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Collaborative Wings for American

By Wendy Zellner Major U.S. airlines have tried nearly everything to cope with the battering they got from the September 11 terrorist attacks and the economic slowdown. They cut routes, workers, and fares, grounded planes, renegotiated debt, and took bailout aid from Congress. But the bad news just keeps coming, from soaring jet-fuel prices to the rapid spread of low-cost carriers. At this point, a despairing industry has to ask: Can anything else be done that can turn all the red ink to black and restore the competitiveness of the country's largest airlines?

One answer may come from a dramatic experiment in labor relations under way at AMR's (AMR) American Airlines. After years of labor turmoil every bit as rancorous as that at other carriers, new CEO Gerard J. Arpey has decided that motivated and involved employees can be a key competitive advantage. So he's pulling out all the stops to form a partnership with his workers and their unions.

SHARED INTERESTS. This isn't a new concept, of course. And it's too early to tell if American's effort will succeed. But it's clear that the majors must find new ways to compete on efficiency and service -- and joining hands with labor may be one of the few options left. If Arpey's strategy works, it could offer a much-needed model for other big airlines that are struggling to survive. "The [financial] restructuring is the first 10%," says Jeffrey J. Brundage, American's senior vice-president for human resources. The other 90%, he says, involves a dramatic change in tapping employee creativity.

In many ways, Arpey is attempting to improve on what others already have done. UAL's (UAL) United Airlines initially boosted its performance and finances after labor and management joined forces following the 1994 buyout that gave workers majority ownership of the company. But employee involvement quickly foundered there. Continental Airlines (CAL) also pulled off a dramatic turnaround in employee relations in the 1990s, one that continues to this day. But CEO Gordon M. Bethune enjoyed an unusual confluence of circumstances that Arpey and the other carriers lack today, including two bankruptcies that left employees desperate to save their jobs and a subsequent economic boom that helped Bethune pass out generous pay hikes.

Arpey's plan is deceptively simple: Include employees in making and implementing decisions, big and small. "If you don't involve people in the decisions before they've already been made, then you're not really collaborating -- you're just communicating. We're really trying to go to the next level," says Arpey, 45, who took the top job in April, 2003.

BOTTOM-UP DECISIONS. The 22-year company veteran has brought in an outside expert on employee involvement, Overland Resource Group. The Lee's Summit (Mo.) outfit has helped such companies as Ford Motor (F), Boeing (BA), and Goodyear (GT). The goal is to create a permanent structure that will engage employees, even as managers and union leaders come and go. Overland President Robert L. Hughes says he's not trying to create a lovefest at American. "The focus is that it's in all the parties' interests to make this business work better," he explains.

To that end, a "joint leadership team" of senior managers and union officials meets every month to discuss strategy and finances, while another team communicates with employees through the company and union Web sites. Union heads also meet monthly with American's chief financial officer. Similar joint teams are being created at airports and maintenance bases. "We've never in the history of American had this type of information flow before," says James C. Little, director of the Transport Workers Union's air-transport division, which represents mechanics.

Another first: In January, American gathered 100 front-line workers, from flight attendants to skycaps, to discuss customer service. And ever since, employee teams have been cooking up recommendations for everything from fares to meal service. One group pushed American to drop the fee for changing some frequent-flier awards, an irritant for many customers. "In the past, the answers came from the top," notes Kenneth A. Gilbert, the manager who's coordinating the customer service project.

NOT ENOUGH. Of course, in a 92,000-person company marred by decades of labor strife, change won't come easily. But there are signs of progress. Consider American's code-sharing deal, announced in February, with Alaska Air Group (ALK), the first such domestic partnership for American. In the past, American's pilots resisted efforts to sell seats on another U.S. carrier and market them as its own. This time, execs negotiated job protections with union leaders while they were talking to Alaska. "There was very little pushback from the employees because we had been involved in the process from the get-go," says Allied Pilots Assn. President John E. Darrah, whose union represents American's 11,000 active pilots.

One of Arpey's most ambitious efforts could save union jobs and go a long way toward creating employee goodwill. As United, Delta Air Lines (DAL), and other majors anger their unions by outsourcing more maintenance work, labor-management teams at American are looking for ways to add new business. They're scouring the carrier's three maintenance bases for efficiencies and working together to target outside customers. Union leaders say the effort is already bearing fruit. At the Fort Worth base, seat-overhaul work that was sent to an outside vendor several years ago has returned. American wins, too, with savings of $137,000 a year, thanks to lower inventory and quicker turnaround times for the work.

Financial health, though, is still a long way off. Despite whacking costs by $4 billion, including $1.6 billion from its unions, much of the gains have been wiped out by record fuel prices and the need to slash fares to compete with a slew of low-cost carriers. American also faces massive debt and pension obligations. Some airline experts figure it needs to lop an additional billion or two off its costs to compete in the long term.

PROMISES, PROMISES. That's not likely to come from employees, who gave massive concessions last year to avoid bankruptcy. Their contracts aren't amendable until 2008. Arpey's make-nice ambitions won't easily win over this battle-hardened workforce, who have heard such promises before.

His predecessor, Donald J. Carty, vowed to change the corporate culture, too, when he took the CEO spot in 1998 from the confrontational Robert L. Crandall. Carty was forced out last spring after he failed to reveal executive pension protections and retention bonuses even as he was urging employees to approve concessions. According to John Ward, president of the Association of Professional Flight Attendants, Arpey is just trying "to pacify everyone rather than to really see any change in their day-to-day life."

That's a sentiment echoed by front-line workers, still seething over their big pay cuts and griping about a lack of "shared sacrifice" by management. But if Arpey gets anywhere with his peace efforts, American could be one of the first major airlines to fly out of the financial danger zone. Zellner is BusinessWeek's Dallas bureau chief

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