Gary Kennedy worked at American Airlines for 30 years and served as the General Counsel during arguably the company’s most tumultuous period. He was the leading legal voice when American went through the bankruptcy more than a decade ago and the merger with US Airways. Gary reflected his experience in the book Twelve Years of Turbulence.
This book pulled back the curtain on the airline industry and the bankruptcy process. Chapter 11 is something that I read on the news once in a while, but it still remains a novelty. A foreign concept. Through the account of Gary and American’s own bankruptcy proceedings, I learned more about this unique process, including some key players and protections offered by the laws. Additionally, this book is a valuable resource on the airline industry. I became more familiar with how airline executives could struggle to deal with the unions. If I had been on the fence about investing in airlines, which I was not, I would have made up my mind after reading the book. I do have to call out the light touch that Gary applied to his book. A lawyer by trade, he could have made this book as boring as a legal brief. But I never felt that way going through all the pages.
I am pushing myself to read more and more books that can give me an edge in investing. That means reading what few others read. That also means the more a book is about a specific industry or offers insights into the inner workings of a company, the better. I think this book is a good start on that journey for me. Even if the book is not a mainstream work, it’s easy to read, yet it taught me a few unique things here and there. If what I have said so far and the snippets below interest you, give it a go.
“Carty reminded the union leaders that months earlier he had shared with them his concern that the continued deterioration of the company’s financial performance was driving officers to leave the company at alarming rates, and that he needed to take action to stem the tide. He had also told them that he had instituted a program to entice certain officers to remain with the company during the difficult times. Carty’s explanation fell on deaf ears.”
“As the details disclosed in the 10-K became widely known, matters grew more urgent as the unions cried foul and demanded that American reopen negotiations on the concessionary package. The unions wanted to rewrite the deal before the ink was dry on the first deal. The flight attendants went one step further. The Association of Professional Flight Attendants (APFA) announced a decision to rescind the earlier vote approving the concessionary agreements. They planned to have a revote on the concession package. It was total chaos. No one knew exactly what to expect or what could be done to get the concessions back on track and the company moving forward.”
“At another debate centered on the 2007 PUP payment, Arpey told the executive officers that he had decided to forgo 100 percent of the payment due him. He made this decision in spite of the fact that he didn’t receive a PUP payment in 2006 because he refused to accept the stock awards granted to him by the board in 2003. He reasoned that by refusing payment, he could provide “cover” for the rest of the management team and use his sacrifice to curry favor with labor. He desperately hoped to placate labor and build upon the trust he worked so hard to establish with employees.”
“I know. And the rest of the team should take the payment,” he said. “But as CEO I’m the one with my neck on the line and I just can’t do it. I made a promise to employees and I’ll lose all credibility if I accept the money.”
“In the end, we retained the program and it paid out as promised. Despite my admonition, Arpey waived his right to receive any payments. Labor’s reaction to the payments was awful even though Gerard’s sacrifice cost him millions of dollars”
“Over the last eight years, I have interviewed hundreds of senior executives for a major academic study on leadership, including six airline CEOs. Mr. Arpey stood out among the 550 people I talked with not because he believed that business had a moral dimension, but because of his firm conviction that the CEO must carefully attend to those considerations, even if doing so blunts financial success or negates organizational expediency. For him, it is an obligation that goes with the corner office.”
“Consequently, some labor leaders worked hard to discredit management and disrupt the airline. While the vast majority of employees were dedicated, hardworking individuals, the tactics used by certain union officials proved ruthless and unrelenting. At the 2007 Annual Meeting of Shareholders one employee referred to Arpey and other executives as “arrogant, greedy, selfish, and heartless individuals.” That statement was mild in comparison to what labor leaders, particularly the pilots, unleashed in the coming months and years.”
“Under the direction of new APA president Lloyd Hill, elected in 2007, the pilots initiated what is commonly referred to in labor union circles as a “corporate campaign.” The campaign was designed to embarrass and harass management at every turn. By the time the campaign was in full swing, we were in contract talks with all three company unions. The campaign lodged by union leadership against management was aggressive and mean-spirited. Even for veterans of previous corporate campaigns, the degree of vitriol and bullying was astonishing”
“The seat spacing is called “pitch,” and is measured in inches. At American, pitch ranges from a low of thirty-one inches in coach to sixty-four inches in the first-class cabin of large international aircraft. On some competitor airlines, like Spirit, pitch drops to a meager twenty-eight inches. For American, the pitch in first class of the Super 80 was only thirty-nine inches.
Pitch is something that receives a lot of attention from airline execs. It is consistently the subject of heated debate, particularly between the finance and marketing departments. Pitch greatly affects passenger comfort but also has a direct bearing on profitability. The near-impossible riddle to solve is the correct mix between comfort and revenue. On one hand, less pitch equals more seats, and more seats should equate to more revenue. But as pitch decreases, passengers complain and move business to competitors. The battle is even fiercer in the first-class cabin. A generous amount of pitch is essential to attract high-paying corporate customers. But as pitch increases, the total number of seats available for sale decreases. It is a constant tug of war.”
“The next important event in our bankruptcy case involved the appointment of the Official Committee of Unsecured Creditors, informally called the UCC. The UCC is comprised of several of the largest unsecured creditors and is appointed by the United States Trustee. The trustee is an arm of the Justice Department and is charged with the responsibility to monitor and oversee bankruptcy cases. The UCC plays a pivotal role in a large bankruptcy case. The committee meets with the debtor on a regular basis, reviews the debtor’s business plan and its plan of reorganization, has standing to participate in court hearings, and has the right to hire professionals, like lawyers and financial analysts. The UCC’s job is to maximize the payout for unsecured creditors. Often, the interests of the UCC do not align with the interests of the debtor.”
“One of the most powerful and fundamental tools available to a debtor is found in Section 1113 of the bankruptcy code. This provision was, in many respects, at the epicenter of our bankruptcy case. It allows an employer, under certain circumstances, to reject collective bargaining agreements (“CBAs”). If our unions would not accept new labor contracts voluntarily, we intended to use this provision to force them to accept the drastic changes outlined in our business plan.”
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