AMR CEO Builds On Strategy 1 Year After Near-Bankruptcy
By Elizabeth Souder, Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones) --AMR Corp.(NYSE:AMR) (AMR) Chief Executive Gerard Arpey said he doesn't have all the strategies the company needs to become successful, but he's confident employees and executives will find ways to turn it around as they implement the tenets of his basic plan.
One year ago, Arpey took the reins of the American Airlines parent company as it stood on the brink of bankruptcy. Since then, he has managed to narrow losses, beef up liquidity and begin to build trust again with employees at the world's largest airline.
Arpey's plan, announced last May, is this: lower costs to compete; fly smart by giving customers what they value; pull together, win together; and build a financial foundation for American's future.
"We don't have all the strategies to be successful to do those four things, and we recognize that," Arpey said earlier this week in an interview with Dow Jones Newswires. "Performance has to be your reality."
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Acutally, He didn't really pat himself on the back
It is a decent read, and he admitted that they don't have all the answers.
He is stealing a page from Gordon Bethune, me previous airline hero, after Crandall retired.
I think that Arpey is being rather sober to be honest. As someone who runs a decent sized company, I do believe that one has to be positive and realistic in public. And none of us have all the answers, despite what people are led to believe.
Perhaps patting himself on the back wasn't the best phrase to use, but I did so when I saw it was referred to as "HIS" basic plan when clearly everything that is happening is a culmination of several ideas from several key individuals. It just looked like he was taking credit where it wasn't due.
ETA: After a re-read, it does look like the reporter/writer put some words in mouths where they clearly didn't belong. Still the fact remains that a lot of what is happening at AA right now is the result of many plans and programs that were in place, or in the works, before Carty took the million dollar walk of shame. Some of the ideas are working, albeit slowly but many of the ideas likewise are not. It still won't surprise me if Arpey steps down before the battle is over.
He is stealing a page from Gordon Bethune, me previous airline hero, after Crandall retired.
Please, don't even joke about that. If he turns into GB, I am outta AA. GB was an egomaniac that played up to the street more than he managed the airline. Confused the financial markets with the consumer markets. He destroyed all initiative at lower levels, turned customer service people into unthinking robots, created a maze of complexity in the rules and policies that nobody even in the company could understand let alone the customer and more important lost trust of a significant part of this customer base with two-faced talking.
As far as the OP is concerned, it is a little bit odd to refer to something as his plan at least publicly. Usually, CEOs refer to it as "our" (meaning the management team's plan). But then it is not a plan. It is his very high level sound bites for the turnaround that anyone can pick up in the self-help management section of a book store. It is the details and execution that he enables that matters.
What is worrisome is that he (and AA) don't seem to understand what the "customers want". Just being frank about it doesn't help. Why his tenets may remain just tenets is shown by the inability to link the tenet of simplification to customer needs. He needs to simplify what the customer sees such as fare structure, change/standby policies, award structures, etc. They don't know what the customers want because they are tied too much to their failed business model to see it.
For example, AA wants almost $500 for a one-day 50 minute each way trip next week to BOS from EWR on an RJ. If WN came into this route and offered a $39 one-way trip, I would choose it regardless of what WN offered or didn't offer. Can you draw the conclusion then that I don't care anything other than price? Absolutely not. I wouldn't even think about WN if AA had a $200 R/T. This is something that AA (and most majors) just don't get. If I don't have a choice and pay $500 to AA, do they think I am hapy about it? Am I likely to fly them the next time I had a choice? This is just one example.
The yield management has turned into an extortion scheme that doesn't consider the effect the pricing has on loyalty, on the bottom line of the companies giving their business, and on the market being created for LCCs. It sacrifices longer term loyalty to one-time ability to extort.
This is why the "tenets" don't mean much. You can run the airlines consistent with the tenets and yet ruin it.
A better leader is one who points to specific steps to turn around and shows how they might follow a simple tenet in retrospect, not one which spouts tenets and hopes the team will find means to stick to it. And in that respect, the article does come out more self-serving than pitch AA to wall-street.
I can see it now...This is going to turn into another Wing against AA Management thread
We all know form this board, and other boards, such as US Aviation that Wing has an axe to grind with AA (the company he holds stock in )
Althought this thread is related to AA, please do not feed the troll
It would be much more useful if you contributed to the discussion whether you agreed with something or not. This is far more destructive to the board than any trolling.
As far as the OP is concerned, it is a little bit odd to refer to something as his plan at least publicly. Usually, CEOs refer to it as "our" (meaning the management team's plan).
But the OP is wrong - if you read the article, Arpey NEVER refers to it as HIS plan - the reporter did. Arpey always used the words "we" and "our," never "I" or "my." The reporter refers to it as "his" or "Arpey's" plan but Arpey doesn't personally take the credit in the article.
But the OP is wrong - if you read the article, Arpey NEVER refers to it as HIS plan - the reporter did. Arpey always used the words "we" and "our," never "I" or "my." The reporter refers to it as "his" or "Arpey's" plan but Arpey doesn't personally take the credit in the article.
The OP here is 100% completely disingenuous and oblique in the titling of this thread-- and obviously that's no accident.
The very first paragraph:
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Chief Executive Gerard Arpey said he doesn't have all the strategies the company needs to become successful, but he's confident employees and executives will find ways to turn it around as they implement the tenets of his basic plan.
as well as the rest of the piece-- as others have pointed out-- in no way, shape or form comports with "Arpey Pats Himself On The Back - AGAIN!" Quite the contrary, in fact.
Perhaps a basic, reading-comprehension course is in order?
A better leader is one who points to specific steps to turn around and shows how they might follow a simple tenet in retrospect, not one which spouts tenets and hopes the team will find means to stick to it. And in that respect, the article does come out more self-serving than pitch AA to wall-street.
Where to begin...
First of all, the business model has not failed, "simply" because you say it has or because AA isn't offering a $200 RT fare on BOS-EWR on a brand new 777.
You really need to do some more research. I really don't know where to begin to correct your misconceptions. Here is my honest attempt.
It is not unforseen that in the future AA could end up rationalizing its fare structure - for heaven's sake they tried once years ago under Crandall. So, the intellectual capacity exists to do it.
Before they get even close to doing that, they have to get costs to a place where they can make a profit on such lower fares. That is why Arpey is so focused on cutting costs at the moment. As an outside observer of this company, I've never seen a CEO at AA take such a disciplined approach to the cost-cuting process like Arpey has. Crandall used to get philosophical about it, but he still allowed complexity to creep into the system. Arpey is now focused on eliminating all of the complexity. In almost every article about AA, he seems to give away a new idea.
It was Carty who said that AA's costs didn't need to match Southwest's in order for AA to be profitable. While this may still be true, albeit to a lesser extent, you wouldn't know it from how Arpey has been running the company. In some ways, I think he is driven by the goal of seeing how close he can come to Southwest's unit costs. Getting labor to pitch in got them a long ways there, but management has also pitched in by depeaking all the hubs (not a small accomplishment by any means), concentrating more assets at key hubs (e.g., Miami, DFW, and Chicago), renegotiating terms on long-term debt, and strategically positioning AA for future expansion (with the Mexicana codeshare, the HNL-Narita slots, etc.).
With some of the cost-cutting, it is true that the product that AA provides has suffered. But, here too, I think Arpey has been thoughtful in his deliberations. It may have been Carty who single-handedly advanced the cause of MRTC at AA despite the qualms of the number crunchers. To Arpey's credit, he has taken a more measured approach to its reevalution. They need more seats in certain markets to compete on a cost and revenue basis with the LCC's. Unfortunately, that made the addition of the extra seats on the 757 a necessity. While we may have all moaned and groaned about it, it was a cost-effective means to add capacity in markets where AA needed it.
Adding the seats back to the 757 is consistent with Arpey's tenet that you give the customer only what they value and therefore are willing to pay for. Knowing that this would eventually come to mean a drastic change in how the coach passenger is treated, including some of AA's more frequent flyers, the implementation of this tenet is something that AA and Arpey have not taken lightly. That's why they've been paying attention to their Survey America scores. They want to figure out what really counts with customers. Arpey recently said that based on the feedback AA has gotten from Survey America he is becoming convinced that being on time, arriving with one's bag, and being treated with courtesy may be all customers really want. Nevertheless, it is refreshing to see than in this article he's not casting himself as the savant who knows what customers want. That says a lot.
There are, of course, passengers who are still willing to pay a premium to fly AA. And, AA is trying to be fair to them too. Meal service in domestic First has been or will be restored to pre-9/11 levels. In the email reporting the news, posted here by an AA flyertalker, we learned that this upgrade in service would be funded by eliminating the Bistro Meal in coach. This is bound to be the new reality at AA, pay as you go. Having said that, and taking the meal change as an example, one can envision more upgrades to premium services as more and more of the costs of running a complex domestic coach product are taken out. That seems to be the pattern AA is following now. If done right, the results can be beneficial to AA's "best customers" and cost-effective.
I've tried to address your misconceptions from the cost-side because I think that is really where Arpey seems focused at the moment and that is really what he is talking about in this article. Plus, your generalizations about yield management misrepresent the complexity of the current situation so fully that it would take me more than a few paragraphs to correct. Suffice it to say for now that AA has not left this part of the problem alone. It has been experimenting here and there. There are loads of markets for instance where AA no longer offers B and Y fares to corporate customers, only K's or lower. I see this first hand when I venture onto the AMEX Corporate Reservation site. Some price rationalization has already started. Simply because you do not recognize what is happening, does not mean that AA is not exploring the mathematical possibility.
Whatever the case, you are simply (your favorite word) wrong when you say that Arpey is "spout[ing] tenets and hope[ing] the team will find means to stick to it." He's the one who made the decision to add the seats back to the 757's. He's the one who has made it a policy that all service upgrades be funding internally. He's the one who saw the opportunity to expand in Asia given the fact that United has done very little over the years to protect its market share or market position. He's the one that finally recognized that it was about time AA bolstered its operations at Miami at the main expense of STL. It was he who jumped at the chance to codeshare with Mexicana because he thinks AA can grow at LAX with more traffic flowing into its domestic system. The guy deserves the attention he gets.
Plus, your generalizations about yield management misrepresent the complexity of the current situation so fully that it would take me more than a few paragraphs to correct. Suffice it to say for now that AA has not left this part of the problem alone. It has been experimenting here and there. There are loads of markets for instance where AA no longer offers B and Y fares to corporate customers, only K's or lower. I see this first hand when I venture onto the AMEX Corporate Reservation site. Some price rationalization has already started. Simply because you do not recognize what is happening, does not mean that AA is not exploring the mathematical possibility.
I would like some of your thoughts on yield management. I think what venk said, and I am paraphrasing, is that yield management is about screwing every possible dollar out of each flight. His concern was that while that might seem a good idea from a profitability standpoint, the mathmatics of it necessarily ignore the intangible factor of loyalty. Weigh in here if I am misrepresenting you, venk. Lest anyone dispute what yield manahement is, let me borrow from another large and respected airline and direct you to the fact sheet on yield management here, where it says: "Airlines adopted yield management systems ... to maximise revenue returns from each flight."
Your examples of fare availability reductions for corporates does not mean that the yield management process is changing in any way, nor that yield management as a tool for maximising revenue is not being used. All it means is that certain fares are unavilable to certain corporate clients. Cutting out Y and B fares doesn't make K fares, or any other fares, any cheaper, better utilized, or more logically restricted.
I think the concern being expressed is that yield management is being used in too heavy-handed a fashion, and that it needs either take into account, or be deployed with, more sensitivity to certain non-measurable factors like loyalty. I have no idea how that could/would be done, and would be interested to hear your opinions.
First of all, the business model has not failed, "simply" because you say it has or because AA isn't offering a $200 RT fare on BOS-EWR on a brand new 777.
One has to illustrate a point with examples for clarity rather than make general statements. This was an example. For you to take that as the sum total of the argument not to mention extrapolate it to put in my mouth something I never said makes it disingenious at best.
Have you wondered why they have had to cut costs and what assumptions in the earlier business model is no longer valid that have required them to cut costs? I am not sure how someonce can claim a business model that has lost money for the last X years is a valid one without even going into the specifics.
Cuts may be necessary and will help but there is a very well respected saying that you cannot cut your way (or shrink a company) to success. Cuts don't contribute to topline growth. So while all that you say about cutting costs is true, all that has done is stop the haemorraging for now. But he still needs to build the business and that is where, at least as portrayed in this article, there is very little confidence that he knows what to do.
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Adding the seats back to the 757 is consistent with Arpey's tenet that you give the customer only what they value and therefore are willing to pay for.
This is where the example I gave you is relevant. Another place where the airlines (and it is not just AA) have misunderstood the customer. The argument oversimplified is as follows:
1. If you give the customer a choice between $180 R/T no frills and $1200 R/T with all frills, the customer will choose $180 R/T.
2. This does not justify the conclusion that the customer is only willing to pay $180 R/T and they only value the price with no frills and nothing else.
I can easily justify not flying WN in my company if the cost was $400 R/T on AA even if WN had $180. The company values certain things about AA but not enough to pay $1200. That price from AA has nothing to do with whether AA is providing things in return but simply has to do with whether they can extort that money at that time because someone wants to fly. So the pricing has not always been based on the services provided (in coach) but rather on the importance of being able to travel from place A to B. This model no longer works because there are too many choices now if all I wanted to do was get from place A to place B. On the other hand, I (and my corporation) are willing to pay differentiated amounts to different airlines based on the services and features other than having to get there and the tenet of modern business is you only want to pay for what you want/use. So that might mean that I might want a last minute ticket but not refundable, I might want a advance purchase ticket with no changeability but no Saturday night stay restrictions, etc.
So the fallacy in the thinking you have expressed is that the issue is not what you give for what customers are willing to pay (which assumes some uniform single price that the market will bear perhaps as determined by LCCs) but how to package your product to what the market is willing to buy at different price points. The reason they cannot do this easily is because they are tied to this ridiculous fare system of the old business model and there is no way to get out of it without disturbing the corporate discount system they have in place. It is like a department store that has loyal customers based on targetted 50% discounts which cannot suddenly reduce its high list prices without taking losses on those targetted customers or risking losing them by changing the discount structure.
What AA and other majors are trying to do are to justify the stupid fare structure and trying to see what will make customers pay the cheap fares and what will make them pay the extortion fares. They can make the service and features on the cheap price really terrible and the service and features on the extortion price fantastic but it will not work because that type of spread is not something any corporation can justify regardless of what services they provide for it.
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Whatever the case, you are simply (your favorite word) wrong when you say that Arpey is "spout[ing] tenets and hope[ing] the team will find means to stick to it."
In the article he is shown to be doing exactly that. I was commenting on the article.
I think the concern being expressed is that yield management is being used in too heavy-handed a fashion, and that it needs either take into account, or be deployed with, more sensitivity to certain non-measurable factors like loyalty. I have no idea how that could/would be done, and would be interested to hear your opinions.
You have captured my point very well.
The simplest way to account for loyalty is to not jeapordize it. That is achieved by using "fair pricing". By this I don't mean charitable pricing (as some people equate it) but pricing that can be justified in the consumer's mind. A pricing (and differentiation in pricing) can be justified as "fair pricing" if it has a correlation with what the customer perceives as value associated with such pricing. Yield management does not care if the person who pays a certain price for a flight is paying willingly or is paying with ill will towards the airline and is feeling extorted. Yield management might adjust the price to ensure that there are enough extortable people at any time but not ensure people will jump at the next chance to pay less to a different carrier.
The first thing that needs to happen while AA continues to use YM which still has a place is that there needs to be a cut-off ceiling on the maximum pricing regardless of being able to get a higher price but making someone feel extorted to do so. This maximum needs to be adjusted to value of the service provided and needs to be consistent across the different routes. A high ceiling cannot be justified by pushing services people don't necessarily want (e.g., an automatic FC upgrade).
Second, yield management needs to work only on the basic price for transportation within a reasonable range, not on the value of the frills/flexibility/features that go with it. My perception of value of a FC meal or a widebody service is not going to differ if I book 3 months in advance or 2 weeks in advance. Separating that increases the value and fairness perception. Some of the LCCs which only consider the basic transportation price do this very well while the cost of food that people may purchase on board remains the same.
Next Yield Management must distinguish between the various types of service in the same route. An RJ seat will not promote the same feeling of value as a 767 seat. A meal-less flight will not promote the same feeling of value as a flight with meals.
Now, of course, too many parameters will make the system complicated again, so there needs to be a few packages that people can select from but carefully packaged based on the demographics but for each such package there needs to be fair pricing with YM working only on the basic transportation pricing and within the fair price range.
Yield management may have become a very complex process but nevertheless is subject to "garbage in garbage out" principle. If the assumptions (and there are always assumptions) under the complex structure are no longer valid, then the result of that complex system may no longer be valid.
What has changed since yield management came about is the increased competition from different kinds of carriers, commoditization of travel, increased visibility into the pricing structure from online booking and ironically the widespread prevalence of air travel as the major form of travel that has made travel a significant cost item in modern business. All of this has an effect on the willingness of the customer to pay and justify as reasonable cost of doing business. In this climate, people will rebel against any pricing that results in an increased cost of doing business which affects their bottom line. Any pricing considered "not fair" would affect the loyalty factor.
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