American’s Rough Rider : Despite Pockets of Turbulence, Crandall Has Held AMR on Course
As fare wars and huge losses engulfed the U.S. airline industry in mid-1992, a Senate subcommittee met to probe allegations that American Airlines was using predatory pricing to shoot down weaker carriers. Their witness that day: Robert L. Crandall, American’s combative chairman.
As usual, Crandall took the offensive. American’s rivals were struggling because they had lousy managements or risky balance sheets, he said, not because American was pricing its seats below cost in violation of antitrust laws.
And there’s no room for weakness, he added, because “this business is intensely, vigorously, bitterly, savagely competitive.”
Many say the same about Crandall, which is a key reason why he has been running a major U.S. airline far longer--15 years--than anyone else since the industry was deregulated in 1978.
Crandall, who turns 60 on Wednesday, also is perhaps the industry’s chief innovator and strategist. With sharp elbows and instincts, he has steered American through many of the fare wars, recessions and other financial calamities that ruined so many other carriers.
American, the main part of AMR Corp., a holding company that Crandall also heads, has quadrupled in size and become one of the world’s premier carriers since he took the controls in 1980. Among U.S. airlines, only United is bigger.
But Crandall’s reign also has been buffeted by major turbulence. He has made enemies not only among rival airlines, but also among many of American’s workers because of bitter labor disputes that cost American dearly.
American is now profitable again following huge losses in the early 1990s, but some who know Crandall say he is loath to admit any business errors.
“I don’t hear Bob readily admit to a lot of mistakes,” said one industry official who asked not to be identified. “He’s very quick to defend why he did what he did.”
To be sure, Crandall remains a legendary figure in his industry. “Crandall is the best manager in the industry,” says Raymond Neidl, an analyst with the investment firm Furman Selz Inc. in New York.
He built what in many ways is “a beautiful machine,” said author Thomas Petzinger Jr., describing American in “Hard Landing,” his new book about the airline industry.
But at American’s headquarters at the Dallas/Ft. Worth International Airport, even Crandall’s loyal followers look at him “with pride and terror” because of his demanding nature, said Neidl, who was a finance researcher at American before becoming a Wall Street analyst. “You knew you were going to be torn apart if you didn’t do it timely and right.”
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Brash, excitable and frequently profane, Crandall is certainly one of the most colorful executives in an otherwise bland brotherhood of airline managers.
He is a lean, intense man who both smokes and exercises daily at 5 a.m. His square jaw, protruding teeth and slicked-back, razor-straight hair, together with his brazen personality and steely gaze, prompted his critics long ago to call him “Fang”--though usually behind his back.
But after weathering the industry’s in-fighting and mopping up American’s own red ink in recent years, even Crandall has lost some of his edge. Said one associate: “You don’t see the mad-as-hell-I’m-going-to-bite-his-head-off Bob as much as you did five years ago.”
And Crandall declined to be interviewed for this article, saying through a spokesman that he prefers to “focus on the company and not on himself.”
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Crandall is a tenacious survivor in an industry where executive turnover is, well, sky high.
While he’s been managing American, rivals such as Donald Burr (People Express), Richard Ferris (United) and Frank Borman (Eastern) emerged as rivals, only to bail out of the industry after their airlines suffered huge losses and were sold or went belly up.
The only other executive with a tenure approaching Crandall’s is Herb Kelleher, another maverick manager who’s been running the smaller but prosperous Southwest Airlines since the early 1970s.
Crandall commands an empire of more than 600 jets moving an average 220,000 people and 304,000 pieces of luggage daily between 175 cities, including 70 in Europe, Central and South America, the Caribbean, the Middle East and Asia.
Many of Crandall’s innovations at American are now industry staples: The frequent-flier program, super-saver fares, complex computer reservation systems, and “hub-and-spoke” route networks that feed flights to central hub cities for connections elsewhere.
Crandall also pioneered the use of an airline’s computer system--in American’s case it’s called Sabre--to juggle how many discount seats could be sold in advance to keep each plane as full as possible, a now-common ploy called “yield management.”
To limit labor costs, Crandall also invented the “B-scale” wage system in 1983, in which new hires were paid substantially less than existing workers doing identical jobs. That gave Crandall the financial cushion to launch American’s huge expansion in the 1980s, but it also opened a rift between Crandall and American’s employees because it meant that flight attendants, for example, worked side by side at vastly different pay.
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Under his watch, American also has logged more than 10 million consecutive flights without a fatal accident (excluding its American Eagle commuter affiliate). No other major U.S. carrier comes closing to matching that record, and it is a tribute largely to Crandall’s emphasis on training and maintenance, according to the International Airline Passengers Assn. in Dallas.
Crandall also is noted for analyzing every nuance of an airline’s costs; he once saved $40,000 a year by removing black olives from American’s in-flight meals. He also became renowned for his Monday meetings, during which his managers would be grilled for hours on every aspect of American and the industry. (The meetings are now shorter and held on Tuesdays.)
AMR’s revenue last year was $16 billion, four times its level of 1981. AMR’s stock, trading recently at $76 a share, has nearly quintupled in 15 years, outpacing the Standard & Poor’s 500 composite stock index.
Yet for all of Crandall’s accomplishments, he has also stumbled.
AMR’s earnings have been ragged over the years, and its 1994 profit of $228 million was less than the company had earned a decade earlier on 66% less revenue. Earnings in the first nine months of 1995 jumped 28% from the comparable year-earlier period, but all of the airlines are performing better this year.
Crandall once told an interviewer that an “acceptable” return on every $1 of his stockholders’ investment was 15 cents, but AMR hasn’t achieved that return on equity since 1988.
Crandall’s paycheck reflects AMR’s struggle. His base salary of $600,000 a year hasn’t gone up for five years--at his request. “He didn’t think [a raise] would send the right signal to the work force,” an American executive said.
Bonuses, stock options and other payments lifted Crandall’s total compensation above $900,000 in 1994, but that still paled next to the $2.9-million average compensation package earned by all U.S. chief executives last year, according to a Business Week survey.
Moreover, when the airline industry went into its nose-dive in the early 1990s, neither Crandall’s energy nor his strategic insights could save his company from sliding into the red as well. AMR lost a combined $850 million from 1990 through 1993 (excluding one-time gains and charges) before turning a profit again in 1994.
“No one is perfect, and the record is what it is,” said Maurice Segall, one of AMR’s outside directors and a senior lecturer at the Massachusetts Institute of Technology’s Sloan School of Management. “This is a tough industry for anybody to make money in.”
Several events torpedoed Crandall’s ability to keep AMR profitable in that period, said Michael Lowry, president of Aviation Forecasting & Economics, a research firm in Lake Oswego, Ore.
The airlines were unexpectedly clobbered by a recession and the Persian Gulf War, which sent passenger traffic tumbling. Labor contracts that American signed between 1987 and 1990, which included pay hikes that might have been neutralized had the industry kept growing, suddenly became an onerous cost.
“It’s harsh to require Bob Crandall to have recognized the oncoming recession and the falloff in passenger travel that occurred,” Lowry said. “The airlines were buried.”
American also fought fare wars with other airlines to protect its market share, although in 1992, Crandall came up with another radical plan to halt the relentless and complex discounting. Called “value pricing,” it offered just four fares on any route, and it looked to be another Crandall innovation that would be adopted industrywide.
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Not this time. Northwest Airlines and others quickly launched a new round of 50% fare cuts. An angry Crandall, who got word of the discounts on his treadmill at home, lashed back by matching the discounts across American’s huge system. Another fare battle was on, and “value pricing” was shelved.
All of which left American with mounting losses and Crandall with mounting frustration. For a while, it seemed as though the industry’s complexities had finally overwhelmed even him.
Crandall’s mood at the time “went beyond anger,” one American manager said. “He reached this totally exasperated phase that lasted for months. He was genuinely depressed about what our fate was if we couldn’t get a grip on the problem.”
Crandall finally acted by shrinking the airline to slash costs. He closed hubs in San Jose, and Raleigh-Durham, N.C., and stopped service to 25 cities. About 5,000 jobs were eliminated, and 90 jets were grounded.
American’s debt continued to rise, however, owing to the carrier’s earlier growth. The combination of its long-term debt and equipment leases now stands at about $7 billion, nearly triple its level of only six years ago.
AMR’s debt has cost the company more than $600 million in interest expense a year for the past three years, and is a big reason why Crandall remains under pressure to keep cutting costs.
American’s labor costs account for a bigger share of its total spending, 35%, than any other major carrier except struggling USAir, according to the research firm Avitas Inc. But the labor-cost problem has pitted Crandall against one of his most difficult foes: American’s unions.
Their sparring goes back to the B-scale wages. Though it gave Crandall the savings to grow in the 1980s, it also “had a lasting and somewhat devastating effect on employee morale,” said Denise Hedges, president of the Assn. of Professional Flight Attendants, which represents American’s 19,700 flight attendants.
Later contracts diluted the B-scales’ impact, but worker morale worsened anyway in 1993, when a contract dispute resulted in the flight attendants going on strike for five days during the Thanksgiving Day weekend.
The strike, which ended after President Clinton asked both sides to submit to arbitration, cost the airline $190 million and tarnished the reputation of Crandall, whom observers said badly underestimated the attendants’ willingness to walk.
The dispute was finally settled in October when a federal arbitration panel awarded American’s attendants an average 17% pay boost over six years--a moderate annual raise but hardly the lower costs Crandall had sought.
Hedges said Crandall’s hard-edge style was partly responsible for the walkout: “Until the strike, he wasn’t interested in being cooperative. AMR was blindsided by our unity.”
But AMR board member Segall defended Crandall: “God knows how hard he’s tried to get the bulk of our employees to understand that we need more productivity. We are a high-cost airline.”
Segall conceded, though, that “if Bob has an Achilles’ heel, it’s that when something is self-evident to him, he thinks it should be self-evident to everyone.”
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Now American is in contract talks with its most powerful workers’ group, its pilots, with Crandall again pressing for work-rule concessions and cost savings.
Some analysts said American’s labor relations should improve because Crandall last spring named Donald J. Carty to be American Airlines’ president, and Carty will deal more directly with the unions. Carty is more subdued and approachable than Crandall, whom Carty is likely to succeed as chief executive some day.
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In announcing Carty’s promotion, Crandall himself alluded to the notion that American’s unions would prefer dealing with a fresh face. “I don’t know why, because I’m a very pleasant fellow,” Crandall said. But he added that if the union wants someone else to talk to, “they now have somebody.”
Crandall doesn’t plan to retire for several years, however, and there’s a good chance he’ll dramatically change commercial aviation yet again. When United Airlines recently mulled buying USAir, Crandall made it clear he was ready with a rival bid--signaling he would not stand by if merger mania again sweeps the industry.
Which should surprise no one, given how Crandall has survived this long. Gregg Overman, spokesman for the Allied Pilots Assn., which represents American’s 9,000 pilots, summed it up this way:
“Look, it’s a tough business and you need somebody who’s pretty hard-headed at the helm. We definitely have cause to admire the guy, even if we also have cause to really disagree with him at times. He’s not the devil incarnate, and he’s not a saint, either.”
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CRANDALL’S TRACK RECORD
AMR Corp., the parent of American Airlines, has grown steadily under Robert L. Crandall’s leadership. But its earnings have been uneven, and its debt has swelled faster than its investors’ equity.
Net income / loss)
in millions
Revenue
in billions
Long-term debt
in billions
Stockholders’ equity
in billions
* Nine months ended Sept. 30
Source: AMR Corp.
ROBERT L. CRANDALL
Education: Bachelor of science degree, University of Rhode Island, 1957; MBA, University of Pennsylvania’s Wharton School of Business, 1960.
Career: Worked at Eastman Kodak, Hallmark Cards, Trans World Airlines and Bloomingdale’s before becoming chief financial officer at American Airlines in 1973. Became American’s president in 1980 and chairman and chief executive in 1985.
Personal: Married, three grown children. Lives in Dallas.
Style: Tough, vocal, aggressive. Tries to foster “competitive anger” among employees.
