http://www.usatoday.com/travel/news/...an-cover_x.htm
American strains to find footing after shaky year
By Dan Reed, USA TODAY
FORT WORTH "” In the year since his dramatic battlefield promotion to CEO of American Airlines, Gerard Arpey has seen his hair turn gray, his family less than he would like and his company shed $4 billion in annual costs.
American CEO Gerard Arpey continues to fight to restore the carrier.
Rick Moon, Fort Worth Star-Telegram via AP
He's helpless about the hair, and he won't let work crowd out family. But Arpey continues to be deeply frustrated that the unprecedented cost cuts may not be enough to save the world's largest airline.
When Arpey was put in charge a year ago this week, American was a whisker away from bankruptcy court. After a year of deep cuts and earnest efforts to mend the tattered relationship of labor and management, there's reason for optimism. But parent AMR continues to lose money.
American registered an encouraging performance in March,
but today it will report a first-quarter loss of about $170 million, if the consensus of stock analysts is correct. Record fuel prices and relentless price competition have slammed all the big airlines, including American.
But its problems go deeper. American faces staggering payments on $25 billion in debt. Its pension plans are underfunded by about $2.7 billion. After the bloodletting that led to Arpey's ascension a year ago, workers' trust in management remains fragile, as does their faith in union leaders. Plus, there's evidence that the austerity push is taking a toll on worker morale and the quality of customer service.
After the tumult of 2001 "” a recession, the Sept. 11 terrorism, which involved two American Airlines flights, and the crash of American Airlines Flight 587 in Queens, N.Y. "” former CEO Don Carty determined that, without cost cuts, the airline would run out of cash by mid-2003. But union leaders stiff-armed management on proposed concessions until early 2003.
On March 31, 2003, the deadline set by management for a bankruptcy reorganization filing, negotiators for American's three unions agreed to givebacks worth $1.6 billion annually. Ratification votes stretched the process to April 15.
Pilots and ground workers approved the deal; flight attendants rejected it. Carty waited 24 hours before filing for Chapter 11 to allow flight attendants to reopen voting. Given the extra day, the flight attendants reversed their vote and ratified the deal. Attorneys poised to file bankruptcy papers in New York were called back to Texas.
But the saga wasn't over. In securities filings made April 15, 2003, American revealed a retention bonus plan and special retirement fund protections for the company's top officers. Workers exploded.
Union leaders, claiming they'd been misled and manipulated, threatened to throw out the ratifications. Carty apologized repeatedly. Workers didn't buy it.
In crisis negotiations, Carty offered to resign. Pilots and ground workers took the deal. But again, the flight attendants balked.
The board elevated Arpey from president to CEO and gave him until the next morning to get a deal.
Arpey met late into the evening of April 24 with Association of Professional Flight Attendants President John Ward. The APFA board approved a concessions package the next morning, and Arpey waved off American's attorneys, who were back in New York for a potential bankruptcy filing. Then, in a nationally televised news conference, AMR board member and former Dallas Cowboys quarterback Roger Staubach introduced Arpey as the new CEO.
Arpey has since met at least monthly with union leaders. Top managers meet with their union counterparts weekly. Phone calls to solve problems occur almost daily, sometimes with Arpey on the line.
John Darrah, president of the Allied Pilots Association, praises Arpey's fence-mending. "You couldn't be any more transparent than Gerard has been with us," he says. Arpey is "absolutely the right man."
Still, he and other labor leaders worry that changes aren't happening fast enough to meet the competition from discount airlines such as Southwest and JetBlue, which operate more cheaply than American. Says Darrah: "Labor negotiated $1.6 billion in concessions essentially in 48 hours. Now, 365 days later, we still don't have a plan in place that makes us truly competitive with the low-cost carriers."
Major cost cuts
In 2003, American dropped to No. 6 in wage-and-benefit cost per employee from No. 3 the year before, says analyst Vaughn CordleofAirlineForecasts. Its 2003 cost of $72,974 was just 7% higher than that of Southwest.
New attention to details has produced savings. For example:
"¢ Cutlery. American saved $570,000 a year on plastic utensils through an Internet reverse auction.
"¢ Air filters. It had paid $31.70 apiece for replacement filters. A new supplier provides them for $1.25.
"¢ Nuts and bolts. American paid $49 for engine spacers "” small washers specially made to withstand the heat and stress inside jet engines. It now pays a new supplier $9.
In all, American has cut or planned to cut $2 billion or more from annual operations. Five aircraft types will be grounded by September, leaving American with six. The fleet will be down to 720 planes by year's end from nearly 900 in 2001.
More savings have come "” or are on the way "” from downsizing or rescheduling traffic at its Dallas-Fort Worth, Chicago, St. Louis and Miami hubs.
In a recent interview, Arpey praised American employees for shouldering more work and helping to identify cuts.
But American is spending $1.3 billion more this year than it would if fuel prices were at 1999 levels. And low-fare competition has caused American's average leisure fare to fall 25% in the three years ended in January. So, he says, the cost cutting hasn't gone far enough. Arpey's new message: "Drive simplicity to lower costs."
Long-term challenges
[color=#FF0000]
Arpey says cost reduction must become a way of life at American "just like it is at Southwest Airlines."[/color]
But Arpey, who has spent his professional life at American, isn't calling for American to be Southwest. He believes American's global service, multiple daily flights in big business-travel markets and frequent-flier program, with 45 million members, provide powerful advantages over discounters.
So, while cutting costs, American is not backing away from its global reach. It's rebuilding its international network and strengthening its marketing relationships with foreign partners. It also continues to shift domestic routes to regional affiliates to maintain its reach into smaller markets but at lower costs.
But the discount carriers' rapid growth "” they now carry a quarter of all passengers in the USA "” means American has lost permanently much of its "revenue premium" "” the ability to get from travelers more money per mile flown than its competitors.
American's $1.2 billion loss in 2003 was only one-third its 2002 loss. But it was still its third-worst ever. And challenges remain. Debt and pension funding obligations are huge.
Perhaps most important, frayed relationships with workers haven't healed. Many workers grumble that they still don't trust management. Union leaders who signed restructuring deals last year are feeling the heat, too. Tired of fighting with both management and union opponents, Darrah, the pilots union chief, chose not to run for a second term.
American's flight attendants recently voted out three of their four national officers. Only Ward was returned to office "”by five votes.
The Transport Workers Union, representing mechanics, bag handlers and other ground workers, is being challenged by the Aircraft Mechanics Fraternal Association. A representation election among American's mechanics is likely this summer.
Not surprisingly, some frequent fliers say service is slipping. American's own research bears that out.
Aaron Gellman, an industry consultant and American frequent flier, says he has seen a decline. The airline's best customers no longer get the special treatment that won their loyalty in the first place, he says.
"Their agents all tell the same story: Management no longer gives them the latitude to deal with top customers who have a problem," says Gellman, who teaches at Northwestern's Transportation Center.
Ward calls the letter insulting and notes that American received one of the industry's top awards for customer service in 2003 "” in large part because of its attendants. "It's things like this that tell me they very much are still the same, old company with a top-down, we're-the-boss-and-you-aren't culture," he says.
Jim Little, international vice president of the TWU, says many members, especially those in expensive cities such as New York and San Francisco, have taken second jobs to make ends meet.
Even workers at the top of the food chain, the pilots, have been knocked off stride. Chris Manno, a 19-year veteran of American's cockpits, last year sold his "captain's house" in Fort Worth and moved to a smaller home after a 23% pay cut. Across all work groups, he says, American employees are making difficult adjustments: Spouses are going back to work, and kids are being pulled from private schools.
Yet, in that, Manno sees reason for hope. It shows they, like their company, recognize that the world has changed, and they're getting in position to compete, he says. "That tells me that our people are in this for the long haul," Manno says.
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American airlines is a dying horse that needs to be gently put down
Hey ! How about that American Airlines Corp huh VC ?
