BOB CRANDALL'S BOO-BOOS THE FIERY AMERICAN AIRLINES CHAIRMAN FACES LABOR STRIFE THAT COULD CREATE LONG-LASTING SCARS AT HIS COMPANY. HERE'S HOW HE WENT WRONG.
(FORTUNE Magazine) – Sometime in the next few months, American Airlines and the union that represents its pilots will probably end their 32 months of bickering and agree to a contract. But no matter how things turn out, this standoff will likely have long-term repercussions at the carrier, the largest domestic airline in the U.S. Though the planes its pilots fly and the wages they earn are the issues on the table at American, the impasse has really been about something much more intangible: trust. When it's lacking in your company, it can cost you deeply--as American's bean counters are currently learning all too well. The airline, no doubt estimating conservatively, guesses that the threat of a strike has so far cost it at least $100 million in lost bookings as passengers, concerned about various impending walkout dates, choose to fly on other airlines.
It's a bit surprising that American Airlines CEO Robert Crandall has allowed employee trust to deteriorate so badly, and with such dire consequences. Even his pilots, many of whom speak of him with outright contempt, concede that he's mastered many other key management roles in his 25-plus years in the airline industry. Under Crandall's watch, American harnessed technology to distribute tickets through its Sabre system of travel agent computer terminals. Then it used the data to price its tickets more judiciously, a technique known as yield management. You also have Bob Crandall to thank for all those miles your company lets you hoard; American was the first carrier to grasp the importance of loyalty and build a big frequent-flier program.
Yet Crandall has always been far less agile when dealing with people--especially some of those who work for him. "Employees are units of expense to him, not assets," says Captain Jeff Jones, a spokesman for the pilots' union. "Money is everything, and people cost him money." Pilots don't trust him, among other reasons, because he brought many of them in at a discount during the 1980s, maligned their intelligence in the press in the first half of this decade, and continues to replace their routes with propeller flights operated by low-wage commuter pilots.
In Crandall's defense, pilots are a difficult bunch to manage, especially when compared with other unionized workers. American Airlines pilots earn $120,000 per year on average, and have no shame about asking for more, even though their average lump-sum payout upon reaching the mandatory retirement age of 60 is just shy of $2 million. While they're paid like airline vice presidents, they can't just split for a job at United if they hate their boss. Airline seniority rules dictate that $120,000 American pilots have to start over at roughly a third of that salary if they want to hop to another airline. So pilots are stuck, both with one another and with management. Because they're going to live with every contract forever, they tend to quibble over every word. Finally, pilots can't be replaced quickly, which means they can shut down the airline at will and thus have the upper hand if they strike.
This wacky balance of power makes for an uneasy marriage at all the major airlines, and at American the relationship has been especially stormy because of Crandall's combative manner. Instead of learning to love his flyboys and flygirls over the past 20 years, he has basically waged a war of attrition. "Whatever the facts, there's been a growing feeling among American employees that the competitiveness Crandall employed so effectively against other airlines is now being turned toward them," says Ralph Craviso, a former vice president of employee relations at American who is now a consultant based in Dallas.
The war started back in 1983, when a growth imperative gripped major airlines as they raced to compete with low-fare startups. Crandall convinced the pilots that the airline couldn't buy planes to add routes unless new pilots could be hired at drastically reduced pay scales. It seemed like another brilliant Crandall win-win at the time. The pilots who were then at American got to keep their pay, and the new planes offered them opportunities to move more quickly from co-pilot to captain status. Meanwhile, with each new cut-rate pilot, Crandall lowered his average labor costs, all the better to finance the debt incurred in buying the new jets.
Several years later, however, this move came back to haunt him. The pilots hired at what came to be known as the "b-scales" developed a sort of inferiority complex. "All of a sudden, there was a whole group of people working there who were extremely resentful of the fact that the person sitting next to them was making a lot more money for exactly the same job," says Larry Crawford, president of Avitas, an aviation consulting firm in Reston, Virginia. "They began to wonder what kind of scheme was coming at them next." It might seem strange, given that many of their jobs might not have even been created without the b-scales, but they still resented their status as second-class citizens.
Thanks to growth made possible by all the cut-rate hiring, American expanded so quickly that the b-scale pilots eventually made up the majority of the union that Crandall is haggling with today. The b-scalers, whom some at the airline now refer to as the Killer B's, are largely responsible for a grassroots movement called Pilots Defending the Profession that has sprung up on the Internet during the latest round of negotiations. Though the union leadership had approved a tentative settlement offer from American last year, the leaders of the splinter movement persuaded the pilots to turn it down (by almost 2 to 1) when the full membership voted on ratification in January.
B-scales alone were probably not enough to cause pilots to turn on Crandall. But the public insults he aimed at them in the first half of the Nineties infuriated them. In early 1991, during the last contract dispute, Crandall took out full-page ads in national newspapers titled "AApology," asking passengers to have patience with the carrier while pilots were conducting an illegal sickout to force flight cancellations. Miffed pilots, who dispute that a sickout ever took place, still carry key chains with the text of the ad laminated underneath. That's a six-year grudge, and counting.
During other negotiations, pilots suggested a number of operating changes they said would lower costs without damaging their own pay scales. Crandall scoffed at the pilots' analysis, saying that "if the pilots were in charge, Columbus would still be in port. They believe the assertion that the world is flat." Later on, the New York Times turned over the front of its Sunday magazine to Crandall. Right there on the cover, he made a specious threat that if labor costs didn't come down, he would be forced to simply take his company out of passenger service altogether, sell all his jets, and concentrate on Sabre and other businesses.
If you don't want to play by my rules, he seemed to be saying, then get the hell out of the sandbox. "It appears as if he's on a campaign of continually lowered expectations," says Jones of the pilots' union. "He tells us that we'll never make it in our business, but then we earned over $1 billion in profits last year."
Though the pilots' union and American management are currently discussing wages, money is the least of the problems. The lack of labor-management trust has served as a huge obstacle in settling a far thornier issue for American pilots: the regional jets, or RJs, that the company wants to buy. These 50- to 70-seat jets would replace turboprops on many routes flown by American Eagle, whose short flights feed into longer American Airlines routes emanating from the carrier's hubs in Chicago, Dallas, Miami, and San Juan, and other big cities like Los Angeles and New York. It's a good move for the company, of course, since travelers hate the noisy, bumpy turboprop planes and think they're unsafe. Plus, if more passengers switch to Eagle to get to Dallas, more of them will get funneled onto flights operated by the main airline to New York and Europe. If more passengers fly Eagle to connect to American, the big airline will also need to add more jets to meet the demand, which would mean new jobs for American Airlines pilots.
Fancy new planes, growth--everyone should be happy, right? Well, pilots note that the RJs can fly much farther than turboprops. If the low-paid Eagle pilots are flying the RJs, they say, Crandall will replace current routes with RJs piloted by cut-rate Eagle captains. The pilots say they have been burned by similar switcheroos in the past. For years their contracts have been governed by a "supplement" that says Eagle, a wholly owned subsidiary of AMR, the shell corporation that also holds American Airlines, exists primarily to feed passengers to the main airline. So American pilots have not been pleased in the past several years as one route after another has been converted into Eagle propeller service to save money. They believe that Crandall is trying to outsource their jobs.
Why has it taken almost three years to resolve this issue? "A lot can't be written into a contract," says Ray Friedman, a professor of labor relations at the Owen School of Management at Vanderbilt University. He notes that the current trend in labor negotiations among trusting parties is to write short contracts, since both sides realize that they simply can't account for every last contingency on paper. "But it's hard to negotiate that way with someone who you think will screw you every which way once something else comes up a year later."
Clearly the prospect of being tricked by Crandall is a big concern with the pilots, who fully expect him to violate the spirit of whatever agreement emerges from the morass. With this contract the stakes are especially high, since other airlines are already operating the RJs or have ordered dozens of them. "American Airlines will always react competitively to whatever is going on in the marketplace, and they'll usually do it better than anyone else," says former American VP Craviso. "American pilots are afraid of how far the airline can take the use of regional jets, regardless of whatever guarantees they make about preserving jobs."
Contrast the unease at American with Southwest Airlines, home of Herb Kelleher, the only CEO of a big airline who has held his post longer than Crandall. At Southwest, the pilots chipped in and gave Herb a custom-made Harley in the corporate colors. They're currently signed to a ten-year contract. Meanwhile, this is what American's pilots think of their CEO. "When you hear what Crandall says now, you no longer believe it, because he's cried wolf so many times before that you don't want to hear it anymore," says Jones. "We call it 180-degree coding: If he says things are bad, that must mean they're good."
There is plenty of blame to go around here. AMR, the carrier's parent corporation, certainly can't stay competitive if it lets American Airlines pilots fly the RJs at six-figure salaries. But Crandall has erred by allowing himself and his intentions to become the central issue of these negotiations. "Who's right or not just isn't the point anymore," explains Craviso. "In these negotiations, it's all a matter of perception, and for the pilots, Crandall has become a rallying point."
Crandall, who is 61, would no doubt like to fly off into the sunset in a few years with the respect he clearly deserves. Yet he really has no one to blame but himself for his current woes. At an age when most men mellow, he has allowed his personality to shadow the negotiations with his pilots.
And his troubles may not be over, even after he settles with the pilots. American's flight attendants, who brought the airline to its knees with a bitter Thanksgiving strike in 1993, have a contract that's expiring next year. They're not big Bob Crandall fans either. If those negotiations drag on for years, as those with the pilots have, Crandall may reach his mandatory retirement age before a settlement is reached. That would provide an especially sad end to a magnificent career, as one of the industry's true visionaries would be forced to depart in the midst of some very messy unfinished business.