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Much has been written about the post-9/11 airline environment and the attendant financial losses incurred by the major air carriers. American Airlines, which acquired St. Louis-based Trans World Airlines in 2001, came dangerously close to bankruptcy protection, while at the same time weathering an executive bonus and pension plan conflict that threatened relations with its labor unions.

Gerard J. Arpey
AMR Corporation

Following a change of CEOs, the man who now leads American’s already obvious comeback is Gerard J. Arpey, who took over as CEO of American and its parent company, AMR Corporation, in April 2003. Arpey, 46, earned an MBA from the University of Texas at Austin, and has spent his entire professional career at American. Some thirteen years after joining the airline as a financial analyst, he became CFO in 1995, and in 2002 served as president and COO.

Shortly after his promotion to CEO, Arpey unveiled the company’s aggressive “Turnaround Plan,” which called for streamlining operations and removing $4 billion in permanent costs. As part of that plan, American dramatically reduced its presence in St. Louis, cutting some 200 of its 400 plus daily flights from its Lambert-St. Louis International Airport hub, while eliminating 2,000 jobs.

Recently, Commerce had the opportunity to hear Arpey’s thoughts on St. Louis, discount air carriers, the airline slump in general and, of all things...pilgrims.

Bob Schaper
managing editor

American Airlines announced in July 2003 that it would downsize the St. Louis hub. What factors went into that decision?

The last thing any of us wanted to do, after investing such an enormous amount of money, time and energy integrating TWA and the
St. Louis hub into our system was turn around and shrink our operation here. But the St. Louis experience, perhaps better than anything else, illustrates just how much our industry has changed during the past three years.

As we started 2001, business travel was booming—so much so that we were in danger at American of maxing out our two mid-continent hubs at Dallas/Fort Worth and Chicago. Adding the St. Louis hub in that environment seemed to make sense—not just because it enabled us to grow, but because it let us expand without disrupting the overall supply and demand equilibrium in the industry.

By mid 2001, however, business travel was slowing pretty dramatically. Then came 9/11 and suddenly nobody wanted to fly. We had to make thousands of tough decisions on the fly, just to stay in business. We continued the hard work of integrating TWA, because at that time we still thought an efficient connecting hub in St. Louis could be a profitable addition to our network. Our people—both at American and TWA—did a heroic job. However, the economics of our business continued to deteriorate. We barely escaped bankruptcy a year ago, and in the aftermath of that escape we had to make some even tougher decisions. One of our most difficult realizations was that—in the course of two years—a connecting hub in St. Louis had gone from something we thought we needed to something we could no longer afford.

It’s analogous to a company with three factories. If the volume of business falls dramatically, you have to match your productive capacity to the demand in the marketplace. And, you need to decide whether it makes sense to spread your capacity cuts equally among the three facilities, or focus the reductions on one. For us, it was clear that further shrinking our hubs in Dallas/Fort Worth or Chicago didn’t make economic sense. Shrinking the St. Louis operation, while painful for us and tragic for the folks who lost their jobs, was the only real option that made sense. Yet we were able to make the changes in ways that allow St. Louis to continue to function as a hub, though smaller than before.

In 1926, Charles A. Lindbergh was the chief pilot of Robertson Aircraft Corporation, which was based at an airfield in Forest Park.

Starting in 1929, Robertson and many other companies consolidated to form The Aviation Corporation.

In 1930, The Aviation Corporation’s airline subsidiaries were incorporated into American Airways, which became American Airlines in 1934.

Are there plans for further cutbacks in flights or personnel at St. Louis within the next year or two?

We don’t think so. Despite the painful changes we have had to make, we continue to believe in the St. Louis market. And we are hoping to add flights, in a careful way, as the economics of our business improve and the demands of the traveling public in St. Louis become clear.

AMR's Five-year stock price, as of June 18, 2004

In light of the $1.1 billion expansion program currently on-going at Lambert International Airport, what role does American expect to play in the St. Louis market in the future? Are there plans to revitalize St. Louis as a significant hub if the airline can return to profitability?

Given the rapid pace of change in the airline business, I am not going to rule anything out. But I definitely see us playing a major role in St. Louis in the years to come. We already provide service to 95 percent of the markets St. Louis travelers visit the most. And we’re adding capacity in some of the most important markets. For instance, since last November we have added a fourth daily roundtrip flight to Los Angeles and more mainline jets between St. Louis and Washington D.C., as well as new AmericanConnection flights to Columbus, New Orleans, and Springfield. And (now) we are flying our “More Room Throughout Coach” Boeing Super 80s roundtrip between Lambert and New York LaGuardia.

Commerce has written extensively about the business and civic communities’ efforts to improve Lambert Airport. What changes, if any, need to occur in airport systems to help airlines survive financially?

Airport operators have to compete just like everybody else. That means they need to focus on reducing costs, and doing more with the resources at their disposal. Like us, they must recognize that the business of air travel has changed dramatically, and the approaches that worked in the past are probably not going to work in the future.

What does a company like American have to do to succeed against its low-cost competitors?

First, we have to lower our costs to levels that are more competitive. This will prevent the lower-cost airlines from pushing us out of the markets we want to serve. We’ve made great progress on this front, but we need to keep pushing. Second, we have to make the most of the strengths we have, the amenities that many of our competitors cannot replicate. But again, those advantages won’t mean much if we don’t do a great job with the basics of our business. We need to take excellent care of our customers, and do so at a profit. You might say it’s circular. We cannot make a profit unless we take care of the customer, and we can’t take care of the customer unless we make a profit.

If the aviation industry’s slump continues, do you think that most airlines ultimately will have to become low-cost carriers to stay afloat?

I think in just about any business the low cost competitor is always going to have an advantage. Our customers have made it clear that we have to be competitive on price. That means we have to be competitive on costs. So to the extent that a lot of customers continue to base their decisions on price, every airline is going to have to either be cost competitive or die a slow—or perhaps not so slow—death. That doesn’t mean you have to have the lowest costs in the industry to succeed. But you need to make sure the activities and product attributes that increase your costs above the other guy bring in at least that much more in revenue, and hopefully more. Our Fly Smart philosophy is about investing only on those points of differentiation that pay for themselves, that earn a revenue premium commensurate with what it costs us to provide that product or service.

Do you foresee the popularity of commercial flight ever returning to pre-9/11 levels?

From an airline economics perspective, I don’t see the boom times of the late 1990s returning anytime soon, if ever. But I don’t think the popularity of flying has diminished a bit. People, and Americans in particular, love to travel and love to fly. It’s in our DNA, going back to the Pilgrims, Lewis and Clark, the Wright Brothers, NASA and on and on. We love to explore, to discover new things, meet new people. At American Airlines, we have built a business around the love of travel that has lasted three quarters of a century. And I’m pretty sure we’re just getting started.



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