What Next for the Airlines?

What Next for the Airlines?


By Robert Crandall (former CEo of AA)
Thursday, August 15, 2002; Page A25

The bankruptcy of US Airways underscores the depth of the crisis in the country's airline industry. The recession, the immediate and ongoing effects of the Sept. 11 attacks, new technologies, intense competition from low-fare carriers, inflexible operating procedures and stubbornly high labor costs all have contributed to circumstances that are severely challenging airline managements. The crisis is also heightening a long-felt uneasiness among policymakers in Washington, and in state and city governments, about how the industry's response to its problems will affect the availability and cost of airline service throughout the country.
Robert L. Crandall
Former CEO and Chairman of American Airlines
 

The Wall Street Journal has called the former CEO and Chairman of American Airlines, Robert Crandall, “the man who changed the way the world flies.” During his 25-year tenure at American Airlines, Crandall made major contributions which revolutionized the travel industry.

In 1975, Crandall created Super Saver fares, which introduced the concept of deep discounts for advance-purchase tickets. Subsequently, he led the development of the industry’s first yield management system, a revenue-maximizing approach now used throughout the airline industry. In 1980, he created AAdvantage, the industry’s first frequent flyer program, and in 1983, launched an expansion program which more than tripled American’s size and transformed it into one of the world’s leading international airlines.

Crandall currently serves on the board of directors for several finance and technology companies.

In the past, bankruptcies have been a destabilizing influence in the industry. Bankrupt carriers are able to use the statute to lower their costs in many ways; additionally, they have often chosen to offer lower-than-normal fares to retain customers. While it remains to be seen what course US Airways will follow, its new flexibility can only intensify the pressure every major airline is feeling.

On the other hand, the US Airways bankruptcy could prove to be the catalytic event many industry observers have believed necessary to drive the industry toward dramatic change. During the past several years, the public has made its preference for lower fares more than clear, and in response the country's major carriers have been aggressively reformatting their business models. This week's announcement by American, and speculation about impending changes by other carriers, reflects a broad understanding that new approaches are needed.

Because large labor cost disadvantages lie at the heart of the difficulties the traditional U. S. carriers face, US Airways will no doubt do all it can to use the flexibility the bankruptcy statutes offer to reduce its historical labor cost disadvantage. Reducing its costs sufficiently to become competitive with such low-cost carriers as Southwest and JetBlue is important for US Airways, because each of those carriers has encroached heavily on important US Airways markets.

As the US Airways reorganization proceeds, other carriers will find themselves confronted with a new, more effective competitor. Faced by that reality and unwilling to contemplate a noncompetitive future, managements and unions may find new opportunities to work out the effective cost reduction formulas that have thus far eluded them.

As the story unfolds, the federal government should avoid actions that might prevent market forces from working. Specifically, the Air Transportation Stabilization Board should reject US Airways' bid for a loan guarantee. It is clear that the bankruptcy laws and private capital markets will provide a reorganization opportunity for US Airways if the company and its unions can agree on contracts that will allow it to operate at competitive costs.

Congress should rethink the aviation security mandate it laid down in last fall. It is now clear that the planned changes cannot be implemented effectively and efficiently by year's end. Attempting to do so would waste a stupendous amount of money and discourage travelers from returning to the skies, thus slowing the recovery of both the airline industry and the economy.

The administration and Congress should give careful thought to the question of how an industry that is forbidden to consolidate but whose failures are consistently resuscitated by the bankruptcy laws can ever achieve success. In most industries, financial results equivalent to those produced by the airline industry would have long since resulted in liquidations and consolidations.

The US Airways bankruptcy is a catastrophe for those who invested in the company. But failure is always a possibility in a free market, and the bankruptcy laws, though badly flawed, are society's best judgment about the most appropriate remedy. Given the importance of the nation's airline industry, we must all hope that the marketplace will guide the airlines to solutions consistent with the continued availability of convenient, competitively priced transportation services for cities across America. As the industry works out its problems, the government should stand back and let the market do its job -- while avoiding actions that will make things worse.

The writer is former CEO of American Airlines.

http://www.washingtonpost.com/wp-dyn/articles/A19834-2002Aug14.html


 

The Response by a Father of an Aircrash Victim

Mark Fetherolf's response to the above article:

August 16, 2002


Robert Crandall, former CEO of American Airlines, argues that the fate of beleaguered airlines should be determined by market forces (Opinion, August 15, "What next for the Airlines?"). He asserts that it is in the interest of "convenient, competitively priced transportation services for cities across America" for the government to reject US Airways' bid for a loan guarantee, relax security mandates and lift restrictions that limit the consolidation of carriers. It is clear that the proposed actions would benefit large air carriers (other than US Airways), but the benefit to consumers is questionable. Mr. Crandall states that, without loan guarantees, US Airways will "use the flexibility the bankruptcy statutes offer to reduce its historical labor cost disadvantage." In other words, if jobs are threatened, US Airways can play hardball in negotiating with its labor unions. Other carriers' leverage will increase as the result of the competitive pressure of a leaner, meaner US ! Airways. But consumers should be aware of the nature of the concessions that the air transport industry would negotiate. Relaxed work rules will result in longer hours, less downtime and increased pressure and fatigue for flight and maintenance crews. Essential functions will be relegated to lowest-bidder subcontractors. The tragic crashes of both Valujet and Alaska Air were the direct result of precisely these practices.

In the years since our sixteen year old daughter Tara was killed in the crash of Swissair 111, my wife and I have learned a lot about the business of air transportation - and it's not good. Mr. Crandall is an veteran of and a spokesperson for the big air business, the interest of which is profit, pure and simple. This is not to say that there is anything wrong with businesses that deliver value to their customers making money. But it is pure foolishness for consumers to believe that airlines will act in a manner that is contrary to their own profit motive when it comes to safety and security. Perhaps most disturbing is the manner in which industry advocates like Mr. Crandall couch their arguments for reductions in regulatory safety and security mandates in terms of the public interest. This from an industry that spent over sixty million dollars on lobbying during the period from 1997 to 2000!

In 1996, the White House Commission on Aviation Safety and Security (chaired by Al Gore) recommended, among other things, bag matching and criminal background checks for airport security screeners. The FAA missed a congressionally mandated deadline of May 31, 2002 for release of rules implementing the commissions recommendations. United Airlines objected to proposed requirements that security screening trainers have 40 hours actual work experience and that trainees pass a test on the basis that it would create an "unnecessary administrative burden." Other carriers and industry groups registered similar objections.

Under deregulation, the FAA does retain regulatory authority over safety, which is administered through a certification process for aircraft and related equipment. But, in practice, the actual certification is performed by FAA designees who are often on the payroll of the regulated manufacturers. The FAA's direct involvement is limited to the specification of the process. After the crash of Swissair 111, the FAA conducted an investigation into the certification of the in-flight entertainment system installed in Swissair's MD11 fleet. Certification of the equipment was revoked and the company that performed the certification was stripped of its status as an FAA designee - yet the FAA's final report found that "no regulations were violated."

While the industry decries regulation as contrary to the free market forces, it is absurd to believe that the public interest in safety and security are somehow special - an exception wherein hiring the fox to guard the henhouse will be just fine. How many human lives will the public willingly sacrifice for lower fares, or for the welfare of the airlines? I'm darn sure the answer is none! For air carriers in the relentless pursuit of the bottom line, I'm not sure at all.

Mark Fetherolf

 
Robert Crandall

and back when there was

SOMETHING SPECIAL IN THE AIR?

 

May 20, 1998

The NewsHour with Jim Lehrer Transcript

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.


 

NEWSHOUR LINKS:


May 11, 1998
The FAA orders the inspection of Boeing 737s.


March 19, 1998
How Continental Airlines manages a huge turnaround in profitability.


February 4, 1998
Congress renames Washington National Airport after Ronald Reagan.


December 30, 1997
How can passengers and pilots cope with turbulence?


December 11, 1997
The National Transportation Safety Board reviews the danger of aging aircrafts.


Browse the NewsHour's coverage of transportation.


OUTSIDE LINKS:


American Airlines.


Robert Crandall addresses the National Press Club.


 

Graphic: Profits 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.

American Airlines Planes 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.

Use of Computers 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 and Robert Crandall PAUL SOLMAN: Robert Crandall, welcome.

ROBERT CRANDALL, CEO, American Airlines: Thank you very much. Glad to be here.

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 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 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 does.

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 buy it.

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 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 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 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 benefits.

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 PAUL SOLMAN: Superbowl-during the Superbowl you called a meeting once, is that true?

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?

Robert CrandallROBERT 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.

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