Airline CEO's
Novel Strategy:
No Bankruptcy
By MELANIE TROTTMAN
April 17, 2006; Page B1
Gerard Arpey has been slashing costs and grabbing for more revenue ever since he abruptly became chief executive of American Airlines and its AMR Corp. parent three years ago.
He has yanked pillows out of planes, halted some unprofitable flights, and crammed more seats into coach in a quest to restore his company to profitability. He recently shelved a more draconian experiment to make customers pay for soft drinks, but most of his efforts have succeeded in helping boost revenue and lower costs at the world's largest airline. "Yes, I am relentless about change or continuous improvement," he said in an interview last week. "But I don't think I'm mean about it."
Still, by many measures Mr. Arpey is losing ground against leaner competitors who have shaved their debt and cut costs to levels below those at American.
The irony is that he might have an easier time if not for something he played a key role in averting three years ago: a bankruptcy filing.
In April 2003, American's board turned to Mr. Arpey -- then president and chief operating officer -- to rescue disastrous labor negotiations after former CEO Don Carty resigned amid an uproar over hiding executive bonuses. American had been asking union employees to take pay cuts and was within hours of filing bankruptcy when Mr. Arpey stepped in to help finalize the crucial labor deals.
Mr. Arpey, a driven 47-year-old executive, who started at American in 1982 as a financial analyst, said he took action so American could control its own destiny. "Bankruptcy, by definition, really puts the problem in the hands of somebody else," he said. His intent is to "ingrain into the fabric of this company that to be successful we have to work together (with unions) or we will fail ultimately."
Since that labor deal, most of American's other major competitors have filed for bankruptcy, allowing them to extract deeper cuts from labor unions and shed debt by shortchanging creditors, lowering lease rates for aircraft and airport gates, and getting rid of unneeded planes. Some have even dumped costly employee pension obligations onto the federal government.
Now, Mr. Arpey is starting to face the first of these newly streamlined competitors at a time when experts say low costs matter more than ever for success. US Airways Group Inc. emerged from bankruptcy court last fall as part of a merger with America West Airlines, and United's UAL Corp. parent exited bankruptcy earlier this year with an innovative business plan. Executives at Delta Air Lines and Northwest Airlines, the latest two big airlines to enter court, are working to eventually emerge with less financial baggage. American is also facing increasing competition from growing low-cost carriers such as Southwest Airlines and JetBlue Airways.
American now has the distinction of being the only one of the six largest traditional U.S. airlines that has never filed for bankruptcy-court protection. American's CEO, however, complains that bankruptcy filings are allowing rivals an unfair financial advantage.
Consider how American is faring compared to United, an airline that Mr. Arpey calls a "formidable competitor." In its three years in bankruptcy court, United, a slightly smaller airline, was able to reduce its employee wages and benefits by about $2.5 billion annually, compared with American's reduction of about $1.8 billion since Mr. Arpey's appointment. And because of its bankruptcy filing, United saved $650 million a year in payments by terminating its pension plan, while American continues to fund its program to the tune of $310 million last year and $250 million this year.
American is banking that there is an upside to staying out of bankruptcy court: better employee relations. Bankruptcy court wrecked other airlines' labor relations by forcing concessions down workers' throats.
At American, by contrast, managers have worked closely with employees to uncover bloated costs and other inefficiencies, building stronger bonds with unions whose leaders now sit in on monthly meetings with management to review company financials and brainstorm. "If folks are not truly your business partners, they will undermine your strategy," said Mr. Arpey.
Last year, while some other airline CEOs were in the midst of nasty spats with embittered unions, Mr. Arpey was applauded by American's unions for joining them on a pension-reform lobbying trip to Washington D.C. where he slept in the same college dorm rooms they occupied.
"He loves this airline just like the rest of us. He is honest and he is open," said Dennis Burchette, president of Transport Workers Union Local 514, which represents 7,000 mechanics at American's largest maintenance base in Tulsa, Okla. Still, Mr. Burchette estimates that up to 30% of mechanics at his job site remain skeptical about management.
Since Mr. Arpey took the helm three years ago, employee productivity has risen about 20%, expenses per seat-mile excluding fuel have dropped by about the same amount, and the airline has raised its cash reserves substantially to $4.3 billion at the end of last year. Investors have applauded. AMR's share price has risen seven-fold, far more than any other major carrier, during Mr. Arpey's tenure as CEO.
Mr. Arpey plans to keep pushing. "The key when you're in rough water: Don't ever take an oar out of the water," he said. "Always have a destination. Don't ever let the river take you."
To stay focused, he's banned cellphones and BlackBerrys from weekly executive committee meetings that can last into the night. "I lock them all in a room once a week on Tuesday," he said of his executive team. And at any point during the meeting, he might ask a finance executive a marketing question or a marketing executive a technology question. "I'm the first among equals," he said. "When we leave that room, I want everyone paddling in the same direction even if they disagree."
It doesn't stop there. Mr. Arpey also began requiring his executive team to complete individual "scorecards" each month with a fresh list of strategies or tactics from their departments to help the company cut costs. This was his way of refusing to let management make labor unions the scapegoat for the company's problems, he said, and it worked so well he expanded it to include ideas on boosting revenue. One suggestion the company implemented: a recommendation from the in-flight service group that the airline sell advertising on its napkins.
But some analysts worry that American has gathered up much of the low-hanging fruit and will have increasing difficulty competing with airlines with lower costs. Mr. Arpey believes he and his team can keep the airline competitive.
That won't come easily. In addition to the $20 billion in debt American plans to start paying down this year, it faces $600 million in increased non-fuel related costs this year, including higher salaries and benefits, pension expense and airport rent and landing fees. The airline said it has identified a hodgepodge of cost-savings worth $700 million, such as further reducing the time and cost of maintaining certain aircraft. At the same time, American said it has revenue-generating initiatives worth $300 million for this year, such as charging $25 for confirmed standby on flights.
Despite the daunting task, it's not all straight-faced at the airline these days. When Mr. Arpey recently re-hired his former chief financial officer Tom Horton to an expanded position from AT&T Inc., he gave him a playful "to do" list of about seven things. Last on the list: "AMR Unprofitable. Please Fix."
Novel Strategy:
No Bankruptcy
By MELANIE TROTTMAN
April 17, 2006; Page B1
Gerard Arpey has been slashing costs and grabbing for more revenue ever since he abruptly became chief executive of American Airlines and its AMR Corp. parent three years ago.
He has yanked pillows out of planes, halted some unprofitable flights, and crammed more seats into coach in a quest to restore his company to profitability. He recently shelved a more draconian experiment to make customers pay for soft drinks, but most of his efforts have succeeded in helping boost revenue and lower costs at the world's largest airline. "Yes, I am relentless about change or continuous improvement," he said in an interview last week. "But I don't think I'm mean about it."
Still, by many measures Mr. Arpey is losing ground against leaner competitors who have shaved their debt and cut costs to levels below those at American.
The irony is that he might have an easier time if not for something he played a key role in averting three years ago: a bankruptcy filing.
In April 2003, American's board turned to Mr. Arpey -- then president and chief operating officer -- to rescue disastrous labor negotiations after former CEO Don Carty resigned amid an uproar over hiding executive bonuses. American had been asking union employees to take pay cuts and was within hours of filing bankruptcy when Mr. Arpey stepped in to help finalize the crucial labor deals.
Mr. Arpey, a driven 47-year-old executive, who started at American in 1982 as a financial analyst, said he took action so American could control its own destiny. "Bankruptcy, by definition, really puts the problem in the hands of somebody else," he said. His intent is to "ingrain into the fabric of this company that to be successful we have to work together (with unions) or we will fail ultimately."
Since that labor deal, most of American's other major competitors have filed for bankruptcy, allowing them to extract deeper cuts from labor unions and shed debt by shortchanging creditors, lowering lease rates for aircraft and airport gates, and getting rid of unneeded planes. Some have even dumped costly employee pension obligations onto the federal government.
Now, Mr. Arpey is starting to face the first of these newly streamlined competitors at a time when experts say low costs matter more than ever for success. US Airways Group Inc. emerged from bankruptcy court last fall as part of a merger with America West Airlines, and United's UAL Corp. parent exited bankruptcy earlier this year with an innovative business plan. Executives at Delta Air Lines and Northwest Airlines, the latest two big airlines to enter court, are working to eventually emerge with less financial baggage. American is also facing increasing competition from growing low-cost carriers such as Southwest Airlines and JetBlue Airways.
American now has the distinction of being the only one of the six largest traditional U.S. airlines that has never filed for bankruptcy-court protection. American's CEO, however, complains that bankruptcy filings are allowing rivals an unfair financial advantage.
Consider how American is faring compared to United, an airline that Mr. Arpey calls a "formidable competitor." In its three years in bankruptcy court, United, a slightly smaller airline, was able to reduce its employee wages and benefits by about $2.5 billion annually, compared with American's reduction of about $1.8 billion since Mr. Arpey's appointment. And because of its bankruptcy filing, United saved $650 million a year in payments by terminating its pension plan, while American continues to fund its program to the tune of $310 million last year and $250 million this year.
American is banking that there is an upside to staying out of bankruptcy court: better employee relations. Bankruptcy court wrecked other airlines' labor relations by forcing concessions down workers' throats.
At American, by contrast, managers have worked closely with employees to uncover bloated costs and other inefficiencies, building stronger bonds with unions whose leaders now sit in on monthly meetings with management to review company financials and brainstorm. "If folks are not truly your business partners, they will undermine your strategy," said Mr. Arpey.
Last year, while some other airline CEOs were in the midst of nasty spats with embittered unions, Mr. Arpey was applauded by American's unions for joining them on a pension-reform lobbying trip to Washington D.C. where he slept in the same college dorm rooms they occupied.
"He loves this airline just like the rest of us. He is honest and he is open," said Dennis Burchette, president of Transport Workers Union Local 514, which represents 7,000 mechanics at American's largest maintenance base in Tulsa, Okla. Still, Mr. Burchette estimates that up to 30% of mechanics at his job site remain skeptical about management.
Since Mr. Arpey took the helm three years ago, employee productivity has risen about 20%, expenses per seat-mile excluding fuel have dropped by about the same amount, and the airline has raised its cash reserves substantially to $4.3 billion at the end of last year. Investors have applauded. AMR's share price has risen seven-fold, far more than any other major carrier, during Mr. Arpey's tenure as CEO.
Mr. Arpey plans to keep pushing. "The key when you're in rough water: Don't ever take an oar out of the water," he said. "Always have a destination. Don't ever let the river take you."
To stay focused, he's banned cellphones and BlackBerrys from weekly executive committee meetings that can last into the night. "I lock them all in a room once a week on Tuesday," he said of his executive team. And at any point during the meeting, he might ask a finance executive a marketing question or a marketing executive a technology question. "I'm the first among equals," he said. "When we leave that room, I want everyone paddling in the same direction even if they disagree."
It doesn't stop there. Mr. Arpey also began requiring his executive team to complete individual "scorecards" each month with a fresh list of strategies or tactics from their departments to help the company cut costs. This was his way of refusing to let management make labor unions the scapegoat for the company's problems, he said, and it worked so well he expanded it to include ideas on boosting revenue. One suggestion the company implemented: a recommendation from the in-flight service group that the airline sell advertising on its napkins.
But some analysts worry that American has gathered up much of the low-hanging fruit and will have increasing difficulty competing with airlines with lower costs. Mr. Arpey believes he and his team can keep the airline competitive.
That won't come easily. In addition to the $20 billion in debt American plans to start paying down this year, it faces $600 million in increased non-fuel related costs this year, including higher salaries and benefits, pension expense and airport rent and landing fees. The airline said it has identified a hodgepodge of cost-savings worth $700 million, such as further reducing the time and cost of maintaining certain aircraft. At the same time, American said it has revenue-generating initiatives worth $300 million for this year, such as charging $25 for confirmed standby on flights.
Despite the daunting task, it's not all straight-faced at the airline these days. When Mr. Arpey recently re-hired his former chief financial officer Tom Horton to an expanded position from AT&T Inc., he gave him a playful "to do" list of about seven things. Last on the list: "AMR Unprofitable. Please Fix."
