The American Dream

By Cathy Booth Thomas/Fort Worth

Not long ago, the top managers and 80,000 employees at the world's largest airline were barely on speaking terms. The only time they really talked was over the bargaining table. But in a classroom dotted with inspirational posters (JUST BECAUSE THE SITUATION IS TENSE ... YOU DON'T HAVE TO BE!), managers from American Airlines sat down recently to do something unheard of--exchange ideas with employees. From the back, a consultant acting as a "marriage counselor" observed silently as flight attendants and pilots, airport workers and reservationists, and even skycaps made suggestions about how to improve service for American's premium passengers. The rancor of early meetings was gone, replaced by--what's this?--a raucous cheer that went up when flight attendants learned they had won a round in a yearlong battle for...half-and-half. Yes, the real thing is again part of coffee service in first class on American. "They've been through a lot, but they're still passionate," says counselor Marc Bridgham, beaming.

Thanks in part to such sessions, American Airlines is coming back from the brink. In the aftermath of 9/11, when two of its planes went down, American suffered from a collapse in air travel, two wars, a rotten economy, the outbreak of SARS and the rise of low-cost carriers--all of which conspired to put the airline on the verge of bankruptcy in April 2003. What's more, employees were in open revolt after they discovered that CEO Don Carty had secretly handed out retention bonuses and pension guarantees to executives, even as he was negotiating $1.8 billion in salary cuts and eliminating 14,000 jobs. Sliding into the pilot seat, new CEO Gerard Arpey brought in corporate counselors to change the company's culture and slashed the airline's operating costs, making American the most efficient big-network carrier. But the airline's troubles aren't over. Despite increasing revenue and posting a modest $30 million profit in March, the airline is still losing money because of rising fuel prices. Huge pension costs, soft business travel and competition from low-cost carriers like Southwest and JetBlue could still wipe out the airline's mini-recovery.

When he took over a year ago, Arpey had little choice but to introduce radical therapy. The CEO, whose first job as a college student was stowing luggage for Delta, remembers sitting alone in a conference room a year ago, exhausted from negotiating with flight attendants and facing American's grim future. The company had lost $1 billion in the first quarter of 2003. "We had no cash, no flight attendants' deal, no access to the [financial] markets, no real understanding by our employees or Wall Street of where we needed to take the company," says Arpey, 45. Forget about the short-term cash-flow problem of a $20 billion company with just $1 billion in the bank and debt payments coming due, he says. "We had a long-term 'Where is the company going?' crisis."

Arpey launched a plan to cut annual costs by $4 billion, or 25% of American's pre-9/11 operating costs. But with pay cuts of up to 23% and morale at an all-time low, he also brought in corporate therapist Overland Resource Group, which has helped giants like Ford Motor Co. and its unions rethink old habits. Overland told the unions and management that they should see each other not as warring parties but as businesses that need each other to survive. Overland set up a structure, called Joint Leadership Teams, to make sure the old "silos" (management in one silo, unions in another, never talking) came tumbling down. The meetings haven't exactly been love-ins. One blew up over employee travel passes, but the company called the unions the next day to work on a solution. "Gerard really gets it," says John Darrah, head of the Allied Pilots Association.

To carve out savings, Arpey says he shamelessly borrowed ideas from competitors. He reversed his predecessor's policy of expanding legroom, adding seats in one-fourth of the fleet so American could cut fares even further. Emulating low-cost carrier Southwest, American is simplifying its fleet, from 14 types of planes to six by September. Picking up on an idea from TWA, which American bought in 2001, pilots suggested taxiing on one engine instead of two to save fuel. Not all the changes were bloodless. The company's 10,500 pilots agreed to the biggest layoff in airline history: 2,400 jobs, 1 in 5 pilots, saving $660 million a year.

Gradually, employees started embracing the idea of rethinking the old ways of doing things. Arpey likes to hold up a set of plastic cutlery to show how far the two sides have come in helping management cut some $2.2 billion in costs annually. Plastic forks and spoons used to cost $2 million a year, but employees at headquarters came up with the idea of reverse auctioning on the Internet and saved $600,000 by buying them in Asia. Of all the changes in operating methods, some of the most productive have come in aircraft maintenance. Workers on MD-80 heavy overhauls realized they could reuse perfectly good windows, light bulbs and fasteners on the plane's outer skin without compromising safety. They saved $30,000 on each overhaul--trimming at least $5 million a year. Shop-floor workers in Tulsa, Okla., taking lean-manufacturing tips from a Toyota sensei, or master, trimmed time and inventory, freeing up room to in-source aircraft repair work from American Eagle.

Even longtime veterans got into the act. In a corner of the huge maintenance complex in Tulsa, Ralph Dwain Garrison and Jack (Robin) Hood schemed to save drill bits costing as much as $200 each that were routinely being tossed after a few uses. Garrison took the motor from his son's science project and slapped on a vacuum-cleaner belt to create "Thumpin' Ralph"--a machine to sharpen old drill bits for reuse. Savings? Over $300,000. "The old mind-set--unions vs. management--it's still there for about 10% of the people," says machinist Jim Messick. "But if we want to survive as unions and as a company, we have to work together."

Not everyone is happy, of course. Morale is lowest among the 19,500 beleaguered flight attendants, who took 15% pay cuts and frequently work on quick turnarounds with little sleep. They plan to hold a press conference in Washington this week to raise concerns that exhaustion could compromise safety. "Company relations with employees, in particular flight attendants, are as strained as ever--if not worse," says John Ward, president of the Association of Professional Flight Attendants, pointing to an "insulting" management memo leaked on the Internet last month. The letter quoted corporate travel agents complaining that American attendants were "not enthusiastic" and aired the airline's "dirty laundry" on flights. "You can hire all the suits you want to give advice," says Ward. "But we're the ones being taken to task when customers are unhappy that service is not what it once was."

Keeping business travelers happy is crucial to American's future. Once the darling of such premium-paying customers, who liked the airline's service along with being able to rack up frequent-flyer miles on transcontinental flights, American has lost some even to the likes of JetBlue, a low-cost alternative with amenities like seat-back TVs. "The business traveler used to be American's bread and butter, but the butter is a little thinner these days," admits executive vice president Dan Garton. But American's elite clientele will see improvements this summer--a low-carb, high-protein breakfast as well as more power ports--and more frequent service on the main bicoastal routes, like New York to Los Angeles.

The company's pension burden weighs on profitability, though Congress recently allowed American to defer some payments to underfunded pensions for two years. This year management has put $319 million away for pensions and will spend an additional $300 million on retirees' medical benefits--an expense its younger competitors don't have. These low-cost carriers "pay people a lot less, and they don't provide good benefits," says Arpey. "I do believe people in big public companies should retire with benefits, but we've got to find a way to pay for it."

While American's turnaround has surprised skeptics, the long-term survival of such old-line carriers is still an open question. No-frills carriers, once just 8% of the U.S. market, now grab about 25% and compete with American on 8 out of every 10 routes the airline flies. Last week vintage carrier U.S. Airways said it may have to consider its second bankruptcy filing in two years, while United Airlines is still waiting to hear if the government will guarantee a $1.6 billion loan. Delta and its pilots' union are headed for a dustup that could roil the company's future. At American, losses for the first three months this year were lower: $166 million vs. $1 billion last year. But jet fuel prices are up more than 40% in the past year, and every penny of increase costs American $30 million annually. Arpey is acutely aware that his airline still faces a bumpy ride. Sitting on his desk is a purple papier-mache dinosaur his 6-year-old daughter gave him for his first "show and tell" with executives after the near miss with bankruptcy. "She says it has special flying powers," says Arpey, "and boy, do we need that right now." --With reporting by Sally B. Donnelly/Washington

With reporting by Sally B. Donnelly/Washington