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 One-On-One: Carty Sees Ugly Changes In The Air
MAY 11, 2009 --
Former American Airlines CEO Don Carty, currently chairman of Virgin America and Porter Airlines, recently gave BTN editors David Meyer and Jay Boehmer his views on the evolution of corporate travel and the airline business.
BTN: What have we learned from these 25 years and where are we headed?
Don Carty: It's a difficult thing to look back at. Of course, we've had almost 25 years of pretty ugly change in the airline business. We had a couple of good years in the late '90s when things went pretty well, but it continues to be an industry that hasn't finished whatever transition started with deregulation and probably won't finish for another 15 or 20 years.
The transition seems to accelerate in every downturn: We see more consolidation and more contraction, particularly by the legacy carriers in areas where they're weak and can't defend their networks. We continue to see the evolution of international alliances and we're going to see more of that, although any movement to a change in foreign ownership has probably been slowed again by the anxiety the government and labor feels about the current state of the economy. That's true here but also true abroad. We have more change to come.
The eventual shape of a lot of the competitors in this business remains to be seen. I personally think the legacy carriers continue to get themselves deeper and deeper in trouble—not so much because of their high labor costs, although they still have cost work to do.
This isn't a criticism, because if I was still running a legacy carrier I'd find myself in the same position, but they've had to respond to very difficult, very adverse economic situations by doing the only thing they can do in the short term to ensure their survival, which is to cut costs further. The result of quick cost cutting tends to lead to service cutting as well.
BTN: In the freshly deregulated period, was it clear right away that this corporate travel market was emerging?
Carty: Thinking back, our preoccupation at that time was really building the loyalty of the travelers themselves, as opposed to the business travel buyers. We were focused on all the elements we needed to put in place from a pricing, scheduling and distribution point of view to attract the business customer.
BTN: At first you did that through the AAdvantage loyalty program.
Carty: The notion of loyalty was formative as early as 1980. We were playing with the notion that we have to make a connection with these customers, and we've got to give them a reason to keep coming back. Even before we fully conceived of AAdvantage, we were collecting as much data as we could on who our customers were. When we were able to launch AAdvantage, we were fully automated. Our launch wasn't an advertising campaign; it was a direct mail campaign, because we knew who most of those people were at that time.
BTN: The year 1984 marked a time when travel management was starting to mature and BTN was founded.
Carty: That point was significant. At that point, we began to see a real focus on that end of the market. It was something we pursued: We saw the evolution of all the economic interests that wanted to play in this space. We tried to determine who the winners and losers were going to be and how we build relationships with them. We entered into a lot of early agreements with American Express because, at the time, we perceived them as a significant player in this space.
BTN: A partnership that continues to this day.
Carty: That continues to this day. The only blip in that partnership was our effort to convince them that they really needed an AAdvantage card. It's nice to have one where you know you were right, and even they know now we were right.
BTN: 1991 marked the first Gulf War, and it was one of those times when the airlines seemed to lose every penny they ever earned.
Carty: It was the first really, really disastrous year. We've had ups and downs in the past, and this had not been a business that sustained long-term profitability, but those were losses that nobody had even conceived of before.
BTN: You had to reinvent the cost rationale for the business.
Carty: Every time there's a downturn in this business, it accelerates the change. Certainly 1991 did, and certainly 9/11 did. In fact, for us, 9/11 might have been more significant because we at American had been thinking about how we move the airline to the next giant step on the cost side and position the company for the next five years. That April, we did a lot of flying in the high-tech markets and we started to see the dot-com bubble bursting. We said, "Look, this is going to be a downturn, and we are going to need to make a pretty dramatic change here." We built a five-year plan that contemplated getting about $4 billion in costs out of the company. We didn't know how to do it, quite frankly, but we knew that a couple of billions would have to come from organized labor. We weren't sure how we would get that implemented; we just knew that had to happen. Then, 9/11 happened, and our five-year plan had to be accomplished in 14 months or we'd be out of business. And, as you know, we almost went out of business.
BTN: That seems to be recurring theme, that this is an untenable, crazy business.
Carty: It is. It absolutely is.
BTN: Why do you stay in it?
Carty: Not to get rich. It really is an enormously fun business to manage. It's fun because it's so complex. It's capital-intensive. It's labor-intensive. It tends to lend itself to mathematical problem solving, whether it's how many agents you need at a ticket counter to avoid the queue getting any longer than 3 minutes. It's a mathematical problem when it comes to scheduling airplanes; it's a mathematical problem when it comes to allocating crews to airplanes. Of course, the inventory management problem is a highly complex, mathematical problem.
The beauty of these mathematical problems is they're never quite solvable. You tend to move towards optimization all the time, and you're always looking at something to improve your math. A lot of airline guys wouldn't describe it as math, but that's what it is. It's a quantitative search for a better and better answer. Every day you show up and every day that puzzle, or some piece of that puzzle, is there to solve.
I've been in a lot of businesses, and I have yet to see one with as much complexity as the airline business. If you like complexity, and you like problem solving, you kind of get hooked.
BTN: Where do we go from here?
Carty: In the short to medium term, we'll see more contraction, perhaps another failure and some additional consolidation. If one of the legacy carriers enters bankruptcy today, they enter bankruptcy with a lot less restructuring to do. If their operations aren't in a position to generate cash, there's less they can do to cure themselves in bankruptcy. I think there is the risk that we will see additional bankruptcies. Also, the oil speculation that occurred is a contributor to that possibility. By all appearances we'll probably see one in Canada. If you look at the balance sheets of all the U.S. legacy carriers, there are a number of them that have challenges.
Getting a debtor-in-possession loan now is hard to conceive of in this industry. If anyone has to file, they'd better do so before they run their cash balances down. The possibility of losing a carrier is real in the next 12 to 18 months.
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