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And The Winner Is… Gerard Arpey – 3.14.07

Source: Plane BusinessBanter
Holly Hegeman, Editor

And The Winner Is…

It's that time again. Time to award the 2007 PlaneBusiness Ron Allen Airline Management Award.

Unlike most years, in which a clear winner is apparent, the decision this year was not so obvious–a point confirmed by the number ofdifferent nominations submitted by subscribers. However, when it came down to it — we had to go with Gerard Arpey, CEO of American Airlines.

For those of you who are not familiar with our award, the award is named for former Chairman and CEO Ron Allen of Delta Air Lines.

An affable guy, by most anyone's standards, Ron nonetheless steered Delta down a disastrously wrong path. He missed opportunities, blew other ones, and most importantly, came up with the "The Leadership 7.5" goal — a goal that was completely  ill-conceived. Whateverpossessed Ron to think that a full-service airline like Delta should attempt to have a 7.5 CASM — "because that is what Southwest had"– we'll never know. What we do know is that his resulting draconian cost cutting, coupled with his inattention to the job of increasing revenues, set the stage for problems Delta is still struggling with
.
So yes, for new subscribers, the award is given annually to that airline CEO that we feel has done the most harm over the previous year to the financial interests of his airline.

And, this year, that is Gerard Arpey.

As long-time readers know, I have been a supporter of Gerard. I felt that he brought PlaneBusiness Banter March 8, 2007 – Page Four Page a very needed change in leadership to American Airlines when he stepped in after Don Carty unceremoniously departed. Gerard reeked of credibility — something that was sorely needed at American.

Also, unlike his predecessor, Gerard had the reputation of being a person who eschewed pomp and circumstance. No limos for him, and no special treatment was necessary. In fact, he abhorred it. Again, a
welcome change from the previous regime.

These positives enabled Gerard to begin his tenure with employees on a positive note. His ability to come across as earnest and sincere didn't hurt. His past financial management track record, meanwhile, meant that Wall Street was happy too. Slowly, we began to see what appeared to be a genuine attempt on the part of American mangement to change the dysfunctional management/union relations that had so convulsed the airline in the past.

The airline hired the Overland Resource Group to help it structure a new way of working with its union leadership. A meeting framework was created that allowed union leaders and management to meet on a regular basis — in an attempt to hash out problems before they became insurmountable.

Two years ago, I wrote in PBB how impressed I was as I sat and listened to the leaders of every American Airlines union talk about the process. It was the Phoenix International Symposium, and as I wrote then, I couldn't remember an event in this industry that seemed like such a potential turning point. Not to say that everything was happy, happy, happy. But it did seem that a tremendous amount of progress had been made in improving the way in which management and labor at the airline looked at the business — and how they could work together to improve it going forward.

But clearly the fledgling effort was fragile. Oh so very fragile. And what about American's employees who are not union members? I would pointout that this is a group that is rarely discussed. But it's a very important group. Those management employees who are not union members — but who have been asked to give up salaries, and bonuses, and benefits. And then asked to do so again.

The same employees who were also asked to work much harder with many fewer employees as the airline cut staffing levels deeper and deeper. Two years ago, I'd say this group at American was, for the most part, behind Arpey and his efforts. They were happy that the airline had not gone bankrupt, they were happy that Carty and many of his hangers-on were gone, and they were happy to pitch in and do their part to improve the airline. They believed in Gerard and what he was telling them.

Fast forward to January 2006. Just 7 months later.

It was here where Gerard made his serious, and perhaps, fatal mistake. It was at this point that Gerard's response, and that of
his top executives, to employees' anger over news concerning executive bonuses doomed all that had been done previously. Because it was at this point where Gerard, the financial guy, appeared to completely discount how fragile those "warm and fuzzy" intangible things like trust and credibility can be.

It was also at this point where Gerard apparently did not realize that when you preach the concept of "shared sacrifice" you'd better believe in it — really believe in it — or you risk losing the "shared trust" you have worked so hard to build with those same employees. And you'd better damn well make sure that those senior execs close to you believe in it as well. But instead of supporting his employees — all his employees — and expressing empathy as to why they might feel upset at the thought of top execs getting large bonuses, after having given up so much themselves, Gerard became defensive. No bone thrown to the worker bees, not even a word of encouragement. No, it became us versus "them" — with "them" being his own employees. He became so defensive that he began to publicly defend why it was that his execs were entitled to the bonus payments. So defensive that he then made another mistake — he encouraged the company's "spin" of the issue into a union/management fight.

Gerard also failed to muzzle Dan Garton, his marketeer, who was quite vocal about the fact he thought he deserved his bonus. If I had been Gerard, I would have fired him. On the spot. But I didn't hear Gerard publicly chastise him. Not hardly. Gerard, the financial guy, obviously forgot about a very important part of any CEO's job — the part about being a leader. Of the entire organization. Serfs and all.

Not just a select few.

It should have come as no surprise then, that later last spring, instead of working out an issue concerning the way in which these payments were to been made — after the Allied Pilots Association brought forth a complaint — that the company told the union it could take the issue to arbitration.

As far as I'm concerned, if there was any question before then, all the millions in consulting fees paid to the Overland Group became moot at that point. That's not to say Gerard still could not have saved the situation. I personally think he could have. Or he should have put someone in a position who could have made it happen.

But it didn't happen.

Instead, since that time, the flight attendant union has not participated to any extent in joint management/union meetings, and the pilots' union recently informed management that it is not going to either.

But, Gerard has another problem.

Again, I ask, what about the all-important middle and upper-middle management ranks of employees who are not union members? For years American has been known around the industry for its "bench strength." The ability to nurture and grow management talent throughout its system. Gerard Arpey is a prime example of that system at work. I'd argue that this reputation is now in jeopardy. Why? Because it's this group that is also tired of sacrificing — while they see their superiors enjoying nice pay increases and/or hefty bonuses — while their own advancement upward has been
stopped, for the most part. And while their workload has doubled, as they've been told to cut back on subordinates, or not re-hire after another person finally decides they've had enough and leaves.

For example, in April 2003, pay cuts for management (excluding officers) at American were made on a sliding scale basis: Management (excluding officers)
$0 to $30K 4%
$30 to $60K 7%
$60 – $90K 10%
+$90K 13.5%
Officers took a flat 17% reduction.

The average front-line supervisor took cuts between 4.5% (based on the minimum salary for that classification) and 7.5% (based on the max). While some might look at these numbers and say, "that doesn't look that bad," when you compare it to the 17.5% cut that the union members took, there's more to the equation.

There were no pay raises for management between May 1, 2000 and April 30, 2003. Prior to that, raises had been averaging 4% per year for high performers, and 2% for medium performers. Add another 4% to 8% to the above percentages for raises not given, and you get a minimum cut of 8.5% to a maximum cut of 15.5% for front line supervisors.

As one American manager told me, his 2003 post-cut salary was 17.1% lower than what his 2000 salary would have been with the high- performer raises. But as we mentioned before, the money is just one part of it.

The October 2001 cuts in employees totaled about 15% of the workforce, and the airline had subsequent reductions of 5% in 2002 and 2003. As another person told me this week, "The desks may have been empty, but the work didn't go away, and management employees don't typically get overtime." He added that supervisors are eligible if it's operationally necessary, but even there, only if the workday exceeds 9 hours; and they don't get it for administrative work, or for meetings outside their work hours.

As a result, typical work weeks for these employees have gone from 40 hours pre 9/11 to an average of 55 hours post 9/11. As one employee told us, all of this would be fine. But again, it's that nagging issue of "shared sacrifice." The concept goes cold fast when only the top dogs get to share in whatever bonuses are paid after the fact. And the top dog himself is on record defending their bonus structure — flawed as it is.

Of course, management employees have an option that pilots and other seniority based union members don't. They can leave. And they have. And this was before the news this week about how Delta is going to reward its employees with pay raises and bonuses when it emerges from bankruptcy this spring.

I'm sure that went over well over on Amon Carter Blvd. this week.

Like a slap in the face.

Looking forward, the airline will once again soon be announcing the amount of its latest "bonus" payments that execs will receive from its flawed bonus plan. And once again, a large portion of the airline's employees will be wondering about the concept of "shared sacrifice." Meanwhile, the trust and credibility that was so slowly and painfully built between management and two of its largest unions is gone, for the most part.

Gerard could have avoided all of this.

He could have stepped up last year and done the right things. He could have announced some type of special bonus plan for rank and file employees and/or a modification of the existing executive payout plan that most everyone acknowledges is based on a flawed formula.

He could have publicly chastised upper management members who ran around crying about how they deserved their bonuses. He could have shown more empathy for those who were not included in the plan, instead of arguing that employees should not have been surprised.

And, most importantly, he could have been less defensive about the issue — not taking it personally as though he himself were being attacked — taking a leadership role instead.

But he didn't.

Gerard, the financial guy, got mired in the minutae. He was oblivious to the big picture and the impact and perception of his
actions — or lack of action. He fell back on old and worn ways of dealing with new problems. He showed a lack of vision and/or
innovation.

In short, he failed last year to show he's a leader — rather than just a head number cruncher. And in doing so, he wiped out whatever positives he and his team had worked so hard to gain over the previous two years.

As a result — we award this year's PlaneBusiness Ron Allen Airline Management Award to American Airline's CEO Gerard Arpey.

PlaneBusiness Banter Disclosure Notes: Holly Hegeman currently holds no positions in any stocks discussed in today's issue. PlaneBusiness.com is not currently engaged in a consulting capacity with any airline discussed in today's issue. However, we do routinely provide research and/or consulting services for airlines and/or financial firms related to the industry. Comments made in regard to individual stocks in this publication are not to be interpreted as stock recommendations.

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M-F: 9:00AM - 5:00PM (CT)
Phone: (817) 540-0108

Call APFA

Contract & Scheduling Desk
M-F: 7:00AM - 7:00PM (CT)
Phone: (817) 540-0108

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