Bob Crandall Flies Off the Handle
In the eighties, his toughness and intensity made American Airlines the best in the business. Today, his rivals are undercutting him, Washington is ignoring him, and answers to his company’s woes are eluding him. No wonder he’s so angry.
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To match his business strides, Crandall buffed up his corporate image. He went to executive charm school, cleaned up his grammar and his table manners, and learned to stop thrusting his finger into the face of whomever he was talking to. When a reporter frankly told him that his bad teeth made it hard to find a flattering photo of him, he had them capped. He took up jogging, lost thirty pounds, and came out looking and behaving like a Fortune 500 CEO. The second quarter of 1989 was the most profitable in the company’s history. Bob Crandall and American Airlines seemed invincible.
Everything changed in the last half of 1989. The economy turned sour. Corporations everywhere laid off workers. Air traffic fell off. Crandall had relied upon hiring cheap labor to free up funds, but now those workers were getting older and moving into higher salary brackets. Just as American had been slow to expand under deregulation, so it was slow to cut back when times were bad. In 1990, a year AMR lost $40 million, Crandall kept grabbing up foreign routes, kept pouring money into hubs, kept adding planes. His biggest competitors, United and Delta, did the same.
Suddenly, the hub system that had worked so beautifully became onerously expensive. Employees worked frenetically during busy stretches, when as many as fifty planes were arriving and departing. But then, after all the planes had gone, the employees were left to twiddle their thumbs, waiting for the next confluence of flights. In other ways as well, American’s costs had simply become too high to compete with the discount carriers. It wasn’t just a matter of hot meals versus peanuts. Take the cost of labor. Southwest’s employees were earning, on average, about the same as American’s, but they worked much longer hours—in 1991 they were 27 percent more efficient. Southwest’s capital costs were lower too. Its airport facilities were less elaborate, and its fleet was standardized. By flying only Boeing 737s, Southwest could cut down on pilot and crew training, mechanics, maintenance, and inventory. By contrast, American was flying nine different jets, plus five propeller planes on its commuter airline, American Eagle. No matter what Crandall did, he couldn’t lower his costs to rival the discounts.
The next three years were horrendous. American had opened three hubs that did not work—Nashville; Raleigh-Durham, North Carolina; and San Jose. American began to lose money on nearly all of its domestic flights. International flights are the most lucrative for long-haul carriers, but Crandall had been slow to act, and so, American missed out on the best deals, especially when it came to the Pacific. Crandall didn’t get serious about Japan until 1986, and as a consequence, American has only a tiny presence at Narita airport in Tokyo compared with United and Northwest.
Flying back and forth to Washington, Crandall lobbied for relief. He had always resented the federal government and its interventionist role in regulation, taxation, and the allocation of routes and airport slots. Now he railed against the bankruptcy laws that sustained sick airlines, the taxes that added 10 percent to the cost of each ticket, and the bilateral agreements that allowed foreign carriers access to the U.S. markets while keeping U.S. carriers out of foreign markets.
Every industry needs a spokesman, someone to articulate its needs from an insider’s perspective, and Bob Crandall might have played that role. Yet the very qualities that had propelled him to success—his unyielding certainty, his pedagogical arrogance, his need to dominate—did not endear him to those he was trying to influence. It wasn’t always what he said but how he said it. In speech after hectoring speech, Crandall offended with his condescending tone. He made no secret of what he thought about then Secretary of Transportation Samuel Skinner. A former Department of Transportation official recalls, “He would demand meetings. You don’t demand meetings. You request them. People who don’t work for American Airlines don’t work for Bob Crandall.” Eventually, there was so much resentment toward him that people would disagree with him no matter what he said.
After three years in which all the major U.S. carriers lost money, Washington has finally taken note that something has to be done. Crandall has emerged as the most persuasive proponent of change in the bankruptcy laws, but the rest of his agenda has met with a lukewarm reception. It’s no surprise that his pugilistic philosophy doesn’t sit well with the Clinton administration, which is, after all, more share-the-wealth than survival-of-the-fittest. “I think people are increasingly not interested in getting involved in an interchange with him,” says one former airline executive. “The universal impression is that you can’t win. You can’t even stay even.”
On May 19, one day after American announced it would lay off 412 employees at its maintenance facility in Tulsa, Bob Crandall stands before AMR Corporation’s annual shareholders meeting at a hotel near DFW airport. Aided by a teleprompter, with color slides projecting onto a screen behind him, Crandall tries to put the best face on a rotten year. “You have our assurance that your management will do everything we can to return your company to profitability as promptly as we can,” he says. But even Crandall’s bravado can’t obscure the bottom line. American had anticipated a $165 million loss for botching a reservation system for hotels and car rental companies. Another huge loss occurred when Crandall tried to get his rivals to go along with a simplified pricing plan last summer, one that eliminated hundreds of ticket discounts. The plan failed when cash-hungry Northwest broke ranks by offering what amounted to a two-for-one sale. In a fury, Crandall retaliated by slashing all of America’s fares by 50 percent—knowing that his competitors would have to match. The upshot was a summer of frenzied discount travel and industry losses in the billions, leading to the lawsuit against American in Galveston.
Now the question is whether any of the big airlines can stay out of bankruptcy. The reality of aviation economics is that the long-haul carriers are selling an uncompetitive product. Their tickets are priced too low to recoup their expenses—adjusted for inflation, the average price of a ticket has dropped 25 percent since deregulation—but they can’t raise fares as long as the discount carriers are undercutting them. The hub system adds to the problem. American’s planes, for instance, spend too much time on the ground, waiting for passengers to arrive from other places. Southwest, which flies from point to point with a quick turnaround, gets far better use of its planes and its people.
But Crandall cannot simply transform American Airlines into a low-cost carrier like Southwest—his costs (capital, labor, overhead) are too high. He cannot spin off a separate short-haul commuter airline (as United is considering) under American’s corporate umbrella, because of his union contracts. And he knows he can’t simply slice off excess capacity without losing more revenues—the marketplace won’t let him. For example, both American and United fly from Chicago’s O’Hare to New York’s LaGuardia approximately twenty times a day. The planes are seldom full, because there is not enough traffic to justify that many flights. But neither airline wants to be the first to reduce its number of flights. Market surveys show that, given comparable ticket prices, passengers will always choose the airline with a more convenient schedule. The moment either one of them cuts back, they lose market share.
Crandall’s solution is simply to eliminate the routes that aren’t making money. American Airlines will keep flying, but to fewer places. If American is to make any money in the air, it may eventually be as a transcontinental and overseas carrier, flying routes on which the short-haul carriers can’t compete. Domestically, American will be reduced to linking major cities—New York, Miami, DFW, Los Angeles, and Chicago—and leaving the medium and smaller cities to the discounts. In the meantime, American will concentrate on service contracts, such as designing reservations and pricing systems for the French high-speed railroad and training computer programmers at Aeroflot.
The truth is that Crandall would be better off if he were free to demolish his rivals through old-fashioned cutthroat competition. Compared with the other major carriers, American is in good shape. It has the quietest, most modern fleet in the business. It also has the deepest pockets. But for American to regain its preeminence, the bankruptcy laws would have to be changed so that the weakest carriers do not hang on and undermine the healthiest. Only then would the industry be truly deregulated.
In a press conference after the shareholders meeting, Crandall answers questions in front of an enormous canvas illustration of a Boeing 757. It is a legacy of happier days, but at the moment, it seems to be mocking him. American had ordered seventy of these superquiet narrow-bodied jets back in 1988 and is still making payments on some of them, planes that will be delivered in the next two years. But who will ride in all those shiny new planes? How will American keep up its payments?
The hard-nosed style that got Crandall to the top won’t help him now. If he makes the right cuts and the economy revives and the planes fill up, American might be profitable again in the next few years. But for Crandall, time may be running out. He has hinted that retirement may not be that far off. In 1986 United tried to lure him to be its CEO, and the AMR board countered the offer with golden handcuffs in the form of stock options currently worth about $22 million, which vest when he becomes sixty—in December 1995. If American Airlines is going to be rescued a second time, someone besides Bob Crandall may have to do it.
Perhaps this is the price for playing the role of Attila—you give no mercy, you expect none back. At the shareholders meeting, the reporters are grilling Crandall about the cutbacks. “I think you can count on a sort of continuous stream of long-term layoffs,” Crandall says, with a frozen smile. “It’s going to go on forever.”
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