Interview: Former American Airlines CEO Robert Crandall

Former American Airlines CEO Robert Crandall pioneered the development of airline loyalty programs, yield-management concepts and computer reservations systems during his tenure in the industry. The inaugural member of The BTN Group's Business Travel Hall of Fame, who has been more frequently named on BTN's annual list of the most influential executives in the business travel industry than any other person, recently spoke with David Meyer as part of BTN's Vision: 2020 project about potential changes in the airline industry, or lack thereof. An edited transcript follows.

Crandall: Any time you try to speculate about the future you have problems.

Even though economists keep getting paid real money—

They do, and they are almost always wrong.

Will our economy gain strength during the next several years?

No. I don't think so. I must confess that I am by nature pessimistic, but it seems to me that until we get out of this tremendously dysfunctional political situation we are in, the economy is going to sputter along. The level of unemployment that we have is throwing away the potential productivity of a tremendous number of people. The level of income disparity that we have between the half of one percent and everybody else is going to continue to detract from the capability of the middle class to contribute to the kind of consumption economy that we've had for many years.

I'm not very optimistic about the United States from the political perspective. If the U.S. got its political act together, it has a lot of natural advantages versus a lot of other places in the world. Until we solve this business of these terribly gerrymandered districts, which send extremists to Congress, I don't see much hope for sorting out the political situation.

So that makes any prospect of significant investment in our infrastructure and the air traffic control system almost laughable.

That just isn't going to happen. The infrastructure of the country, all the roads, all the bridges, all the water systems are just not going to be maintained. To the extent they are not maintained, our ability to compete with countries that are maintaining their infrastructure is compromised. What has been one of the great strengths of the United States over the years is just going to diminish. This political extremism that we've fallen victim to is doing very bad things to the economy.

What will be the impact of having no improvement of the air traffic control infrastructure?

I think we'll get marginal improvement but not the kind of improvement you would get if NextGen [the proposed U.S. Next Generation Air Transportation System] was fully funded and appropriately implemented. We are not tapping our potential.

What changes will affect business travel during the next several years?

I don't think business travel is going to change dramatically. You will have three very large multinational mega carriers competing against one another, and the only thing I think that will drive is a greater focus on service levels. Because there will be three big carriers and because business travel is tremendously important, carriers rather than focusing maniacally as they have in the past on growth will focus on hanging onto their share of the business traffic, and that's going mean more attention to better service. People able to pay business-class and first-class fares are going to see improved service levels.

That's almost a characteristic of a seller's market, right? You can charge more but then you have to deliver.

That's kind of the world I think we're going to be in. You are going to see a continued growth of the so-called low-cost carriers. They are really not low-cost, as you know. But the Southwests and the JetBlues are going to continue to take share from the big guys and the international-based carriers, and the international carriers will pay more attention to hanging onto their share of the business market that is headed out across the Pacific and the Atlantic and down into South America. I think we'll see sort of a revitalization of service standards.

With the airlines getting control of their inventory, we've seen a tightening of corporate airline contracts to the point where some smaller companies now think less about the possibility of being able to negotiate. Will that trend continue?

That would be my guess. As the supply of any product dries up, the willingness of sellers to discount it diminishes. Very large companies will continue to get deals of one kind or another because they control so much business traffic but smaller and medium-size companies are very unlikely to see the benefits of that. If carriers don't get back into the business of growing domestic capacity, then it becomes sort of a market segmentation game.

Will we eventually see a change in airline-ownership regulations?

No. I would certainly hope not, because that's sort of the last redoubt, if you will, of the U.S.-based international carriers. To the extent that you let foreign flag carriers in effect control U.S. flight carriers, then the ability of the U.S. flags to sustain their domestic market position would be further weakened.

Look, Lufthansa doesn't give a [damn] whether they can fly in the United States or not. To the extent that a Lufthansa controls a United or an Air France controls a Delta, those people are going to eliminate more and more of the segments within the domestic system that don't contribute adequately to aid the national service, which would turn even more business over to the JetBlues and the Southwests. I don't think you will see that.

Will we see consolidation in Europe of the national flag carriers there?

To some limited extent, yes. Alitalia is a case in point. I don't know how long the Italian state is going to be prepared to sustain Alitalia. That's more of a matter of the political will of individual European states to sustain flag carriers, and my guess is that is limited. Given the European financial problems, it would seem to me consolidation within Europe is likely to happen.

Today, joint ventures are where it's at in terms of doing business on a multinational basis—

Yes, and it's really just another turn of the screw in terms of the alliances. The alliances are for the most part simply exclusionary interline arrangements.

And the JV gives them additional negotiating muscle.

Among other things, the JV gives them a greater ability to do shared services. For example, you can have one IT shop. Over time, I can't imagine that Air France-KLM-Alitalia or Iberia-British Airways are going to maintain unique IT arrangements for each entity. Why would they do that?

Do you think these JVs become the groundwork for mergers of the future?

I don't think so. Mergers have a lot of political overtones. It is easier to keep Iberia's name on the Spanish carrier but let it be effectively run by BA rather than trying to make it all BA.

For several years, the biggest factor putting the squeeze on airlines was fuel.

That's completely wrong. Fuel is a basic part of the business. Everybody basically pays the same price for fuel. It is a matter of how appropriately you trade off capital costs against operating costs. New airplanes burn less fuel but they take more capital. Delta has decided to fly some older airplanes because they don't fly them intensively enough to make the capital tradeoff worthwhile. It isn't fuel that has sunk the airlines as much as labor.

There was a huge escalation in fuel costs.

We all have seen fuel costs go up and down, but you are still going to fly the airplanes. Over time we are seeing advances in petroleum engineering with the U.S. getting more supply, and Germany has discovered an enormous natural gas deposit. Fuel is not going to be the dominant issue. I'm very much afraid that labor will be, [because] when concentration occurs, labor gets stronger and stronger. So you've really given the inmates the key to the asylum. How's Delta going to take a strike?

You don't see Delta's purchase of a refinery as strategic?

I don't think it's even marginally sensible. You invest a bunch of capital in a refinery, right? Now you sell that fuel at the market price. There's no shortage of fuel, and since there is no shortage if you take the aviation fuel output of your refinery and you give it to Delta at a preferential price, you are depriving the capital you invested in the refinery of a market return. Why would you do that? You are investing money in different business. With $500 million in capital invested in a refinery if you want to earn a market rate of return on that capital, you have got to sell the fuel at the market price. If you don't, then Delta makes more money and the refinery makes less. What the hell's the point of that? It would make sense if jet fuel was in shortage, but it's not in shortage. It's just a matter of price. There is plenty of it. So why would you do that?

As far as the labor situation is concerned, what can be done?

It is just going to be a problem. Labor costs will continue to escalate. Which in turn is likely to turn more business to the Southwests and JetBlues if they control labor costs more effectively, although they are looking more like the big guys except for the percentage of domestic versus international flying.

Is the challenge how to differentiate and keep from being a commodity?

But it is a commodity and has been. And that's one of the reasons why I think you are going to see a greater emphasis on service standards.

Do you think the proliferation of mobile will have an impact on the airline business?

Of course. It already has made a tremendous impact in terms of the ability to shift work from airline people back to the customer; the customer is now responsible for getting his own boarding pass often on his smartphone. Mobile has had a real impact on labor costs and on taking the friction out of airline transportation. As mobile technology becomes ubiquitous and more powerful, it will continue to have an impact. I don't see any profound change that is going to occur as a result, however.

Will there be more direct deals in the future?

The airlines over the years have worked to cut out the intermediaries and they are going to continue to do that. When you add it all up, I don't anticipate that a lot of dramatic change is going to occur in the next five to 10 years.

We can get biblical and say there is nothing new under the sun.

That's right. It's just not going to be transformative change I don't think. You are going to see the continuing evolution of the business, but I think it is going to be pretty much the way it has been. Back at the 1929 World's Fair [they thought] we were all going to be riding around in helicopters, but we're not. We're still stuck in traffic jams.