AA CEO The Worst Job In America-Making Airline Workers Pay For The Crisis
AA CEO The Worst Job In America-Making Airline Workers Pay For The Crisis
Monday, Oct. 08, 2012
The Worst Job In America-Making Airline Workers Pay For The Crisis
By Bill Saporito
Don't even think that you have a more difficult job than Tom Horton. Although some airline bosses can still seem besotted with this once glamorous business, at ground level it's an industry that has lost more than $60 billion in the past decade, erasing every penny earned in its 80-year existence. An industry whose combined market value, below $30 billion, is less than that of Starbucks, one of its vendors. One with irrational competition, uncontrollable fuel costs, a feckless regulator, and jets and airports filled with people who don't like you--and not just the passengers but your employees too. Beyond that, well, who'd want to run a major airline that just went bankrupt, sending its former CEO fleeing from the building?
Horton does. He runs American Airlines, which is running for its independence in bankruptcy court in New York City. American lost $10 billion in the past decade and $2 billion last year alone. Last November, when other carriers made money, American was filing for Chapter 11. Things have gotten tougher. Recently the carrier had to cancel hundreds of flights, and its on-time rate plunged below 50% because of an unofficial showdown with and slowdown by its 10,000 pilots, whose contract was chucked out by the bankruptcy court earlier this year. American hastily summoned Allied Pilots Association (APA) president Keith Wilson to Dallas from Washington for peace talks.
Horton is hanging tough; he knows that bankruptcy will allow American to slash operating costs, and he says a revitalized fleet will regain passengers lost after years of underinvestment and deteriorating service. He has reason to hope. In its most recent quarter, American earned a $95 million profit before restructuring costs, an operating-profit turnaround of at least $381 million over the previous year. The company has more than $13 billion in financing to buy 550 new jets to replace its ancient fleet of MD-80s, 767s and 757s and promises upgraded services and amenities. "Our people are doing a really good job. They are standing tall and doing a great job for our customers," Horton told Bloomberg Television in July after the sparkling quarterly numbers came in.
Customers might beg to differ. But one thing is sure: after a dismal decade of bankruptcies that has made air travel as much fun as a high-altitude nosebleed, airlines have finally figured out how to make money. The mergers of Delta and Northwest and of United and Continental have removed billions of available seat miles (ASMs) from the system as the combined companies rationalize routes. That's why planes are 80% filled (and overhead space is overfilled). The carriers now charge a basic price for a seat and offer a menu of fee-based options--for roomier seats, for boarding early, for meals--to generate more revenue.
This is the future for consumers: you can buy a lie-flat seat in business class and be cosseted or suffer in the knee-bashing cheap seats in the far back. That means 10 seats across instead of nine in coach in Boeing's new 777 at American. Some dream. Either way, you'll get there.
It's not only customers feeling the pain. The unionized workforces at the major airlines have had to take a backseat. They've absorbed job cuts and diminished wages and benefits as the carriers shed costs via bankruptcy. The good news for the company is that the labor cost differential between legacy carriers and low-cost operations like Southwest has never been smaller. The playing field is leveling.
Of course, American's staff sees it differently. They want to work for someone else--and they could get their way. Although the company has negotiated new contracts with its flight attendants and ground-crew unions, they are so furious over what they view as cramdowns that they made a side deal with US Airways CEO Doug Parker--Horton's former colleague at American--and president Scott Kirby. The highly regarded pair, who get credit for saving US Airways, want to merge the two companies under the American Airlines banner and run the show. "In an industry in which consolidation makes sense, there's probably one big consolidation left," Kirby said recently at the Boyd Group International Aviation Forecast Summit. "It's a path that's nearly completed."
And he'd like to complete it. At the same time, Horton has been quietly trying to win back employees, unsecured creditors and the public, suggesting that a consolidation is something to consider after American emerges from Chapter 11. The two firms have signed nondisclosure agreements, granting access to each other's books. Neither would make its executives available for an interview.
Horton is cutting costs and layers of management. But Parker and Kirby are trying to outflank him. In March they called Laura Glading, head of the Association of Professional Flight Attendants (APFA), and the heads of the APA and the Transport Workers Union (TWU) and invited them to US Airways' headquarters in Tempe, Ariz., for individual meetings. Glading was surprised, but she was a willing listener, having been shell-shocked by American's postbankruptcy contract offer. "It was just such a horrific, horrific proposal. The company was completely unyielding, [saying] If you don't give it to us, we're going in to a judge," she says.
She went to Tempe and listened to Parker and Kirby outline their plan for a merged company and what they might offer the workers. Then she called her negotiating team and said, Get out here, now. So did the others. The unions have what are basically bridge agreements that they will abide by until a merger takes place, and then flight attendants will renegotiate a pact for the combination, even assenting to binding arbitration to get it done.
By playing hardball, American got what it so needed too: drastically reduced labor costs and perhaps 10,000 layoffs or buyouts. In its bankruptcy filing, American pointed out that its unit labor costs per seat mile were 19% higher than United's and Delta's. Bare-bones carrier Spirit has a 77% total cost advantage over American. Spirit can undercut American and still earn a profit, but not the converse.
In its presentations, American says it has to improve its finances by some $3 billion, with $1.25 billion of it coming from labor, to be competitive with Delta and United, which have already gone through the wash and rinse cycles of bankruptcy and merger. The slashing is well under way. American's agreement with the TWU allows the company to close a maintenance base at Alliance Airport near Dallas and outsource the work. In its remaining maintenance facilities, work rules that resembled the bad old days of GM are gone.
The flight attendants have also had to contribute. American hasn't hired a flight attendant in 12 years. It had too many of them, the company says, because too few of them worked a full schedule. Yet all of them claimed full benefits. There were also pay differentials done away with--for instance, extra pay for domestic coach galley duty, overtime and the difference between domestic and international pay. In its new contract with the APFA, American offered $40,000 buyouts, and over 2,000 flight attendants obliged, about 15% of the group, which has an average of 30 years of service. (A couple of them have been working since 1958.) Attendants will put in more hours, triple their health insurance contribution and end their pension plan. "We got a 3% raise and bonus. It's going in one pocket and out the other," says Glading. "We have lost some very, very valuable things."
More Optimist than Tyrant
Admirers Laud Horton, 51, for having the guts to file for Chapter 11 and confront the unions over the cost issues. (The filing rendered worthless his 1.65 million shares, at least for the time being.) It's not a role he was unprepared for. Although he joined American in 1985 and rose to CFO, he moved to AT&T in 2002. There he worked for an iconic company that was facing a dynamically changing business environment and was tied to a deeply unionized workforce. According to former AT&T CEO Dave Dorman, Horton not only overhauled AT&T's balance sheet, which had been crippled by the tech crash, but also restructured management, which made AT&T a much more attractive merger candidate for its combination with SBC. At AT&T he was ahead of the game in an industry that was consolidating. At American he's now behind. "Tom had this almost serene bearing," says Dorman, "but with intensity. When he tells you he's going to do something, A) it will get done, and B) he knows how to do it."
The son of a public-information officer at NASA's Houston space center, he had astronauts as neighbors and got the flight bug early, when "America was on offense." He returned to American in 2006, just as it was starting to play D and losing ground. Horton got a battlefield promotion to CEO the day the company filed for Chapter 11. His predecessor and friend Gerald Apley left the company over the decision.
Despite the ongoing clashes with labor, Horton is more optimist than corporate tyrant. "I feel the way about American the way I feel about America," he told the Global Business Travel Association this year. He regards American as the nation's flag carrier and said, "It brings a duty and obligation to us to make it successful." Union leaders describe him as friendly and trying hard to make his case. "He really wants to convince us he can do it," says Glading. "Tom believes he can do it."
That doesn't mean they'll help him. The pilots are leery that American will pursue a metal-neutral flying approach, meaning more flights farmed out to foreign partners. Labor is critical of American's top-down culture--which is authoritative at best and patronizing, we-know-better at worst, compared with US Airways' bottom-up, we're-all-ears ethos. "Even if he could [turn the company around], it's too late," says Glading. "The employees are done. There has to be some kind of change so that the employees really believe what they've heard and that someone will take care of them."
It's not only the union members who take that view. Consultant Michael Boyd notes that Horton is part of the management team that got American into trouble, taking on way too much debt, for instance. "All that says to me is you need to get rid of your senior management," Boyd says. He calls Scott and Kirby "visionary" managers. "They really do see the future. They are a whole lot less in lockstep with one another. They ask questions," says Boyd.
American's plan is to make the company more customer-centric and thus capture more high-value business flyers, the ones more likely to fly in the front, where the profits are made. It is going to kit out its 777s and Dreamliners with the works, including a stand-up bar and turndown service in first class. Gate agents will get iPads to expedite boarding and departure. Flight attendants will have Samsung Galaxies to process in-flight food orders. "[We're] getting ready to take a huge leap forward with respect to our products and services," Horton said in a recent letter to employees.
All very nice, but Continental and Delta leaped first, and what major airline doesn't claim to be customer-centric? United, for instance, has already taken delivery of Boeing's new Dreamliner. Both rivals are ahead in converting to lie-flat business seats and are showcasing their new wares on network television, where cost-constrained American hasn't been seen much lately.
Even executed perfectly, American's revival plan will still leave it with a couple of disadvantages. American had 14.6 billion scheduled ASMs in May, fewer than it did in 2003. United, by contrast, had 21.9 billion ASMs. In airline networks--in any network business--"bigger is beautiful" says Booz & Co. transportation consultant Andrew Tipper. You can collect more customers, especially given that they like to concentrate their flying with one airline to get frequent-flyer perks. In a network business, if you're not first, you're last.
Also, American's OneWorld alliance is considered weaker than Delta's SkyTeam and United's Star Alliance. That's significant because 30% of travel will be generated overseas by 2017, according to Boyd Group's forecast, and American doesn't have an alliance partner in mainland China. Plus it's hemmed in at its hubs in Los Angeles and New York City's JFK Airport. On the other hand, the company has a ready-to-rocket gateway to Latin America at Miami and nearly boundless expansion possibilities at its fortress hub at Dallas--Fort Worth.
US Airways thinks of itself as the perfect partner to fill in American's network voids. It would bring more than 8 billion scheduled ASMs, including a big chunk of business in the Northeast. The two companies overlap on only 2% to 3% of their direct routes, so there's no antitrust issue. A combo would allow American not only to connect more dots worldwide but also to add hubs in Phoenix; Charlotte, N.C.; and Philadelphia. The Philly hub would give American another international gateway to take the pressure off JFK. "If the merger could be effected with US Airways' senior management put in charge, it could be a terrifying competitor," says Boyd.
Who will win? Certainly, unsecured creditors, which include labor, will have a big say. American has $29 billion in debt and has hocked everything from terminals to landing slots at Heathrow and Narita airports. It even sold a bazillion frequent-flyer miles to Citibank for an advance of $890 million. Those distressed debt securities are being accumulated by interested parties like Appaloosa, a hedge fund that also owns a stake in US Airways. Vicki Bryan, a transportation-bond analyst with Gimme Credit, says the market "is sending a clear, distinct message that the best outcome is that American Airlines be run by someone else."
Such talk won't rattle Horton. "Because he's smart, he's calm--always calm--well organized and his own ego is not wrapped up in the decision he makes," says Roger Altman, chairman of investment bank Evercore Partners, who has worked with Horton. American is big enough to thrive without a merger, although Horton isn't unalterably opposed to one. He prefers that the company exit bankruptcy first, which should happen this year. People who know him say he will support the deal that creates the best value for all stakeholders.
Whether American stays independent or merges with US Airways or whether Horton or Parker is CEO may not matter to travelers very much. The carriers were running at 80% of seat capacity early last year and not making a profit. According to a study by consulting firm Oliver Wyman, the network carriers needed to sell one more seat in coach and a half a business-class seat per flight to break even. That's difficult at the margins.
The solution is to raise prices, which they have been doing. Fares will continue to rise because fleets aren't growing as fast as the traffic. Lots of new jets are on the way--bigger jets--but older, gas-guzzling jets are headed for scrapyards. You're not going to be stuck in those 50-seat commuter jets much longer. For smaller cities, it's a mixed bag: fewer flights but larger planes. For some, alas, it will mean no flights at all.
Curiously enough, some of American's new jets are made of composite materials, which will give the fuselage a dull finish. The shiny silver ships that had been American's hallmark are going to have a new look. And so, one way or another, is American.