big business

The Slow Death: American Airlines, HP, and Corporate Decline

American Airlines planes sit at a gate at Washington's Ronald Reagan National Airport, Tuesday, Nov. 29, 2011. American Airlines and its parent company are filing for bankruptcy protection as they try to cut costs and unload massive debt built up by years of high fuel prices and labor struggles
Yes, the planes are falling apart, but have you tried the honey-roasted peanuts? Photo: Susan Walsh/AP/Corbis

I’m writing these words in one of the most fraught places on Earth: row fifteen of an American Airlines plane.

As you may have heard, American Airlines has ceased to be much of an airline in recent months and has become a sort of autophagic corporate experiment — a company that seems to be eating itself alive.

The current trouble started when the 82-year-old airline put itself into Chapter 11 bankruptcy after three years of huge losses and mounting costs, then threw out its labor agreements and offered its pilots a new, noticeably worse contract.

And it reached an apex last week, when, in protest, the pilots began calling in sick in droves and ordering up huge numbers of delay-causing maintenance tickets, dragging the airline’s on-time performance from an already-bad 74 percent down to a hysteria-inducing 54 percent. (The AA pilot’s union, Allied Pilots Association, has denied that the foot-dragging is intentional, but, sure, okay, whatever.)

As an anonymous AA pilot explained to the Dallas Morning News:

What you’re seeing going on at AA is a lot like on your car. You normally ignore the minor squeaks or rattles and if you are going to get it fixed you wait until you get back home and have your local mechanic fix it. Now guys are writing those problems up and not on the inbound leg to DFW or MIA but instead when they see them on the outbound leg to OMH, MCI or PDX.

If you ran your car like American Airlines has been running for the last two weeks if your car was leaking oil on the drive, write it up.  Windshield wipers streaking, write it up.  Shocks squeaking, write it up.  Car pulls slightly to the left, write it up.  Your wife would be thrilled…..until the bill came in.

The endless delays, compounded by the horrible customer service that is endemic to the airline industry in general, has been hell for customers. Gary Shteyngart wrote hilariously in the Times about an American flight from Paris to New York that was marred by delays and malfunctions, and ended up taking 30 hours. He concluded, “You, American Airlines, should no longer be flying across the Atlantic.” Matt Yglesias added to the pile-on, writing “Long story short, American is totally screwed.”

These are harsh diagnoses, but not undeserved ones. Companies that are in end-stage decline are rarely pleasant to do business with. For the record, unlike Shteyngart and Yglesias, my AA flight today ended up getting me to my destination on time, making me one of the fortunate 54 percent. But I’m hardly the kind of consumer AA needs to worry about. They should be paying major attention to their frequent fliers, the valuable road warriors who fly hundreds of thousands of miles a year and are invested deeply in the airline’s loyalty programs. If you see a mass exodus of the George Clooney Up In the Air types (a movie that prominently featured American) to Delta or United/Continental, it’s really lights out.

American Airlines’ problems echo another piece from this weekend’s Times about a storied American corporation that is experiencing some old-age pains: a puffy profile of 73-year-old Hewlett-Packard and its gubernatorial candidate turned CEO Meg Whitman.

Both HP and American Airlines were born around the time of WWII, became juggernauts in the sixties and seventies, expanded through acquisitions in later decades (HP bought Compaq; AA took over TWA), and were overtaken by upstart competitors in recent years. Both are being crippled by huge, expensive labor costs (HP has 320,000 employees, while American has around 80,000) that have weighed on profits even as top-line revenue has remained fairly robust. And both are being run, at present, by CEOs who think they can turn the ship around.

The biggest difference between the two is that American Airlines has a much harder turnaround ahead, since it has unionized labor and an inflexible, capital-intensive business model to contend with. (An airline, no matter how innovative and 2.0 it wants to be, still has to buy big airplanes and fly them from city to city. It can’t pivot into, say, making software.)

American Airlines also has the added burden of a management team that is perversely motivated not to make the changes the company needs. As Andrew Ross Sorkin pointed out in July, what AA needs most — a merger with US Airways — is unlikely to happen, mainly because, through a little-known feature of bankruptcy law, the company’s management team can receive stock worth up to $600 million if they can escape from Chapter 11 without merging with a rival airline. A provision that incentivizes going it alone is dumb if you’re any other bankrupt company. If you’re American Airlines, which can basically only survive by hitching itself to a stronger wagon, it’s a death sentence.

In the absence of any true revolutionary potential, both HP and American are stuck trying to make small, incremental changes to stop the bleeding. Whitman is planning to sex up HP with cloud-connected printers that are “capable of initiating Google-esque data searches through corporate information.” (O, how my loins stir!) And American will stick to the time-honored tradition of cutting labor costs and paring back unprofitable routes while it slinks along in money-losing hell.

The long process by which huge companies fail is, of course, painful for the employees who counted on them for paychecks. But it’s also painful for consumers, who, in American Airlines’ case, have become the unwitting casualties of a company at war with itself. And while the corporate annals do contain a few bona fide comeback stories (Steve Jobs at Apple, for one), many more companies that have reached the end of their usefulness are simply ground down into dust. Often, it takes decades.

We don’t tolerate these kinds of slow, agonizing failures-by-degrees in all industries. If HP and American Airlines were investment banks, regulators might have already stepped in, either to arrange emergency funding or to inquire about their “living wills,” the Dodd-Frank-mandated documents that require banks to make plans for their wind-downs. But American and HP are in industries in which companies are bought, sold, and merged all the time without causing any catastrophic shocks to the global financial system. In the long run, that’s how capitalism works.

In the short run, though, consumers should brace themselves for a lot of subpar printers and canceled flights.

American Airlines, HP, and Corporate Decline