This article from NYTimes.com has been sent to you by psa188@juno.com. Pass Ideas to Center Aisle. American Needs 'Em. July 21, 2002 By EDWARD WONG CHICAGO -- Mary Frances Fagan thought she had done her part to help salvage the world's largest airline. She had spent weeks brainstorming over American Airlines' chronic problems. How to turn a profit. How to trim costs. How to make people work harder and airplanes fly more efficiently. Then the idea struck her like a wave of turbulence: sell advertising space on the back of boarding passes, as grocery stores do with receipts. "They sent my idea to the advertising department," she said with a wide grin over a chicken sandwich at O'Hare International Airport. "We could make a lot of money." As a regional manager of corporate communications at American, Ms. Fagan might not be the likeliest person to come up with new ways of generating revenue. But this is supposedly the brave new flight path of American, where every worker is being asked for suggestions. "Everything is on the table" is the catch phrase, and company executives say they are exploring all possible ways to bring down costs, from adjusting taxiing speed to rescheduling arrivals and departures here so jets turn around faster. But in trying for greater efficiency, American is not so much leading the field - as it did in the 1980's and early 90's - as playing catch-up to healthier full-service rivals like Continental Airlines, some analysts and industry executives say. And it is jealously trying to copy some techniques that have made Southwest Airlines the only consistently profitable major carrier. To some eyes, much of the tinkering makes American look increasingly like a petulant schoolchild being forced to take summer classes to keep up with its cleverer peers. The company has yet to introduce revolutionary ideas to bring down labor costs or to revamp a complex fare structure that has driven away many business travelers. It has remained guarded about what big changes, if any, are in the works, and it says no breakthroughs will occur before year's end. "Anything they can do on the cost side can only help them," said Jim Corridore, an analyst at Standard & Poor's. "But these things are not enough. Certainly the larger issues are the only ones that can help in the long run. The wages are out of whack. The business fares are too high. Nobody is addressing the fare issue." Darryl Jenkins, an airline consultant and director of the Aviation Institute at George Washington University, said that tweaking the O'Hare schedule was a step in the right direction and that American might overhaul its fare structure after it gradually makes its hubs in Chicago, Dallas-Fort Worth, St. Louis and Miami more cost-efficient. But the airline must take more immediate steps to stanch its bleeding. On Wednesday, AMR, its parent company, reported a second-quarter loss of $495 million, only slightly less than in the period a year ago and mildly better than its first-quarter loss of $575 million, the largest of any airline. It lost $1.76 billion last year and, analysts say, will lose close to that this year. AMR's revenue per available seat mile, a standard benchmark, was 9.83 cents in the second quarter, a 10.6 percent decline from last year, worse than most rivals. The company's shares closed at $12.01 on Friday, less than one-third of their 52-week high of $36.23 last August. Donald J. Carty, the chief executive, has been upfront about American's "dire financial straits." But he also eagerly promotes the retooling effort. Some people in the industry say the soul-searching is wrapped up in Mr. Carty's desire to leave his mark on a company so closely linked to his predecessor, Robert L. Crandall, who retired in 1998 after 13 years leading AMR and, in many ways, the industry. Mr. Carty, 55, was an executive vice president for finance and planning before he was appointed president in 1995. A lanky native of Montreal and a graduate of the Harvard Business School, he has a reputation for being less hot-tempered and hardheaded than Mr. Crandall. Months after taking over as chief executive, Mr. Carty was seen wearing reindeer antlers and a "Star Trek" mask while partying with Make-a-Wish children. He quickly doled out more travel perks to workers and tried to smooth over volatile relations with unions. In a recent telephone recording, he told employees he had received 900 suggestions on efficiency improvements in an "Ask Don Carty" e-mail box. Many changes under consideration could greatly affect the travel experience, from permanently keeping meals off shorter flights to massaging hub schedules in a way that forces passengers to wait longer for connections. Executives are even re-evaluating American's most appreciated innovation: the removal of two rows of seats from 875 planes to add more legroom in coach. "We're much more focused on making fundamental changes and trying to accelerate in a whole lot of ways," Mr. Carty said in a recent interview in New York. "We need to be more productive, we need to be more effective as an organization, we need to be more responsive. We need to learn a lot of lessons from some of the new airline models." But the profitable model he was referring to - the one used by no-frills carriers like JetBlue Airways - was actually conceived three decades ago by Southwest, American's crosstown rival in the Dallas area. Analysts and executives say American has a long way to go before pulling off a similar revolution. They argue that such a breakthrough is necessary if American is to lead the full-service carriers from their dependence on the economic cycle. "No airline is going to go out of business because it taxis too slowly or puts too many nuts on its sundaes," said Jamie Baker, an analyst at J. P. Morgan. "AMR's efforts to reduce costs may help the margin, but they don't address the basic design deficiency of its business plan." Airlines like American that use hubs and spokes, funneling large numbers of passengers to connecting flights in central airports, should rethink their business models, said Alfred E. Kahn, a professor of political economy at Cornell who oversaw deregulation as chairman of the Civil Aeronautics Board in the late 1970's. The airlines traditionally offset high fixed expenses - like those from costly labor contracts - by relying on pricey tickets bought by business travelers. But that works only when the economy is prospering. During downturns, those carriers stumble while ones like Southwest keep turning profits by not having to maintain hubs and by generally operating with low costs. On Thursday, Southwest reported a second-quarter profit of $102.3 million. Mr. Carty appears to be both envious and resentful of Southwest, liberally taking potshots at it. "We won't be `Wal-Marting' American Airlines," Mr. Carty said in one of his weekly telephone messages to employees. "There are elements of our full-service airline that have tremendous value." AMERICAN'S plans do not include abandoning the hub-and-spoke model, which it popularized under Mr. Crandall. No airline executive has come up with a better way to move large numbers of people across a broad network. But some analysts say American's cost-cutting is just shuffling in Southwest's footsteps without taking the necessary big leap. American is trying to persuade passengers to use electronic tickets by charging an extra $20 for paper ones. Southwest introduced e-tickets in 1995, before any other major airline, and 85 percent of its passengers now use them. After Sept. 11, American shut down 107 ticket offices - 14 in the Chicago area - in the hope of having customers buy more tickets online. Southwest never had ticket offices and started online booking in 1996. American has cut meals from most domestic flights of less than four hours. Southwest has never offered more than cookies, pretzels and chips, even on long flights. American has been trimming its number of plane types to 7, from 14, to save on training and maintenance. Southwest flies just the Boeing 737. "I think the growth of those carriers and the growing amount of our network competitive with them is one of these trends we're going to take account of," said Henry Joyner, senior vice president for planning at American. Even though Southwest's flights are often likened to cattle cars, its chief financial officer, Gary Kelly, sounded somewhat smug about hub-and-spoke airlines chasing Southwest's shadow. "It's clear that we have the cost advantage," he said. "It becomes crystal clear in tough economic times like this. We intend to stay the course and keep our focus on our costs to ensure that they're low." The operations here at O'Hare, American's second-largest hub, after Dallas-Fort Worth, provide a window into the kinds of changes the airline is trying to make. From the gates to the ticket counters to the gray bowels of the churning baggage room, American has taken stabs at revamping. But much of it follows what rivals have already done. Mr. Carty, though, boasted of one potentially radical experiment - uncoupling arrival and departure schedules here. Hub-and-spoke carriers schedule all flights coming from the same direction to arrive at roughly the same time, shortly before those leaving in other directions, allowing passengers to transfer quickly. This results in two major inefficiencies: Peak hours become too congested; and workers and planes spend too much time sitting at both hubs and spokes during lulls. In April, American changed its schedule at O'Hare so flights would not have to connect so closely and planes at spokes could turn around more quickly. Turnaround times have decreased 13 percent, the company said. This has allowed American to use planes and workers more efficiently; the airline has eliminated the use of three planes and the equivalent of five gates. The schedule is also more even now. Before April, for example, American had 31 departures from 1:14 to 1:47 p.m., and just three from 1:48 to 2:49. Now, about 15 planes leave in the first period and 20 in the second. The downside is that connecting passengers now wait an average of 50 minutes, instead of 35 or 40, said Bernard J. DeSena, an American vice president at O'Hare. On the other hand, he added, labor is more efficient, and passengers boarding at Chicago have more varied departure times. "It is more efficient from a manpower standpoint," acknowledged Kevin Knight, vice president for resource planning at United Airlines, American's main rival at O'Hare. "They have their operations spread throughout the day. They're betting on the fact that customers will wait." Mr. DeSena said, "You have to look at a lot of things before you call this a success." It is not yet clear how much American has saved, or when it might try the same experiment at its flagship hub in Dallas-Fort Worth, Mr. Joyner said. But American remains a hub-and-spoke airline, which ultimately limits how fast it can turn around its jets. Southwest never has to worry about that. It does not synchronize its flights so closely, and its planes usually turn around within 20 minutes. The scheduling changes may not be obvious here, but many travelers have taken note of the 35 blue self-service kiosks scattered around the ticket counter. Ms. Fagan, the American spokeswoman, said 40 percent of passengers who are eligible to use the check-in kiosks, meaning those with e-tickets and traveling alone or in small groups, did so last month, a higher proportion than at any other airport. The airline has 221 kiosks at 29 airports and plans to add 450 by year-end, with 19 arriving at O'Hare in the next few months. That allows American to thin an entire layer of labor. But it is not leading the way in this technology. Continental began setting up kiosks in 1995 and has 631 in domestic airports. In trying to improve efficiency, American is equipping some ground employees with hand-held computers similar to Palms. Mechanics in San Jose, Calif., are experimenting with such devices to call up reference information quickly. If executives approve further financing, American could roll out 800 of these at 20 maintenance centers before year's end. At O'Hare, up to 10 such devices are already being used occasionally by ticketing agents to check in passengers. In a dim, cavernous basement, where conveyor belts churn with luggage, some baggage-handlers are armed with hand-held computers that reads information from bag labels. Again, American is blazing no trail with these devices. United has been using them for about three years and now has 3,000 of them worldwide. Some of American's streamlining seems only an attempt to jettison dead weight that came with its purchase of Trans World Airlines in April 2001, a merger that some analysts and consultants faulted because it added too much capacity. For example, American is changing the cockpit configuration of all its T.W.A. jets so pilots do not have to be trained multiple times. Part of American's fleet simplification program includes retiring the Boeing 717's and DC-9-30's acquired in the merger. After Sept. 11, American also trimmed some frills. It took magazines off planes, which it said saves $2 million a year, and pared its food offerings. "The airlines are realizing that that's a way to keep costs down," said Christine Turneabe-Connelly, a spokeswoman for Southwest. "It's something we've known for 31 years. Travelers would much rather pay less for their air fare and skip their meal." Still, American has not come up with solutions to the two gaping problems that many analysts and executives say keep all hub-and-spoke airlines from making consistent profits. The first is high labor costs, inflated by generous work rules and partly rooted in antagonism between unions and management. For example, American and its pilots' union have reached an impasse in contract talks and are turning to a federal mediator. Mr. Carty warned employees recently that more layoffs were ahead, on top of the 20,000 jobs eliminated last fall. But that won't change the labor cost model. American also appears no closer to fixing the broken fare structure. Executives at the major airlines acknowledge that they have to simplify fares, paring dozens of arcane choices to something more akin to the four or five tiers offered by Southwest. "It's clear that something dramatic needs to be done, but it's too soon to know what that something is," Mr. Carty said last month in a speech in New York. American executives still cringe at memories of the rivers of red ink in 1992, when the company simplified its pricing by offering only four kinds of fares. That ignited a price war. Travelers snatched up great deals, but the airlines suffered huge losses. "The industry is too focused on cost reduction and insufficiently focused on redefining the revenue model," Sam Buttrick, an analyst at UBS Warburg, wrote last Monday in an investors' note. But for now, American is not putting in place any truly radical changes. Marty Heires, a spokesman, was cryptic about "the big breakthrough items," saying only that "it'll be the end of the year before we see any of those plans rolled out." Until then, executives will keep poring over the hundreds of ideas tossed around by workers like Ms. Fagan. After finishing her sandwich, she walked across the concourse to the self-service kiosks. A man was pulling out a boarding pass. She took it from him and held up the back of it. Her eyes sparkled as she envisioned an ad there. "Perfect. This is just perfect," she said. "This is what we need." http://www.nytimes.com/2002/07/21/business/yourmoney/21AMER.html?ex=1028216540&ei=1&en=959816b3a46e28d0 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2002 The New York Times Company