Leadership Lessons From American Airlines Past

Gerard Arpey led American Airlines for 9 years up until the carrier’s bankruptcy. However he lost the trust of employees half way through his tenure. That’s odd, in a way, because by insisting on pulling every lever possible to forestall bankruptcy the airline underperformed the industry financially for years, while delaying changes to employee contracts that would eventually come through Chapter 11.

The biggest area of controversy with employees was Arpey’s (and management) pay. Another piece of irony is that his pay was mostly in stock, the bulk of which he held to the end losing much of its value when the airline finally did enter bankruptcy. His compensation was ultimately far less than that of his peers, perhaps even less than $2 million a year – which was low for a major company CEO and for an airline CEO once stock awards are factored.

In 2003 the airline secured labor concessions worth over $1.5 billion a year. That’s why they didn’t enter bankruptcy, even as the rejection of a pay deal at United pushed that carrier into Chapter 11.

  • While other airlines outsourced maintenance as part of their bankruptcy process, American did not. It’s a huge part of why the airline’s recent contract negotiations with mechanics were so bitter. American has more employees per aircraft than competitors.

  • American also didn’t liquidate pensions through bankruptcy the way competitors did. They didn’t do so in American’s ultimate bankruptcy, with the Pension Benefit Guaranty Corporation weighing in favor of the US Airways acquisition of American prior to emergence, avoiding doing so. The US Airways deal meant American didn’t gain some of the concessions through bankruptcy that other airlines secured.

Arpey invoked the slogan “Pull together, win together” and talked about shared sacrifice. When the airline performed well in 2006 and 2007 – prior to once again entering a crisis in 2008 – executives received stock awards rewarding the performance. However employees resented not seeing their own upside. Employees felt burned, and they didn’t trust management to bargain in good faith for more concessions outside of bankruptcy.

Upon entering bankruptcy Gerard Arpey resigned, having failed to keep his commitments to creditors. Airline President Tom Horton became Chairman and CEO. The pilots, in the midst of contract negotiations, more or less determined his fate by engaging in a work slowdown.

Current American Airlines management wouldn’t be in place, US Airways wouldn’t have taken over, if American had gotten concessions through bankruptcy that Arpey avoided, and if they hadn’t sided with the takeover and pushed out management.

The resentment came over the perception rather than the reality of being treated unfairly, of management benefiting from the company’s success while employees did not. They benefited in many ways more than Arpey did, as a result of Arpey’s strategy not to wring concessions through bankruptcy or use the bankruptcy code to terminate pensions.

I’d submit that the wrong decisions were made – because perception matters, unfortunately, as much as reality when it comes to leadership. As travel companies struggle through the current times that’s a lesson that executives need to remember – and one that struggling employees need to understand as well as they sort through where their interest actually lies.

My advice is that the substance needs to be there also, people eventually figure out when the symbolism is fake in an age that craves authenticity. However along side making all the right moves it’s important to frame messages effectively.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Appreciate the inside baseball but this was a little hard to follow

    Help me understand how AA / US wasn’t inevitable after DL/NW and UA/CO. Sure they could have delayed but were not cash flow positive I recall so eventually would have filed.

  2. I thoroughly remember this era at AA. It was the ‘suits’ against everyone else. The mechanics, office staff, everyone hated the suits and there was nothing that the suits could do to sway them. It was a horrible place to work if you were an average, intelligent person that could see the business sense along with the work product of the employees. Moving to the current era, AA just came away from having the mechanics manipulating the work in order to create delays and cancellations while once again hating the suits for making so much money. As a customer, AA has completely lost my desire for them to continue to be in business. I still have a million miles to dump and will do so while I have this elite status, but even if they survive I will never fly them again unless they can create the consensus that the service is going to be rewarded based upon how they treat the customers. Goodbye AA, as this article state, you did it to yourself with blind hatred and salary envy. I am only going to miss one of your employees and I am certain that Sammye can do better at one of the new airlines that comes out on the other side of this.

  3. I think your analysis is fair. Arpey behaved rationally and well. When he left, he got nothing.

    A long, long time ago, my father worked at American for a CEO named Marion Sadler. Mr Sadler had what he called a ‘polity’, a word you don’t see much any more, that the management would run the company for the benefit of the flying public first, for the employees second, and for the shareholders third. Mr Sadler did not serve as CEO for very long – he contracted cancer and had to step down.

    We haven’t seen his like since. It’s pretty clear the priorities are not that way any more.

  4. Excellent recap, and I would add that the pilots criticized management for taking big stock grants, but steadfastly refused to take their own compensation in anything other than cash.

    Much as I think Parker deserves harsh criticism for inept management, the unions and their members have heavily contributed to the demise of a once excellent airline.

  5. AA labor will always hAAte AA management. They wanted Parker, he gave them raises for nothing, and now they hate him.

  6. @Greg – US/AA *inside of bankruptcy* wasn’t inevitable, and if AA had exited bankruptcy intact and then merged we’d see a different airline today… not a straight takeover by US Airways. [And as an alternative, AA might have merged with JetBlue]

  7. Lots of nostalgia for Bob Crandall who was American Airlines CEO from 1985 to 1998.. What might he have done differently if he had continued to lead American Airlines into the 2000s?

    I often wish Bob Crandall and Gordon Bethune, CEO of Continental Airlines from 1994 to 2004, would come out of retirement for one last hurrah.

  8. Gary-

    I believe back in the 1990s, Bob Crandall (ex AA CEO) said that in 20 years, AA wouldn’t exist. As he knew it then, it doesn’t.

    Wasn’t Crandall also very critical of the 1978 dereg of the airline industry, saying it would lead to a price war racing to the bottom?

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