'Life in the airline business'

Gerard Arpey was on a panel of speakers at a CEO roundtable hosted by the Dallas Business Journal this morning. He spoke about the challenges the carrier is facing, and how it switched from fuel cost issues to demand problems:

So from our perspective, we seem to have experienced an almost seamless transition in which our fuel cost crisis has been replaced by a potential air travel demand crisis.  Now, I would have preferred a little downtime between crises, but that’s life in the airline business.

Keep reading for the full text of his prepared remarks.

- Trebor Banstetter

Gerard Arpey
Dallas Business Journal Event
December 9, 2008

Good morning everyone.  I want to thank the Dallas Business Journal for hosting this event, and all of you for being here so early in the morning.

Some say the old Chinese saying -- “may you live in interesting times” -- is a blessing, some call it a curse.  Either way, we’ve certainly all been living in interesting times in 2008, and we appear headed for more of the same in 2009.

As usual, things are particularly interesting at American Airlines these days.  And as always, what happens at AA has a big impact on North Texas, which is not only home to our headquarters and many thousands of American Airlines employees, but also the site of our largest and most important hub.  

We directly employ more than 20,000 people in the DFW area, our total job impact is estimated at over 160,000, and we contribute an estimated 24 and a half billion dollars to the North Texas economy annually.  We connect North Texas, nonstop, to 26 cities in 13 foreign countries, as well as dozens of communities here in the United States.

So let me touch on a few of the challenges we faced this year, and what we see coming down the pike in 2009.  2008 has certainly not shaped up the way we hoped it would.  A year ago we were putting the finishing touches on our second profitable year in a row -- a pretty big accomplishment given the trauma we went through in the early part of this decade.

We returned American to profitability despite grappling with fuel prices the likes of which we had never seen, and a significant labor cost disadvantage versus the industry.  As many of you know, we are the only legacy airline that has never filed for Chapter 11 Bankruptcy Court protection.  All of our legacy competitors have used the Bankruptcy Courts -- some more than once -- to lower wage rates below American, eliminate or freeze defined benefit pension plans, eviscerate retiree medical plans, outsource maintenance work, and eliminate restrictive work rules.

So, having earned back-to-back profits in ’06 and ’07 despite our challenges, we entered 2008 with some confidence that -- if we got a little fuel relief -- we could sustain our hard-earned momentum.  Of course that’s not what happened.  As 2008 progressed the price of oil soared to almost unimaginable heights.  
From about 75 dollars a barrel in the 3rd quarter of last year year it went to almost 150, and along the way our industry’s financial results -- which have never been particularly stellar -- went off the cliff.  That increase from 75 dollars a barrel to 145 dollars cost American 5.5 billion dollars.  

Despite our best efforts, we were largely unable to pass these increased fuel costs on to our customers, so we were forced to absorb the billions of dollars of extra expense.  Fortunately, we have been working hard for many years to pay down debt, build our liquidity and be prepared for this kind of external shock.

We also took a number of steps to close the gap driven by oil prices between our revenues and costs.  

As we built our schedule for the second half of this year, we eliminated a lot of consistently unprofitable flights.    

We also reduced our schedule broadly in an effort to confront economic reality and get supply and demand realigned in a way that lets us charge a price for our product that reflects what it costs us to produce it.

We also introduced a new revenue paradigm, introducing a number of fees for various services and product attributes such as checked bags, food service in coach, confirmed flight changes and reservations assistance.  

We essentially unbundled our product, enabling us to generate more revenue from the customers who demand more, and allowing those customers who don’t desire certain aspects of what we offer to avoid paying for them.  Virtually the entire airline industry has launched their own or has matched American’s initiatives.

We took these and other difficult steps to address the threat posed by the oil shock, and then -- as those initiatives were gaining traction -- an interesting thing happened.  Or rather, two interesting and related things happened.  The financial markets and economy fell off a cliff, and the price of oil started to fall very dramatically.

So from our perspective, we seem to have experienced an almost seamless transition in which our fuel cost crisis has been replaced by a potential air travel demand crisis.  Now, I would have preferred a little downtime between crises, but that’s life in the airline business.

The bottom line is that we are headed for more big challenges, and more “interesting times” in 2009.  That said, there are a couple silver linings embedded in our cloudy forecast.  One, from a local point of view, is that DFW, while certainly not immune to the pain reverberating through the industry, has had its schedule cut a bit less than a lot of other big airports around the country.

DFW’s comparative advantage has a lot to do with the resilience, diversity and relative health of the local economy and the fact that DFW is a big, modern and well-run airport.

The silver lining from an American Airlines perspective is the fact that the actions we took in response to the fuel crisis earlier this year gave us, in effect, a running start as we begin to address our new economic challenge.  You might say we started taking our medicine a little earlier than some other industries.  

That doesn’t mean we don’t have more medicine to take in the months to come.  We’re going to be keeping a close eye on some key indicators -- the overall economy, both in U.S. and the other countries we serve around the world, the level of industry capacity relative to demand, and of course oil prices.

The question now is whether the adjustments we made to our business in response to the fuel crisis are sufficient and appropriate to deal with the current economic downturn.  At the moment we are in a bit of a wait and see mode.  So, make no mistake, the outlook for 2009 -- for us and just about every business -- is tough.  

But we are no stranger to tough times.  What’s more, despite the frequency and intensity of unexpected challenges in our business, I think it’s important for our customers, our employees, our shareholders and of course our hometown to understand that our focus is on making American Airlines a world class global transportation company that can -- not just survive the latest crisis -- but compete and win over the long haul.  

And we’re working hard on a number of fronts -- from balance sheet repair to fleet renewal to infrastructure investments -- to make that happen.

Bottom line, I think, is that our challenge at American Airlines is pretty analogous to most businesses and the country as a whole.  We’ve got our work cut out for us in the year to come, but one of our greatest strengths is our resilience.  

So I’m hopeful, and confident, that when we convene a year from now there will be a lot of progress to report, and the outlook for 2010 will be significantly brighter.

Thank you all very much.

Comments

[Suzie orman]

Life in every business and operation is tough. But most of us tend to see only those difficulties which are experienced by us in our business.

[Guinea Pig]

I don't buy your public rhetoric for a minute Gerard. Each year you sound like a broken record, constantly foisting your overwhelming pessimism and global blame when you truly should be speaking about the internal problems American Airlines faces on a daily basis, problems that you and your senior management have been negligent in addressing.

American Airlines needs strong leadership right now, since it has so much potential as a global leader. The airline will continue to fall short in this area, Gerard, if you continue in your actions to ignore employee's concerns, appoint rank and file managers to address the issues that you are too afraid to address, walk away from people who have a strong voice to air at a shareholder's meeting and fail to show up at a state appellate hearing to discuss company discrimination of employees. Do you "lead by example" when condoning your rank and file managers and VPs when they retaliate against employees both internally and externally to protect the company "at all cost" ?? Do you have both the courage and the integrity to host president's conferences risking scrutiny and rebuke from concerned employees ??? Do you personally look into corporate policy which has proven to be discriminatory in nature ??

So Gerard, people may have arisen early to attend your 7:30 a.m. pessimism speech and some from the media and the business journal may continue to kiss your butt so that your fame and American's brand can boost their circulation. You may be a big shot over at the Dallas Museum of Art and Suzie may make good points here, but the fact is, when you stop covering up the real problems facing American Airlines and start being truthful and sincere with your audience, then perhaps your "challenges" may begin to lessen. Perhaps then you won't be faced with threats of legal lawsuits or investigations from the EEOC or picket signs from your unhappy and demoralized employees. I state strongly, WAKE UP GERARD !!!

Many corporations are struggling today and I would highly encourage you in this uncertain economy to start getting with the program when it comes to leading a company, otherwise I see a very near future of failure before congress like AIG and the big three have been (what a coincidence, they all received excessive executive bonuses too.......). And quite frankly, if it gets to that point, then American's credibility is all but lost, despite how many letters your Diversity VP, Volunteerism Director and Sales and Marketing favorites write to congress to sell them on an ideology that you truly don't believe in, or even practice for that matter !!!

This posting is not from a current employee, union member or passenger. This posting comes from a person around the business circles who knows all about the inside of corporate American Airlines and the corrupt HDQ executives you protect, Gerard, solely because they help save the bottom line "at all cost".

Please remember this post, Gerard, the next time Jeff sends his HR Ops Manager to do your dirty work for you. Make sure he sends you both copies of exhibits K-S. I'm sure you both will find the evidence interesting as opposed to the popular sentiment of "I do not see a need to re-visit these concerns" or the assertion of "entitlement".

As the old saying goes Gerard, lead, follow or as Bob Crandall would say " If you can't compete, then you should get out of the business !!!"

Thank you for your time.

[dc8]

well said guinea pig. don,t worry gerard,s and the rest of his gutless management days are numbered. what goes around comes around ten fold. i believe in carma and the hands of the almighty god to punish him and the rest of the roman empire management.