THE AXIS OF AIRLINE EXCESS
By Joe Brancatelli
August 9, 2007 -- Hear those cheers? That’s the nation’s six legacy carriers celebrating the fact that they are all out of bankruptcy and have recorded two back-to-back profitable quarters for the first time in about a decade.
The glee is much ado about little. The six survivors of the era before deregulation—American Airlines, United Airlines, Delta Air Lines, Continental Airlines, Northwest Airlines, and US Airways—only earned a combined $1.6 billion for the second quarter of the calendar year. Their pretax margins are thin. Despite a surge in passenger traffic, the Big Six are reducing their domestic capacity. Several have gambled on expanding international flights, even though their product offerings in the highly profitable business- and first-class cabins still lag behind those of their overseas competitors.
And all that screaming you hear? That’s us business travelers. We’re enduring schedule-busting, body-breaking service so that the airlines can register their paltry profits. There’s been a collapse of basic services; they haven’t been able to handle baggage responsibly, fly on time, or, in some cases, fly at all. Even those of us who predicted a miserable summer (see “The Summer of Our Discontent”) are stunned by the speed of the Big Six’s operational deterioration.
According to U.S. Department of Transportation statistics released on August 6, the Big Six operated just 64 percent of flights within 15 minutes of their scheduled times during the month of June. It was one of the worst months in the last 12 years. The report also includes a 17-page list of flights that arrived late at least 80 percent of the time. Delta Flight 1891, from New York to Los Angeles, for example, was late every single time in June; the average arrival delay was 2.25 hours. Mishandled-baggage figures jumped 20 percent from a year earlier, meaning more than 450,000 passengers had baggage issues. Additionally, Northwest Airlines canceled 5.3 of its flights that month. And Mesa Air Group, which operates commuter flights for three of the Big Six, canceled 6.4 percent of those flights.
You’d think that all of the service problems and financial weakness would make airline C.E.O.’s a humble and fiscally circumspect lot. But they’re raking in colossal payouts. Shareholders, employees, and passengers are all expected to offer up tribute money to these self-styled sky gods.
Are you shocked by the Portfolio.com multimedia feature that shows U.S. chief executives making 465 times more than the average worker in 2005? That’s child’s play in the airline business.
United Airlines chairman, president, and C.E.O. Glenn Tilton earns 1,000 times what a United flight attendant at the top of the scale takes home. Tilton’s total compensation package for 2006 was estimated at $39 million. After United flight attendants made several rounds of concessions during the company’s bankruptcy, they now earn an average salary of about $31,000. New hires make about half that, which means Tilton earns 2,000 times what newbies do.
Tilton made his millions through the bankruptcy process, in a way the New York Times’ Gretchen Morgenson called “insanity squared.” When he arrived at United, the nation’s second-largest carrier, late in the summer of 2002, the former oil executive suggested that bankruptcy wasn’t inevitable. But the company had filed for Chapter 11 protection before Christmas. During the course of the longest (38 months) and most expensive (at least $325 million in fees) bankruptcy filing in airline history, Tilton wiped out shareholder equity, slashed employees’ pay and dumped their pensions, shrunk the airline’s route network and market share, and left a string of unpaid bills at airports around the world.
When United finally staggered out of bankruptcy, in February 2006, Tilton was the company’s largest individual shareholder and the fourth-largest overall, trailing only two investment firms and the Pension Benefit Guaranty Corporation. Tilton’s stock award—sanctioned by a compliant bankruptcy court judge and an equally tame creditors committee—so infuriated business wit Ben Stein that he compared Tilton to Orson Welles’ amoral, drug-dealing villain Harry Lime in The Third Man.
Doug Steenland, the president and chief executive officer of Northwest Airlines, hasn’t done quite as well as Tilton. In May, when Northwest came out of bankruptcy, Steenland received a package of restricted shares and options worth only $26.6 million. After several rounds of concessions made during bankruptcy, a Northwest flight attendant with 15 years on the job now earns about $36,000 annually. Steenland’s package is 739 times larger.
But Steenland is at least as clueless as Tilton about appearances. In June, Northwest’s first full month out of bankruptcy, management miscalculations about staffing and mechanical issues forced the airline to cancel thousands of flights. During the height of the crisis, in the last week of the month, Northwest was scrubbing as much as 15 percent of its schedule each day, and Steenland made no public appearances and issued no apologies to travelers. But according to a June 30 filing with the Securities and Exchange Commission, he did take possession of 159,000 more stock options.
Need more examples? Over at the nation’s largest carrier, American Airlines, chairman, president, and C.E.O. Gerard Arpey got his job when the previous boss was forced to resign after a secret executive-bonus plan was made public.
Arpey has shunned the secrecy but not the executive perks, which have skyrocketed even as service has declined. For many months this year, the once rock-solid airline was at or near the bottom of the Transportation Department’s ratings list for on-time performance, baggage-handling efficiency, and schedule reliability. Plagued by storms at its Dallas/Fort Worth International Airport hub, American had a dreadful June: Just 57.9 percent of its flights nationwide were on time, and its baggage-handling efficiency was far below the industry average.
Yet, in part for improving the airline’s share price, Arpey was given a stock bonus in April of $6.6 million. (Four other top executives snagged bonuses worth a combined $12 million, and all five dumped their shares within days of getting the grants.) Just two weeks ago, Arpey received another basket of gifts: 95,000 performance-based shares, 78,000 deferred shares, and 75,000 stock-appreciation rights.
Arpey faces difficult negotiations this year with several of the airline’s unions, all of whose members have made billions of dollars’ worth of salary, benefit, and work-rule concessions to keep American out of bankruptcy. When union representatives pressed Arpey about the executives’ pay, at American’s annual meeting in May, Arpey said management and labor might have to “agree to disagree” about the suite life.
“This is an issue on which we may have a hard time finding common ground,” he said.
The Fine Print
When Delta Air Lines emerged from bankruptcy earlier this year, C.E.O. Gerald Grinstein made news by declining to jump on the bonus bandwagon. But Delta’s story is more complicated. Grinstein, the former C.E.O. of Burlington Northern Railroad, made a fortune 20 years ago when he orchestrated the merger of his Western Airlines with Delta. And the septuagenarian Grinstein only returned to Delta management to repair the damage done by two previous chief executives. In 2004, he replaced Leo Mullin, whose greed in the months after 9/11 was exceeded only by his callousness. (On the first weekend after the attacks, with bodies still buried in the rubble of ground zero, he demanded a federally funded bailout, arguing that the “airline industry cannot be the first casualty of this war.”) Mullin had replaced Ron Allen, who resigned in 1997 but who continued to draw millions in Delta payouts until mid-2005.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
THE FINE PRINT This column is Copyright © 2007 Condé Nast Inc. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright © 2008 by Joe Brancatelli. All rights reserved.