Bankrupt American Airlines Can’t Get Off the Ground – But Don’t Blame Its Employees

by Published on
Photographed by Adrian Pingstone
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I like Alec Baldwin, I honestly do.

He’s a skilled, accomplished actor, someone who truly inhabits a role. If you haven’t seen his lacerating salesman’s speech (“It takes brass balls to sell real estate”) in the film version of David Mamet’s Pulitzer-winning “Glengarry Glen Ross,” you haven’t been to the movies.

But I was disappointed that Baldwin got himself tossed from an American Airlines plane last month in a quarrel with a flight attendant who asked him to turn off his mobile telephone.

Why, I wondered, did it have to be an American flight? Haven’t these people suffered enough? Two crashed planes and the deaths of both flights’ crews and hundreds of passengers back on 9/11. And now, after a painful decade of fuel price increases and cuts in service, the airline’s parent, AMR Corp. filed for Chapter 11 bankruptcy — Just in time for the Christmas and the New Year.

Along with facing a harried and surly flying public during this year’s holiday season, American’s pilots, flight attendants, baggage handlers, mechanics, ticket agents and other members of its 88,000-workforce can count on existential angst.

Add to that an additional indignity: former and current American employees are being roundly blamed for the Chapter 11 bankruptcy declared Nov. 29 by the Fort Worth-based airline’s parent company, AMR Corp.

At least that appeared to be the harsh verdict of much of the business press. “They (AMR) simply could not get the unions to make a deal that would yield costs equal to those of the other carriers,” former American chief executive Robert Crandall declared on CNBC’s Squawk Box. Gordon Bethune, former CEO at Continental Airlines, chimed in: “This is the inevitability of an irrational workforce.”

But it’s far from clear that paying employees a living wage is what is keeping American from soaring. The airline’s bankruptcy follows decades of mismanagement, failed leadership and executives’ arrogance, resulting in not just crushing debt but labor relations that are among the most poisonous in the industry. No wonder it has been virtually impossible for the two sides to find common ground.

It’s true that, largely because of pension obligations, American has the highest employee cost structure. And to its credit – until now – the airline did not follow suit and go into bankruptcy to break contracts as did Delta, Northwest, Continent, and U.S. Airways, among others.

But American’s unionized employees have hardly been the picture of selfishness that management and their allies in the conservative business press automatically allege. Since 2003, all of American’s employees have taken financial haircuts worth a combined $10 billion in reduced wages, slashed pensions and employee benefits such as holidays and vacations, according to a source at Association of Professional Flight Attendants.

Since 2005, American’s top five executives reaped $100 million in bonuses, according to news reports of filings to the Securities and Exchange Commission, mostly in the form of stock options and grants. This nest-feathering transpired even as American posted losses of $471 million last year, the only one of eight leading U.S. airlines to lose money in 2010. Those losses have continued to mount in 2011.

Pacing the pay trend were AMR’s former chief executive Gerard Arpey, who hauled off $5.2 million in compensation in 2010, and newly minted CEO Tom Horton, who cleared $3.1 million. Waving signs that denounced management’s “Bonuses for failure,” flight attendants picketed American’s terminal at JFK airport earlier this year to call attention to corporate greed (making them in retrospect prophetic avatars of the Occupy Wall Street movement).

Typically flight attendants earn $30,000-$40,000 a year. “American’s unions said to the company, ‘O.K., here’s your money. Now go do your job,’” one union official told me. “But they took bonuses instead.”

Among the most glaring signs of managerial ineptitude at American has been the mismanagement of the aging fleet, among the least energy-efficient in the industry. While other airlines modernized and invested in fuel-efficient aircraft, American stuck by its MD 80s, (manufactured by McDonnell Douglas, which is now owned by Boeing, they are sometimes called “Super 80s). While hardy and safe, the Super 80s are 25%-35% less efficient than the midsized Boeing 737’s flown by most of the competition, reports Michael Boyd, a noted aviation industry consultant who once worked at American.

“They never expected fuel to go over $50 per barrel,” adds Boyd, who reckons that, if crude oil prices had remained below that figure, American would have earned more than a billion dollars in profits last year.

That strategy was typical of American’s “short-run view of the world,” says Richard Gritta, an aviation finance expert at the University of Portland. “They just refused to be as smart as Southwest,” he added of American’s top management in a telephone interview, noting that the Dallas-based rival “understood you don’t use a lot of debt.”

Gritta drew other contrasts between the Dallas-Fort Worth competitors. Southwest, he asserts, built a “point-to-point” route system that reduced costs. Despite being cost-conscious in myriad ways, such as not painting the aircraft to lessen wind resistance, American has employed a “hub-and-spoke” system, Gritta says, which passes as “a revenue generator, but it’s a cost nightmare,” he adds.

In addition to being a “genius at operations,” Southwest’s former CEO and chairman Herb Kelleher had a talent for winning over employees. “Whenever I fly, I always talk to flight attendants. Along with Lufthansa, Southwest’s are always the happiest with their jobs. Kelleher and (his successor Gary) Kelly have always treated employees with respect. They (flight attendants) like to work for them.” (Southwest CEO Kelly earned $1.806 million in 2010 at profitable Southwest, about a third of his American counterpart’s compensation.)

American has $8.3 billion collected for the pension and health funds of its 130,000 active and retired employees, but is underfunded by roughly $10 billion, reports the Pension Benefit Guranty Corp. Josh Gotbaum, director of the agency, fervently hopes that the airline will preserve its pension plan and not dump pension onto the PBGC. “Based on our estimates, American Airlines employees could lose a billion dollars in pension benefits if American terminates their plans,” he said in a statement.

Among those who saw his wages and pension cut was U.S. Airways pilot Chesley “Sully” Sullenberger III. If the name doesn’t sound immediately familiar, it’s because almost three years have passed since “Sully” crash-landed his aircraft into the Hudson River shortly after takeoff at LaGuardia after his plane was disabled by a flock of birds. Sully became a national hero overnight when all 155 passengers survived.

But, Reuters recently reported, Sully has said that he was in straitened financial circumstances on the day he was flying. His salary had been slashed by 40% and, after two U.S. Airways bankruptcies, his pension had been “derailed.” Fortunately for him, a book and lecture tours have cushioned him economically. But many brave aviators and hard-working airline employees have not been so lucky.

So, fasten your seat belt. Turn off all electronic equipment, including cellphones. And try not to blame the flight crew for a bumpy flight or a bankrupt airline.