American Airlines- power to return to the black

American Airlines

Image by millerm217 via Flickr

I’m saddened by the inevitability of American Airline’s (AMR) decision to file bankruptcy. In the last few years, the world has watched one industry leader after another lose its footing leading the pack.  Is the phenomenon  inevitable of the product life cycle curve at work?  My fear is the more we attribute this news as another sign of the structural weakness in the global economy, we may overlook an underlying ailment– withering resilience.

Leaders inspire followers

The recent move by American Airlines’ board signals the loss of faith in the capability of corporate leadership to restructure without the benefits bankruptcy protection affords. The boards’ decision places hope for the company’s future in what Stephen Lubben describes as the ability to restructure with speed.  (see American Won’t Be the Last Airline Bankruptcy).  Bankruptcy laws allow every contract to be opened for renegotiation.  Certainly in competition, speed matters. No one with fiduciary responsibilities should turn a blind eye to mounting losses or the clear discrepancy in the balance sheet between debt and assets plus cash–$.8billion in the case of American Airlines.  A comparison of financial results to forecast, or the simulations of alternative assumptions must have been clear earlier and should have raised questions, or at least challenged the executive team’s belief that the commitments they made would prove viable, right?

I urge readers to review either Sunday’s  New York Times   At American Airlines, a Departing C.E.O.’s Moral Stand – NYTimes.com.  The author, D. Michael Lindsay, and other sources continue to cite  competitive pressures that forced the board to succumb and  points out Gerald Arpey’s values commitment was distinct among a larger sample of CEOs.  His story may be noble, but I fail to see how his leadership echoed these values; and I am reluctant to herald him as a positive exemplar.

“It is not good thinking — either at the corporate level or at the personal level — to believe you can simply walk away from your circumstances.” 

In 2010 he held a similar position:

Gerald R. Arpey

“The path we have taken has created cost challenges for us. But I believe there is something misguided about how we measure success, if success is bankruptcy, giving pension obligations to taxpayers and not paying back creditors. By that measure, we have failed.”  (see Thestreet.com interview Sept 2010).

Arpey’s quotes ring  hollow in the face of his years at the helm. As CEO, he could have led the charge to measure success in an alternative way.  Should we blame the board for the AMR structure , its inherent decisions and commitments? Similarly, decisions that impact the company should rely less on competitors’ values, assumptions and next moves.  Instead the strategy should  show  a keen commitment and understanding of value creation, not ongoing obligations as Arpey argued.  Did Arpey lack audacity, proper advisors and/or the  market intelligence necessary to lay out a plan that would have positioned AMR   uniquely  in the marketplace? Sadly, being the last legacy airline to file bankruptcy, even if he disagreed, suggests a lack of leadership, and specifically a lack of followship.

Sharing Values delivers $Value

Heroes are often industry disrupters.  They buck the trend and prove their firm’s value in the marketplace by brandishing an alternative paradigm.  When the value created extends from shared values, consumers, employees and the firm are mutually engaged in a win- win- win strategy.

In 2008,   Joe Nocera, writing for the New York Times The Sinatra of Southwest Feels the Love  contrasted Aprey to  Ken Kelleher, upon the latter’s  retirement as CEO from Southwest Airlines.  Clearly strategic choices, when rooted in shared principles that link to planning can and do lead to higher performance. Aprey had faith but offered little or no inspiration. Kelleher built Southwest, and in doing so, he created and fostered its culture.  AMR’s Arpey, the most recent CEO  was a product,not a force for change within American Airlines culture.  At the shareholder meeting in 2008, he acknowledged  both necessary and inevitable changes for  the airline industry; yet chose to renew his commitment to shareholders and asked that employees and customers lower their expectations.  In so doing, Wall Street pounded the stock, resulting in a significant loss of value.

Aprey’s  demonstration of  differentiated principles in the face of deteriorating conditions seems to have laid the course for American Airlines subsequent decline.  The labor negotiations for pilots was on both their minds.  Aprey failed to lay a course  or inspire his team to re-invent and ultimately lay the foundation for another, more promising alternative.  By contrast, Kelleher renewed his commitment to his people without guaranteeing anything  to the pilots.

The idea of Shared Values is often confused with value sharing. The former a more universal presumption about a set of beliefs and the latter a calculated measure of utility. In a service industry, delivering value to customers demands a highly evolved understanding of meeting needs and desires. For example, how well does an airline deliver on an individual’s hope to be with family on the holidays?  Can that same airline deliver on another individual’s hope to get to a distant meeting and back for another commitment?  Calculating the costs of delivering value is trivial by comparison, in that the components are concrete, not fuzzy. Southwest was able to gain market share over competitors  focusing on being the low-cost airline provider and inspiring employees to deliver on that shared value.  Every decision made at the corporate level hinges on that principle and the results are clear in their resilience in spite of the hostile economic climate and changing regulatory environment that daily challenges their operating costs

Power in creativity

Mavericks like Richard Branson, another airline mogul and Ken Kelleher place their faith in people to be naturally creative. They consistently live up to simple principles and obligations they make to  employees, create a culture and foster ideals for employees rooted in a higher sense of value that is also shared by customers.  Their sense of economy, scale and flexibility extend to people at every juncture in their process.  Rather than take or assume full control they partner with their customers to share responsibility.  No advance seating, no meals just on time service at a low price. The company takes action, by helping employees focus on the goal that propels their entire business.  In other words they deliver customers safely and reliably from one destination to another and executive management puts  complete faith and trust in all their employees to do what makes sense to best deliver on that simple goal.

By contrast, Aprey did not have that working on his side, the culture at American and  the board’s action focused on their obligations to investors and put the source of their revenue, customers needs and desires second with  employees taking the last position.

Aprey seemed to have a clear understanding of the  principles behind product cycles, and production experience costs showing the predictable relationships between unit costs and cumulative output.  Increasingly it’s not technical prowess, intelligence or even relationships that differentiate successful leaders and resilient companies, but their ability to inspire.  The problems in the airline industry are not unique. The path to restoring profitability has always depended on operating flexibility and financial strength,  and Aprey was right to believe that it  doesn’t have to come at the cost of reneging on earlier commitments.  Decisions to speed up the restructuring by reopening every contract for negotiation suggests leadership who lost their way in the face of unexpected forces or circumstances.  It also is evidence of an inability to inspire, believe and uphold universal shared values.

I’m betting there are plenty of unsung heroes inspiring creativity and bringing about change at speeds that don’t require bankruptcy.  If you know the story, please help me share and build the faith by posting them here.

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One thought on “American Airlines- power to return to the black

  1. Rachel,

    American’s bankruptcy may have been inevitible. Do they get any credit for trying to avoid it?

    United filed in 2006, and American could have done so as well, but opted to try to survive without Ch 11 protection. We now know they couldn’t, but maybe that was because their major competitors had a significant advantage coming out of bankruptcy without the burden of pricey union and airplane lease contracts, etc,

    I agree that American wasn’t as distinctive or innovative as Southwest or Virgin, but sometimes these are luxuries a niche player can enjoy that a major cannot.

    Thanks!

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