Pilot Error

In an exclusive interview, exiled American Airlines CEO Don Carty reveals how he lost his job—and where the most important employer in the metroplex is headed now.

LAST SPRING, WHEN DON CARTY WAS being widely hailed as the man who had saved American Airlines from bankruptcy, I never imagined that I would be standing on the deck of his well-appointed timber lodge in Whistler, British Columbia, talking to him about what had gone so disastrously wrong. As recently as April, the 57-year-old executive held the most important job in the airline industry—CEO of American, the largest airline in the world. He had pulled off a stunning piece of brinkmanship, the largest consensual (not court-ordered) corporate reorganization in the nation's history, and he had done it by leading by example and treating the unionized pilots, flight attendants, and transport workers as partners instead of mortal enemies. He took the unions in, opened his books, and told them more about the company's business than any American manager ever had. Unlike his snarling, combative predecessor, Robert Crandall, in his five-year term as CEO Carty had tried to remake the unforgiving, top-down, hyperagressive culture of American and its parent company, AMR Corporation, into something friendlier and more humane. He was a nice guy. He had tried to do the right thing.

And then, unaccountably, he made one large, irrevocable mistake. In the wake of an emotionally charged labor negotiation over huge wage cuts for American's roughly 100,000 workers, news broke that he had concealed about $40 million in executive perks from the unions, who went nuclear when they found out about it. Critics called Carty's move "shameful" and "appalling." Carty resigned, some reports said, "in disgrace." As a BusinessWeek headline put it, "What was Don Carty thinking?"

I had gone to British Columbia, having been granted the first full interview Carty has given since his resignation, to get some answers to that question—and another one: What is the future of American, to which the economic fate of Dallas, Fort Worth, and North Texas is inextricably linked? As air travelers who go through Dallas-Fort Worth International Airport are constantly reminded, American Airlines is less a company in the traditional sense than a colossal organizing principle, an idea around which enormous numbers of people (24,600 employees in North Texas), enterprises, and cities have coalesced. A bankrupt, or dismantled, American Airlines is not a pretty thought.

"In hindsight, I did make a mistake," Carty said, sounding penitent. "I very publicly apologized. We should have put that information [about the executive perks] out there. I am sad not to be part of the recovery. I am sad that some of my employees think of me as a bad guy." During our interview, he was seated across from me at his dining room table, a friendly, outgoing man in shorts and a Hawaiian shirt. He seemed happy with his new life—and who wouldn't be? These days he hikes the snow-tipped mountains that ring his house, romps with his four-year-old son, drives his nine-year-old stepson to hockey practice, looks after board memberships that range from Big Brothers Big Sisters of America to the Dallas Symphony, Southern Methodist University, Dell Computer, and Sears, and fields half a dozen calls a day from headhunters.

The story he told, gazing periodically toward the liquid sunshine cascading down the vertical slopes of Blackcomb Mountain, was nothing like what I had read in the newspapers about his fall. He insisted that his so-called money grab was a media-fueled illusion, and he wanted me to understand, by way of background, the full context of American's perilous run-up to bankruptcy in late 2002 and early 2003. It began with a Biblical concatenation of disasters: "We were already going into a recession in 2001. Then there were the unbelievable events of 9-11, when twenty-three of our employees were killed. Two months later, there was the crash of Flight 587 in Queens. More death, and a crisis of confidence in one of our aircraft types, the A-300. Then, about a month later, the shoe-bomber happened in Paris, and everybody said, 'Well, of course American is a target; it says "American" on the side,' and we lost even more passengers. Then the price of fuel goes through the roof in anticipation of Iraq. Iraq happens, and then SARS hits, and we are the biggest U.S. carrier in Toronto. I have left out the hailstorm that grounded one hundred planes in Dallas. We had to shrink the company twenty percent, lay off twenty thousand people."

Even before the events of 9-11, Carty and his management team had known that American would have to cut $4 billion in operating expenses to survive. The most intractable problem, he said, was wages, which had spiraled upward in the fat times of the nineties. Unions asked for—and got—large pay raises, using strikes or the threat of strikes as a bargaining tool. In bad times, revenues dropped, but the cost of labor remained high. This cycle, and some good old-fashioned mismanagement, was the main reason that, of the one-hundred-plus carriers that started up in the deregulation era that began in 1978, only a few survive—and why established airlines like Pan Am, Eastern, and TWA (which American took over) failed. But there were other problems too: While airlines were rolling in profits, they forgot all about streamlining their operations. "The error of the traditional airlines," said Carty, "was that we didn't see a big need to change."

By early 2003, though, American's troubles were too obvious to miss. It needed to reduce its costs immediately. Management figured out how to achieve more than $2 billion in savings through fleet simplification (fewer types of aircraft) and technology and productivity improvements. The rest would have to come from lowering workers' wages, and that required Carty's getting the unions to go along. "They had to believe that management had done everything they knew how to do short of coming to labor," said Carty. "They had to believe it was really four billion dollars. The way we did that was to share more data about this than we had ever shared before." He promised them that American's top

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