What Was Don Carty Thinking?

American Airlines' disgraced CEO damaged union leaders' credibility and jeopardized needed labor pacts. Now, he's out of a job

By Wendy Zellner

Everything and nothing has changed at American Airlines (AMR ) since Apr. 16. That was the day jubilant CEO Donald J. Carty snatched defeat from the jaws of victory by revealing the details of executive-retention bonuses and pension protections after most union members had narrowly voted to accept $1.62 billion worth of annual concessions. Suddenly, Carty's calls for "shared sacrifice" rang hollow. Almost immediately, two of the three unions were calling for new votes -- endangering the contracts Carty fought so hard to win. "This has been probably the most badly handled transaction in my 30 years in the industry," says airline expert Mo Garfinkle of GCW Consulting.

The price of Carty's bungling turned out to be his job. On the evening of Thursday, Apr. 24, he resigned as chief executive. But what hasn't changed is why employees accepted the concessions in the first place: These deals were their best hope for avoiding bankruptcy. And a bankruptcy could bring even more job losses, as well as painful changes in pay, pensions, and work rules. Even now, advisers involved in the talks fear that American's creditors could push the company into an involuntary Chapter 11 filing as the carrier continues to chalk up massive losses -- including $1.04 billion in the first quarter.


  That's why Carty's megablunder is so appalling. Sources close to the company insist he was driven by the desire to keep it out of bankruptcy, a process that he knew would rip employees' lives apart. But because of his ineptitude or arrogance, it looks as if Carty has risked precipitating the very result he wanted to avoid.

As board members and union leaders scrambled to salvage the concessions, one outcome became exceedingly clear: Any deal had to include Carty's ouster. Carty not only damaged his own standing by trying to pull a fast one on the unions but also undermined the credibility of union leaders who worked hard to persuade their members to accept the concessions. "He put the union leaders in a position where they had to go to war to keep their own jobs," says one airline consultant.

While some observers felt any potential successors from inside the airline may have been tarnished by the compensation revelations, President Gerard Arpey is taking over as CEO. He's going to need the negotiating skills of a gifted diplomat. As Continental Airlines (CAL ) and others have discovered, lower costs alone are no recipe for success. Says H. Blair Pomeroy, global director for airline strategy at Accenture Ltd.: "You can't run a low-cost airline without happy employees."


  Well, Carty has ensured that American's employees are far from happy. He insisted he didn't intend to deceive employees but "naively believed" that American's moves would seem modest in light of the much more egregious bonus and pension grabs that recently came to light at rival Delta Air Lines (DAL ).

But it's hard to believe that anyone as steeped in the industry as Carty would miss the labor implications of his compensation moves. Sources close to the company say some advisers were advocating earlier disclosure, but Carty chose to ignore them in his headlong rush to get a deal done. "This is just a manifestation of the arrogance American has always had," says one airline consultant. "I think they thought they could weather the storm."

As it turns out, they couldn't. So now, Carty's "historic" victory -- the biggest consensual airline restructuring ever -- may evaporate. And he has paid a bigger price than he ever imagined.

BusinessWeek Dallas Bureau Chief Zellner covers the airline industry

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