AA's Carty Assesses The Future Of The Airline Industry

New York - The ramifications of renewed hostilities in Iraq could force the U.S. government to enact radical changes in its policies toward the domestic airline industry, according to the chairman of American Airlines. Don Carty, here late last month to meet with the Society of Airline Analysts, also said the carrier is evaluating fresh changes to its pricing, frequent flyer, capacity and hub strategies.

According to Carty, a war with Iraq, among other things, would further depress domestic and international traffic, pressure oil prices upward, press many commercial pilots into active military duty and force reappropriations of widebody aircraft. "If all of the above occur and break the airlines' backs, the government would have to do something," he said, suggesting as possibilities fuel tax relief and a reauthorized loan guarantee program. "It also is a possibility the government would allow some sort of sit-down among airlines regarding further capacity cuts. But the whole industry in Chapter 11 is not something that can be tolerated." Should a war with Iraq somehow be averted, Carty still warned, "This is an industry in deep, deep trouble."

Touching on what he and other airline CEOs stated earlier that week during testimony before a congressional subcommittee on aviation, Carty explained the industry "is not looking for Congress to write a check," but to mitigate airlines' financial responsibilities related to security and insurance costs. "Insurance costs industrywide are up more than $1 billion, year over year," he said. "It is a national security issue, not just an aviation security issue."

On the revenue side of the equation, Carty said the business mix at AA has held up relatively well, "but the problem for us is that only about one in a dozen passengers is flying at full coach fare. We've unwittingly created enormous buying-down opportunities."

To counter that, AA, in line with the other Big Six U.S. carriers, eliminated corporate discounts on lower-bucket fares and imposed fees and restrictions on lower fares. "While these changes may not be the optimal, long-term solution, they do create a greater level of distinction between business and leisure fares and better align the value proposition."

Yet, Carty acknowledged that AA specifically and the industry in general have yet to determine the appropriate level for business fares. "Instead of answering that question, we have steadily raised business fares and then found ways to offer business travelers leisure fares," he said. "That is not the intention of the original architecture." As evidence, Carty explained the pricing situation in many markets where, considering corporate discounts, some fares are 20 percent to 25 percent lower than those offered by JetBlue or Southwest. "I am not sure that makes sense. We need to find a better level, without scaring off passengers."

He also addressed mounting criticism against the traditional hub-and-spoke system. "The hubs we have now in the country are sustainable, even if they have to be gauged down a bit," Carty said, adding that AA's "de-peaking" efforts at Chicago O'Hare—a strategy to be replicated this fall in Dallas Ft. Worth—has not caused any share shift in the Chicago market. "How much does two or three minutes matter? The reaction from passengers is they are now less concerned about missing their connections," he said. "We should have figured this out four or five years ago. Shame on us."

Meanwhile, Carty left the door ajar—albeit slightly—for a possible reversal of American's heavily marketed and passenger-friendly More Room In Coach initiative, of which there have been murmurings for months. "There is no pressing need in the current environment to backtrack," he said. "But in the revenue environment moving forward, does the product represent a problem or a benefit? We have not yet answered that question."

Carty said AA also is examining the premise of the massive AAdvantage loyalty program "and has not yet ruled out any radical changes." One idea being considered, Carty confirmed, is awarding points based on fare paid.

Meanwhile, Carty said AA's previously announced autumn capacity reduction of 9 percent "will likely end up closer to a 10 percent or 11 percent reduction by the time we are done adjusting the schedule."