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Back From The Brink

December 3, 2004

Campbell Little still feels stung.

    On the morning after employees at American Airlines Inc. had agreed to $1.8 billion in cuts to wages, benefits and thousands of jobs--all intended to keep the world’s largest airline carrier from bankruptcy--he got a call from one of his reps. The rep told Little, whose friends call him James, to get a copy of the Wall Street Journal. There was a shocking story about the airline.

    Little, a union leader representing mechanics and ground workers, got a copy of the newspaper and read the headline: "Carrier Created Protections for Executives in Event of Reorganization Filing." The protections included quietly funding a pension trust for 45 American Airlines executives and lucrative bonuses for six of the firm’s top honchos, including its chief executive officer, Don Carty.

    "I just couldn’t believe what I was reading," says Little, still a tinge of anger and shock in his voice at the article that was published that fateful day in April 2003. "My first reaction was this void. Our members had struggled to prevent American from going into bankruptcy and then to find out about significant increases for senior management on the back of workers.

    "I believe our members were duped."

    The company, it turned out, had delayed filing the Securities and Exchange Commission report divulging the management perks until after negotiations with its unions, leading to costly concessions, were finished.

    The news couldn’t have come at a worse moment in the airline’s history. If there ever was a time to make nice with labor, be upfront about the airline’s plight and put the company good before executive greed, the spring of 2003 was definitely it.

    Faced with the aftermath of September 11, the Iraq war, the outbreak of SARS, a troubling U.S. economy, competition from low-cost carriers such as JetBlue and Southwest, American Airlines, among many of its old-line carrier counterparts, was in danger of going into a financial tailspin.

    Carty’s move and that of his senior team appeared to be the deathblow. But then something happened, something no one expected: A new CEO came on board and management and employees started talking.

    American, whose parent is Fort Worth, Texas-based AMR Corp., avoided Chapter 11 and, while still in the red, ended its most recent quarter with more than $3.5 billion in cash, including $500 million in readily available cash. It also saved millions of dollars thanks to employee cost-cutting ideas. Even more astonishing, labor leaders are singing the praises of management--albeit guardedly.

    "We have cautious optimism for the new generation of leadership," says Tommie Hutto-Blake, president of the Association of Professional Flight Attendants.

    Union leaders agree that a big reason for the relatively upbeat mood at American is new CEO Gerard Arpey, who assumed the post in May 2003 following Carty’s ouster.

    Even Little, who is international executive vice president of the Transport Workers Union, is encouraged. "I believe Gerard to be a sincere person, compassionate and someone who wants to turn American around."

    Clearly, the world’s biggest airline with 80,000 employees is still experiencing financial turbulence. But the story of how American was able to get from its lowest employee-management relations point to a place where trust is beginning to form is a lesson in how companies can move beyond unwise, even stupid management decisions and get workers to buy into a more cooperative corporate world order.

    "The only way to build trust professionally or personally is by being trustworthy," Arpey says. "I hope I’m living up to that standard."

    For American, building trust is a matter of survival. In October, AMR reported a $214 million loss in the third quarter mainly attributed to rising fuel costs. The airline announced plans to cut up to 1,100 jobs and to continue its cost-cutting campaign.

    "We hit bottom and had to figure out what to do differently," says Mark Burdette, vice president of employee relations for American. And with Arpey, the company’s former chief financial officer, at the helm, that’s just what the airline did. It made a swift decision to bring in a third party to help mend fences, launched a movement to disclose all financial matters to unions and began encouraging workers to submit their ideas to make the airline more efficient.

    Arpey’s approach sounds deceptively simple: "I think you will make better decisions and execute better on those decisions if you involve the people who actually do the work," he says. "You certainly won’t always agree, but the process of listening to each other can’t help but lead to better outcomes, no matter which way you go."

    Attempting such a labor relations renaissance, management experts say, is impossible without a credible leader with a willingness to make bold changes in a company’s hierarchy--ingredients apparently key to American’s turnaround recipe.

    "All evidence indicates Arpey has made excellent progress," says John Kasarda, professor of management at the University of North Carolina’s Kenan-Flagler Business School. "Right now, they’re halfway there, where other legacy airlines are not even 10 percent."

    Arpey, the 46-year-old CEO, made his mark with labor leaders early on, before he even accepted the top job. John Darrah, the former head of the Allied Pilots Association who ran the union during the transition, says Arpey came to him and other labor officials to ask for their approval.

    "He said he wouldn’t take the position unless we accepted him, unless he had our support," Darrah says.

    Having had dealings with Arpey for several years, Darrah felt confident that he "understood that without the employees the company was not going to succeed." He points out that Arpey began his career as a baggage handler with Delta Airlines and had a 20-year-plus history in the airline business.

    Once in the position, Arpey visited cities every two weeks or so where American had operations to conduct town hall meetings. He also ditched the expensive art in his office and replaced it with American Airlines memorabilia, a move that spoke volumes to the flight attendants’ Hutto-Blake.

    And he’s instituted an open-door policy with union brass, returning phone calls, asking their advice on critical company issues and constantly stressing the importance of getting the rank and file on board.

    Passengers even get a dose of Arpey’s worker appreciation mantra in the airline’s in-flight magazine, American Way.

    In the CEO’s October column, he states: "… our people have seen and done it all. In the months and years to come, we will continue to tap into their unique perspectives and insights on our business and, especially, on our customers--on what you value most and on how we can deliver it better than anybody else."

    The chief executive has also put his money where his mouth is. In July, Arpey turned down a 22 percent raise, or more than $110,000 annually, that had been approved by the board of American Airlines parent AMR, saying that it would send the wrong message to workers.

The flight team
    But the huge labor-management chasm Arpey inherited required more than just an upright leader. At the urging of employee relations and human resources staff, the company brought in a consultant, Overland Resource Group, headquartered in Lee’s Summit, Missouri, and known for its labor-management magic at Ford, Boeing and Goodyear.

    "The Overland Group specializes in helping companies achieve a high degree of employee involvement and engagement and has a long track record of success," Arpey says.

    What’s unique about Overland’s strategy is that it will not take on a job unless labor--at least one major union--can provide a representative to speak on behalf of workers. Also, union leaders as well as top management can fire the consultants anytime during the process.

    Once everyone is on board, Overland creates a structure specifically tailored for the company that employs them. In the case of American, that included something called a Joint Leadership Team, chaired by the CEO and the national presidents of the airline’s three organized labor groups--flight attendants, pilots and ground workers.

    The JLT team holds a meeting once a month to discuss company issues, everything from strategic directions to labor grievances. Also in attendance is the CFO, the senior vice president of human resources, the top three operations senior vice presidents and three or four union representatives from each union.

    Typically there are two people from Overland on hand who act as pseudo-marriage counselors to help the group communicate. All the participants sign nondisclosure agreements making it easier for them to open up and discuss grievances without fear of re-prisal, says Robert Hughes, founder president of Overland.

    "The first couple of meetings are a little bit of getting through the discomfort of never having behaved this way, getting past expectations that this will be like traditional negotiations," Hughes says. "Everyone has to get to the point where they realize these are all smart people running a very large organization."

    The second piece of the plan is bringing this type of meeting to other sites throughout American Airlines. Currently, six locations including airports and overhaul bases have city business teams in place that include union and management leadership as well as employees from throughout the airline.

    The groups meet once a month to review employee ideas for efficiencies and go over the finances in the particular location that tell them how well the location is running.

    A quarterly review of companywide finances is also part of the mix. Again, an Overland staff member is on hand to oversee or facilitate the meetings, but Hughes stresses that it’s American Airlines personnel who run the show. About a dozen Overland employees are now working throughout the airline. Burdette says the company expects to spend more than $1 million for the first 18 months of consulting services from Overland, which began in summer 2003, and anticipates a productivity return of 30 percent to 50 percent. Burdette adds that while the company has seen marked improvement in labor-management relations, it’s still too early in the process to estimate return on investment.


We have cautious optimism for the new generation of leadership.


    It’s unclear now how long Overland will stay on at American. Hughes says that most companies need a concentrated year or so and then they can begin the process of internalizing what they’ve learned and roll it out themselves.

    American Airlines management maintains that the Overland project is just one piece of an overall approach to mend fences with labor and get efficiencies rolling. Other initiatives have already begun.

    Union president Little participates in biweekly conference calls with Bob Reding, American’s senior vice president of technical operations, and Reding’s line vice presidents. The calls help resolve issues on the ground quickly and have helped keep the rumor mill in check.

    Also, in January the airline took the unprecedented step of holding a customer strategy meeting in Dallas with 100 employees from throughout the company, spending two days brainstorming about how to improve customer service.

    According to Austin-based market research firm the Benchmark Group, American gets high marks this year in customer satisfaction when compared to other large carriers.

    "It’s partly a function of improving employee morale," says Rob Baliff, president of the firm.

Everyone aboard
    A big piece of cutting costs and improving morale is focusing on getting good worker ideas up the chain of command and implemented, Burdette says. The key is encouraging managers to take the rank and file’s ideas seriously, a concept Arpey is pushing throughout the company.

    While the firm does not track the number of ideas that are implemented, it estimates that it’s saved about $100 million this year as a result of employee-identified cost-savings ideas, the majority of which were developed by workers who then took them directly to their supervisors. And there is no compensation for workers who see their ideas adopted. Helping the firm’s bottom line is the only motivation.

    Union leaders believe Overland’s presence has encouraged idea adoption. "Prior to Overland, the ideas were not taken and acted upon," Little says. "Now management knows a third party is watching--sort of like Big Brother."

    Each month, for example, American went through thousands of drill bits--costing $20 to $200 each--to service its fleet of aircraft. Two mechanics in Tulsa, Oklahoma, invented a drill bit-sharpening tool allowing the bits to be refurbished and reused, saving the company $300,000 to $400,000 annually.

    Another worker idea saved $675,000 by reusing the parts of obsolete DC-10 coffee makers on other American Airlines planes. Employees also came up with a plan to place engines on a hydraulic lift and turn them vertically so mechanics could work on the ground instead of using a ladder or harness, making the job safer and less expensive.

    American’s labor leaders now look at the concessions their members made from a practical business perspective. Ralph Hunter, president of the Allied Pilots Association, is keeping an eye on ill-advised management decisions and pointing them out wherever he finds them.

    "We want to make sure they spend our money wisely," he says.

    One example is a manager who insisted on putting a pilot through a $40,000 training program even though the pilot was a month away from retirement. While that manager has yet to alter the practice, Hunter says, he is hopeful that discussions with upper management will soon be fruitful.

    "Good things are happening here," Hunter says. "We see progress, but it’s agonizingly slow, like a big ship with a little rudder."

    While financial transparency and a willingness to listen to employees have created a more cooperative approach among labor, the best motivator may be survival. Workers see competitors including United and US Airways mired in bankruptcy court, and want to avoid the process where a judge, not workers, may end up determining what concessions would be made, says Daniel Mitchell, professor of management and public policy at UCLA’s Anderson Graduate School of Management.

    Certainly, American still faces a difficult road ahead. "A leader, consultants can make a lot of difference, but there are limits and economic constraints," Mitchell says. Rising fuel prices in particular could spell doom for the airline even if a full-blown labor-management love-in occurs.

    Still, thanks to Arpey’s leadership, Wall Street views American as among the most likely of the legacy carriers to persevere.

    "Unless labor provides additional concessions, oil prices retreat, capacity is reduced or merger-and-acquisition activity picks up in the industry, our estimates suggest that AMR will be down to the critical $1.5 billion in cash by the second quarter of 2006," states a recent report from Bear Stearns & Co. Inc. in New York.

    As the pain of concessions still stings among baggage handlers, pilots and flight attendants, some of whom roll their eyes at recent attempts at peace, American Airlines management is still a long way from singing "Kumbaya" around the campfire with all of its employees.

    Ultimately, no matter how nicely and cooperatively bad news is shared, if you’re still bringing bad news, that’s a problem, Mitchell points out. "The biggest question is: How much sacrifice are the workers willing to make?"

    Barb McClure, a 30-year veteran American Airlines flight attendant, says that morale among her co-workers is low. "The union and Arpey may have a good relationship, and that’s a good thing, but I don’t see it trickling down to us," she says.

    The big issue for flight attendants, she notes, is their shortened layovers between flights, which have gone from 12 hours to eight hours, and the loss of in-flight meals, both of which are concessions the union made in 2003, fearing bankruptcy, after initially rejecting the cuts.

    "For me, it’s not a matter of trusting or not trusting management," McClure says. "I come to work, work and go home."

Workforce Management, December 2004, pp. 32-37 -- Subscribe Now!