Compensation Blues Costing American Air Executives

[JS]

Does Garmin International have entrenched unions? Are they simultaneously de-regulated and heavily regulated? Are they on the verge of going out of business? Do they have serious customer satisfaction issues? Will they lose millions of dollars in revenue and suffer wrath from Scary Mary and her ilk should a phone or GPS unit break while in use?

Running just about any company other than AMR, and airlines in general, is a cakewalk in comparison.

 

[KCFlyer]

If you can find someone who has the requisite financial knowledge (most rampers don't) and is willing to deal with the press 24/7 (most flight attendants don't) and is skilled at striking a balance between good labor relations and reasonable labor costs and is willing to do this job for only $100,000 a year, go for it.

I would be happy to be CEO of AMR for $100,000 a year, but you probably don't want me to be CEO, because I will do my damnest to rake over the coals and then fire every union employee who generates customer complaints. That's not good for the labor relations part of the job requirements, is it?

I'm not defending upper management who makes thousands of times the salary of the rank-and-file. That's extreme. However, saying that any old union employee is capable of being CEO, or that there exists someone else out there who can meet the job requirements I listed above for only $100,000 a year is just unrealistic.

Where do I begin with this one....but I am glad that you mentioned unions in a later post. You're not much of a "pro-union" guy. Neither am I. But I can assure you that if a ramper consistantly failed to close a cargo door, or a FA consistantly threw hot coffee on passengers, or a mechanic who consistantly left parts off an engine, they would be dismissed with little recourse. Yet, an executive who has "led" this company to the brink of bankruptcy (and avoiding BK isn't done yet) with the only mantra of "must get labor costs down" must be offered some outrageously high pay package to "retain their talent". IMHO, that's no different than a union "protecting the slackers". They are rewarding non-performance.

You're right, a lot of rampers aren't numbers guys. But a lot of rampers might have an idea on how to save $10 per flight and that "numbers man" pooh poohs the idea, because HE is focused on the fact that the ramper making the suggestion is making $17 an hour and HE wants to get that down to $15 an hour. What he overlooks is that AA operates over 1500 flights a day - that's $15,000 saved every day, or $5,475,000 saved over the course of a year. That doesn't take into account any ideas from that FA who can't handle the press suggesting ways to save a few dollars per flight without taking away from customer service. That "numbers man" unfortunatly thinks just like you do - the unions are the root cause of all our problems. So they tend to get a little "tunnel vision" when they focus 99% of their efforts at controlling labor costs. So they don't listen to any ideas from the rank and file that don't have anything to do with how much or how little they are willing to give back. I know that LUV pilots offered suggestions on how to save fuel on their flights. LUV adopted the idea and the result is a reduction in operating costs. The finance guys over there loved the idea, and in case you haven't noticed, LUV pilots are unionized.

No...these guys must be retained because they are real "experts" at wringing concessions from the labor force. Perhaps they should focus some of those efforts at revenue generation and non-labor cost savings. Maybe those guys who are MBA whizzes with numbers might be able to learn something from the ramper with a GED... The result might be....improved morale, which results in better service, which results in more business, which results in higher profits. Let's say your boss came to you and told you that you had to give back 20% of what you were being paid. Then they grant themselves a 30% pay raise to reward them for their managerial "talents". Would you continue to answer your phone with a cheerful "Good Day, JS here". Or would you maybe find yourself grunting "hello"?

It ain't all labor's fault. Poor employees should be let go. That extends all the way to the top of the corporate ladder.

 

[FWAAA]

As of this morning, Garmin's market cap is $6.1 billion, which is more than 3 times the market cap of AMR.

With the executives and board members owning more than 40% of the stock, it's no surprise that the executive compensation is on the low side - after all, why pull out tons of money at individual income tax rates when capital gains are taxed at such favorable rates?? B)

The co-founders have no stock incentive plan in place because, as the company puts it, they each have "a significant ownership interest in the company and, therefore, already has a motivation to maximize shareholder value."

Similarly, Bill Gates' salary has always been lower than that of comparable executives.

Garmin's 2002 after-tax net income of $143 million on sales of $465 million is certainly wildly successful. That the company accomplished this with only 732 US employees, 804 Taiwan employees and 39 UK employees (fewer than 1,600 total) makes it all the more impressive. Of course, none of the Garmin employees are represented by a union or covered by a collective bargaining agreement.

AMR has almost 60 times as many employees and only 38 times the revenue as Garmin. And of course, profits have been elusive at AMR since 2000.

Companies on the brink of death, like AMR (as opposed to successful growing companies like Garmin), will have to pay higher salaries to attract talented executives. Same at many other elderly or geriatric companies.

Are there any Garmins in the airline business? B6 and WN come to mind. Maybe AirTran.

 

[JS]

Originally posted by KCFlyer:

Yet, an executive who has "led" this company to the brink of bankruptcy (and avoiding BK isn't done yet) with the only mantra of "must get labor costs down" must be offered some outrageously high pay package to "retain their talent". IMHO, that's no different than a union "protecting the slackers". They are rewarding non-performance.

You're right, they should have used their magic wand to produce billions in profits. Such morons -- following the advice of Darrin in Bewitched, insisting on doing everything the hard way.

Upper management is not unionized. They can be and are fired at any time. Ergo, if someone quits, it's probably not a good thing.

You're right, a lot of rampers aren't numbers guys. But a lot of rampers might have an idea on how to save $10 per flight and that "numbers man" pooh poohs the idea, because HE is focused on the fact that the ramper making the suggestion is making $17 an hour and HE wants to get that down to $15 an hour. What he overlooks is that AA operates over 1500 flights a day - that's $15,000 saved every day, or $5,475,000 saved over the course of a year. That doesn't take into account any ideas from that FA who can't handle the press suggesting ways to save a few dollars per flight without taking away from customer service. That "numbers man" unfortunatly thinks just like you do - the unions are the root cause of all our problems. So they tend to get a little "tunnel vision" when they focus 99% of their efforts at controlling labor costs. So they don't listen to any ideas from the rank and file that don't have anything to do with how much or how little they are willing to give back. I know that LUV pilots offered suggestions on how to save fuel on their flights. LUV adopted the idea and the result is a reduction in operating costs. The finance guys over there loved the idea, and in case you haven't noticed, LUV pilots are unionized.

Employee suggestions can be useful, but you can't run a company as a democracy, as previously noted. If management has to get all of their operational cost-saving ideas from the rank-and-file, management needs to get a clue so they can figure out most of this stuff themselves.

Just as a silly example, suppose that management had arranged for all flight plans to be filed with a request for FL250 (for jets, anyway). 25,000 feet sounds like a nice, round number, right? Any idiot who works in the the appropriate area of the airline dealing with flight plans knows that flying at higher altitudes will burn less fuel.

Coming up with more complicated cost-saving procedures than that can be done without having to rely entirely on the whims of pilots taking the time to put something in the employee suggestion box.

Let's say your boss came to you and told you that you had to give back 20% of what you were being paid. Then they grant themselves a 30% pay raise to reward them for their managerial "talents". Would you continue to answer your phone with a cheerful "Good Day, JS here". Or would you maybe find yourself grunting "hello"?

Neither -- I would quit, because I can. The employees desire to have a union protect them in exchange for being married to AMR with no possiblity of an amicable divorce. That means givebacks in bad times and a raise for not striking in good times.

 

[KCFlyer]

I'm not ordinarily a betting man JS, but I'd be willing to bet that I'd have a better shot of turning AA around than you would. As much as you might despise unions, the simple fact is that they aren't going away. Focusing your efforts on busting the unions would certainly doom the airline to failure. Because, as poor as unions might be, it's the folks that belong to the union that ARE the airline.

What managment needs to do is work WITH unions...the union folks have already given back a lot. About the only thing managment seems to be able to do is to ask for even more.

Here's the problem though - when things finally DO turn around, management hasn't said anything about what they can expect to get back. Instead, they pay a managment team a high salary because they are good numbers men who can talk to the press. Then, as these great numbers guys lead the company downhill, they pay them even more to "retain their talents" during these rough times. When things do finally turn around (despite their best efforts to the contrary), they give themselves some congratulatory bonuses and raises. Meanwhile, the union folks who ARE the airline are working under a concessionary contract and calls to "snap back" fall on deaf ears. Until such time as the contract is up for renegotiation and the chasm that exists between labor and management gapes even wider.

What managment really should do is spell out an "employee recovery plan" that specifies what will happen when times turn around. If it means a one time "thank you" bonus as a first step - then it's something for employees to strive for. If it's reinstating some of the givebacks as the bottom line improves - the say it...and more importantly - follow thru with it. Leaders have to motivate the workforce, and motivation by intimidation doesn't seem to be working all that well. Why not try motivating by mapping the employee groups into a recovery?

The seniority system is most certainly flawed. But let's say you took your 20% pay reduction and planned to tell your employer to go to hell and quit. But you're a smart fellow and know that it's always better to be looking for another job while you still have a job. But in your search, you find that all the other insurance companies are only willing to pay you a salary that is still 20% less than what you had been making (but their managment teams got some fantastic "retention bonuses"). Would you still quit? Because if you won't because you're fully vested in your current 401K and there's just nothing that can pay any more out there, then your employers "golden handcuffs" are just as shiny as any union handcuffs. Would you still stay...and more importantly, would you still have that "gung ho" attitude that keeps your company ahead of the game? Or would your morale start to suffer when you had to put off that vacation while the CEO of your company jetted off to Palm Springs on the company Learjet to play some golf?

You know though, someone with your thoughts has already been in the airline industry...a guy named "Frank"

 

[MCI transplant]

<_< Somehow this all sounds like something I've heard before! But one way to look at it is: How do they work it at Southwest! It seems they're always comparing every other aspect of our business with them! How do'es our top management compensation compare with their's????

 

[KCFlyer]

<_< Somehow this all sounds like something I've heard before! But one way to look at it is: How do they work it at Southwest! It seems they're always comparing every other aspect of our business with them! How do'es our top management compensation compare with their's????

CEO, COO, and CFO of Southwest all make more, both in salary and options, than AMR CEO. CEO of AMR makes about $540,000 per year in salary. CEO of Airtran makes about $900,000 per year. But those airlines are profitable. Exec's of SWA make about $600,000 in salary.

 

[AirwAr]

<_< Somehow this all sounds like something I've heard before! But one way to look at it is: How do they work it at Southwest! It seems they're always comparing every other aspect of our business with them! How do'es our top management compensation compare with their's????

This site may help answer some of your questions. As an FYI, I don't believe Arpey accepted a raise for being promoted to CEO when Carty left, so his 2002 salary as president should be close to correct.

http://www.ecomponline.com

 

[MCI transplant]

Sorry ! But I'm not impressed with their plite! I've seen their decision to throw away thousands of Dallors , as trash! I've seen their "Political" decision to pull the 737's out of MCI, at an cost of thousands, even though we've produced them on time, or less, with half the people. And produced an excellant product! I've heard of company business cards for maintenance leads, and inspectors! I know! Peanuts! But 36 inch T.V.s in break rooms!! Please!!!! It all adds up!!! You all have had money for so long, you don't have a clue as to how to save it!!! :angry:

 

[tadjr]

But 36 inch T.V.s in break rooms!! Please!!!! It all adds up!!! You all have had money for so long, you don't have a clue as to how to save it!!! :angry:

Does AA buy the tvs for you? We have nice tvs and cable in our break rooms, but the employee fund pays for them all. No company money involved. Just curious.

 

[Winglet]

When Mr. Arpey and the senior executives demonstate the business savy to start making this company successful again, without making slaves out of it's workers, then they should get pay raises.

 

[jimntx]

CEO, COO, and CFO of Southwest all make more, both in salary and options, than AMR CEO. CEO of AMR makes about $540,000 per year in salary. CEO of Airtran makes about $900,000 per year. But those airlines are profitable. Exec's of SWA make about $600,000 in salary.

And, don't forget that this is a RECENT development for the AMR CEO to make less than the money-making airlines' CEOs. Carty made about 3 times what the CEO of Southwest made.

And, I don't buy the "golden handcuffs" argument either. Life is way too short to work at a job where you are miserable. I'm living, breathing proof of that. I spent over 20 years in the computer business--first as an analyst and at the end as an independent consultant. I made wonderful money--in 1999, the last full year I consulted, I worked a total of about 6 months and paid income tax on almost $90,000--but I was more and more dissatisfied. I had always done the work for the money; it was never my passion (to put it in Oprah-speak). In July, 2000, I walked away from the business and started training as a flight attendant with American. Even though I'm furloughed now, it was still the best decision I ever made other than asking my wife to marry me.

All the years I was in the computer business I struggled with high blood pressure--even with medication, exercise, and eating a VERY boring diet. The best I could muster was 130/90. Last February, I was in for my annual checkup. Now even post-9/11, and the threat of bankruptcy hanging over us at the time, my BP was 108/65 without medication! If you are doing what you are supposed to be doing, everything works out.

If the level of compensation is the only thing keeping someone in a job, they need to leave. As KCFlyer said, we need executives who are PASSIONATE about the airline business. Passionate about the paycheck won't cut it.

Oh, and even with the concessions and crappy work rules, and the fact that if I'm recalled it will probably be to one of the "less desirable" bases, I'll go in a second. I LOVED being a flight attendant, and I was good at it.

 

[JS]

The seniority system is most certainly flawed. But let's say you took your 20% pay reduction and planned to tell your employer to go to hell and quit. But you're a smart fellow and know that it's always better to be looking for another job while you still have a job. But in your search, you find that all the other insurance companies are only willing to pay you a salary that is still 20% less than what you had been making (but their managment teams got some fantastic "retention bonuses"). Would you still quit? Because if you won't because you're fully vested in your current 401K and there's just nothing that can pay any more out there, then your employers "golden handcuffs" are just as shiny as any union handcuffs. Would you still stay...and more importantly, would you still have that "gung ho" attitude that keeps your company ahead of the game? Or would your morale start to suffer when you had to put off that vacation while the CEO of your company jetted off to Palm Springs on the company Learjet to play some golf?

I'm not worried about that happening anytime soon. I have threatened to quit, and I got my way. I even sent out resumes just to prove I was going to walk.

Unmotivated or underperforming employees (skilled or not) don't have that kind of bargaining power. When the boss slashes pay by 20% and other jobs either aren't there or pay the same reduced rate or worse, there's not much one can do, is there?

Your description of what you would do as AMR CEO was awfully fuzzy in details. I'm sorry, but your application is hereby rejected!

 

[KCFlyer]

Your description of what you would do as AMR CEO was awfully fuzzy in details. I'm sorry, but your application is hereby rejected!

Let me clear it up then -

First, I'd approach the management team and inform them that we were on a mission. They would be told that they were now on the same team as the rank and file union members. They would be told that raises, bonuses, options, and every other perk was on hold until such time as the airline turned around. They would be told that when the airline was once again profitable, they would be rewarded for their efforts. They would then be given the opportunity to resign right then and there if they didn't think that they had what it took to turn the company around.

Second, I'd approach labor and tell them pretty much the same thing I told managment. I'd spell out what they will get when the airline turns around. I'd put it in writing for them. I'd let them know that without them, we fail. I won't say "team" because that's one of the most overused terms in MBA land. Teams mean nothing if it's just a bunch of talk. I'll take steps to show them that management intends to work with them rather than against them. And I'll listen to ideas from them for cost savings. Yep, you can't run a company on employee suggestions alone. But what you CAN do is consider them, and if you don't implement them, you let them know WHY you can't do it. When labor realizes that you really are taking them seriously, then you've won half the battle.

Next, I'd implement value pricing accross the board. I'd redesign the airline to be the first choice of the business passenger and a very attractive choice to the leisure traveller. I'd value price both cabins to insure that the folks sitting in first class actually paid to sit there. I'd drop most restrictions and eliminate change fees. I'd market the hell out of that to the business community. I'd market the hell out of that to Joe and Sue Leisure. I'd drop participation in Priceline and Hotwire. I'd give the public the opportunity to pay just a little more for advance fares, and a lot less for unrestricted fares. I'd gamble that when the other airlines try to steal that valuable "21 day advance purchase highly restricted money losing fare" passenger from me, that they'll bleed cash when their "high yield" business flyer demands that they match my last minute fares. Business travel departments would look at my "no change fee" policy and pretty much order all business to go to this airline. Once we got back to profitablity, I'd focus on ways to keep costs low, but offer improved services to the customer.

Then I'd approach the lenders and I'd explain how I am taking steps to increase revenues, decrease costs and achieve a postive relationship with my labor groups, which will result in an improved morale and improved services to the customer, and generate new loyalty among the passengers.

That's pretty much what I'd do. Oh, I forgot to tell you...that guy that shared your dislike of the unions was pretty much told he couldn't run any more airlines, so I guess that your application was rejected after reading the first line.

 

[JS]

Oh please, Frank Lorenzo? Let's try something more realistic -- Bob Crandall. He certainly wasn't known as a union-friendly CEO, was he? Yet now we have some of the same "abused" AA union people crying over Bob Crandall's position at Amtrak, wishing for the good old days of Crandall busting their chops. Some people will never be happy!

For some reason, AA labor will never be happy with who is CEO. The only choice for AMR is bust their chops ala Crandall.

Remember what happened with UAL and their labor-friendly choice of Goodwin? He almost put the airline out of business!

As far as the other details on your AMR CEO plan, they look suspiciously like Southwest. As a result of value pricing, are you planning to terminate service to TYR, GGG, TXK, ABI, ILE, etc.? Shrinking airlines are not a good idea, especially if you announce it up front before taking the helm.

Charging a reasonable fare for First Class (subject to availability) is something the airlines have finally figured out. However, they still end up giving away many of the seats. It seems that even with a discount First Class fare that is a several hundred dollar cut from the full fare, most people would rather buy the coach fare and upgrade for free.

In an ideal world, your ideas will work just fine, but in the real world, they won't. All the other airlines, even the "evil" Delta, give complimentary upgrades to frequent flyers. If you boot out all of your AAdvantage members from their cushy First Class seats, they will run, not walk, to Delta, Continental, United, etc.

Same problem with across-the-board value pricing coach fares -- the only advantage to raising your advance purchase fare is that you'll save a little on fuel and you'll never have to ask for volunteers on an overbooked flight. People don't like to pay more money for the same product. Weird!

Why did Crandall's value pricing fail? Because Crandall was hoping the other airlines would collude with him. Turns out that meanie Northwest chose to compete.