American's jumbo mistake

Posted: Apr 26, 2003 12:00 AM

Donald J. Carty, the head of American Airlines, said Monday that he made a "big mistake" in not disclosing to the airline's unions that top American Airlines execs would receive huge retention bonuses and a sweetener for their pensions -- even as three airline unions voted to cut their own pay to keep the ailing airline from declaring bankruptcy.

Carty's wrong. His big mistake was awarding himself and six other senior management suits big bonuses. This we learn at the close of a quarter in which American Airlines lost more than $1 billion.

Bonuses, after all, are to reward success. Earth to Carty: By no measure is losing $1 billion in a single quarter success.

Carty claimed the bonuses were necessary to retain airline executives who otherwise might retire or go on to work for another company -- presumably not a rival and also nearly bankrupt airline. But when an airline is talking about laying off rank-and-file workers, the big cheeses leaving should be a good thing.

"They've got layers and layers of management," said Morten Beyer, an aviation consultant with Morten Beyer & Agnew in Arlington, Va. "They undoubtedly have many people who are qualified to perform many functions. American's strategies can't be all that great, given the record they've got. It might be better to replace all those guys and get some new thinking."

No lie.

To be fair, the airline's woes aren't entirely the fault of management. Sept. 11 cut deeply into the airline business. Then the war in Iraq soured some consumers on flying just as they were starting to get back in the air. Fear of SARS isn't helping.

Airline executives shouldn't shoulder all the blame for events beyond their control. They can be blamed, however, for not responding quickly to those events and for prices that have driven consumers in droves to low-priced competitors.

Carty explained that with his agreement to voluntarily cut his $811,000 salary by 33 percent, "I am the lowest paid CEO among the major carriers." With the retention bonus, Carty stood to earn $1.6 million annually. These perks would have doubled the executives' pay if they stayed through 2005.

Boo hoo -- except he's wrong. According to the Atlanta Journal-Constitution, James Parker, the CEO of Southwest Airlines, earned a salary and bonus of $492, 000 in 2002 -- and Southwest is the only major carrier that turned a profit last year. (American is larger: It carried 2 million more passengers last month than Southwest.)

And this should be a no-brainer: You don't give yourself a bonus when you're asking the rank-and-file workers to take a big pay cut. The flight attendants, for example, gulped and agreed to a 15.6 percent slash to their yearly salaries. Now, no surprise, union honchos are talking about tearing up the agreements union members approved just days ago.

Late Wednesday, I talked to a labor consultant who was disgusted at Carty's blunder. It only feeds the division between labor and management that has workers thinking that, no matter what happens, management gets paid and laborers get laid off.

The worst of it is that labor in America has changed. The days of unions bargaining to the death for money-losing ventures are disappearing. The unions today are more understanding of a bonus structure that is linked to a company's growth, to its profitability.

So as the unions are becoming more capitalistic -- and respecting the bottom line -- capitalists are becoming more socialistic -- by voting for bonuses even when businesses lose money.

If Carty still has his job (which is now in question) by the time you read this, he ought to think about sitting in on a lesson on "shared sacrifice." It doesn't mean that management gets to share the earnings and labor gets to sacrifice.