One-On-One: AMR Corp. Executive VP Marketing Dan Garton

BTN: First in developing the EveryFare program and more recently joining with Sabre's DCA Three-Year Option, American Airlines has been pushing distribution cost savings. Where does the industry now stand?

Dan Garton: If you think about what has happened to those costs during the past 15 years, it is impossible not to see this as an inflection point. I don't know that it is possible to forecast what will happen at the end of these original terms, but the days of increasing prices for a product whose embedded costs are declining are over.

BTN: The GDS providers see that they need to rein those costs in themselves.

Garton: To varying degrees, even they talk that way. Previously, people have been quoted saying that it is a cash cow and that they would take advantage of it as long they could. Now, we are seeing a turning point. There are more competitors, and the industry they are serving is so weakened that the idea of charging increasing rates in an environment where the cost of technology is declining is not viable.

BTN: Which brings our discussion to Orbitz.

Garton: We see Orbitz as a very attractive source of distribution, a supplier-friendly source. Corporate travel on Orbitz is an evolving trend, clearly not as quick to change as the non-corporate customer, but the unmanaged corporate travel group is very large and very valuable. Those customers are seeking less expensive solutions. Whether it is Orbitz or any similar business Internet site, it is likely to grow.

BTN: Back to EveryFare, which was deflated when American enrolled in Sabre DCA. What did that program accomplish?

Garton: We wanted to create momentum in a direction, and EveryFare definitely did that, but we did not think—and still don't think—that it should have been only that. The concepts in EveryFare were right on because they were trying to adjust the relationship to be more closely tied to the travel agency and GDS rather than the obscure situation we have now.

Money flows around in a 360-degree circle and people take bits and bites out of it here and there. It is very cumbersome. Today, the GDS has leverage on us because the person who buys its services is the travel agent, yet we pay for them. EveryFare was trying to create the incentive for the travel agent to negotiate with the GDS company.

BTN: How will the industry be impacted by developments at travel agencies to create their own GDSs—TravelBahn at American Express and new direct-connect technology at Carlson Wagonlit, for example.

Garton: Frankly, it is not a surprise. It is a form of vertical integration. Those guys look at opportunities to grow a profit and naturally, like any other company, look to see if they should grow horizontally—should they buy Rosenbluth—or grow vertically. Clearly, Navitaire is a modern technology. The question is whether it has scalability. As far as the impact, what we always worry about is whether any one of these entities—a GDS or travel agent—gets so much market power that we become beholden to them. Most of the recent acquisitions have been pretty friendly. Amex is extremely friendly to American Airlines. It is not a threat, but a partner getting bigger.

BTN: As far as Sabre DCA, can you clarify any changes to American's marketing agreement with Sabre following the settlement of the recent lawsuit?

Garton: I do not know what I can and cannot say on that in terms of privacy.

BTN: Back in the real world, how is the summer looking?

Garton: The summer looks far better compared with the depths we were in before. Traffic has been at incredible levels. For the first 15 days of this month, we're at 85 percent load factor. Yields are not as good—next question. Seriously, it is what we have seen all along in the past few years. Leisure travel has remained, but business travel has gotten very weak. In a summer where prices are very attractive, we have created an incredible amount of demand. Oddly, that has not allowed us to drive prices up in response to that, and we know this is the high point of the year. We know, unless something wild happens, that we will have a horrible September, October and November. Corporate travel would have to come back in a surprising fashion to make it okay. The great success we already have had is restructuring and saving the company. Permanently? I don't know, but we have saved it for now.

BTN: Are you sensing any pent-up demand in corporate travel?

Garton: The head guys from the largest accounts talk about increased travel and prospects for good business. I do see optimism in those guys, more than 50/50. People used to fly to prospect for business. That has been scraped away. People still fly to the meeting they need to go to with the customer they already have; what they are not doing is going to the customer they don't yet have. We hope that prospecting will come back as people get more confident.

BTN: How are you calibrating for business travelers purchasing like leisure travelers?

Garton: Business travel still is down 20 percent from where it was two years ago, based on statistics from our corporate contracts. On top of that is this other shift. The availability of what we used to call junk fares is so large now that we are changing the name to "fares formerly called junk," no disrespect to Prince. It is becoming one of the biggest buckets we have, and we can't distinguish what is in there. They used to be only available in Southwest Airlines markets, and now they are in 80 percent of our markets.

BTN: Is that sustainable?

Garton: It is sustainable if your costs are at the correct level. Both fares and costs still are not where they need to be. Fares formerly classified as junk are probably too low. There was a sale launched last week, as there is almost every year at this time. As we looked at the opportunity, we could not find a fare level to set that would have been attractive relative to what is out there already today. If junk fares are at such a level that you can't offer a sale, they are too low themselves.

BTN: Is the remedy a much-discussed compression of the fare structure?

Garton: It is an evolution. If you look back at the data over the past several years, it seems to be an undeniable trend. The bottom end coming up is economy-driven. The top end coming down is more competitive-driven. As far as growth, even though you have high load factors, which normally would be a signal to expand, why would you do that right now? A, you cannot finance or afford the growth. B, it is not very rewarding. The percentage of operations that you are really making money on is so small.

BTN: Looking specifically at the Northeast, we understand the shuttle markets, which American Eagle entered last fall, are holding up well. Can you elaborate?

Garton: Customers have begun to recognize the service is pretty comparable, and the loading and unloading takes one-third of the time. Convenience is not the only factor. Many customers in those markets have lots of other stuff going on with American Airlines. We filled in a segment that was lacking. There was latent demand to fly American. We are holding our own in terms of share gap versus the incumbents. We believe the other carriers will migrate to using some mix of regional jets and bigger jets. RJs were meant for business-intense, short-haul markets.

BTN: Considering the extra legroom in coach class, the return to standard coach seating on some airplanes, the price-competitive products against low-cost carriers, RJs in certain markets and the premium service on transoceanic routes, is it possible to be all things to all people?

Garton: It is not possible, but it also is not possible to ignore that there are some substantial differences in markets. The more room throughout coach versus the standard room in coach is just a realization that in certain markets you cannot afford the luxury of taking those seats out. In other markets, it probably made sense all along, but never quite as much as we had hoped.

We started the more room in coach before the 20 percent drop-off in business travel and certainly before the big reduction in the percentage of people on full Y fares. It is a very different environment. In those markets that are high load factor and low yield, it is just not competitive.

BTN: Another changing environment is at the airport. How far along is the Transportation Security Administration in bringing consistency to the checkin process?

Garton: I don't think they have even scratched the service on what we have pushed since Sept. 12: some kind of certified traveler program. It will enhance the travel experience for those who are not a security risk and concentrate resources on the others. There should be three levels: certified, uncertified and scary. Those that are certified may only be 5 percent of your customers, but they represent 20 percent of your travel. In the beginning, TSA was so incredibly overwhelmed and, in fairness, we were asking too much of them. A certified traveler program still is not likely in the near term, but it also is not an impossibility.