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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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