Why American Airlines Has Become So Terrible

Commentary about business and finance.
Oct. 8 2012 3:56 PM

American Fail Lines

The airline that can’t get its passengers to their destinations on time, manage its workers, or even keep its seats bolted down.

American Airlines customer rests her head on the counter.
American Airlines passengers try to get the airline to put them on a different flight after their scheduled flight was canceled.

Photo by Joe Raedle/Getty Images.

The good news for American Airlines is that it’s prepared to announce that by Saturday none of its 757s will have seats that come loose during flight. The bad news, obviously, is that as of last Thursday, American had to cancel 50 flights because 48 of their planes couldn’t be flown safely. The problem, it says, is that spilled sodas blocked the locking pins used on some of the seats, a flaw that can be corrected by using a different mechanism. The deeper problem for American is that seats coasting around the cabin in flight isn’t even the biggest problem it’s wrestling with this fall. American is bankrupt, and the bankruptcy proceeding—while designed to restore the airline to health—has ignited a multifront civil war pitting executives against their own employees.

Things are so bad for American that the hilarious Sept. 29 New York Times op-ed by novelist Gary Shteyngart about his nightmarish experience on a trans-Atlantic American flight actually understated the case. Everyone who flies has an airline horror story or two to tell, but this fall American is demonstrably worse than the competition.

Consider the latest on-time arrival data. About a third of American’s flights were delayed 15 minutes or more, compared to just 22 percent for United, 18.1 percent for US Airways, or 13.5 percent for Delta. Now consider that this was actually a huge improvement over how American had been doing in the second half of September when almost half of flights were delayed.

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American’s tardiness isn’t bad luck. American couldn’t get passengers to the airport on time because the pilots who fly the planes didn’t want to get passengers to the airport on time.

This horror story begins with the Chapter 11 bankruptcy filing made by AMR Corp. (the holding company that owns American Airlines) last November. Bankruptcy, conventionally speaking, is about restructuring debts owed to banks and bondholders. But most of American’s debt was backed by hard assets like airplanes. What’s more, AMR actually had some cash on hand at the time of the filing. The debts American really wanted to restructure were the implicit debts to employees. As S&P analyst Philip Baggaley put it at the time, the goal was to “reorganize in Chapter 11 and emerge as a somewhat smaller airline with more competitive labor costs and a lighter debt load.” In other words, American went into bankruptcy primarily so it could pay people less.

The bankruptcy process gave American management leverage with which to extract concessions from its labor unions. American got those concessions, except from the pilots’ union, with which no agreement could be reached. So American decided to call the pilots’ bluff and got a bankruptcy judge to void the pilots’ contract.

It turns out that the pilots weren’t bluffing. Organized labor in the United States—especially in the private sector—has been in decline for so long that management seems to have forgotten that a disciplined union can exert a ton of pressure under the right circumstances, even if the legal environment is hostile. American pilots weren’t allowed to strike over the contract voiding, so instead they did something clever: They started following the rules.

If you own a car or a home, you know that you don’t get every little problem fixed right away. Some issues are so severe as to require immediate attention, but a lot of stuff you let slide until it’s more convenient or financially viable to fix. A plane turns out to be the same way. Part of what a good pilot does is know the difference between something that needs to be fixed right now and something that can wait until fixing it won’t cause massive delays or tons of missed connections. When American angered its pilots, they struck back by doing the reverse—deliberately calling in every little complaint, timed for the worst possible moment. The results were catastrophic, and it’s no surprise that the recent improvement in flight timeliness has coincided with a resumption of negotiations. But American doesn’t seem to have backed away from a philosophical commitment to hardball anti-union tactics. In June, it persuaded a federal judge to rule that a new, higher threshold for triggering a unionization vote among passenger-service agents should be applied retroactively, contrary to the interpretation of the National Mediation Board. On Oct. 3, an appeals court judge overruled that call, but the airline insists it’s going to keep fighting rather than allow an election to go forward. If nothing else, American may delay the process until next year in hopes that Mitt Romney wins the election and appoints a more management-friendly National Mediation Board.

To rebuild traveler confidence in the airline, American is going to need to do more than reattach its seats. It needs to repair its relationships with its workers. Labor and management have some divergent interests, but there should be room for ample common ground. At any firm, workers can obtain high wages and job stability if the firm succeeds and generates enough revenue to pay them. And as American is finding out, an airline can only succeed if its workers want it to succeed. In this sense, the original sin of the American saga is perverse incentives built into the compensation structure of American’s executives. The aviation industry has been consolidating for decades, and last winter it looked like American would likely end up merging with either Delta or US Airways, both of which were interested. A Delta merger would pose serious anti-trust questions, but a US Airways merger would work for federal regulators, and US Airways management smartly sought and obtained a thumbs-up from American’s three major labor unions. But American brushed these overtures off and preferred to continue brinkmanship and independence under the umbrella of bankruptcy. 

The reason, as Andrew Ross Sorkin explained in July before the pilots’ situation really blew up, is that CEO Tom Horton and the rest of his executive team can earn a huge payday by keeping the company independent. During bankruptcy, Horton earns a relatively modest $660,000 salary. But “in an odd twist of the bankruptcy process, airline management teams have typically managed to extract 5 percent to 10 percent of the company’s shares for themselves upon exiting Chapter 11,” a stake that could be worth hundreds of millions of dollars. There’s no particular reason to think this outcome would be better for shareholders than seriously pursuing a merger with US Airways, but it’s easy to see why it’s appealing to Horton. And by the same token, it’s easy to see why the pilots’ union is in no mood to make concessions whose objectives are as much about executives’ pocketbooks as they are about the viability of the airline. Until that breach of trust is repaired, don’t count on American getting you where you’re going on time.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.