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Apr102008

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Some Thoughts for Gerard Arpey

With my mind firmly on Magnolia Lane and the Masters, my mind finds itself drifting from excitement and anticipation to Amon Carter Boulevard. As I do from time to time when I am online, I look to the Dallas Morning News' blog to take the temperature of airline happenings in the Metroplex. And what is going on with AA is no trip down Magnolia Lane. The Masters for me is the culmination of what I call the “Finest 30 Days in Sports Television”. The back nine of the Masters on Sunday provides the fitting bookend to the NCAA Men’s Basketball Tournament Selection Show.

For those of us who relish the tradition of each year’s first major golf tournament, we are familiar with the suggestion that the back nine at Augusta on Sunday is considered the most exciting two and one half hours of golf we will witness. Given the recent happenings at American surrounding the flight cancellations – not from a safety of flight perspective - I am beginning to feel like the company may be playing the final nine holes of the Masters on Thursday. If that were true, then all American could act on under the rules of golf would be to withdraw from this year’s first major. If that’s what the employees want, then the internal noise is equal to the external noise.

American Airlines is not going to withdraw. Or I hope not. But even I have to say it is time for American management to rethink its course strategy after shooting a 40 on the front nine. Tiger did demonstrate that the Masters can be won even after shooting 4 over on the outward nine. Mr. Arpey, I am not trying to put you in the unenviable place of being compared to Tiger, but you are the CEO of the world’s largest airline in terms of traffic and capacity and in some circles that makes you the world’s number one. And just like Tiger has to deal with cameras going off in his backswing, you are going to have to block it out, deal with fuel and an over-zealous FAA and find that will to win.

Mitchell Schnurman of the Ft. Worth Star-Telegram wrote a column this week about the situation at American where he took management and labor to the wood shed in the ongoing saga at American. While Mr. Schnurman and I have not always laughed at each other’s jokes, he does make some good points. My views about the TWU’s action toward Mr. Conley were written two posts ago. But the very idea that transformational change is needed at American, and in the industry can no longer be ignored as the industry’s problems continue to mount. And, if, somehow the foundation issue for your company is how management is compensated then it is time for your Board to consider making changes.

Mr. Arpey, as you make your way to the tenth tee, the bookmakers are starting to bet against you. For the second time in nearly as many days, 24/7 Wall Street mentions AMR as a bankruptcy candidate. Remember it is not about how much money you have made for Wall Street in the past or how many of your decisions and actions have preserved their capital, it is how much money you can make for capital now. With your labor groups, it is not that you have managed your company at a tremendous cost and balance sheet disadvantage because you did not file for bankruptcy; it is because you are deemed to be over-compensated as a result of your Board of Director’s design of AMR’s management compensation system.

I sit on a Board of Directors of a publicly traded company in the airline industry and it gives me a lens into your issues. I know how difficult it is to design a compensation structure that is not only fair and incents the best to stay yet meets today’s rigorous plan design rules. In fact, these rules were put in place to prevent business activities that earned headlines early in this decade. Every plan requires a funding mechanism and yours is stock price from what I can interpret. Other funding mechanisms can be used. But despite what your work groups may think, designing compensation plans today is much more difficult than it might appear.

In theory, stock price is an obvious funding source for a management compensation pool because stock price should be that self correcting mechanism. And that is sound thinking in theory and not always in reality. And that has proven true at AMR. The fault is that stock price reflects expected future earnings and not company performance that has just transpired. Mr. Arpey, your problem is that while you kept your company out of bankruptcy and industry fundamentals started to turn more positive in 2005/2006, your stock price far outperformed the industry. Shame on you for positioning your company that way [and please read this with tongue firmly in cheek].

I want to see this industry change. And change only occurs at the very foundation of how we do business. But, after watching your situation very closely through both good and bad, there is obviously something very wrong at the foundation of American Airlines. I am even more troubled by the public outcry about how this recent inspection has caused dislocations for many. And I am on record and believe fervently that this industry will never knowingly compromise safety. By absorbing tens of millions of dollars of losses for your company to adhere to the Airwothiness Directivenes, I know that you know that. And I will not comment on the unprofessional actions of the APA as I have been down that road way too many times.

What seems to be at the heart of all the bad news that emanates these days stems from AA’s senior management’s inability or unwillingness to communicate with employees and customers. I see you communicating through your actions to Wall Street and what you have done to your balance sheet is nothing short of remarkable with the lack of legal tools available to others. But now it seems that even capital is growing impatient not only with you but with the industry.

I am, and remain, a staunch proponent of variable compensation for both labor and management. This period of transition in our business will determine winners and losers. Whereas no Masters champion has ever shot over 75 on Thursday and been awarded the green jacket on Sunday, there is one champion who did shoot 4 over on the front nine of the first round. I know that there is nothing that can be done to change the management compensation plan design this time around or maybe even the next time. But it is time for you to urge your Board to consider making changes. And make that a priority because you have a lot of people rooting/depending on you.

Just as it hard to imagine a Sunday at the Masters without a Tiger on the prowl; it is just as hard to imagine a US airline industry without American Airlines.

There is still a lot of golf to play. But your course strategy needs to be rethought or you might be watching Saturday and Sunday on TV with the rest of us. And I am sure you do not want that.

Reader Comments (13)

Swelbar, I like your sports analogy. Your piece is well-reasoned and I agree that the airline industry needs an American Airlines that isn't forced into bankruptcy over a labor fight. Arpey seems to know how to run the business side of an airline, but what makes an executive a strong businessman doesn't always lend itself to the psychological aspects of labor negotiation. If labor, especially the pilot's union, could get over the executive comp issue and cease their self-destructive, short-sighted rhetoric, perhaps they could gain a reasonable contract and help position their employer for the future.

04.11.2008 | Unregistered CommenterAnonymous

Thanks for the note. At this point in the cycle I do not know what the APA would even consider a reasonable contract. They currently have an industry leading contract but are one of the only unions I have ever known in this business that does not want be acknowledged for that.

And today, the APA actually requested formal mediation. Whatever they might be thinking is beyond me.

This has been and remains a very sad story.

Swelbar

04.11.2008 | Unregistered CommenterSwelbar

This is prime example of the labor vs. mgmt culture that has been at AA since the days of C.R. Smith. There is no "reasonable" contract, and even if the company gave 50% raises to the pilots they will say "We should have asked for 75%." APA wants control and power over the company in every way possible.

I really dont think there is a way to change this overnight, and AMR doesnt have enough time to wait for this to happen. It is either give APA what they want while running the company into the ground, or finding a way to scare APA into agreeing to more reasonable terms.

04.11.2008 | Unregistered CommenterAnonymous

seems to me that we are seeing the collapse of american airlines from the inside out. From an insiders view of course

04.11.2008 | Unregistered CommenterAnonymous

Anonymous

I sure hope you are wrong. But those saying that the US network carriers are safe, well positioned, financially sound etc. are wrong. The bankruptcy of Frontier is the first real demonstration of the fragile capital markets and their view of the US airline industry.

In a post or two ago, I stated that I think the traditional barriers to exit will be challenged during this period and that the safety nets that have traditionally have been there just might not be.

It is much to early to call a collapse of AA. But it is getting past the point where things need to be addressed.

Swelbar

04.11.2008 | Unregistered CommenterSwelbar

I'm sorry but where have you read that APA is asking for "50% raises"? All APA is asking for is a restoration of the original pay scale that was used to save the company back in 2003 to the tune of “Pull together, win together.” As it is now we have “Pulled” and they have “Won.”

Gerard Arpey almost personally installed Lloyd Hill as APA President by chopping rAAlph Hunter off at the knees and leaving him standing naked in the face of the storm. He now is reaping what he has sowed.

In the next eighteen to twenty-four months AMR is facing strikes by all three of its major unions. If this isn't leadership I don't know what is. Gerard Ourpay has done an outstanding job of unifying every unionized employee on the property and is leading us straight over the edge into the abyss. How that is for leadership. In a little over five years he will tank a company that has endured for almost a century. His dad will be proud!

Gerard Arpey's dad was one of Frank Lorenzo’s right hand men so why we thought he would be any different is beyond me. He flushed all the good will that was given to him when he took over as CEO right down the toilet. Now we look back on the Crandall regime as the "good old days."

AMR has adapted quite well from $30 a barrel oil to $110 a barrel oil so they will adapt to the new higher salaries. Soon DA, NW, US and UA will follow our trail.

Swelbar’s comment with “tongue in cheek” will have to wait for another post. Opening pitch is in 45 minutes.

04.11.2008 | Unregistered CommenterChitragupta

Chitragupta, are you under the illusion that if the APA gets what they want (which a 50% pay raise over what they get now) that AMR will be able to survive in the current economic climate? And if so, how?

I find it shocking that AA's union have so little grasp on the economic realities of the current economy and their position compared to AA's competitors.

04.12.2008 | Unregistered CommenterAnonymous

Anonymous

I am glad you are asking Chitragupta the question. When I first read it, I was beginning to think that APA was beginning the process of pulling back from its initial ask of restoring American pilot earning power back to 1992.

I guess we will await clarification. But quite honestly the mention of the 50% pay raise ask caught me a little off guard as it was not even mentioned in my post.

04.12.2008 | Unregistered CommenterSwelbar

Anonymous,

Before we can move the ball forward I must ask if you a member of AMR’s executive compensation pay program?

Tell the truth now.

04.12.2008 | Unregistered CommenterChitragupta

Chitragupta,
I do not, nor have I in the past, work for AMR or any other air transportation company, group, or organization. Nor do I have any family or friends that work for any of the aforementioned organizations.

Now answer the question.

04.14.2008 | Unregistered CommenterAnonymous

I submitted a comment on this, suggesting that this should be compared to a team sport rather than an individual one, which you chose not to publish. I am curious why - you do not like the team analogy, or something else. Should you choose to respond, you can email me at tvol71@yahoo.com.

04.15.2008 | Unregistered CommenterAnonymous

Anonymous

I am sorry, but I did not receive the post you are speaking to. With rare exception, everything gets posted. Please resubmit and I will be happy to post it.

04.16.2008 | Unregistered CommenterSwelbar

I guess we can officially take our Hindu friend's comments with a huge grain of salt. S/he obviously can't back up his/her own rhetoric.

04.22.2008 | Unregistered CommenterAnonymous

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