American Is No Longer the Best Airline -- but It Isn't Eastern

CHARLOTTE, N.C. -- ( TheStreet) -- On Dec. 20, 1989, American Airlines ( AAMRQ.PK) CEO Bob Crandall visited Miami to discuss his day-earlier purchase of Eastern Airlines' Latin American route.

It might have been the best day in American's history. Within the previous week, American had also bought TWA's London-Chicago route authority and Braniff's landing rights at Chicago and New York.

"American Airlines, already the top domestic airline, has suddenly become a major international player as well, paying weak competitors $665 million for valuable foreign routes to 18 countries," The Miami Herald proclaimed in a story that appeared the following day.

Twenty-three years later, America had some of the worst days in its history. Ironically, some people now compare it to Eastern. I covered Eastern. I don't buy that at all.

Labor strife combined with a poor network destroyed Eastern. At American, employees are angry and some pilots have been flying by the book. But American isn't busting unions. It doesn't employ replacement workers. It is not selling its best assets. Management isn't stripping assets from one airline to give them to another, as Frank Lorenzo did when he built Continental at Eastern's expense. Sure, American, like most airlines, has followed the strategy Lorenzo developed, using bankruptcy to reduce costs. But here it should be noted that Lorenzo's strategies enabled Continental to become America's leading airline in the 2000s.

American's bad days were defined by a September on-time rate around 59%; by the seats that came loose on three flights in late September and early October, the result of faulty seat locks; and by becoming a national joke, drawing laughs on late-night television. Surely C.R. Smith, the other key executive besides Crandall in American's growth story, would be appalled.

It has been a long, sad descent from that day in Miami in 1989. Eventually, Continental replaced American as the major carrier that seemed to do the most things right. Now, it is Delta ( DAL) that leads the industry.

On Monday, for example, Delta announced it would vastly expand Asia service in Seattle, the U.S. airport that is closest to Asia. Every airline wants to be best friends with Alaska ( ALK), ensconced in Seattle; Delta became the chummiest. Also, Delta is trying to manage the airline's industry's biggest problem by operating an oil refinery. Will that work? Who is to say? But United ( UAL) CEO Jeff Smisek said he is watching, and if Delta is successful than United may follow.

In the 1990s, American was the airline that set the pace. Then came two bad mergers, creating a reluctance to pursue a third; regulators who wouldn't grant American the same trans-Atlantic partnership privileges they bestowed on its rivals and the decision, motivated by morality, to avoid bankruptcy. Unfortunately, this effectively put employees through two rounds of major concessions. The first came in 2003, when nearly every other airline filed bankruptcy. The second came in 2011, when the other airlines were already reaping the benefits of their bankruptcies. It does not seem that the strategy, virtuous as it was, succeeded.

Sometimes it seems that American executives, believing they still ran the greatest airline, devised their cornerstone strategy of growth in contested gateway airports like Kennedy and Los Angeles and San Francisco because they believed that given the choice, passengers would prefer to fly American. Having been in Miami when American rescued the city from its reliance on failing carriers, I still find it hard sometimes to shake that same belief. Unfortunately, many other airline passengers find it increasingly easy.

When you really think about it, the most appropriate comparison for American is not with Eastern, but with Pan Am. It too was the greatest airline in the world and its sense of superiority survived long past the time that was justified, just as American's sense of superiority did. The new Kennedy terminal certainly makes the case that American views itself as the nation's flag carrier, just as JFK-focused Pan Am was earlier.

Like American, Pan Am pursued a failed merger strategy, acquiring National which brought culture clashes but no real assets. Also, like American, it was disadvantaged by regulators who wouldn't let it do the same thing its competitors did. But American, structurally, is nothing like Pan Am or Eastern. It has far too many valuable assets to fail. The only question is who will run it after bankruptcy.

American CEO Tom Horton is not Frank Lorenzo, not by any means. I think he is more like David Siegel, the CEO at US Airways ( LCC) and now CEO at Frontier. Siegel led US Airways into bankruptcy. He imposed cuts, although it turned out they were not enough. Then he was forced out, largely at labor's behest.

On Monday, American announced September financial results. For the sixth month in a row, it led the industry in unit revenue gains. If Horton is going to be blamed not only for all the bad things that happened on his watch but also for all the bad things that happened years before his watch, then he ought to also be credited for the continuing financial improvement.

Still, it's hard to think he will be able to avoid Siegel's eventual fate or to prevent the merger with US Airways that he has tried so hard to stave off.

-- Written by Ted Reed in Charlotte, N.C.

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