Air Transport World

American is biggest where it counts most. (American Airlines Inc.) (part 2) (company profile)

American is biggest where it counts most

Deregulation's survivors will be "the carriers who don't make any big mistakes,' says Robert W. Baker, senior VP-operations of megacarrier American Airlines, "and we don't think we've made any yet.'

The growth plan devised in 1982 under the guidance of Robert L. Crandall, then president of American and today chairman, president and CEO of both the airline and its parent AMR Corp., certainly doesn't seem to have been a mistake. On the contrary, it has allowed American to claim the title of the world's most profitable airline in three of the last four years (it was No. 2 to United in 1984) and to take aim on the top spot again in 1987. In the first quarter, American not only was No. 1 in operating profits but it was the only U.S. carrier to improve on its 1986 performance in every financial category--revenues, operating and net profits, yield and seat-mile cost.

When deregulation arrived at the end of 1978, Baker says, American was "one of the worst-positioned carriers.' Its costs were extremely high, its fleet was old, it had "zero presence' in the major Sunbelt growth areas of the U.S. and in international markets outside the Caribbean, its "culture of quality' had been achieved at the expense of inefficiency, its work force was restive.

In 1979, the year American startled the industry by moving its headquarters from New York to Dallas in preparation for creation of a hub-and-spoke route system, the airline's operating profits plunged to a bare $5 million, a drop that was masked by large profits at AMR Corp. Then in 1980 the airline suffered a $111.1-million operating loss, and Crandall's election to the presidency that year was likened by Robert Serling in his biography of American to "being put in command of the Titanic as she sailed.'

Baker says, "It took us a couple of years to decide how to cope. The decision was to grow in our areas of weakness, to cut costs without compromising quality, and to reject options like merger, high-risk financing and wage cuts.' (American does not regard its purchase of AirCal this year in the same light as the megamergers of 1986 because AirCal is only about 5% the size of its partner.)

American "had to think of something new, and we did,' says Crandall (ATW, 5/84). Recognizing that it had to get its labor costs in line, it decided that if it could talk its unions into allowing it to hire employes at the low "market rates' being paid by the new entrants and then could expand rapidly by buying large numbers of cost-efficient airplanes, it could average down its costs by erecting an "umbrella' of low-cost growth over the old airline.

It took, Crandall says, "a lot of talking, entreating and cajoling' to gain approval of the industry's first two-tier contract--with the Transport Workers Union (TWU) in February 1983. Others have a harsher description of Crandall's tactics. He was fully prepared to contract out every TWU job if an agreement had not been reached; he took the same hard line with American's in-house Allied Pilots Association (APA) early this year, declaring his willingness to shrink or sell the airline unless significant gains in productivity could be obtained. The pilots believed him and capitulated, signing a three-year contract whose productivity increases when coupled with a change in fleet mix will reduce cockpit costs 8.6% per ramp hour by 1989 despite an across-the-board pay increase.

The TWU and APA contracts, incidentally, are no longer two-tier; instead, says retiring VP-Employe Relations Charles A. Pasciuto, they contain a single scale with entry rates that are "not as low as at some carriers,' a longer climb to the top than in the past, and top rates that are "comparable to the best in the industry.' And because American believes, Pasciuto says, that both sides should win in labor negotiations, the carrier has given its union employes no-furlough guarantees and Crandall reiterated this spring that "there will be no pay cuts or layoffs at American Airlines.'

At the end of the 1987 first quarter, more than 17,000 of American's 52,800 employes were being paid market rates and Pasciuto noted that the carrier's unions, who represent 60% of the work force, had gained 10,000 new members. By 1990, he says, American will have 75,000 employes and more than half will be working at market rates.

Five years ago, Crandall says, "our growth plan was a pretty radical idea. Today, the fact that we developed a sound strategy and stuck to it looks pretty good.' Baker agrees, with some reservations. He thinks American "now has the ingredients to come out in good shape when the deregulation shake-up is finished' but wonders if the carrier should have taken another road. "If we ultimately fail, one of the reasons may be that we didn't attack the employe cost problem the way others did,' he says in a reference to Continental's abrogation of its labor contracts via bankruptcy, "but we don't think you can treat employes in a service business that way.'

One thing the plan has done is to create megagrowth for American. The carrier shrank a bit as it was attempting to come to grips with deregulation, reaching its low point in RPMs and ASMs in 1981. In the ensuing five years, however, its RPMs soared by 75.5% or 21 billion and its ASMs by 65.9% or 29.8 billion. In other words, between 1982 and 1986 it added the equivalent of a 1986 Continental to its size.

Like its fellow megacarriers, American regularly chalks up meganumbers. In 1986, for example, it flew slightly more RPMs (48.8 billion) and nearly as many ASMs (75.1 billion) as the entire U.S. national airline industry. Its 1986 growth alone--10.5% or 4.65 billion in RPMs and 9.9% or 6.75 billion in ASMs--was the equivalent of acquiring two AirCals.

But the astounding part of these numbers is that despite its huge growth, American has barely kept pace with the U.S. airline industry and in fact has dropped a notch in the rankings since 1978 as the Texas Air Corporation (TAC) conglomerate has grown into the largest U.S. airline company and United has retained its lead over American. …

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