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American Airlines CEO: How We Do Things Differently

This story was originally published on Sept. 7.

DALLAS ( TheStreet) -- For better or worse, a strong sense of morality strongly influences American Airlines (AMR) CEO's Gerard Arpey's management of the world's second-largest airline.

Arpey's strong ethical sense is well-known to anyone who listens regularly to American's quarterly earnings conference calls, where he periodically reminds us that the carrier's difficult financial position reflects its efforts to avoid bankruptcy in 2003 and to honor obligations to shareholders, employees, and other business partners.

American Airlines
American Airlines CEO Gerard Arpey

In an interview in his Dallas office, Arpey's commitment to principle came through even more plainly than on the calls. "This company stands for something, more than just any old company," he declared. "Gradually, it will emerge as a successful company that honored its commitments and its pension obligations and that was guided by principles of doing what's right.

"The path we have taken has created cost challenges for us," Arpey acknowledged. "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."

Yet the strategy, while morally appealing, has not benefitted American financially. Rather, it has put the carrier at a cost disadvantage to most competitors, who went in the other direction. American estimates that disadvantage at $600 million annually. It was one of the key reasons why American was the only major airline not to report a second quarter profit.

"I feel badly for Gerard Arpey because he tried so hard to avoid bankruptcy -- I believe he views it as a moral hazard," said Stifel Nicolaus analyst Hunter Keay. "Now he gets penalized for not wiping out billions of dollars in shareholder wealth."

Added aviation consultant George Hamlin: "The word I would use with respect to American management is 'probity.' They are trying to do the right thing, and they don't get much credit for that. Maybe the world works in a way now that virtue is not rewarded anymore."

Although the Allied Pilots Association, which represents American pilots, has been at odds with Arpey, president Dave Bates said Arpey "seems to be a moral guy who is sincere in wanting to protect the pensions of employees of American Airlines." He added, "management has not been willing to share the wealth. I hope he continues to seek the moral high ground."

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