Heavy Weather At American

Can the embattled airline make peace with the pilots' union before it goes on strike?

Robert L. Crandall, chief executive of AMR Corp., was stunned when pilots at American Airlines Inc. rejected a tentative contract on Jan. 8 by an overwhelming vote. A gloomy and frustrated Crandall was still fuming days later, insiders say. "He's just in his enraged state," says one. Crandall and President Donald J. Carty quickly sent a dire message to the pilots in a letter dated Jan. 10 that said: "For the first time in many years, we fear for the future of our company."

Now, the two men are scrambling to head off a strike the pilots have threatened to start on Feb. 15. Thrown into doubt, say Carty and others, is American's recent $6 billion-plus aircraft order with Boeing Co.; American says having to pay higher salaries would make such an investment uneconomical. A walkout even could threaten the carrier's proposed alliance with British Airways PLC, says Carty. And American isn't alone. With industry profits soaring, unions at United Airlines Inc. and Northwest Airlines Inc.--where employees exchanged concessions for stakes in those companies--are pushing for higher pay, too.

The distressing thing about the American dispute is how badly both sides miscalculated. The company was confident that the tentative deal--described by managers and union leaders alike as "industry-leading" in pay, pensions, and job security--would pass. One problem was that it fell far short of American's original goal of cutting $300 million a year in pilot costs. In fact, the company claims the deal would have increased its pilot costs, but Crandall and Carty finally decided that was the best they could get after more than two years of bargaining. The executives figured the Boeing order, which Crandall had tied to ratification of the accord, would clinch the deal because adding new planes to the company's fleet would create jobs.

ANIMOSITY. American, however, glossed over early signs of division in the Allied Pilots Assn. leadership and discontent among the rank and file. In November, for instance, eight members of the union's 18-person executive board voted against the contract. And some pilots viewed the timing of the Boeing order as a heavy-handed effort to sway the vote. Another factor: the personal animosity many pilots harbor against Crandall, a notoriously combative chief. "They're after Bob," says an executive of a rival carrier. "Some of that gets in the way of objectivity."

Union President James G. Sovich and some colleagues didn't read their members much better. In the end, more than 61% of the nearly 9,000 pilots voted against the tentative agreement. The proposal looked generous by industry standards, with American arguing that its pilots would still make more than those at United, Delta Air Lines, and Northwest at the contract's end in 2000. But pilots saw it differently. They focused on the fact that the proposed 5% pay increase over four years would leave their compensation rates lagging behind inflation. Worse, the company essentially has kept pay scales frozen since the last raise in 1993.

More controversial, perhaps, was a provision that would allow the company's lower-paid American Eagle pilots--who are represented by a different union--to fly small, efficient commuter jets American wants to fly on short routes. Rivals such as Continental Airlines Inc. have already added such planes to their fleets and American says it must follow suit to remain competitive. The pilots, however, fear Crandall eventually will try to use the new planes to displace APA pilots on longer routes. "It's about trust," says one senior pilot who rejected the deal.

RECORD PROFITS. Now, American is back to square one. The National Mediation Board on Jan. 15 started a 30-day "cooling off period," after which the union could strike. Sovich and a new union negotiating committee are demanding an 11% pay increase over four years and more than double the number of stock options that American had offered on the date of signing. They also want only APA pilots to fly the new smaller jets. Gerard J. Arpey, American's chief financial officer, says these demands would leave the carrier at a labor cost disadvantage of "hundreds of millions of dollars" annually to such rivals as United and Delta. Laments Carty: "We wouldn't know how to run the business any more" if the pact went through.

Such arguments are tough to sell to the pilots, who want a bigger share of the record annual profits of $854 million, excluding special items, that American announced on Jan. 15. They argue American can afford to be more generous. And indeed, its 10.4% operating margin for 1996 is among the best in the industry, figures analyst Samuel C. Buttrick of PaineWebber Inc. (chart).

In the end, American is likely to pay more than its original deal. But analysts figure that a strike is unlikely, given the huge cost it would exact: more than $50 million a day, figures Buttrick. "Rational decision-making will outweigh emotionalism," he says, adding after a pause, "I think." If emotions rule, Crandall and Carty won't be the only ones fearing for American's future.

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