AMERICAN AIRLINES STRIKE ENDS : Strike Could Lead to Chairman’s Grounding
As a consequence of Monday’s dramatic end to the strike at American Airlines, there’s a good chance that Chairman Robert Crandall will be taking early retirement within the next year, pushed out by institutional investors who find his miscalculations counterproductive and his confrontational style out of date.
That’s only an opinion based on Wall Street scuttlebutt, but the combative chief executive of AMR Corp., American’s parent company, may well be losing support among the institutional investors who own 84% of his company. On Monday, those investors lifted AMR’s stock price 37.5 cents a share to $68.625 after Crandall was persuaded by President Clinton to reverse himself and accept binding arbitration in the dispute with the flight attendants union.
At that, Clinton might have done Crandall a favor. In the strike that began Thursday, it was becoming clear that the union had outflanked Crandall, who had no backup at one of the busiest travel periods and whose company was losing $10 million a day. At this point, retreat may well have seemed the logical strategy for Crandall, who probably realizes that the game changed with Clinton’s action.
Presidential intervention is the latest evidence of a return to modified regulation of the airlines, coming after establishment of a national commission to try to achieve a profit-making transportation business but one less confrontational with its labor force and less competitive among companies.
The smaller, no-frills services of Southwest Airlines, Reno Air, Morris Air and others will continue to gain customers. The problem will be to find a solution for the Americans, Uniteds and Deltas, full-service airlines that fly across the country and around the world but have been losing money in a business that clearly has enormous overcapacity. When many passengers can find alternate transportation for Thanksgiving--despite the virtual absence of American, with 20% of the market--you know the business has planes and space to spare.
Crandall twice struggled with the consequences of that overcapacity--in 1992, when he drastically lowered fares thinking competition would fold, and this year, when he tried to solve his competitive problem with Southwest and others by moving against the airline unions, beginning with the flight attendants.
In each case, he ended up frustrated, angry and ultimately defeated: last year, when unprofitable airlines such as Continental and TWA took refuge in Chapter 11 bankruptcy and kept flying, and now, when the strikers found American’s management unprepared with neither replacement personnel nor much of a plan to counter their strike, cleverly limited to 11 days around the busy and emotive Thanksgiving holiday. Crandall could have acted more wisely and productively, say airline experts, but he did not.
To see why and to get a glimmering of what’s ahead in this major transportation business, you have to understand airline economics.
American Airlines, one of the world’s largest and most successful airlines, brought in $14.4 billion in passenger and cargo revenue last year. But it lost money because competition is so very hot in the U.S. market, especially on short-haul routes where companies like Southwest are flying customers at lower fares.
Southwest’s advantage is not lower wages--in fact, it pays wages comparable to American’s--but more efficient use of an airline’s most expensive asset: the airplane itself. Southwest aims to have its planes land and take off within 20 minutes, spending maximum time in the air earning money rather than sitting on the ground.
To achieve economies, Southwest promises you no connections or baggage transfers with other airlines, it feeds you no meals--hands you a bag of peanuts instead. Its longest flight is 500 miles.
It has been expanding, will bring in almost $2 billion in revenue this year and earn roughly $140 million.
American, by contrast, tries to route passengers through its hub airports in Dallas, Miami and other cities and take them on long-haul flights. Its system involves a lot of connections, which means planes sit on the ground for hours at a time. Meals and greater service are offered, more employees are needed. So American has been losing short-haul business to others. Meanwhile, on its specialty--the nationwide and even international routes--American has been battling financially marginal airlines such as Northwest, Continental, USAir--an affiliate of British Airways--and TWA. All that capacity limits the opportunity for profit.
Crandall, 57, has gone at both short- and long-haul competition head-on, like a fullback with his head down. He dramatically expanded capacity in the 1980s, counting on growth in air travel and the failure of weaker competitors to leave American powerful and prosperous atop the business. But travel didn’t grow and competitors didn’t go. American has lost money for three years and will probably lose more this year thanks to the strike.
“He could have done things differently,” suggests airline consultant Robert Mann of Simat Halliesen & Eichner, a New York firm that advises institutional investors. He should have created a second-tier airline for short routes, with no hubs and fewer employees, Mann says.
“Instead, he tried to force his employees to subsidize the way he chooses to do business,” he says.
In fact, the confrontation with employees in a service business highly dependent on cheerful, competent workers may well represent the last desperate act of a disillusioned chief executive.
The issue of airline competition and profitability will increasingly be in the hands of the federal government.
Make no mistake, Clinton’s intervention on behalf of American’s flight attendants--stipulating that all strikers get their jobs back--means the airlines won’t solve their overcapacity problem by survival of the fittest. Instead, there will be some sort of allocation of routes; airline jobs will be preserved, airline fares will be higher.
Crandall, for all his miscalculations, was more entrepreneurial. There are omens aplenty for American business in Crandall’s reversal by a politically motivated Thanksgiving play by the President of the United States.
