$3.3 million a day (cont.)
American Airlines (AMR, Fortune 500) is only now beginning to find solutions to the problem. The company is rolling out software to identify flights for which passengers will pay extra. "We call it the passenger choice model," says Scott Nason, American's vice president for revenue management. "And it's easily worth a few percentage points. On an individual flight that was going to take in, say, $10,000, if we got 3% more, that's $300. But across our system, over the course of the year, 3% of $20 billion is $600 million."
Every dollar helps. To bolster its balance sheet, American recently sold 90% of its investment arm, American Beacon Advisors, for about $480 million, and it is trying to divest its American Eagle regional carrier. To reduce costs even further, the airline plans to pare back domestic flying by about 4% by the end of the year. But Baker, the J.P. Morgan analyst, thinks that at current fuel prices the industry needs to shrink as much as 20% - something not easily feasible in the short term.
Arpey, a reserved man who rarely speaks to the press, can seem icy when you first meet him. But it took just a few minutes on the flight to Washington for him to loosen up and begin ruminating on his industry like somebody with the appropriate amount of jet fuel in his veins. We were sitting in the last row of first-class, and lunch was a turkey croissant sandwich. He's not optimistic about his industry, nor does he have a new plan to save it: Fares will have to rise, service will have to be cut, and some carriers will have to merge - perhaps even his. "All we can do is cut capacity and hope for the best," he says. "You never realize how much disruptive change there is in this business and how limited your options are to combat it."
He certainly has his hands full. Arpey is dealing with a near-revolt among his employees, particularly pilots, hundreds of whom recently picketed outside the headquarters of the airline's biggest customers and shareholders. The unions say they are embarrassed by the airline's operational record - it recently came in last in on-time performance - and are outraged about the more than $250 million in stock grants that went to executives and managers in the past two years. They say the company should spend more on maintenance and personnel, even while it's losing money. The distrust runs so deep that the Allied Pilots Association hired an investment bank to make its own assessment of whether American should try to buy another carrier.
In this climate, Arpey won't rule anything out. If Delta were able to complete its purchase of Northwest, American would be toppled from its perch as world's largest carrier. And a combined United and Continental would be even larger. That would leave American in arguably the weakest position among the network carriers. But Arpey says the size of his company doesn't matter as much as the strength of its assets. "We believe we will remain competitive irrespective of any consolidation that occurs," he said. "The real challenge is being profitable."
Later, as we were walking down the jet bridge, Arpey paused. "There is no business," he said, "that can go on forever selling its product for less than the cost to produce it." Never mind that that's precisely what the airline business has done for the past 30 years. As Emily Dickinson almost wrote, Hope is the thing with wings.