As CEO of American Airlines, Robert Crandall increased company
profits and changed the face of the entire industry. Last week, he stepped
down as head of the industry giant.
PAUL SOLMAN: A key figure in the airline industry since joining American
Airlines in 1973, Robert Crandall is going out on top. CEO of American
since 1985, the controversial Crandall has grown the company from $6
billion in revenues 12 years ago to $18 billion last year, from losses of
nearly $1 billion as recently as 1992 to profits of almost $1 billion in
1997. More significantly perhaps, he's been a key player in a series of
changes that have arguably revolutionized the industry.
When Crandall was first named president of American in 1980, airline
deregulation had just been introduced by the Carter administration.
American, under Crandall, was worried, pointing to the tendency of
airlines, if unregulated, to compete by cutting price and, thus,
continually wiping out all profits. When deregulation came to pass,
however, American began to innovate. American, like every other carrier,
knew that the way to make money in the airline business is to increase the
percentage of seats occupied on any given flight. That's because it costs
almost nothing to stuff an extra passenger into a plane. Every added fare
is almost pure profit.
Thus, under Crandall's rein at American, innovations like the hub and
spoke system came to the fore. Linking flights from various destinations
to a hub city, you pick up more passengers per flight, can use smaller
aircraft, and, thus, you up the percentage of seats filled on every leg of
the journey. Another Crandall innovation, frequent flier miles to build
brand loyalty. American also pioneered in computer reservation systems in
order to save money, give American an edge over rivals, give American
flexibility in pricing its seats versus the competition. Always worried
about the tendency of airlines to price cut themselves to ruination in the
early 80's American's outspoken boss was tape-recorded-some would say set
up-by the CEO of now defunct Braniff Airlines, who got Crandall to say
that if both airlines raised their prices, both would benefit. He was
censured by the Justice Department for seeming to broach price fixing.
Under Crandall American was a fierce competitor that fought hard to
keep costs down, taking two major union strikes, flight attendants during
Thanksgiving of 1993, pilots in 1997. At age 62, Crandall is now retiring.
We caught up with him at American's Admirals Club on a busy, noisy day
at LaGuardia Airport.
PAUL SOLMAN: Robert Crandall, welcome.
ROBERT CRANDALL, CEO, American Airlines: Thank you very much. Glad to
PAUL SOLMAN: A lot of Americans feel air travel today is uncomfortable,
the seats are too small, there's lots of delays, the food's no good, and
the pricing's arbitrary. Are they wrong?
ROBERT CRANDALL: Yes, I think they're wrong in some respects and
perhaps right in others. u know, the airline business is a big service
business. We try to give people what they want. People have sent us a very
clear signal through a lot of experiments that they would rather have
lower prices than bigger seats. Now, we've tried that. Lots of airlines
have tried that. And the consequence is what the industry tries to do is
deliver the essentials: on time-because the on time record is vastly
better than it has been in years past; safe-safety record's improved
consistently since deregulation, if we all work hard to make it perfect;
and inexpensive, and prices have, in real terms, gone down very
consistently ever since deregulation and are 40 percent less today in then
year dollars than they were when deregulation occurred.
PAUL SOLMAN: So we want smaller seats and lousy food?
ROBERT CRANDALL: No, we want-when given a choice-we would rather have
lower prices than bigger seats.
PAUL SOLMAN: Deregulation-is that the cause of all this-and if it is, why
did you oppose it when the Carter administration was proposing it?
ROBERT CRANDALL: Well, I think it's fair to say that what I said when
deregulation was proposed, I said, look, you got to make a choice; this is
a choice of social values versus economic values. I think you probably
will get economic benefits from deregulation. And, in fact, we have, and I
think those economic benefits have been greater than I thought they would
be. On the other hand, there will be some social offsets. Some employees
will take a hit, and some communities won't get the kind of service they'd
like to have. And that's what you're hearing in Congress today, that we'd
like it better if all cities had about the same level of service, as was
true in the days of regulation. But deregulation has paid big economic
dividends at some social cost.
PAUL SOLMAN: Because the smaller communities can't afford to maintain
major airline service coming in and out of-
ROBERT CRANDALL: Smaller communities don't have enough people to
attract-to attract the service that they would really like to have.
PAUL SOLMAN: A lot of your innovations, as I was reading over them,
seem to be attempts to control, constrain potentially ruinous competition.
Let me just tick off a few: frequent flier programs. One way analysts say
you can look at that is you bribe customers to use your more expensive
airline. Many of them are business passengers-they're the higher-paying
ones-so they'll use American, as opposed to Southwest say or somebody
because they'll build up the frequent flier miles, and it's not their
money anyway, right?
ROBERT CRANDALL: Well, see, I'd interpret it a different way. I'd say what
we've done is we've established differentiation between ourselves and
others. So we give the consumer a choice. You've got this package of
service on this airline, which includes frequent flier miles, and, indeed,
everybody seems to think that's a good idea because you now get frequent
flier miles on every airline. So we weren't trying to dissuade
competition. What we were trying to do is differentiate our product in the
minds of the consumer relative to other people. That's what every business
PAUL SOLMAN: What about the system of multiple pricing made possible, I
guess, by computers, where you could price yourself on almost a day to day
basis against smaller airlines?
ROBERT CRANDALL: Just the way every other product is priced. You want
to buy this watch at the best price? You can't.
PAUL SOLMAN: How much-
ROBERT CRANDALL: You can't, you see, because unless you go to every
store in New York, you don't know what people are selling that watch for.
On the other hand, you can go to any travel agent-indeed, you can go on
the Internet, look at every airline fare, offered by every airline in
every market, anywhere in the world. We have almost perfect pricing. So we
price our product just the way every other producer of goods and services
prices their product based on the value of that product at the time you
PAUL SOLMAN: But, I mean, 1982, you're famous for this conversation
with Howard Putnam, the CEO of Braniff Airlines-and I took down what you
said-I'm not going to quote everything-raise your GD fares 20 percent,
I'll raise mine. The next morning you'll make more money and I will too.
ROBERT CRANDALL: I'm highly famous for that-one of the more embarrassing
things that I did-and I've said that was-that was a foolish thing to do.
PAUL SOLMAN: But the idea behind it is, look, if we all keep cutting
price, we'll keep losing money like we have been for decades
ROBERT CRANDALL: Doesn't make any difference. That's the way the
capitalist system works. The fact of the matter is everybody does keep
cutting prices, and the public has been the beneficiary, and that is why I
said it is-it wasn't clear in the early 1990's that this business, which
is very easy to enter, is very competitive with people who do keep cutting
prices, all to the benefit of the consumer, it isn't clear that that
business could ever be financially successful. Experience has proven that
we can, in fact, compete and, as we get more efficient, we can within the
context of that full, robust competition also profit.
PAUL SOLMAN: And you're surprised by that?
ROBERT CRANDALL: No. I'm not surprised by it. I'm pleased by it.
PAUL SOLMAN: Antitrust in the smaller airlines today, the government is
now saying, the Justice Department is saying that larger airlines like
yours are basically pushing smaller airlines out of contention, out of
business, because you price low in a market they're in until they get out
of the market and then jack the fares back up, so there's a price-at 10
o'clock you know that the smaller airline is running, you've got a 9:50
that's at a discount fare, a 10:30 that's at a discount fare-everything
else is higher, and so they-
ROBERT CRANDALL: This is a very peculiar sort of argument. What the
government is saying is, you know what we're going to do is we're going to
prevent the major airlines from reducing prices and competing. I think the
typical consumer is likely to say when they think about that, say, wait a
minute, are we going to have a government that is going to say that
American Airlines can't cut its prices so that I can fly more cheaply,
that American Airlines isn't going to be allowed to compete with somebody
that comes into its markets and seeks to take its business. I think that
such re-regulation of the business, which is the exact opposite of what
the government decided to do back in 1978, is going to be found
intellectually wanting as people think about it.
PAUL SOLMAN: Re-regulation, you say that's what might happen in this
case. The government moved ahead, but regulation was what you wanted back
20 years ago to begin with, no?
ROBERT CRANDALL: I hear you, but as I told you earlier in this talk, the
fact is that I underestimated the power of the market to produce economic
benefits. Deregulation has produced great economic benefit, and, in fact,
there are some social offsets, but I think re-regulating the business,
which is what the government now is talking about doing, is a bad idea, a
step backwards in time, and a step backwards in terms of consumer
PAUL SOLMAN: You were known in your era as one of the very toughest and
hardest bosses there was, particularly tooth and nail fights with unions,
but not only that. Looking back, would you soften your style at all?
ROBERT CRANDALL: No. And I think-I think the reality is that all that
toughness was more a function of the media representation than of reality.
PAUL SOLMAN: You aren't coming across as terribly mean or tough here.
ROBERT CRANDALL: Well, that's right. And, in fact, if you look at all
of the things that we've done at American, perhaps "the" most outstanding,
most unusual thing we did in the early 1980's, between 1982 and 1992, we
tripled the size of American Airlines, and we tripled the size of American
because of some very unique, very original deals that we did with the
unions in the early 1980's. So all that toughness, I think, is as much a
byproduct of the media's desire to represent me in that way as reality.
PAUL SOLMAN: You're not a tough guy?
ROBERT CRANDALL: I'm tough enough to do what has to be done when it
must be done.
PAUL SOLMAN: Superbowl-during the Superbowl you called a meeting once, is
ROBERT CRANDALL: Well, yes. I think that's right. But the fact is I
think business is more important than Superbowls.
PAUL SOLMAN: You're a tough guy. You're a charming guy. You're a vital
guy, as you made perfectly clear. Why are you quitting?
CRANDALL: Because I've got a long list of other things I want to do. The
reality is I've had a wonderful career at American. And I get up every
day, and I am very intensely involved with airline, and I have fun. On the
other hand, there's a long list of things I've never had time to do
because of that intense involvement with the company. The company is at
the moment in very good shape financially, good shape from a roof point of
view, from a fleet point of view. I think the moment is at hand. There's a
strong successor management team. I'm going to let them run the airline.
I'm going sailing.
PAUL SOLMAN: Robert Crandall, thank you very much.
ROBERT CRANDALL: My pleasure.