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AA’s CEO Details Future Airline Challenges

March 12, 2010 By: George Dooley

From an airline perspective, the past 10 years have been wrenching to put it mildly, Gerard Arpey, American Airlines chairman and CEO, said in recent remarks at the Federal Aviation Administration's Forecast Conference. Arpey identified four major challenges facing the airlines— infrastructure, security, profits and labor relations— and notes the traveler benefits of low airfares. He also questions why tax dollars were spent for high-speed rail, but not for high-speed aviation.

“The attacks of 9/11, while the worst, were also just the first in a series of body blows we— as individual airlines, and as an industry— have had to absorb,” Arpey said. “Our challenges and travails over the past decade are well understood. We have endured the most difficult decade in our industry’s history, more or less intact -- which, considering the big-name companies throughout the rest of the economy that have either vanished during that time, or owe their continued existence to the largesse of the U.S. taxpayer, is pretty impressive.” 

Arpey’s wide-ranging discussion includes comments on the value of general aviation (Arpey is a private pilot) and praise of the performance of the Transportation Security Administration (TSA), who he believes does a tough, thankless job remarkably well. Arpey was elected chairman of AMR Corporation and American Airlines, Inc. in May 2004.

The core of Arpey’s presentation is inevitably the airline industry. “You don’t hear much about the so-called 'bail out' of the airlines anymore— perhaps because the financial assistance we received in 2001— after being directly attacked by Al Qaeda and shut down by the government for several days— can only be described as quaint by today’s standards,” he said. “As an industry, we have had a lot of practice dealing with adversity and disruptive change. We have grown accustomed to it— and to varying degrees, and out of necessity, we have gotten pretty good at managing it.

“While we have generally failed to enrich our shareholders, the airline industry remains— from a macro perspective— an economic powerhouse,” Arpey continued. “The FAA Air Traffic Organization found that in 2006, commercial aviation ultimately drove more than 5 percent of U.S. GDP, helping generate well over a trillion dollars in economic activity and more than 10 million jobs. And while we are a smaller industry than we were a decade ago and that has certainly generated much hardship, we still directly provide hundreds of thousands of good jobs for the American people.

Gerard Arpey

“Today you can not only fly more safely, you can fly to more places than ever,”  Arpey stated. “We’ve made the world infinitely more accessible to millions of people in the last decade. Accessible in a physical sense, in that we connect more places, more easily than ever -- and importantly, we are doing a much better job of taking care of people with disabilities. Air travel is no longer the exclusive province of the able-bodied. But air travel is also incredibly accessible financially. Adjusting for inflation, the cost of flying one mile in a domestic market has fallen from eight and a half cents in 1978, to seven cents in 1988, to about five and a half cents in 1998 to just over four cents in 2008.

“That’s not a great story for our shareholders, but it’s a fantastic story if you’re a traveler," Arpey continued. "If you want to see the free market in action, give yourself a budget of 300 dollars and let the airlines battle it out over who can take you to the best place, at the best price. Of course, factoring in fees and taxes, the winning airline will only collect about 240 of those 300 dollars. We’re connecting more people to more places, more safely, more dependably, more affordably, and more cleanly than we ever have— and in the process, despite powerful economic headwinds, we’re providing rewarding and meaningful work for hundreds of thousands of people and driving literally trillions of dollars of economic activity.

“If as a nation we are willing to spend billions of general tax dollars for high speed rail, why not a few for high speed aviation?" Arpey asked. "In 1946 we scheduled flights from Boston to New York for one hour and five minutes. Today we schedule the identical flight for an hour and 20 minutes. The airlines have invested billions to acquire state-of-the-art equipment. The government has not. The net loser is the economy, which suffers from the diminished productivity of one of our greatest assets. Shame on all of us for bickering amongst ourselves while the high-speed train left the station.”

“The second major challenge we’re facing relates to security," Arpey continued. "Again, the TSA is doing a good job under extremely tough circumstances, but it’s clear to us that in the years and decades to come, there are going to be more and more flights, more and more people flying, and we are not going to be able to manage that level of activity handling security the way we do today. Common sense tells us we will need to use technology much more aggressively, and we need to use more aggressive behavioral profiling— separating the potential bad guys from Grandma. Most importantly, we need to recognize aviation security as a fundamental part of national security, operated and paid for by the one institution charged with protecting our nation from enemies— the federal government.

“Let me turn to the third big challenge, profits," Arpey said. "Simply put, we the airlines need to generate more revenue for our product if we are to be profitable. And before anyone from the Justice Department who may be here comes after me for trying to fix prices, let me simply suggest that what I just said is a tenacious grasp of the obvious. Like any business, we cannot sustain ourselves and invest in the future if we don’t earn a return on capital -- and as an industry, we haven’t done that in more than 10 years. Every time we do something to try to raise more revenue or reduce our costs, the media expresses outrage. Almost never do they recognize the single most fundamental problem we face as an industry. On average, we lose money on every passenger. It doesn’t take an MBA to understand that there is no future in that.

“Finally, in terms of labor relations, there are good people working on all sides of this issue, trying to move us out of the confrontational, boom and bust approach that has caused so much turmoil in the industry, and toward a more business partnership approach," Arpey said. "That is certainly something we’re trying to do at American Airlines, the only legacy airline that has not resorted to a bankruptcy judge to define our labor contracts."

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