Carty Ready To Reinvent American

Last month, American Airlines parent AMR Corp. CEO and chairman Donald Carty issued an employee hotline message: "We have to take a very hard look at our business model and be ready for some fundamental changes in the way we operate." A few days later, he spoke with Business Travel News editors David Meyer and David Jonas.



BTN: Specifically, which areas are under the most intense scrutiny?

Don Carty: Literally, the whole company. Anybody interested in the commercial aspects of aviation says, "Ah, no more hubs and fare simplification. Must be." Certainly, eliminating hubs is not going to happen, not until Boeing or someone develops efficient one-seat airplanes. The fact is, we do need to rethink the way we do business in a whole variety of ways, and fares might be one piece of it. We have built in, not only to the fare system, but into a lot of what we do, more complexity than we need. We did it in a different time, for different reasons. What we are accelerating is fleet simplification. We are literally cutting in half, in a short period of time, how many fleet types we operate. But it is everything: If we have a rule or a procedure, we are looking to see if it adds value. If not, let's get rid of the thing and get on with it. I like to use the airport as an example. Our passengers park their cars and go to the terminal. All they think about is getting on the plane. We have spent a lot of time and energy impeding them from doing that. We make them line up at the counter and give us some paper so we can give them back some paper. They go to security, we process them, take them to the gate. If they want to upgrade, they stand in line. It goes on and on.

Really, those are all things we invented that we believed added value, either to shareholders or customers, and it is not clear to me that very many of them add value. The ticket counter should virtually disappear. So, what will airports look like? We need automation that gives us more productivity, makes our employees' jobs better and makes customer service easier and better.

BTN: What would you tell business travel buyers to help them encourage their companies to get back in the air?

Carty: What all of us know is that the hassle factor is not as great as it is perceived to be. The other thing that is clear is that many business travelers know they will never get their companies turned around until they go and call on customers. The good companies are coming back to the air faster than the not-so-good companies. You can see the strongest of the tech companies traveling more than the weakest ones. You can see it in the data.

BTN: Obviously the economy has a lot to do with business travel recovery, but are there ways American can add value for corporate accounts specifically?

Carty: There are a number of ways, but obviously we would not have done the TWA acquisition unless there was real importance for our corporate accounts. It makes it easier to take them to 92 percent of the places they need to go, instead of 80 percent. That is the place where American is sitting in a unique position. The second place is product and the "more room in coach" initiative. That has some muscle. That being said, we'll have to match all the other value equations.

BTN: Does it surprise you that no one has matched more room in coach?

Carty: A little bit. It has been such a roller coaster period. The strength of it is not as demonstrable yet as it will be. I don't know whether others will match or not. We kind of hope they won't. A lot of carriers are concerned from the threat below, the low-cost guy, and they should be.

BTN: Meanwhile, you have brought back people and restored service. What is the outlook from here?

Carty: When we get through the summer, we still will be down 8 percent or 9 percent, but that is a consequence of fleet simplification and aircraft retirements that otherwise would have happened as replacement planes arrived. So our fleet has, in effect, shrunk by that much. Our capacity will be back to "full strength" by the summer. Given the equipment decisions some of our competitors have made, it looks like a similar pattern there as well. So this is a healthy bite out of industry capacity that should help the industry right the ship whether the economy turns quickly or not.

BTN: Another item of cost concern is fuel. How well hedged are you?

Carty: It is a concern. We are not well hedged, but as well hedged as most other carriers. But we are still vulnerable to volatility.

BTN: Are fuel surcharges still a partial solution?

Carty: On the cargo side. But on the passenger side, we are in a different world. Business travel has dropped, which is part of the reason our average fares are down. The other reason average fares are down is sales to stimulate traffic. In my own view, we left a lot of money on the table. Some of the sales were lower than they needed to be to stimulate traffic. People still would have gone to Ft. Lauderdale for $10 or $20 more, so that is the trap we got ourselves in. The biggest reason for American to hold a sale is we are afraid if we don't, someone will hold a bigger one. You think we are kidding, but we know there will be a sale, the question is who will set the price? There has been a lot of money wasted that way. We have damaged the industry and our profitability more than we need to. There is not much you can do to stimulate business travel. It is not price-elastic. The question is, will it be there for us? And it will be eventually. We know it will come back. Back to the point, many of these sales are held at price points that there is no surcharge.

Meanwhile, there has been much criticism of Northwest Airlines, asking why they didn't go along with the fare increases. Quite frankly, they should have. That being said, Northwest is saying, "It is not the list price, stupid. It is what you are selling it at." In an intellectual sense, they were right. But in a practical sense, they should have taken the opportunity to improve the list price.

BTN: You note that some of these sales have gotten out of control. Looking at the Internet, where fares can be very low, is that problematic for American?

Carty: No. The Internet did two things. One, it created a low-cost distribution option. It wasn't our intent to give all those cost savings back in the form of price. But as people have tried to move people to Internet use, they see this as an investment in the future. If I get you to book three tickets on the Internet, they won't be the last ones you book even if the price goes up. The second thing is that the Internet is a clever way of replacing consolidator business, opaque business. In a capacity-rich world, where we were before Sept. 11, we started getting carried away. Post-Sept. 11, when business travel wasn't there, we have continued that a little bit.

Too much product is being sold in that manner for our own good. Again, the industry capacity-demand equation has to stabilize a bit before it gets to where it ought to be. If we are going to drive the whole change in our relationship with travel agents, largely affecting the ma and pa end of the travel agents' business, that is going to drive business back to the airline, whether it is the Internet or a res office. Agents will not be prepared to do that business without a fee, and some people aren't going to be willing to pay that fee.

BTN: Where does American Airlines and British Airways now stand regarding the alliance and Open Skies?

Carty: Despite our immunity application being withdrawn, we have some other ideas and aspirations. It will be another year of trying to flesh those out. It is clear now that the United States made a bad miscalculation on this whole deal, because here we are without Open Skies with the United Kingdom and probably won't be there for five or six years. And, at the same time, there isn't effective alliance competition, which was the second agenda. We have already decided what we will do, but aren't public with that yet.

There is a lot of opportunity for further collaboration between AA and BA under the existing bilateral agreement. But, in the short term, this decision did not hurt American or BA. In fact, it probably helped American and BA. As long as Heathrow stays restricted, those that have will still have and those that don't still won't. Our competitors really overplayed their hand on this because here they are still not in Heathrow, and it will probably stay that way for an extended period of time. I think we will devolve to a Europe-U.S. negotiation. While European Commission transport commissioner Madame Loyola de Palacio is reasonably optimistic about this negotiation, I am far less optimistic. It is largely because of the U.S. side. The U.S. will have a tough time dealing with things like foreign ownership and cabotage because all of these things require legislative change and organized labor is not comfortable with them at all. My guess is I won't be in the airline business by the time they get this deal done. It could easily be 10 years.

BTN: Speaking of alliances, is there a plan to expand American's global coverage?

Carty: We are asking ourselves, "How easy is it to have a relationship with an airline? Can you do electronic ticket interchanges? If it is not pretty simple, are you really adding much value? If dealing with some strange airline, either domestic or foreign, is a pain in the neck and costs you money, why do you do it?" So we will be rethinking all those questions again, reexamining whether all these tenuous relationships we have by way of the interlining system make any sense to us.

Unlike our friends at Southwest, who don't interline and make it ultimately simple, we don't want to be that simple. But if interlining doesn't meet some level of simplicity, do we want to do it? I think the answer will be no. The likelihood of interlining with someone that cannot do electronic tickets with us three or four or five years from now is virtually zero. As for e-ticket interlining with BA, we'd be there with BA if it weren't for their preoccupation with the conversion. We have a date for it and it is not that far out.

BTN: BA has taken cost scrutiny to another level by stripping out merchant fees on credit cards. Has American considered a similar move?

Carty: We have not looked real hard at that at this stage. But we, like they, have to look at everything. There cannot be any more sacred cows. If you think of the past 20 years as a battle for supremacy among our traditional rivals, we have been jockeying for position and we like where we finished the century. But we didn't give as much attention as we now need to give to what really is the long-term successful growth strategy. Even the most successful of the carriers, American hasn't had enough sustainable profits for its shareholders. We have to do something about that. Does that mean we all have to be Southwest Airlines? I don't believe so. Southwest has had a wonderful business model, but in a lot of ways Southwest has been a monopoly. Monopolies don't ever have to change their business model. We need to be more thoughtful about the combination of things we want to package to be successful. Obviously, Southwest cannot do a bunch of things we can do. The consequence of us choosing to do those things means we cannot do some of the things they do. But how do we make sure the revenue premium that we extract by doing the things we do that they can't covers the cost premium? When we get to that point on a continuing basis, then Southwest probably has to think about its business model. It is not that we haven't been smart enough to think about these questions but we have been preoccupied with that other war which, while not yet over, is drawing toward more structural stability in our industry than there was in the '80s and early '90s. You may see another failure or two, or more consolidation, but essentially we are boiling down to stability.

BTN: You said there are no sacred cows, but the AAdvantage program certainly is still one.

Carty: We are reexamining how we price it, how we use it and whether or not it creates enough value. It is not going away, because we know it is such a value creator. The question is, are there ways to tweak it to make it a bigger value creator and at a lower cost? The bigger we get, the more powerful AAdvantage becomes.

BTN: More than a year after the initial acquisition, how goes the Trans World Airlines integration? What is left to be done? Paint the remaining 100 TWA planes and that is it?

Carty: The TWA name is quickly disappearing. The airplanes largely are American Airlines airplanes. The employees, with the exception of flight attendants and ramp workers who will switch in June, already are in uniform. So, it is sort of over. After 9/11, a lot of our schedule pulldown affected TWA operations, but now we are in recall mode. In the res office in St. Louis, everyone has been recalled and they are just pumped. On the operating side of the business, there is still some stuff the customer cannot see, flight and maintenance in particular. But as far as the customer is concerned, almost everything will be invisible in the next three or four months.

BTN: An unintended effect of the TWA buy was that you invested in a GDS, Worldspan.

Carty: That really was, if anything, a windfall. We have been advocates, with the other partners, for simply selling the thing for a whole variety of reasons. One is that our interests have diverged pretty substantially, which we made clear when we sold Sabre, and I think they will continue to diverge. The best thing we can do is simply cash out, but that takes the consensus of all three owners, us, Delta and Northwest. I think there is a consensus that if the time isn't now, it's soon. It is a matter of seeing if three people can agree on what a good offer is. In fairness to the other partners, and Northwest in particular, they are more deeply invested because their operating system lies at the center of this thing. We will continue to be a passive investor. In the meantime, there is a lot of prognosis as to what the CRS business will look like 10 years from now. But in the short term, this thing makes money and throws out cash and the partners get it. So, we are not unhappy. It also represents a good acquisition for two or three people. If Amadeus, or even Cendant, wanted to take another big step, this would obviously be a good opportunity.

BTN: Now that you have handed many of the day-to-day operational issues to Gerard Arpey, what are you focusing on in terms of interaction with the federal government?

Carty: We have to do something about the way industrial relations works in our industry. It is increasingly clear to us, all your readers and every community in the country, that having a big airline shut down is not the way to go. In fact, it is not even the way to go to look at these destructive, drawn-out negotiations that just make everyone angry and result in poor customer service. We need to have a way of accelerating that. After this torturous period, the President is feeling compelled to get involved. If his bully pulpit isn't enough, Congress will have to get involved. That is managing labor relations at a pretty high level, considering the guy is running a war in Afghanistan. It needs to get pushed down. I like the idea of moving to a baseball-style arbitration in a defined timeframe. You take the whole last offer of one party or another. Understanding that, both parties will want it to be their offer and when you get to the final hours, those things get pretty close together and will occasionally cross. The counter argument will be, "What about labor's right to strike?" Under the National Railway Labor Act, labor doesn't really have the right to strike. Only the President and Congress give it the right to strike.

There is going to be an effort this year to make legislative change. I don't think anyone is talking change that would vary significantly in purpose from the original legislation—having three parties at the table, not just two—and hopefully we will see something happen, if not this year, then early next year. Another item will continue to be infrastructure. The debate has died down a bit since 9/11, but it has to happen because doing infrastructure takes time. We will be right back at gridlock if we don't keep the pressure on.

BTN: What are your impressions so far of the Transportation Security Administration?

Carty: It is so easy to be critical because it's such an impossible task. It is impossible to do the job particularly at the standards they have set for themselves, which is noble, but all you have to do is go to a security checkpoint and you'll realize they are not getting where they need to get. They are realizing what we told them in October, November and December is right: They have no idea about how much money they are adding to this thing. In the meantime, we will work with them where we can on process improvements. The one with which we are most preoccupied is facilitating customer movement. One place where they have overfunded, and they probably realize it, is the secondary gate check. That is a tremendous consumer of people resources. It is largely redundant. And where it isn't redundant, you probably can supplement some screening at the checkpoint.

BTN: Where is all the money going to come from for these security machines?

Carty: It's a huge, huge amount of money. We have been clear that all the money should not be coming from aviation. This is an assault on the nation, and not just on American Airlines or United Airlines. That being said, and despite our protests to the contrary, they went ahead and slammed a tax on this.