Hard Landing (25 page)

Murray, though initially a willing participant in the practice of screen science, soon thought the top brass were
getting greedy. We’ve got a good thing going here, Murray told them. Let’s not call too much attention to it. He pleaded to penalize other airlines’ flights only in tiny increments, in hopes that the travel agents and the other airlines might not notice. But people in the company were soon making snide remarks to Murray, questioning his loyalty. Didn’t he bleed American red, white, and blue?

Murray’s unease turned to panic when American mounted a major marketing study of DFW. In some cases the information that Sabre was accumulating was confidential, data that American had pledged never to use in furtherance of its own operations. Murray had been asked by Max Hopper, Bob Crandall’s data processing guru, to ask Lorenzo’s people for permission to
use some confidential Texas International data in American’s marketing study. In return American would share the results of its analysis with Texas International. While awaiting reply from Texas International, Murray was watching a slide presentation at a marketing meeting and was stunned to see the very same data—Texas International’s booking figures at DFW—projected for all to see.

The two men would later disagree over whether the data in question were the confidential property of Texas International. In any event, when Murray confronted him about American’s use of the numbers, Hopper answered that he thought Murray was getting Texas International’s approval.

“I haven’t gotten the authorization!” Murray explained.

“Well, it’s
too late now,” Hopper said.

Within American there was no stopping Sabre. One after another requests went up the hierarchy for tens of millions of dollars to add more tentacles to the network, all intended, as Crandall’s people wrote in a budget request, to “enhance American’s control over its key distribution channel, the travel agency market.” The rate of return projected in each of the expansion proposals was listed at “500 percent plus”—surely among the greatest payoffs ever promised by a management to a corporate board. Within a year of Crandall’s becoming
president, American had enlisted
3,500 travel agencies, and there were tens of thousands left to conquer. Crandall’s network, as the marketing staff wrote in a memo, had done nothing less than reshape “the
flow of passengers through the air transportation network, in a manner most beneficial to American.”

The “Robert L. Crandall
Factory of Ideas,” as a company historian would call it, also discovered a way to turn Sabre terminals into cash registers, ringing up a few bucks for American Airlines whenever a travel agent booked a ticket on another airline through the Sabre system. It happened because of Frank Lorenzo.

Late in 1981 Lorenzo added a new spoke to the New York Air network: LaGuardia to Detroit, a direct incursion into some of American’s most dearly held territory. American’s Detroit run was part of the C. R. Smith legacy, dating back nearly 50 years, the kind of route that distinguished American as the “businessman’s airline.”

The galling thing, in Crandall’s view, was that he had to list New York Air’s flights in American’s computer system. Travel agents by now were wise enough to realize that American and United played games with their computers, but withholding an entire block of flights was something that Crandall knew the travel agents would never stand for. So while New York Air was invading American’s territory, American was forced to facilitate the onslaught.

Worse still, New York Air, in pursuit of its low-cost strategy, was refusing to perform many of the favors and courtesies that had long been taken for granted among the airlines—for instance, accepting baggage from the connecting flights of other airlines. It was the same story with People Express, and Southwest, for that matter. The upstart carriers were a “
breed apart,” as Crandall put it. They were not contributing members of the air transport system. They were in it for themselves.

After Lorenzo announced New York Air’s invasion of Detroit, Crandall
angrily ordered that all such upstarts—New York Air, People Express, and Southwest—would have to begin paying a fee to American for every sale transacted through Sabre—as much as three dollars for each booking, a sum that exceeded the entire profit margin on many flights. Predictably the upstarts did not react well to the fee plan, neither when first proposed by Crandall nor when matched by all the other airlines rich enough to have built such systems. They
simply refused to pay the fees. As long as the computer networks listed the upstarts’ flights, a travel agent could always call the airline directly for a reservation and a ticket, avoiding any transaction through Sabre.

American had a counterpunch for that as well. New York Air’s flights to Detroit, and everywhere else, were suddenly appearing at the
bottom of the screen in thousands of travel agency computers across America. New York Air’s reservations began to dry up. Soon Lorenzo was forced to cut back from eight Detroit flights a day to four, then from four to none.

In the space of several weeks, Bob Crandall’s computer network had pushed a competitor out of one of the busiest and most important business markets in the world.

Crandall knew that the computer battles were only tactical skirmishes in a war with the upstart airlines. American also needed a strategy, a grand design. Though still well contained, the new airlines, Crandall thought, presented nothing less than a
mortal threat. The upstart airlines had junior, often entry-level, staffs, paid accordingly, while at American the average employee had nearly 12 years’ seniority. The new airlines also had no unions or, in the case of Southwest, unions that did not try to prop up wages through featherbedding. It appeared that success and failure in the airline business was suddenly being defined within the personnel budget, and in American’s case those costs were nearly as high as any in the industry.

One member of Crandall’s brain trust, a young, Canadian-born executive named Donald Carty, had been wrestling with the problem from the moment that People Express had gotten aloft.
Among the options he studied was starting a new airline outside the existing American Airlines, as Lorenzo had done by starting New York Air outside Texas International. As much as Lorenzo’s westward expansion annoyed the people at American, they had to admit that the whole New York Air gambit was brash and brilliant. Crandall, however, believed that a proud and seasoned workforce was part of American’s franchise in the marketplace. Expanding the existing airline would be preferable to starting an altogether new one, and yet …

Crandall brainstormed endlessly over this challenge with Carty
and other members of his inner circle. Creating a new airline versus expanding the old airline; hiring new, low-cost employees versus maintaining high salaries for veteran employees—these permutations eventually began to suggest an altogether different concept. “
If we can’t create a new airline outside of American,” Crandall said, “we’ll create one inside American.”

Yes, that was it: two airlines, or more precisely, two separate and distinct workforces, each flying the same airplanes and the same routes. If you already worked for American Airlines, your job and salary were secure; indeed, you would continue getting salary increases. But for every person hired in the future—every flight attendant, pilot, baggage handler, ticket agent, and mechanic—the story would be different. Each would come in at lower starting wages and in some cases at reduced benefits as well. Through the years, as they gained seniority, this second category of workers would receive raises, of course, but they would remain on a lower scale than the older, more established employees, those lucky enough to have been hired by the early 1980s. In fact the new hires would never catch up. They would be perpetually confined to a second-tier status that the unions would come to call the “b-scale.”

The faster American grew—a worthy strategy in any case, in the newly deregulated world—the more new people it would be able to hire at b-scale rates, and the lower its
average
labor costs would go. The bigger American became, the closer its costs would approach the levels enjoyed by New York Air and People Express.

Bob Crandall christened his newfound strategy with the pretentious name “the Growth Plan,” although there was no disputing that the plan was something extraordinary. It was, to begin with, a major change in strategy for a corporation that had so far responded to deregulation by cutting back on its traditional route structure and getting rid of airplanes. In order for the Growth Plan to work—in order to hire enough new employees to drag down American’s overall labor costs quickly—Crandall would have to launch the biggest expansion in airline history. And he would have to do this as airport capacity was tightening and as new competitors were continuing to flood the market, all in the face of higher fuel prices, stratospheric interest rates, and an uncertain market. But Crandall believed it had to be done: the top people at American were convinced that now, in the
early 1980s, with upstarts popping up all over, the
winners and losers were being permanently decided in the airline industry.

Part of the Growth Plan’s genius lay in how diabolical it was. The one controlling obstacle to the plan, of course, were the unions at American. The very concept of a two-tier wage system ran 180 degrees counter to the fundamental all-for-one, one-for-all principles of unionism. But the Growth Plan was conspicuously structured to benefit
existing
union members, who in an expanding airline would enjoy vastly greater promotion opportunities, meaning that their salaries would increase even more than otherwise. The incumbent employees would reap this windfall on the backs of future employees, but what did it matter when the winners under this strategy were the only ones able to vote on the proposal?

After months of careful preparation Crandall and his people began presenting the b-scale proposal to employees as their labor contracts approached expiration. Through the sale of stock and other means, American had accumulated a massive war chest, the means to win a war of attrition should the unions refuse to approve the two-tier wage scheme.

The first union contract to come up for renewal was that of the Transport Workers Union, whose 10,000 members represented mechanics and other ground employees. Nonunion replacement workers
scabs, in union parlance—were standing by around the country, collecting $25 a day just for waiting. Crandall and other company officials, often in the face of a
booing and hissing crowd, were on the stump, pointing out that existing employees would benefit tremendously under the growth that would follow. Finally, with a strike imminent, the TWU relented. B-scales were born.

Members of the pilots’ union were even less difficult to convince. A
huge proportion of the pilots at American had been hired at one time, in the explosion of flying that accompanied the onset of jets in the mid-1960s. By the early 1980s many of the members of that bulging pilot class were still stuck in the copilot’s seat. Crandall and his aides demonstrated that as American bought more planes—a fleet expansion made possible by hiring new employees at cheap wage scales—these veteran pilots would finally be thrust into the captains’ seats, getting a big raise in the process. Crandall’s task was made even easier by the fact that the pilots at American, though
unionized, were not part of the Air Line Pilots Association, which represented pilots at all other union airlines. Dealing with a distant national leadership in Washington would have made b-scales a much harder sell.

The flight attendants required more convincing. The job of persuading them fell to Tom Plaskett, American’s marketing chief. Seeking to neutralize the union’s leadership, which was more outspoken than the membership, Plaskett met with flight attendants in small numbers, reasoning that it would be easier to
intimidate the rabble-rousers from making speeches in a small room than in an auditorium. Altogether Plaskett held 145 meetings with flight attendants, and he drew an ocean of tears in those meetings, by his later account. “Flight attendants deal with everything on a more
emotional, visible level,” Plaskett would explain. And as they cried still more, “It dawned on me: What was coming to the fore in their minds was, ‘I’m not worth what I’m paid.’… We’re telling them, ‘There’s someone out there who’s willing to do your job at half the price.’ ” In the end, as they watched the company training
every secretary in corporate headquarters to act as a strikebreaker, flight attendants making $30,000 a year decided that they would stay on the job and allow American to hire future flight attendants at about $15,000 a year.

With his b-scales firmly in place, Crandall in early 1984 began unleashing orders for hundreds of new airplanes. Pilots, mechanics, and flight attendants flooded into American. The Dallas hub added new spokes. Still more planes and more employees came aboard. Despite the intractable recession, earnings soon reached record levels, enabling the airline to buy even more planes and hire even more people. Within a few years American was bringing in planes at the rate of nearly one per week and hiring as many as 1,000 new employees a month. At an industry meeting in Washington, Herb Kelleher of Southwest Airlines would one day remark that being headquartered in Dallas with American made him feel like
Finland in the shadow of Russia. With perestroika at its height, Crandall shot back, “There’s one important difference: I ain’t reducing troops.”

The one nagging problem with an expansion fueled by b-scalers, of course, was that the low-paid newcomers quickly came to realize that they were receiving distinctly unequal pay for equal work. This presented Crandall with a labor relations problem in the short term
and in the years ahead with a significant strategic challenge: maintaining b-scales past the point at which the b-scalers themselves attained the majorities in the unions that represented them. The whole thing would have to be managed delicately. “
I don’t want to hear anybody ever say, ‘We beat the union with this,’ ” Crandall instructed his managers. Crandall even tried to stifle use of the derisive epithet “b-scale,” coined by union leaders, in favor of the benign-sounding “market rate” scale.