Compensation Blues Costing American Air Executives

[KCFlyer]

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.

Crandall did play hardball with the unions, but he didn't set out in his "mission statement" (as you did) that the goal was to rid the property of unions.

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

Big difference - Goodwin didn't lay it on the line with managment when times got tough. I believe that the what has to be reached is a situation where labor and management have equal amounts of skin in the game. It some members of the management team don't like that, then I want them off the property.

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.

Who said anything about shrinking the airline? But when your costs are 10 cents per mile and you charge fares on some routes that are 5 cents a mile, is it really necessary to charge somebody going from Tyler Texas to Abilene over a buck amile? I didn't realize that Tyler Texas traffic was what was keeping AA from suffering even more losses. I wonder though - if I priced an unrestriced MCI-DFW round trip for $250, I wonder how much more business I could stimulate between the two cities...A similar fare from MCI-MDW seems to justify 15 daily flights between the cities - betcha Dallas would become a LOT more attractive to the business community if I did that. Heck...they might even continue on to Tyler.

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.

And let's see what Delta's response would be to my suggestion of value pricing...Let's say I sell 90% of my first class seats in advance. Delta sells 60% of their first class seats in advance, so they offer an upgrade for those paying full coach to fill the cabin. Will they keep their current price structure, meaning that my flights on competing routes would have an unrestricted coach fare of several hundred dollars less than they do? Could you tell me what company would be willing to pay several hundred dollars more for the same thing so that their employees could stand by for a first class upgrade? Or would Delta have to meet my prices - and lose money because they couldn't recoup the losses of their bogus 21 day advance heavily restricted money losing fares?

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.

So, will the other airlines increase the size of their first class cabins in response so that they can accomodate the increased numbers of those folks who want to upgrade? Or will they get a bunch of people who flock to them, only to find that they STILL can't get a freeloader upgrade on that airline either.

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!

Really...Offer them a menu of only 5 fares, with no penalties and few restrictions, and people (corporate travel departments specifically) will opt for the lower fare that is loaded with penalties and restrictions? Or will the slightly higher fare, with no penalty other than paying the difference in airfare, that doesn't require a Saturday stay provide them with much more value? You're tripping over yourself to grab that ever important "leisure" market that thinks $200 to fly a round trip transcon is a ripoff. But that's great -because while you do that, I will be grabbing the "high yield" business passengers who can't afford to fly your airline. Either that, or you'll have to match my highest priced tickets, which would make your "high yield" traffic bring in yields that flat out won't cover you low yield losses.

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.

A bit of history - value pricing failed because of Crandall's ego. When NWA decided not to play along and geared a promotion to grab the ever important leisure market, rather than give them a middle finger and stick with value pricing, he set out to "teach them a lesson". Had he not let the ego get in the way, IMHO, NWA would have "seen the light" rather quickly.

 

[dogdriver]

It is rather sad to think that all employees - both union and mgmt. - are nothing but mercenaries, with no care for their company other than getting as much money out of it before they or it die.

Gee Orwell, I wonder where they learned that.

 

[JS]

Originally posted by KCFlyer:

Crandall did play hardball with the unions, but he didn't set out in his "mission statement" (as you did) that the goal was to rid the property of unions.

I didn't set out in my mission statement that I wanted to rid the property of unions. That's completely unrealistic. What I said is that I wasn't going to tolerate employees with anti-customer attitudes.

Who said anything about shrinking the airline? But when your costs are 10 cents per mile and you charge fares on some routes that are 5 cents a mile, is it really necessary to charge somebody going from Tyler Texas to Abilene over a buck amile?

Southwest does basically the same thing. Check out BWI-LAX Jan 15-22. Base fare is $240 roundtrip, yet at 8 cents a mile, it supposedly "costs" Southwest $326 for the trip. TUL-DAL full fare is $92, or 39 cents a mile. That's a difference of 7.5 TIMES $ per mile. What a ripoff!

This is where the financial part of being CEO comes into play. There is a huge difference between average cost and marginal cost.

I didn't realize that Tyler Texas traffic was what was keeping AA from suffering even more losses. I wonder though - if I priced an unrestriced MCI-DFW round trip for $250, I wonder how much more business I could stimulate between the two cities...A similar fare from MCI-MDW seems to justify 15 daily flights between the cities - betcha Dallas would become a LOT more attractive to the business community if I did that. Heck...they might even continue on to Tyler.

Obviously you would have more passengers, but the question is -- would your revenue be higher? More importantly, in order to carry those people, assuming you don't buy 777's for the route, where are you going to get DFW gates? Build a satellite terminal like Delta? Those satellite terminals aren't free.

Charging a lower fare to TYR means you would have enough passengers to justify a tag flight from DFW to TYR, but now you've saddled the DFW-TYR route with mainline labor costs rather than Eagle. Not good for profit!

And let's see what Delta's response would be to my suggestion of value pricing...Let's say I sell 90% of my first class seats in advance. Delta sells 60% of their first class seats in advance, so they offer an upgrade for those paying full coach to fill the cabin. Will they keep their current price structure, meaning that my flights on competing routes would have an unrestricted coach fare of several hundred dollars less than they do? Could you tell me what company would be willing to pay several hundred dollars more for the same thing so that their employees could stand by for a first class upgrade? Or would Delta have to meet my prices - and lose money because they couldn't recoup the losses of their bogus 21 day advance heavily restricted money losing fares?

Of course Delta would match. They match AirTran's fares. The question is -- who has more money to survive a protracted and huge fare war (seeing as how AA is much larger than AirTran) -- AA or Delta? My money's on Delta. Not only are they better off financially (though not by much), but more imporantly, if Delta is charging a lower advanced purchase fare than AA, Delta will be selling tickets to those cheapie leisure travelers while AA will be flying around with empty seats. AA would need billions of dollars in extra cash to beat Delta with this kind of setup.

So, will the other airlines increase the size of their first class cabins in response so that they can accomodate the increased numbers of those folks who want to upgrade? Or will they get a bunch of people who flock to them, only to find that they STILL can't get a freeloader upgrade on that airline either.

It depends on exactly what the discounted First Class fare is. In most markets, it's at least double the coach fare, which is OK as a First Class seat takes up about double the space of a coach seat. In order to sell 90% of your First Class seats in advance, you will have to charge a fare that is only slightly higher than coach. People are just too cheap to pay double the fare for double the space.

Really...Offer them a menu of only 5 fares, with no penalties and few restrictions, and people (corporate travel departments specifically) will opt for the lower fare that is loaded with penalties and restrictions? ...

Again, it depends on the fare differential. If the difference is small, many people will pay more, if you can solve the problem of auto-pricing software ignoring higher fares when the passenger didn't ask for an unrestricted ticket. However, that small difference will cost you, because you will have to set aside additional inventory and cash for people who make changes to their tickets or refunds, respectively.

 

[KCFlyer]

Yes JS isn't it amazing that SWA does that. Isn't it also amazing that the full fare refundable price is just $618. Compare that to the "strategy" you propose using the refundable fare on AA between MCI and DFW - $882.50, or .89 cents a mile. Imagine how many more MD80's they could fill to Dallas for .39 cents a mile. Imagine how many first class seats they could sell at .41 cents a mile. Sorry - no room for upgrades - we're full.

 

[LD max]

A friend of mine was an intern at SWA. While there, he met Herb Kelleher. he asked Herb "What exactly do you to make customers happy so that your business thrives?" Mr. Kelleher paused and said " ____ the customers!...I take care of my employees. They take of the customers!"
Pretty telling statement.

This company is full of Officers (management) and enlisted (line employees). There is no "First Sergeant". No one at the top wants to listen to those at the bottom. It's the same as trying to run a war from Washington D.C.

 

[JS]

KCFlyer, there really aren't that many people who pay full coach fare and sit in coach. In order to make a fair comparison, you need to compare high AA coach fares that aren't upgraded. That is difficult information to obtain, which AA is probably not going to share with us. Of course, if you're CEO, then the data is all yours.

When Southwest starts selling tickets between IYK and BGR for $299 one way walkup, even if it's the last seat on the plane, then value pricing is proven to be feasible. Until then, I remain unconvinced that across-the-board value pricing is possible. It will "work" only on competitive routes. That is, if Southwest or AirTran or JetBlue charges $X, then AA should charge $X. No need to cannibalize yourself on the other 95% of the city pairs that aren't served by discount competition.

 

[KCFlyer]

KCFlyer, there really aren't that many people who pay full coach fare and sit in coach. In order to make a fair comparison, you need to compare high AA coach fares that aren't upgraded. That is difficult information to obtain, which AA is probably not going to share with us. Of course, if you're CEO, then the data is all yours.

When Southwest starts selling tickets between IYK and BGR for $299 one way walkup, even if it's the last seat on the plane, then value pricing is proven to be feasible. Until then, I remain unconvinced that across-the-board value pricing is possible. It will "work" only on competitive routes. That is, if Southwest or AirTran or JetBlue charges $X, then AA should charge $X. No need to cannibalize yourself on the other 95% of the city pairs that aren't served by discount competition.

While you can't be convinced that revenues (profits) can be increased by lowering fares, I remain convinced that if you got rid of every union on the property and implemented your new "company saving" pay scale, then your airline would be closed within a week. Can't run an airline without the people. And wages can only go so low before the employees will look elsewhere for work. Kind of like a "talented" executive. Except that they won't require a high six figure income plus bonus plus country club membership to stay. For most of them, a decent 5 figure income would do the trick. But you will have given them that freedom to leave by liberating them from their union handcuffs.

FWIW - I thought the IYK and BGR were served by the "regional" airline...the one who already has lower costs than the mainline carrier. Why should the folks in Bangor have to pay two bucks a mile when it's costing that carrier that's flying them less than the mainline? Hell...value price the route and you might actually have to have TWO jets serve that market.

 

[JS]

Regional affiliate per-seat mile costs are lower than mainline? Sure about that?

 

[KCFlyer]

Regional affiliate per-seat mile costs are lower than mainline? Sure about that?

Their employees are paid less than mainline - the biggest chunk is labor. Isn't that our goal...to get labor costs down and save the airline? But....even if operating costs are higher for regionals, does that justify $2 a mile to get from Bangor to Erie?

 

[JS]

Per-seat mile operating costs are higher because the planes are small and they fly short distances. There are significant economies of scale (besides labor) involved in operating larger aircraft longer distances, which is precisely why Southwest flies 737's rather than regional jets, does not service small cities (even in their hometown state of Texas, such as TYR, GGG, TXK,...) and does not fly short distances such as SAT-AUS or SAN-LAX.