despite all of the naysayers, US has done an excellent job with what it has to work with. Parker, for all the criticism, has made a lot of tough but necessary choices: dehubbing Las Vegas,and Pittsburgh, and the slot swap are all examples. These are all examples of what I see as vintage Parker strategy. When AWA was having severe maintenance issues, he cut back to the… Read more »
Don
Guest

You forgot Southwest

Don
Guest

You forgot Southwest which will probably buy, Spirit and Jetblue at some point. Virgin is as good as gone. Alaska will probably merge with Allegiant and/or Hawaiian. Not sure about Frontier. I think they could survive.

Nick Barnard
Member

I could see Alaska and Hawaiian getting under the same roof. Spirit is private and I don’t think they’d wanna sell. JetBlue’s culture would be a horrible fit for WN. You’re also butting up against antitrust laws and WN’s ability to integrate the airlines. I also doubt JetBlue’s clientele would end up wanting to fly WN.

DesertGhost
Guest
@Nick, I agree with you about HA and AS. But Spirit just did an IPO, so its now public. If I read a.net right (and it’s quite possible I’m not), it looks like Frontier’s business model may be morphing into a more leisure oriented one, a la Spirit. It’s entered into extensive flying for Apple Vacations which appears to be winding down USA3000. If this is the case, it seems possible that Frontier and Spirit could merge at some point and compete with Allegiant, (which is pure speculation on my part but, I think, an intriguing possibility). As for jetBlue,… Read more »
DesertGhost
Guest

@Don,

Southwest is already the largest U.S. carrier measured in passengers enplaned (if not, it’s darned close). I doubt it will grow too much more in the near future.

Peter Mac
Member

As a fare paying passenger, and from that perspective, I will tell you that USAirways is the worst airline flying in the US. The pl;anes are dirty, the ‘service’ is pathetic. the attitudes of the agents and crew are damn near hostile. They have to keep away from AA. A takeover of AA by USAir would put both of them under.

DesertGhost
Guest

@Polaris Guy,

My experience with US Airways is the complete opposite from yours. I’ve had nothing but good service, clean planes, courteous, helpful crews, and on-time arrivals.

Frequent Flyer
Guest

Cranky, did you work at America Worst prior to it merging with US Airways? Do you know these parties from your prior days there?

“I’m sure that Doug Parker, Scott Kirby, Derek Kerr, and the rest of the team at US Airways are putting their plan together right now.”

If so, please let us know what your sources are saying; that would be interesting for everyone to read.

Tony
Guest
American Airlines has a history a squadering merger opportunities. They take the assets but not the routes. As in the case with Air Cal and Reno Air. The only smart move was aquiring Eastern Airlines (Former Braniff / Panagra) Latin American routes. However, AA may have given away the shop with its OneWorld partner LAN. Which provides non-stop service between Latin America and Europe/West Coast without DFW/MIA hub. Sooner or later the 49% foriegn ownership cap may be revisited to inject more investments into US based airlines. I’m sure Emirates, Singapore, Lufthansa, Virgin Atlantic, QANTAS want a share of the… Read more »
Stephen
Guest

I would say that Eagle will probably hang around and fill in some of the MD-80 and 757 short/medium flying until the new planes arrive.

Nick Barnard
Member

Eagle’s jets are nothing compared to filling in for an MD-80 or 757.. They’re not really comparable..

Fred
Guest

If anything, I’d think we would see large Eagle cuts as well. Smaller RJs have very high operating costs, so I’d expect frequency or routes being dropped rather than switching to RJs, especially since they can now cut mainline pay.

PF
Guest

911 to Gordon Bethune and his former CO Team-

Hunter
Guest

His former CO team? You mean the current UA team? LOL.

John Dubpernell
Member

Get up to speed He is retired LOL
He did a great job @ CO

A
Guest
Cranky, I never saw you as an AA hater. Sure they were run poorly, but what airline hasn’t been? From just your average Joe that has flown all the majors several times over in the past 5 years they all were bad. The only one that stood out as “better” was CO. NW and DL was a merger of equally terrible. UA was terrible. AA was terrible, but I do prefer DFW as a hub over ORD and ATL so if that counts for anything. I do give credit to AA for lasting as long as they did before falling… Read more »
Frequent Flyer
Guest

CF, can AA do DFW-HKG on a 777-300ER? They are taking delivery of the first ones in 2012. First route announced was London.

Don
Guest

Stupid question of the day!

Now that AA stocks are in the dump. Why not buy a lot of them. The company is not going away and they’ll be profitable monster again; it will just take a few years.

Nick Barnard
Member

In 99.99999999999%* (*highly accurate approximate figure) Chapter 11 bankruptcies result in the stock being canceled as worthless. For instance pre-bankruptcy shares of Continental, Northwest, Delta, United, US Airways, etc are all worth nothing. The shares that are on the market are post bankruptcy shares that were likely used to pay off the debtors of those bankruptcies.

jaybru
Member
OK, has everyone who matters here now had their trip to the bankruptcy trough now? And to this UA frequent-flier (constantly complaining to them, of course), AA was and always will be Bob Crandall. [Would Bob please re-enact his 1982 fare conversation with Braniff’s Howard Putnam, just for us Bob Crandall junkies?] But honestly, is anything really going to change? Exhibit A: pricing the product for the customer. The industry has a mindset about pricing their product, or at least they believe they have to have one because of what they perceive as their stupid, mindless competition forces them into.… Read more »
Nick Barnard
Member
Until this industry goes to a pricing system in which the price is what the offeror and bidder agree to in a system like we buy common stocks: airline or seller offers, at this millisecond, a price for the travel for a named flight, on a named day, in a named seating area/traveler or prospective buyer makes a bid for same/partes agree or disagree/sale, or more negotiation, or prospective buyer goes away, NOTHING will change. Isn’t this what we already have? The airlines offer a given seat on a given flight date and time, available for purchase at a given… Read more »
jaybru
Member

Pricing systems/fares/fare structures, I know, are really matters for other than this bankruptcy topic. But, I don’t agree that what I’m suggesting already exists.

I buy/sell stocks, $20,000 a clip, with really no problem, no rules that I have to digest and think about. Not so when I go to buy that $29 fare, for the simplest of services, an air flight from Poughkeepsie to Podunk. The airline lists a dozen or so prices, then I have to read rules, exceptions, footnotes, asterisks………well, there I go!

Nick Barnard
Member

Yeah, we are going off topic, but eh, as long as CF doesn’t tell us to stop.

The problem with airfares is they bundle multiple services up into one. Assuming the exact same seat and flight, the unrestricted fully refundable fare includes not just the flight, but a built in put option that allows you to force American to repurchase the ticket from you.. I’m sure I could come up with analogies for each fare class.. but …. then it’d take another two hours to complete this comment..

kelty
Member

Bankruptcy levels the playing field, but shafts the suppliers.
Has anyone considered the merger of Alaska with US Airways? They would seem to have compatible routes from the east coast and Europe to Hawaii and Alaska..

Nick Barnard
Member

Hrm, Alaska and US Airways would be interesting. But I think US Airways wants to merge with bigger fish, and Alaska is kinda happy being independent, and I bet their shareholders are too. (I mean if you’re the owner of an airline with 10% ROI, you’re quite happy with what you’ve got!)

Dave English
Guest

Well, how about JetBlue and Hawaiian merge? Zero overlap, but result gives feed to Hawaii through the JB network. Adds A330 to the operating certificate, allowing JB to buy more of the type to go to South America. Resultant size also stops Southwest or US Airways from gobbling them up.

Guess we wait and watch the show.

Nick Barnard
Member

That I could see given they’re coalescing around the same fleet types. Although we probably should stick to what happens with AA, given that the sport of which airlines should merge is a time tested one that can take over any and every thread!

John Dubpernell
Member

Are comments screened before being posted ?

Nick Barnard
Member

AFAIK, CF has said some comments may get tagged as spam by the filters, but if they’re legit they’ll go live once he takes a look at em and fixes them up.

John Dubpernell
Member

I guess not. I thought I posted the following ( Bring in Gordon Bethune )
He did once before I am sure he could do it again!

ancdude
Guest
Alaska does a great job doing what they do and expanding incrementally. They do not need to merge with anyone, although I have wondered about an Alaska/Hawaiian merger, but that wouldn’t really add anything worthwhile to either company except economy of scale. Plus, AS is an all B737 fleet and Hawaiian is going all Airbus, and US Airways is mostly Airbus, so that complicates any merger issue. Full disclosure – I am Gold MVP on AS, have no complaints and enjoy the elite priveleges on Delta. My various experiences on AA over the years are not good.
yo
Guest

I’d hate to lose PHX as a hub (especially since I live there and have US flight bennies), but if AA were to do a hub in PHX, they could really bring some muscle into it and relieve DFW and LAX. I couldn’t see PHL as the international gateway, not with JFK and all that clout. CLT vs MIA? MIA is the S. American hub and Central and Carribean.

Andrew
Guest

I simply don’t understand talk about a US-AA merger…it doesn’t make any sense, on so many levels. It would be a labor nightmare (far worse than individual conditions at either company right now), their route networks are not very complimentary, and on and on.

Just because they are the last two remaining legacies that haven’t merged into a “super” carrier doesn’t mean it’s the logical next step.

jamesgdpollard
Member

Great piece.

[quote]When it came to union relationships, American completely destroyed any goodwill it had by defending lavish executive pay plans that weren’t tied to profitability but rather stock performance. Taking those outsized payments while the rank and file dealt with cuts did not sit well. Relations got ugly very quickly and they’ve never recovered[quote]

Shades of Qantas – who grounded the airline to resolve their union battles (at least temporarily).

Jim
Guest

Maybe I don’t understand bankruptcy law, but how the heck can a company with $4 billion cash in the bank and that just ordered 460 planes claim to be bankrupt?

Individuals have to go through a “means test” and show they are insolvent before they are allowed to file bankruptcy, so why not companies?

Nick Barnard
Member

I remember reading an article (or maybe it was a book chapter) several years ago that corporate bankruptcies got easier in the US after the 1978 law change. But, I believe the means test basically is assets versus debt. AMR had $29.6 billion in debt and only $24.7 billion in assets at the time of the filing.

Oh, and the real reason why the means test is so weak for companies? There aren’t credit card banks asking for the laws to be tightened.

Derek Pugh
Member

Really looking forward to this post tomorrow! (As I think are a whole lot of others!) Does anyone know what time it goes live?

Nick Barnard
Member

AFAIK its 6 am Eastern.. (or maybe 6 am Pacific.. One of the two..)

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[…] I have been reading on this, I would highly suggest checking out these two for more information: Brett Snyder’s story on CrankyFlyer.com and Terry Maxon who writes the Airline Biz Blog, via The Dallas Morning News. United Boeing 757 and […]

Phill
Guest

I really like how you’ve glazed right over the Carty debacle after the union concessions and before Arpey – – and now that scumbag is at Virgin America and Porter.

DavidZ
Guest

This is a big hit on management’s egos.

Joe D
Guest
The attitude of the employees and the corporate business culture of the airline doomed it – end of story. Most public contact people have a clear entitlement mentality – if they have to do 2 services on a 4 hour flight -you get 2 services – good luck finding an FA to come refill a drink except at the contract mandated frequencies – and that whole battle axe mentality was rife among all of the employee groups. I traveled in business class from JFK to Narita on AA in business class – I had better service in Coach on JAL.… Read more »
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[…] week, all the talk was about American filing for bankruptcy. That announcement mostly buried what should have been a much bigger and more exciting announcement […]

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