American Flier

It's not easy being Darth Vader's successor, but American Airlines' Don Carty is shaking up the empire anyway.

March 2001By Comments

Airlines have always attracted colorful characters and larger-than-life chief executives. Brash billionaire Howard Hughes once owned Trans World Airlines and corporate raider Carl Icahn once ran it. Think of the volatile, empire-building Frank Lorenzo of Eastern Airlines; folksy, eccentric Southwest Airlines chairman Herb Kelleher; and international bad boy Richard Branson of Virgin Atlantic Airways. And, of course, American Airlines’ Robert Crandall. Crandall was the hot-tempered, cutthroat CEO who built Fort Worth-based American into an industry juggernaut by the sheer force of his competitive thirst for blood. Nicknames like Fang and Darth Vader stuck for good reason. And even though Crandall retired three years ago, it’s hard to think of American as anything but Crandall’s airline. His many innovations, from frequent-flier programs to the hub-and-spoke network and computerized reservation systems, revolutionized the airline business. So it’s not surprising that when the torch was passed in 1998 to the more low-key and polished Don Carty, some wondered if he might be just a caretaker. Until recently the major innovation he was known for was the “More Room Throughout Coach” program that removed some seats from American’s planes to give passengers more legroom. Nice, but not exactly gutsy. It begged the question: What exactly was Carty going to do with Crandall’s airline? And did he have the killer instinct to succeed in such an intensely competitive business?

The tall, white-haired, Canadian-born Carty finally answered that question in January when he stepped onto a New York stage and boldly went where his former boss had not gone before—into the turbulent skies of airline consolidation. But the 54-year-old Carty, it turned out, wasn’t out to destroy competitors with strong-arm tactics. Rather, he shrewdly took advantage of the industry’s merger-and-acquisition fever to scavenge vital parts from other carriers and use them to create a more efficient and more powerful airline.

Carty stunned the industry with three complex deals that, if approved by regulators, will position American along with United as the two dominant U.S. carriers. First AMR, American's parent company, proposed to purchase the assets of venerable TWA, which is in bankruptcy proceedings, and assume its aircraft operating leases. That was surprising enough news, but Carty didn't stop there. American would also play a role in the planned merger of United Airlines and US Airways by acquiring gates, slots, and 86 aircraft from US Airways, which has to shed some assets to appease regulators. American would split the operation of the Washington, D.C.-New York-Boston shuttle with United. And American would take a 49 percent stake in DC Air, a short-haul carrier that's being spun off from United-US Airways. The transactions totaled about $5 billion, including $1.8 billion in cash. Yet it seemed a bargain since the deals, if they get green lights from regulators and a bankruptcy court, would let United and American divvy up about half of the U.S. airline market between them. Moreover, American could significantly expand its route map, especially in the lucrative Northeast. "American Airlines can now say, 'We'll take you anywhere,'" Carty bragged.

Three years after Crandall resigned, his former understudy can now say he was the one who took a big risk and helped reshape the airline industry's competitive balance. "He's putting his mark on the airline," says Raymond Neidl, an industry analyst at ING Barings in New York. Neidl can speak with some authority on that topic, since he worked for American in the early eighties, when he was a financial analyst, and Carty, then the controller, was his boss. While Carty, who has held various financial and strategic planning positions with American over more than twenty years, is much more mild-mannered than Crandall, Neidl says both men are a lot alike. "Carty is just as aggressive. It's just that he puts a more genteel picture on it," Neidl says. "Don is like Bob Crandall but with a smile."

One major difference between the two is that Crandall hated the idea of mergers. "They're a bloody mess for the first year or two and create all kinds of problems and disruptions in service," Neidl says. Sure enough, things got messy almost immediately. A day after Carty dropped his bomb in New York, American's flight attendants dropped one of their own: Their union had authorized a strike vote, paving the way for a possible strike this spring. Carty's free-spending ways were in part to blame. "It is ironic that American can find more than $5 billion for these various assets, but it can't invest in its best assets, its employees, who work every day serving our passengers to contribute to the profits that make these deals possible," says John Ward, the union's president. A few weeks later, a ghost from TWA's past, Carl Icahn, emerged as a potential spoiler in the TWA deal. Now one of TWA's creditors, he ran the airline from 1985 to 1993. Icahn has challenged American's plan with the Delaware bankruptcy court hearing the TWA case. He called it an "illusory, one-sided deal." Icahn is especially upset about a $75 million fee included in the transaction's terms that he says discourages competitive bids for TWA and gives American an unfair advantage. Rivals Continental Airlines and Northwest Airlines have filed objections too. But the bankruptcy judge hearing the TWA case rebuffed their protests and cleared the way for a final auction of TWA, which could take place in March.

Why would Carty deliberately fly into such a storm? The answer is that the United-US Airways merger, which still must pass muster with regulators, changed the industry's flight plan. Suddenly facing a formidable competitor in a business where size matters, Carty saw a rare opportunity. "This combination of transactions really became the perfect package," Carty says. For one thing, American gets rid of a competitor, TWA, that has been discounting fares. It gets TWA's St. Louis hub, which American plans to use to handle the overflow from its east-west traffic. That's valuable because American is constrained in how fast it can grow at its other major hubs, Chicago O'Hare International and Dallas-Fort Worth International Airport. And American gets coveted routes in the market-rich Northeast. It will become an even bigger player at New York's La Guardia and Kennedy airports, Boston's Logan, and the Washington, D.C., area's Dulles. "Long-term, it's going to be very positive," Neidl says. "But there's going to be a rough two to three years in between" as American integrates new employees into the company.

Indeed, one of Crandall's thornier legacies is American's cantankerous relations with its labor unions. Though Carty has tried to inject a more civil tone into contract negotiations—a far cry from Crandall's old scorched-earth tactics—that didn't stop pilots' long-simmering frustrations with American from boiling over after the 1998 acquisition of Reno Air. American's most powerful union, the Allied Pilots Association, feared losing assignments to Reno Air's lower-paid pilots and in February 1999 staged an angry and costly eleven-day sick-out.

Carty has already taken steps to loosen up American's stiff corporate culture and make it a more employee-friendly company. He relaxed the dress code that once required men to wear coats and ties; now it's business casual (but no jeans or shorts). He installed a CEO hotline so that employees could hear from him about once a week on topics related to the airline. Last year he started a program to offer all employees a home computer and Internet access for $12 a month. It wasn't cheap—American took a fourth-quarter charge of $35 million to cover the expense. And Carty ordered "360 reviews," in which managers—Carty included—get rated by their supervisors and by the people who work with them and for them. "That's dramatic because it translates into long-lasting cultural change," explains American spokesman Tim Doke. Now, all they have to do is sell that idea to the deeply suspicious unions.

Regulators and lawmakers could crash Carty's party too. Critics on Capitol Hill complain that the planned deals—which require approval from the U.S. Department of Justice—would erode what little competition remains in the deregulated airline industry. Louise Slaughter, a Democratic congresswoman from New York, warned that passengers can expect "higher prices, fewer flights, and even worse service than they endured over the holidays," when bad weather, a clogged air-traffic-control system, and a contract dispute between Delta Air Lines and its pilots grounded planes and delayed flights. "We're not trying to eliminate competition," Carty insists. "We're trying to build a network." He adds that it would be far worse for consumers if a carrier like TWA simply went away. Consumers will have more choices, not fewer ones, he says, because "you may have fewer airlines, but you'll have airlines that can serve the whole country."

Back home, Carty faces more uncertainties. High fuel costs and a softening economy could deal American a double whammy. Even though it hedges and buys fuel at contracted prices in advance, American's fuel costs jumped 52 percent in last year's fourth quarter. "Fuel costs have become less than predictable," says Thomas Horton, AMR's chief financial officer. Last year AMR's net earnings plunged 17.5 percent to $813 million, although revenues were up 11 percent to $19.7 billion. "Fares are holding up pretty well right now in the first quarter," Horton says. "The wild card is going to be discounting."

And there's another player yet to be heard from: President George W. Bush. The former Texas governor is in an interesting predicament. American already is being sued by the Justice Department (under the Clinton administration) on the grounds that it dominates DFW Airport and charges monopoly fares on many DFW routes. The proposed new airline deals are going to be scrutinized as a major test of the Bush administration's antitrust policy. But American and especially Carty have been Bush allies. Carty is one of the Bush Pioneers, a select group of top fundraisers. He personally gave a total of $5,000 to the Bush-Cheney campaign and the Republican National Committee and $5,000 to the Florida recount effort. And American contributed $100,000 to the Bush inauguration. Carty went to Washington to schmooze at Bush's inaugural balls, although Doke says it was strictly a social occasion and that Carty wasn't there to lobby the new president on the airline's transactions. Still, every little bit helps, and the Canadian who is finally putting his stamp on American is going to need plenty of help flying through the bumpy air ahead.

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