One-On-One: Arpey Eyes Customer Rights, Open Skies

American Airlines chairman, president and CEO Gerard Arpey this month met with Business Travel News airline editor Jay Boehmer in Tokyo during a Oneworld event to discuss customer service issues, plans for the Asian market, cooperation among its alliance partners and government regulation of the airline business.

BTN: Do you feel compelled to follow JetBlue in issuing a customer bill of rights?

Gerard Arpey: Obviously, we're all in a customer service business and so we all want to do the very best that we can. In these very severe weather situations, it becomes very difficult because you find yourself trying to manage the unmanageable. All of us are going back and looking at how we manage severe weather. As you know, we've put in place a four-hour limit in terms of how long we will keep folks on the airplane waiting for the weather to clear. Of course, we have to look at what JetBlue is doing and what the others are doing and respond accordingly, which we will.

BTN: Are you concerned that the government will get involved if the airlines don't act quickly enough?

Arpey: The government plays an important role in our industry, both through the Department of Transportation and the Federal Aviation Administration. We've already heard from the DOT on these severe weather incidents. We'll pay very close attention to what the government has to say on this, but in the end the market is the best vehicle for a solid response.

BTN: American applied for a China route last year, but has yet to throw its hat in the ring for the 2008 slot allotment. Will you dust off that application?

Arpey: Depending on what authorities come available, we certainly have an appetite for more service into China, so we'll take every opportunity going forward to get more authority. We have to work out a long-haul flight agreement with our pilots, and we are in Section 6 negotiations today with them. I'm confident when we're done with those negotiations we will have a long-haul agreement. That will allow us to fly competitively into China.

BTN: What's your outlook for what will happen as a result of the most recent round of Open Skies talks between the European Union and United States?

Arpey: We've long been a proponent of Open Skies with the caveat that because the United States is the largest aviation market in the world, there should be the thought of reciprocity in all of these agreements. With that caveat in mind, we're very pro-competition, pro-Open Skies.

BTN: Would that open up the possibility of antitrust immunity with your Oneworld partners?

Arpey: We think, today and in the future, the governments need to look not necessarily at citypairs and individual airlines and how they compete, but how these global alliances are competing. Governments should allow these alliances to compete on a level playing field. For us, that would mean immunity. We're very hopeful that we'll eventually get there with British Airways and others.

BTN: In Japan, you recently consolidated American's operations with Oneworld partners at Narita International Airport's Terminal 2. Are there other airports where you and the other alliance carriers are looking to collocate?

Arpey: It's certainly an overriding objective to collocate wherever you can to create the best customer experience that you can. Narita Terminal 2 is a great example of that. A number of Oneworld carriers, including American, are now collocated in Terminal 2. We have the new Admirals Club there. It's really going to help with our connections to Japan Airlines. In terms of American's service, our anchor is Narita. We feel with the combination of the bilateral Oneworld partnership with Japan Airlines, the codesharing frequent flyer relationship over Tokyo, combined with our partnerships with Qantas, Cathay Pacific and Dragonair, we really feel well-positioned in this area of the world.

BTN: It really becomes a gateway in this region.

Arpey: Yeah. We've got a very good network across the entire Asia/Pacific region, given our partners. We feel very good about that.

BTN: Your domestic competitors under bankruptcy protection have had some advantages over the solvent airlines. As the last two carriers return from Chapter 11 this year, do you feel the playing field will level out?

Arpey: Clearly companies that have gone through the Chapter 11 process have created some cost advantages over American, primarily in the labor area, either by cutting wages, terminating or freezing pension plans or cutting retiree active medical benefits. That creates a real challenge for us. On the other hand, we've been reengineering a lot of our business processes, hopefully creating more permanent competitive advantage. Where all this ends up remains to be seen, but we're going to stay busy reengineering the way we do things and not making labor a target of our cost-reduction efforts.

BTN: Although merger talks have died down, do you have any thoughts on the prospect of consolidation?

Arpey: Our policy at American for a long time has been that we don't comment on the strategic opportunities for our company and whether or not we'll play a role. I'll have to stick to that today. Having said that, historically, consolidation in the airline industry has been more difficult than in other industries, particularly because of the view the government has taken toward consolidation and organized labor. It's not been looked on favorably. Whether or not that changes in the near future, your guess is as good as mine.

BTN: Can you detail any bottom-line savings from new distribution agreements American forged last year?

Arpey: We're definitely pleased with those agreements. We're very ubiquitous in terms of the distribution of our product. If people want to sell our product, that's fine with us, as long as they do it on economic terms. The travel agency community—whether that be online or brick-and-mortar—is really an extension of our own distribution network, and we're happy to support all of these different venues for distribution, but we have to do it economically, and that's really what last year's discussions were about.

BTN: Still, airlines seem to agree that booking direct through their own Web sites is the preferred method.

Arpey: AA.com is the single biggest distribution site for American Airlines today. It's growing more rapidly than any other venue. We're adding features. In fact, just recently we added a really cool AAdvantage feature that lets you put in dates and it can show you for what level of miles you can get availability.

BTN: What's your demand outlook?

Arpey: It seems to be very strong. We're running load factors that were unheard of 10 years ago, so we're very strong. Demand in our business is highly correlated with gross domestic product. So, if the United States' economy stays strong and by extension many of the other economies that are hooked to the U.S. economy stay strong, traffic will stay strong. If we get a weak economy, traffic will soften. Let's hope that doesn't happen.

BTN: American took a look at radio frequency identification technology for baggage some years ago. To what extent are you still exploring that?

Arpey: We're continuing to do that, but the chip cost has not gotten low enough that it's economically viable to put a chip into every bag tag. The fact of the matter is we do a pretty darn good job with the bags—99.4 percent of our bags, no problem. They travel with the customer. So you're attacking a very small percentage of bags that are interrupted, so the economics aren't quite there. Last year, we carried close to 150 million bags and in terms of how many did we lose—meaning, never found them? Less than 10,000. Of course, that's not perfect. Because if it happens to you, it's very bad.