CNNMoney-Onboard the wild ride of Doug Parker


Sep 10, 2003

Onboard the wild ride of Doug Parker
At 45, the US Airways chief turned a dog into a moneymaker. But along the way, his sky-high ambitions have run into the harsh realities of the airline business. An exclusive look at the education of an aviation wunderkind.

Barney Gimbel, Fortune writer

April 25 2007: 8:09 AM EDT

(Fortune Magazine) -- "Shut up, Doug!" hissed the blond businesswoman across the aisle. "It's not your job to tell passengers anything. Let people make decisions who know what they're doing!"

The weird thing: We were aboard a US Airways flight, and Doug happens to be the CEO. The woman lecturing him? She's Elise Eberwein, his head of customer relations, human resources, and communications. Her boss had rushed into first class, declaring, "The airport is closed! The airport is closed!" It was late January, and Doug Parker was heading to Washington to testify before Congress. As he plopped down in his seat, almost knocking over a plastic cup of red wine perched on the duct-tape-covered armrest, he added, "It's snowing in D.C. Our alternative is Boston." (It’s “alternateâ€, Doug.)

"Jeez, Doug," explained Eberwein, a former flight attendant. "We don't know for sure we're going to Boston yet. There's a rule of thumb: Don't tell the passengers anything until you're sure of it. Otherwise they'll panic." (In fact, the plane did land in Washington.)

It was just one of many vivid lessons in the past year for America's most precocious and controversial airline executive. Parker, 45, has shot to fame in the industry and on Wall Street for successfully combining his ailing America West and the twice-bankrupt US Airways (Charts, Fortune 500), a merger that industry watchers had taken to calling Project Dumbbell for its leaden prospects. Parker has managed to prove them wrong. US Airways (revenues: $11.6 billion), a company consistent only in ranking at the bottom of the industry in customer service, generated more profit last year than any carrier except Southwest.

Yet Parker's progress has been marked by many harshly educational moments as an airline chief. His recent hostile bid to take over Delta Air Lines (Charts, Fortune 500) foundered under blistering attacks by Delta loyalists and high-profile scrutiny by Congress; his pilots and mechanics have rebelled at his efforts to combine the workforces of America West and US Airways; his company's operational shortcomings contributed to several episodes in which tens of thousands of passengers were stranded; and he suffered the side effects of his newfound celebrity when his arrest for drunken driving lit up the financial wires. During his past year's adventures, Fortune was along for the ride, granted unusual access to explore what it's like in a job that has elements of glamour but also thankless challenges.

Parker is the one to watch, according to the previous generation of airline wizards. "He has an effervescence and a joie de vivre that I really like," says Herb Kelleher, the legendary co-founder of Southwest Airlines (Charts, Fortune 500) (who also established an industry standard for whiskey consumption and sent Parker a supportive note after his arrest). (What? “It’s OK. Come on down, Doug. I’ll buy you a drink. You’re my kinda people!)

"He's fun to be with, but he's not fun to play cards with. I'll tell you why: He's an excellent poker player." But Parker is not an operations guy with jet fuel in his veins ("No, I don't know how many flights we've got from Phoenix to Albuquerque"). He's a strategic player with a big idea and as much nerve as a test pilot in pursuing it. Rather than dreaming of global expansion of routes and fleets, like the pioneers of old, Parker wants to combine overlapping carriers and then drive costs down by putting fewer planes in the air. That's not a totally original idea, or a politically correct one, since it could lead to higher fares, but it may bring about a more stable industry. (Don’t forget making the employees work for peanuts.)

Says Gordon Bethune, the former Continental (Charts, Fortune 500) chief who turned it into a top performer: "We've all known consolidation was the answer to a lot of the industry's problems. It's just that Doug's the only one with the balls to go and do it." (Brains are required to go along with the cajones.)

The plan was to to stay up all night. It was late one evening last June, and Parker was sipping a margarita at the rooftop bar of the Peninsula hotel in New York City. It was hot outside, his tie was off, and he was trying to recruit two of his colleagues to keep him company until four the next morning, when he planned to catch a ride to the airport. Sleeping for a couple of hours, he said, wouldn't make any sense.

That night he and his top deputies, a close-knit group of four friends, had reason to celebrate. Parker had just delivered the keynote speech to a Merrill Lynch transportation conference, where he was the star of the show. The company's stock price had more than doubled in less than a year. As the waitress came around for last call, I playfully asked him what airline he wanted to buy next. This was a throwaway question - after all, who in his right mind would try to pull off two airline mergers in two years? (Answer- No one.) Parker just smiled.

Half a year later he was still smiling. It was late January, and Parker had just announced his hostile $12.7 billion offer for Delta, and he was waiting to hear if the carrier's creditors committee had accepted the offer. We were in his office at the company's headquarters in Tempe, Ariz., a small room with a panoramic river view and the Phoenix airport in the distance. Why, I asked him, had he launched an assault on the Atlanta carrier even before enjoying the fruits of his new Southwestern-based empire? "It's not what we're supposed to do," he said, leaning back in his chair. "We're supposed to maximize value. Here's a chance to do it." He paused and smiled. "But it's also kind of fun too."

Most people don't see the business that way, but Parker has a playful appreciation for the absurdity of the economics of his industry, one with deregulated prices and huge fixed costs. While airlines are generally doing well this year, historically they have lost more than they have made. Parker thinks the only way the airlines can grow up and act like rational businesses is to reduce capacity.

To show what that means, Parker cites the case of Asheville, N.C. (pop. 72,231). US Airways operates eight flights a day from there to its hub in Charlotte. Delta flies four to Atlanta. But the passengers typically aren't going to either city, they are just connecting to Los Angeles or Dallas or Boise. Parker's idea: Cut the Asheville schedule by three flights and you can fly the same passengers for a much lower cost.

While Parker is an extrovert who can make people feel they're the most amusing characters he has ever met, his passion is competition and "anything analytical." The son of a meat cutter turned Kroger executive, he played tight end on the Albion College football team in his native Michigan, got his MBA at Vanderbilt, signed up with American Airlines (Charts, Fortune 500) at a job fair, and ascended through the financial side of the industry ever since. He became CEO of the ailing America West just ten days before 9/11, distinguishing himself in the aftermath for going back to Congress three times before winning a $429 million bailout.

Later that morning, on my January visit to the company's headquarters, Parker was fighting to stay awake during the weekly integration meeting, where representatives from each department report on the status of combining America West and US Airways. (Hangovers can be tough.) Though they had merged on paper more than a year ago and cut costs by an estimated $340 million, the two airlines were still effectively operating separately.

There were problems with union contracts, combining the reservations systems - even designing new uniforms for flight attendants. One executive told the group the airline was suffering an employee turnover rate of up to 15% as companies such as JetBlue (Charts), FedEx (Charts, Fortune 500), and Boeing (Charts, Fortune 500) snapped up the carrier's best mechanics and engineers with promises of higher salaries. "We need more incentive programs to keep our best people," the man said. (Try paying them fairly and treating them like the assets that they are.)

Parker's mind seemed elsewhere. He was oddly quiet, letting Scott Kirby, the company's president, run the show. (Jr. needs the practice.) Parker explained to me afterward that he was spending two-thirds of his time on the Delta deal: "Sometimes there's only so many things you can keep track of." At the moment he was thinking of his forthcoming testimony to the Senate Commerce Committee, which planned to grill him on his takeover plans. "That's not the fun part of the process," he says. "Delta has better cards to play. They're making the merger an emotional thing: It's bad for the consumer, it's bad for small cities, it's bad for employees. It's not true, but it's putting us on the defensive because all we can say is, 'No, we're not going to do those things.'"

In a packed Senate hearing room five days later, Frank Lautenberg, the New Jersey Democrat, asked him about the airline's default on its pension obligations. "If you can come up with $5 billion in cash for the merger, shouldn't US Airways pay those pensions back before buying other airlines?"

"Well," said Parker, stopping as the room erupted into loud applause and cheering. The walls were lined with uniformed Delta pilots in double-breasted blazers with brass buttons. The seats were packed with Delta flight attendants and retirees. Nearly everyone in the room was wearing a large red pin that read KEEP DELTA MY DELTA. Parker strained to keep a smile on his face. (Doesn’t matter. It would’ve been louder if US Airways employees were there.)

"Senator, the $5 billion is not our money. That money is Citigroup's money and Morgan Stanley's money, and that money only comes to us if we acquire the airline, because they know full well the value that can be created by putting these two companies together, and they know that they will be paid back." (Unlike the US Airways employees.) Senator Lautenberg cut him off: "That's a very large hope, and I'm concerned about that."

Hope was on borrowed time. When I met with Parker and Eberwein two weeks later, in the bar of a trendy Charlotte restaurant, they looked worn out and dejected. Delta's creditors committee - effectively the company's board of trustees while it's in bankruptcy - had rejected their bid. In retrospect, Parker said, he underestimated the extent of the "natural conflict" (and the Delta culture) on the creditors committee. Members representing such creditors as Boeing, Coca-Cola (Charts, Fortune 500), and Delta's pilots union tried to secure the best return for other creditors even as they "have a relationship with Delta's management team." That meant they chose more on emotion than on pure dollars, he said.

Parker was in withdrawal - he had loved the intensity and adrenaline of the chase. "It was like drinking from a fire hose that suddenly gets turned off," he said. "And it's weird to reintroduce yourself to your old life. My wife asked me if I could help her shop for our son's ninth birthday and I'm like, Well, yeah, I have time. She didn't recognize me."

The next morning it was back to nuts and bolts. We piled into an employee's SUV and headed to the company's Charlotte maintenance base. Parker and Eberwein were in town to host "Crew News," a twice-monthly question-and-answer session between employees and executives. The mechanics were ready for him in a large, whitewashed lunchroom, which reeked of mold and resentment.

Parker, in an open-collar green shirt and black pants, paced across the room with a wireless mike in his hand. "We made more money than everybody else except for Southwest," he said. "But as all of us know, we have a lot to do." A fiftysomething man in a football jersey and stained jeans asked when they would get their pensions back. "You're making all these millions in profit, aren't you?" The crowd cheered. "If we go back to where we were, we'd be out of business in six months," Parker responded. "We just can't do that. The industry has changed, and it's not going back."

Because of its two bankruptcies, US Airways pays its employees some of the lowest wages in the business. "How many people are here despite better offers?" another mechanic asked. No hands went up. "You're only keeping us here because we have no other option. Just give us something. Something!" Parker kept his cool. "It's always a pleasure to see you," he joked to the mechanic. "I wish I could say the same," the man replied.

"I'm not surprised it was that bad," Parker said as we headed back to the airport. Combining the two workforces has led to contentious labor negotiations. The pilots from the old America West, for example, make more than the ones from US Airways. The company wants to equalize the pay, while all the pilots want a raise. "What happened is I lost touch with what was going on," Parker said. "We were all so engaged in this merger, and I was relying on updates from my management team rather than hearing right from the employees." (A big indicator of immaturity.)

The next night, back in Phoenix, Parker was at home watching TV with his 12-year-old son, Jackson, when Eberwein called. The news wasn't good: The media had found out he had been arrested in Scottsdale for driving under the influence of alcohol after having had three beers at a golf tournament the same day he lost the Delta bid. But he hadn't told his employees or his son. "Jackson said, 'Dad, what's wrong?'" Eberwein recounted in an e-mail to Fortune. "Doug said, 'Nothing, buddy, just some work stuff.' The phone kept ringing, and finally Jackson said, 'You have to tell me what is going on.'" The next morning his mug shot was all over the newspapers, and pundits on CNBC were wondering if he should step down as CEO.

"I thought I was okay [to drive] and I wasn't. I made a big mistake," he told me a month later in his office after he had served his 24-hour jail sentence. "It's not one I'm going to make again, and I'm paying the consequences for it, and that's fair. I'm never going to forget it." That day the mood was noticeably somber. "We're all a little down on ourselves," he said. The last weekend had been rough, thanks to a botched integration of the company's reservation systems that led to long lines for passengers and a systemwide on-time average of a dismal 30%. (It's normally closer to 80%.) "But six months from now, people won't be talking about this," Parker said. "This is a transition item."

But it's already hurting the bottom line. Last year US Airways posted a $304 million profit with a pretax margin of 4.5%, one of the industry's highest. First-quarter earnings in 2007, however, are expected to be "slight," the company said, in part because of its operational meltdowns. "We're in kind of a sweet spot in the story of US Airways," says Vaughn Cordle, chief analyst with Airline Forecasts. "The main driver of US Airways' success has been its low labor costs. If it's forced to pay the industry average (standard), then their cost structure goes up $800 million, and there goes their profit." (Their “profit†is our money!)

Parker believes he hasn't gotten close to that sweet spot. "We're doing better than any of the other network carriers by a nice margin. So we're fine with the status quo." (I’m sure.) And as for labor negotiations, he's rather blunt: "We can continue to operate with two separate labor forces if necessary." (Until the employees finally get mad enough and say “No!â€)

At the airline's Media Day the next day, the company opened with a mock video of the merger hearings in Washington in which they used the Conan O'Brien technique of taking Parker's head and giving him new lips and new things to say. In the video a Senator asks Parker, "If you complete this merger, do you see getting even bigger and forcing another merger?" Parker responded, "We most certainly will, Senator. You know, mergers are like Lay's Potato Chips: You can't just eat one. Today Delta. Tomorrow United. And in a few weeks we are going to go after American. And you know, we might not stop there, because, you know, there's that Michael Jackson saying, 'Don't stop till you get enough.'"

Parker was only half-kidding. Back in his office he told me he doesn't rule anything out. "All airlines have a problem right at this point in time," he says. "The industry is out of ideas. We've done all the cost cutting, we've gone through bankruptcy, and we're doing okay, not great. Mergers won't happen until people are in a position where they're thinking, 'Oh, my God, what are we going to do?' Our plan is to sit and wait for that day to come so we can say, 'Hey, we've got a solution.'" In the meantime he's got an airline to run. (Boy, does he. Wish he’d start.)
Parker reaks "arrogance".

The young CEO has not matured in the industry. He's got a very long way to go, if he makes it.

Unless he's got some ingenious ideas outside of consolidation to decrease capacity (which strategy is older than god in which many before him thought up and discussed ad nauseum), the years will only bring about increase in wages, regardless of his opposition. Unless he conceptualzes the inevitable reality with organized employees who will not sit financially idle, he needs to make peace with his employee groups and set a timeline for wage increases and trigger targets. Then, he needs to seriously use his education and experience (if he is worth his compensation) and devise a strategy to contain costs outside of labor, and design a service product that customers will flock to for a reasonable fare.

Wallstreet will soon find out whether the guy is a so-called maverick in the industry, with a business acumen, or the same greedy-type that can't see past his compensation contract.