Saturday, July 23, 2011

American Airlines charts its future
July 22, 2011 10:35 pm
by Jeremy Lemer

Jet fuel in his blood: Gerard Arpey, American Airlines chief executive, joined the company in the 1980s

When Gerard Arpey joined American Airlines in the 1980s as a financial analyst, his arrival coincided with an aircraft-buying spree that would turn the carrier into one of the world’s largest.
Thirty years on and Mr Arpey, now chief executive, has just penned a deal that will in one fell swoop retire many of those same aircraft and chart a course for the US airline for decades to come. On Wednesday, the 52-year-old executive ordered more than 900 jets – counting options – in a deal worth nearly $40bn, badgered a supplier into developing a more fuel-efficient aircraft and stole a march on its main rivals.
Appearing at a news conference surrounded by local dignitaries and top Boeing and Airbus executives was a rare turn in the limelight for someone peers describe as a modest family man, quiet, thoughtful, and even a little cerebral.

Since taking the top job in 2003 – his predecessor was ousted for negotiating a lucrative bonus plan even as he extracted heavy concessions from workers – Mr Arpey has worked tirelessly to save money, cut debt and repair relations with employees, though to little avail.

He sold the company’s executive art collection and replaced it with photos of American aircraft, but net debt remains above $11bn. He set up joint leadership councils with unions, but the monthly meetings are sparsely attended.

Still, the symmetry of the aircraft order is fitting for Mr Arpey, who has spent his entire career at the airline, progressing from lowly analyst through the financial planning department before becoming chief operating officer in 2002.

He has jet fuel in his blood. His father was an airline executive and, as a student, Mr Arpey loaded bags for Delta Air Lines. In his spare time he flies a small Piper aircraft, although steering an airline through fuel spikes and recessions leaves little enough of that.

American in 2011 is a far cry from the carrier it was in the 1980s. Avoiding insolvency in the early 2000s has left it trapped: unable to reduce its debts or fix its labour problems until it makes money – and unable to make money without less debt and lower labour costs.

Then, the airline was spending to grow; now it is spending to survive. Mr Arpey and its team are gambling that, by replacing the old fuel-guzzling fleet and charting a path to growth, they can cut costs and win over disgruntled workers.

“This is something they had to do. With a 300lb jockey, even Sea Biscuit couldn’t win a race,” says Gordon Bethune, who led a turnround at Continental Airlines in the 1990s. Still, Mr Bethune worries that solving entrenched labour problems will be hard.

A chorus of analysts also remain sceptical.

“We understand that American’s fleet (and brand) are tired, but this announcement represents a ton of new capital being put into a failing business model,” one analyst wrote, demanding instant dividends.

Mr Arpey is well aware of the urgency. His office window looks out on the runways at Dallas Fort Worth International Airport and he winces when he sees American aircraft stuck in holding patterns because of bad weather, and burning expensive fuel.

But his preference, and strategy, is for the long term and the big picture. He has focused traffic on “cornerpost” cities, signed joint ventures, and ordered jets that will reduce costs as they enter the fleet. But it will take time to see results.

Whether American gets that time is a moot point. In the second quarter, the company again lost money, increased its debt load and generated less revenue growth than its peers.
Copyright The Financial Times Limited 2011.

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