By Mitchell Schnurman
mschnurman@star-telegram.com
At the end, American Airlines and CEO Gerard Arpey went out with a whimper.
For eight years, they fought like heck to stay out of bankruptcy. They reworked labor contracts, juggled debt, lobbied Congress to lower pension payments, found new revenue in baggage fees and talked defiantly about setting a higher standard than their bankrupt rivals.
Then, in a few weeks, it was over. American had $4 billion in cash and a couple of labor contracts out for vote when it suddenly threw in the towel. Last month, Arpey resigned, said goodbye in a letter to employees and joined an investment firm. His successor, Tom Horton, seemed eager to turn the page to Chapter 11.
American lost $12 billion in the past decade, so financial failure was always a real threat. If this were a football game, American would have been trailing by two touchdowns at the two-minute warning. But then the company took a knee and ran out the clock, which was totally out of character.
No one doubts Arpey's commitment to avoiding bankruptcy; the day after the filing, one writer touted his moral stance in a column in
The New York Times. But his low profile during the past few months begs the question: Why didn't Arpey fight harder to save the company?
The reason, in my view, is that he had already lost Wall Street, his board of directors, even his management team.
While many admired Arpey as an executive and loved him as a friend, they gradually separated from him on bankruptcy. And that was the defining issue at American, from Arpey's first day at the helm to his last.
Analysts started criticizing Arpey aggressively in spring 2010, when Jamie Baker of JPMorgan asked, "Is this all you have got?" In a conference call in April 2010, Baker told Arpey that Albert Einstein's definition of insanity was doing the same thing over and over and expecting a different result.
Arpey and a colleague defended the company's latest moves, and after Baker thanked them perfunctorily, Arpey lashed out.
"It's not quite as Einstein as terminating pension plans, aggregating contracts, [filing] bankruptcy and wiping out shareholders, but it is progress," Arpey said.
Arpey's disdain for Chapter 11 dominated American for almost a decade. But as American's losses piled up, and labor and management repeatedly failed to get new contracts, more insiders came to believe that bankruptcy was the only path.
Horton, Arpey's long-time lieutenant and confidant, started to talk about going through the "carwash" of bankruptcy, as in cleansing the company. Other American execs began using the term frequently, reflecting a subtle shift in perception -- from Chapter 11 as a symbol of shame to a necessary business tool.
The board of directors for parent company AMR appeared to turn more hawkish, too. This was a natural evolution, as it became clear that Arpey's approach wasn't working, and as competitors picked up market share and profits. In addition, longtime director David Boren, who had been a moderating force and big Arpey supporter, retired in May.
Boren, a former governor and senator who is now president of the University of Oklahoma, had considerable experience with bureaucracies and stalemates. He also had a special rooting interest in American's success. The company has a major maintenance facility in Tulsa, kept open and growing, because employees and Arpey committed to keep the work in-house and in the U.S.
In bankruptcy, there will be pressure to scale back the Tulsa workforce and outsource heavy maintenance, as most rivals do.
In July, American unveiled an order for 460 planes with Boeing and Airbus. The new fleet, combined with options for hundreds more planes, offered American a shot at major growth -- but only if labor costs were in line with the rest of the industry.
That carrot was supposed to win over the pilots union, with the stick of bankruptcy in the other hand, just in case. American offered the pilots some generous terms: signing bonuses, pay raises, pensions for the rest of their careers, and job security.
Some board members and American execs were apparently alarmed by the contract terms. They didn't lower American's costs enough to make the company competitive. Everything else would have to fall into place perfectly, including fuel prices, the global economy, American's network and contracts with other work groups.
They feared that the pilots deal might set up a repeat of 2003, with cuts deep enough to avoid bankruptcy but not enough to make the company healthy. Not to worry: The pilots union negotiators rejected the deal and said they would take a much-needed break for Thanksgiving week.
Unlike in 2003, Arpey and his execs didn't try to win over the rank-and-file by barnstorming American hangars or union halls. They didn't meet with newspaper editorial boards to push the plan. Arpey, always uncomfortable with celebrity, didn't take a turn on CNBC.
In fact, Arpey had practically no public profile during the company's do-or-die moment.
American negotiators never threatened bankruptcy as they did before. They made a great offer to pilots, and 15 days after it was rejected, American filed for Chapter 11.
If the unions expected more negotiations, they badly miscalculated. American had the money and time to play out the string longer, but Arpey didn't have the allies.
In 2003, when Don Carty resigned and Arpey was recruited to take his place, Arpey sat at a table with union leaders and senior executives. He said he wouldn't take the job unless each person backed him.
By November, he didn't have to poll his colleagues on bankruptcy.
Mitchell Schnurman's column appears Sundays and Thursdays. 817-390-7821Twitter: @mitchschnurman
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