American Airlines Isn't Going To Bring Bob Back, But That Doesn't Mean Parker's In The Clear

You know the head of a big U.S. company is in trouble when the three parties he has to keep happy – investors, employees and customers – are all so upset with him that some of them start calling publicly for the return of a storied predecessor.

Welcome to Doug Parker’s world at American Airlines, where the calls for the return of the carrier’s historical champion have begun.

To U.S. airline industry retirees, and to an ever-shrinking group of very senior airline employees today, that old champion is the most feared man they ever worked for – or competed against. He was, if you listen to all the stories, ruthless, cutthroat, vicious – and, most importantly – a winner.  His admirers called him Darth Vader. To his enemies he was “Fang,” or worse. Heck, he even liked being called such names.

But now, 21 years after he retired as, arguably, the most impactful leader in U.S. and global airline industry history, some folks at American Airlines, perhaps along with some frustrated investors and fed-up travelers, are calling for American Airlines to “Bring Back Bob.” Indeed, they’ve launched a website by that name – BringBobBack.org – to promote the recall of legendary, 83-year-old Robert L. “Bob” Crandall out of retirement to replace Parker, American’s current CEO.

Despite his age and lifetime of chain smoking, Crandall is in seemingly good health. And his mind certainly is as sharp, incisive and aggressive as it ever was during his two-decade rampage atop the airline industry. So Crandall almost certainly could return to run American Airlines once again, if he were of a mine to do so. But with a similar degree of near-certainty, it is clear that he won’t be doing that.

 Knowing Crandall as well as I do (I’ve covered him for 35 years and even wrote a book about him) I could quite safely place a big bet that I can’t afford on Crandall’s wife killing him if he tried to go back to work. And though he certainly would be tempted by the opportunity to climb the mountain one more time, he knows that despite his current good health there probably aren’t enough productive years left in him to do the job of making American not just the biggest but also the best airline in the business. Not if he judges that by his own lofty standards.

 Beyond that, the reality is that American’s current board of directors has shown no public signs of discontent with Parker despite the growing displays of investor, employee and customer exasperation. So, the idea of replacing Parker – with Crandall or anyone else – is, in all likelihood, mere wishful thinking on the part of some.

And the truth of the matter is that those calling publicly to “Bring Back Bob” likely either don’t fully appreciate the kind of upheaval they’re asking to be brought upon themselves or, far more likely, don’t’ really want Crandall to run American again. Rather, they are using his name and his near-mythical status in industry history as a way of digging deeply into the hide – and the head – of American’s increasingly unpopular current boss, Parker. 

Parker began his airline career in the 1980s as a financial analyst at American before moving on to progressively more meaningful positions at Northwest and then America West airlines. At America West he was named CEO just 10 days before the 9-11 terrorist attacks shut down the entire U.S. airline industry and threatened to put his small, hand-to-mouth outfit out of business. Parker coaxed the Phoenix-based second-tier carrier through that threat with lots of financial maneuverings and the help of a federal loan guarantee provided by an act of Congress in the weeks after the attacks. He then engineered America West’s acquisition of bankrupt US Airways, whose name the combined entity adopted.

But his efforts to create a large enough carrier to compete long-term against industry titans American, Delta, United and Southwest, still were not enough. After several failed attempts to merge with United, Parker out-played American’s then-leadership in a high stakes game of merger poker. His US Airways closed its acquisition of then-bankrupt American in late 2013, giving Parker the bulk and reach he believed necessary for his airline’s long-term success.

However, life at the top has not been entirely rosy for Parker. Yes, American earned its biggest profits ever, $7.6 billion, in 2015 thanks to a collapse of oil prices that drove the entire industry to unprecedented profits. But American’s competitors are posting higher returns. And the industry has since 2013 re-aligned around the “Big Three” plus Southwest in a way that keeps total capacity tightly under control. That means capacity isn’t likely any time soon to outstrip travel demand the way it did for the previous, tumultuous 35 years. Yet American’s profits since 2015 – $2.6 billion in 2016, $1.3 billion in 2017 and $1.4 billion last year – have been historically large, yet underwhelming.

Across the last three years Parker increasingly has been:

• Criticized by some investors for spending too much on hundreds of new airplanes and facilities, losing cost discipline, running a chronically sloppy and unpleasant airline, and failing to use the industry’s biggest fleet efficiently enough to produce the kind of way-above-industry-average unit revenues that investors expect from companies that hold such large market share leads
• Condemned by many employees for spending too much money buying the favor of shareholders with stock buy-backs and dividends while dragging out the process of negotiating the kind of big new contracts the employees believe they deserve. Workers also complain bitterly about Parker and his team ignoring employees’ concerns about operational problems and constant changes to the company’s service product that are, employees say, alienating passengers and making their jobs harder
• Castigated by hundreds of thousands, if not millions of embittered travelers – many of them long-loyal members of American’s pioneering AAdvantage frequent flyer program. Travelers carp about American’s jamming more and more seats into planes, reducing passenger leg room and amenities, charging extra for lots of service features that used to be included in the price of a fare, running a frequently late airline, and, most maddeningly, making it significantly more difficult to convert accrued AAdvantage points into actual free tickets to places most people want to go at times when most people would like to go there. Other big carriers are doing many of the same things, and taking heat for it, too. But American, fair or not, is catching more flak not only for making such changes, but also for its frequently ham-handed implementations and explanations of those changes.

More recently, the bad juju swirling around American has gotten thicker.

Investors are ticked off, to put it mildly, that the carrier’s stock price is down 9.5% from a year ago and nearly 28% from its high last September. The fact that rival Delta is up 9%, that United-Continental Holdings (United’s parent) is up 21.6%, and that even giant discounter Southwest’s shares are even with where they were a year ago despite significant labor and operational disruptions of its own, all serve to highlight just how down Wall Street is on American these days

What’s more, American now seemingly is on a collision course with its powerful mechanics unions. As a result lots of investors already have sold out of their American positions in fear of losing even more of their stock’s value. Yet bottom feeders, betting that the worst is yet to come for American, are still waiting and watching for the company’s shares to drop further before moving in to buy lots of stock on the cheap.

Labor, particularly the airline’s mechanics, is angling for a showdown. One key mechanics union leader has declared publicly the coming fight could turn into the “bloodiest, ugliest battle that the United States labor movement ever saw” if management continues to press its demand for increased ability to outsource aircraft repair work to third parties. Such a change would lead to fewer mechanics being on American’s payroll.

American now has approximately 15,000 mechanics. They are represented by a joint association of two unions, the International Association of Machinists and the Transport Workers union. The groups have worked under separate contracts sine the 2013 American-US Airways merger, and have formed an alliance to negotiate a new, joint contract now. Once a new deal is in place, however, it is possible, maybe even likely, that the mechanics will be asked to settle on which of the two unions will represent them over the long-term.

To be sure, John Samuelson, the outspoken leader of the Transport Workers Union, has on several occasions made much of the fact that as a track worker for New York’s Transportation Authority, not an airline mechanic, he takes a much tougher, more aggressive approach in dealing with companies than previous TWU officers who came out of the more restricted airline industry. Airline labor-management relations are governed by the Railway Labor Act, which is designed to keep vital national transportation systems operating by stringing out contract talks for years before a strike is even legally possible. In this case, American’s contract with the TWU came up for renegotiation in 2015 and didn’t reach an official impasse until early this year. Since then the National Mediation Board has kept the union in “the deep freezer,” as they say, by simply doing nothing to bring the parties back to the table or, conversely, freeing them to engage in “self-help.” Self-help in RLA-jargon for striking in the case of the union, or imposing new contract terms in management’s case. The NMB is unlikely to allow the parties to engage in self-help until at least sometime next year, if then. But the prolonged threat of a work stoppage, and the long months of near-daily news coverage during the acrimonious run up to such an event could be almost as devastating to the airline as an actual strike.

Because the mechanics are restricted in that way, they’ve been engaging in time-tested pressure tactics aimed at slowing down and disrupting American’s operations. Just last week a federal judge in Dallas issued a restraining order against the two-union alliance that has represented all American mechanics since the 2013 merger from engaging in such tactics.

Management had sued the TWU and the IAM, alleging that their members were involved in an illegal work slowdown. Their tactics? Taking too long to complete some tasks, writing up mechanical problems in a way that required flights to be delayed or canceled over minor issues that normally would not require immediate attention, and refusing to work overtime as they would when contract talks were not stalled.

Management lawyers told the court that between June 4 and June 13 American had to remove an average of 61 planes a day from service because of mechanic “write-ups” of mostly minor issues that under FAA rules could have been addressed later. When the judge in the case compared that with 2017 and 2018, when American never had a single day in which it had more than 60 planes out of service because of mechanics’ write ups, the decision to enjoin American’s mechanics from using such pressure tactics was assured. Still, while the law is stacked against the mechanics, who simply can’t win by using such tactics, those workers continue to have the ability to inflict great pain on American by disrupting its operations further and making customers’ travel experience worse.

During a 23-day period through June 14 American cancelled 722 flights because of what its attorneys told the court was a slowdown by mechanics. More than 175,000 passengers’ trips were disrupted as a result, management said.

American already had fallen significantly behind rivals Delta and Southwest in on-time flight performance even before its own mechanics began their not-so-subtle disruptive tactics. And recently it has seen United, the perennial loser in on-time performance among big airlines, catch up to it. Now, its operations are getting worse, and aren’t likely to get much better until a new contract is reached. And there’s no foreseeable time frame in which that is likely to happen.

Two weeks ago, internal data leaked to the public by union sources show that recently only about 58% of American’s flights were leaving their gates on time. Worse, that sad performance was against a not-very-demanding goal of achieving just 63% on-time departures, which itself was a reduction from last year’s 66% on-time departure performance. Those stats also showed that these days American’s “turn times” – the time it takes to get people off an arriving flight, gas up and cater the plane, load new passengers and push it back from the gate – is running about 6% longer than normal.

And before anyone places all the blame American’s mechanics, it’s instructive to know that the carrier’s 27,000 flight attendants are upset too and are gearing up for the start of contract talks late this year. The carrier’s 15,000 pilots haven’t been making a lot of noise about their relationship with management, except over technical matters related to the controversial Boeing 737-800 MAX currently grounded by the Federal Aviation Administration. American has 24 in its fleet with 96 more on order. But the pilots, too, will launch negotiations with management in January, or perhaps sooner. And you can bet they will be pressing hard for both more money and more say in how the airline is run.

Thus, Parker’s plate is full. On top of the ongoing controversy and disruption caused by the 737 MAX issue – a matter beyond his and the airline’s control – American is or soon will be in tough contract talks with all its unions at once. It’s also be trying to convince investors that it’s stock is worth a lot more than those same investors have been willing to pay for it. And they’ll be facing customers who’ve grown frustrated and, in some cases, angry with the airlines over their perceived ill treatment and negative travel experiences.

To calm investors Parker and five of his top lieutenants at the airline disclosed earlier this month that they’d collectively bought an additional $2.37 million worth of American’s shares on the open market. The move, announced just prior to the company’s annual shareholder’s meeting, was meant to signal that American’s leaders have strong faith in their company and believe that its shares currently are an undervalued bargain right now. But that news has had zero impact thus far on the company’s share price and largely has been dismissed as a meaningless public relations stunt. With labor, the executive share purchases have even backfired, with labor leaders using the executives’ ability to spend so much money to buy shares as further, painful evidence of how much they are paid relative to the average American employee.

Parker is one of the very few CEOs of a public company who takes no salary; he hasn’t since 2015 when he opted to be paid entirely in stock. But while arguably noble, aligning his personal interest with the shareholders hasn’t made Parker poor. Estimates are that he’s taken home more than $11.5 million a year since giving up his salary. Yet, as critics are quick to note, Parker’s gamble has not been a particularly successful one either. The shares he got in 2015, (assuming he still owns them) have lost half their value since. Meanwhile, investors who bought their shares in the market rather than obtaining them in lieu of cash pay, have seen their shares lose more than half their value – 54% – in less than 18 months. American’s stock peaked near $58.50 a share in early January 2018, but closed Tuesday at $31.26.

And the operational problems dragging down American’s financial performance aren’t getting better. In the first quarter of this year – admittedly the toughest quarter of the year for any airlines – American actually lost money flying people and cargo. It only reported a profit because it earned around $300 million from the sale of AAdvantage miles to Citibank, its affinity credit card partner, and to other AAdvantage program partners.

So, investors will be watching closely to see what American reports out of the quarter that ends June 30. While the 737 MAX issue will cause a modest dip in revenue and a tiny increase in operating costs, if the financial impact of the labor-driven delays and cancellations turn out to be as large as some observers expect, American’s share price won’t recover any time soon. Yet, though investors seem to have baked those negative expectations into the stock’s current price, there’s growing concern that the labor and operational dysfunction is having a bigger negative impact than anyone, even inside the company, realizes.

In short, despite the wishes – real or manipulative – of some, Bob Crandall won’t be coming back to run American Airlines again. But that doesn’t mean Parker has nothing to worry about.

Parker’s position seems to be safe for the moment, if for no other reason than his board has shown no opposition to the changes and policies that have gotten American into its current predicament. But if American’s share price tumbles further, if labor turns up the heat on management by disrupting operations even more, and if consumers increase their vocal criticism of, and physical resistance to the changes that have made the travel experience on American more unpleasant, then he could be in danger. Unlike most CEOs, Parker has no contract. He is an at-will employee. Dumping him would not cost the airline much if – or when – his board members determine that doing so would relieve the pressure that’s growing on them just as much as it is growing on him.