American the Vincible

Set to lilting music and flashing happy scenes of sea and mountains, American Airlines' TV commercials stress a beguiling theme: "To the good life." Yet for American, the nation's second largest domestic airline behind United, the good life has soured as a result of labor, scheduling and overcapacity troubles in the past year. Lately American has resolved some immediate difficulties, but repairing the damage to its once gleaming image is likely to take time.

For this year's first five months, the line dived $36.1 million into the red, v. a loss of $12.8 million during the same period last year. While total U.S. domestic air traffic expanded by 7% in the first quarter, lifting the earnings of most competitors, American had virtually no increase at all. Investment analysts had earlier expected that American would earn $20 million or more this year, up from a $5.6 million profit in 1972. Last week Chairman George Spater said that a net loss for 1973 "now seems inevitable." American stock has skidded from a year's high of $25 a share in early January to $10.25 last week.

Late last year American ran into trouble during contract negotiations with its independent Allied Pilots Association. Though pilots at other lines fly 80 hours a month, pilots at American have a contract limit of 75 hours, and they had been adamant in refusing flights that put them over that maximum. Management wanted them to work beyond that limit when bad weather, mechanical breakdowns or other problems made it necessary. Miffed, American's pilots began a "rulebook slowdown," taking their sweet time for routine equipment checkouts and throttling back on flights to arrive late. During the slowdown from December to April, American had to cancel 1,300 flights; connections were missed, baggage lost, tempers frayed--and many longtime American customers took their business elsewhere. The company finally won its bargaining point on the hours, but at a frightening loss in passenger loyalty.

American's basic woes go back to 1967 when management, expecting a surge in traffic, decided to load up on jumbo jets. In all, American ordered 16 Boeing 747s and 25 McDonnell Douglas DC-10s. Even when the 1970 recession left lines with empty seats, American continued to take delivery of new aircraft in hopes that a merger with Western Airlines would enable it to fill them up on popular runs to the Southwest sun country and elsewhere. Despite fervid lobbying, the Civil Aeronautics Board last July rejected the merger, and as Spater concedes: "We've had a big bad case of indigestion on those new planes."

In an effort to best use its jumbos, American in 1970 put its faith in long-haul routes leaving from New York and Chicago, and slashed short runs out of less-populous cities like Cleveland and Nashville. Result: many passengers seeking single-line connections between short and long flights switched to other carriers.

American is also hurt because its routes run basically eastwest, while the big traffic growth in the past five years has been north-south, on routes served largely by Eastern, Delta and National. Among the 50 largest traffic points in the U.S., the greatest growth has been in Orlando, Raleigh, Charlotte, Miami and Tampa. At the bottom of the list are San Francisco, Los Angeles, Cleveland, New York and Cincinnati. Says Spater: "The troubles in the big cities--the rise in the crime rate--and the decline in aerospace activity were among the factors that explain this disappointing performance."

Many airlines were forced to cut staff during the recession, but American hacked more than most, damaging one of its major assets--an experienced, loyal, resourceful field force of reservation agents, ticket sellers and baggage handlers. The company's morale was further bruised when two executives, including the fourth highest officer in the company, were fired last year after being accused of taking kickbacks from printers of the line's slick magazine, American Way.

One of the few bright patches in American's sky is its hotel operation--including Manhattan's Americana--which, it is estimated, will earn more than $3,000,000 this year. To get their airline business moving again, American officials have been rebuilding the field force, expanding the number of short-haul routes, and getting word out to the public that their service problems are over. They would also like to see the stock market gain some altitude. In American's board room, Chairman Spater, now 64, keeps a chart that shows the annual gyrations in passenger miles--and in Standard and Poor's 500 stock average. The two lines are surprisingly coincident, proving that as stocks go up, so do passengers.

Spater's main worry now is that a downturn in the economy early next year will again shrink air travel before American can regain lost ground. If that indeed occurs, American--and George Spater--could be in for an even worse pummeling.

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