AMR Corporation (NYSE: AMR) is a commercial aviation business and airline holding company based in Fort Worth, Texas, United States.[2] Formed in 1982, as part of American Airlines's reorganization, its name derives from American Airlines's ticker symbol on the New York Stock Exchange. AMR Corporation is one of the very few larger passenger and legacy carrier airline businesses, which have not become insolvent or had to file for Chapter 11 reorganization bankruptcy during its corporate history, indicative of its success as an airline based corporate and business entity. In addition to American Airlines, AMR owns TWA Airlines LLC, (formerly Trans World Airlines) and regional airlines American Eagle Airlines, successor to Simmons Airlines, and Executive Airlines by way of AMR Eagle Holdings Corporation. Chautauqua Airlines flown in conjunction with American Airlines marketing brand, known as AmericanConnection, are independent of AMR Corporation's divisions and subsidiaries, but do operate in conjunction with them in order to provide seamless connections to AMRs two principal airline holdings. AMR's and AA's Chairperson, President, and CEO is Gerard Arpey.[3]

Gerard Arpey was president and chief operating officer of American Airlines and its parent company AMR in the early 2000s when the U.S. economy suffered a major downturn, partly as a result of the 9/11 hijackings of four passenger jets, two of which belonged to American Airlines. The entire airline industry fell into financial disarray, and American was facing Chapter 11 bankruptcy. Arpey took over as chief executive officer early in 2003, when the presiding chief executive was fired following a scandal involving huge executive bonuses and pension-plan benefits at a time when lesser employees were taking enormous cuts in salaries. Functioning in an internally hostile environment and an externally ailing economy, within nine months Arpey pulled American away from the brink of bankruptcy and developed considerable employee and shareholder confidence in his leadership abilities and in the corporation as a whole.


Gerard J. Arpey.
AP/Wide World Photos
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A ONE-COMPANY AVIATOR

Arpey was a one-company employee, and his relationship with aviation was both personal and professional. He hailed from an airline-industry family—his father was a career airline employee and an executive with Texas Air (now part of Continental Airlines)—and started with American loading luggage into airplanes. After college he became an analyst in the finance department, which, according to Micheline Maynard of the New York Times , was a "stellar training ground for airline executives" (April 25, 2003). Under the tough leadership style of the then CEO Robert Crandall, who gained a reputation as American's "iron hammer," Arpey developed an ethic for hard work. Aviation even became his hobby; an avid pilot, he earned his Federal Aviation Administration multiengine instrument pilot rating and flew private multiengine planes. In the Washington Post , Sara Kehaulani Goo quoted George Hamlin, the aviation analyst with Global Aviation, as saying, "He's got some kind of kerosene in his blood" (April 25, 2003).

American Airlines, the largest airline in the world, serviced more than 250 cities in 41 countries and territories in 2003 and owned 1,100 aircraft that made a combined total of 4,400 flights a day. While working his way up the corporate ladder, Arpey was responsible for profitability analyses, fleet planning and scheduling, financial planning, strategic planning, and partnership activities. As chief financial officer, he oversaw the company's entire financial operations. As executive vice president of operations, he managed flight operations worldwide, which included engineering and maintenance, purchasing, corporate real estate, operations planning, the flight department, and AA Cargo and American Eagle.

BECOMES CEO AMID HOSTILITY AND SKEPTICISM

Following 9/11 and the major economic downturn of the early 2000s, American, along with other major carriers, suffered a financial freefall. Donald J. Carty, the chief executive officer at the time, appealed to American's employees and negotiated with union leaders for huge employee concessions and cutbacks. Indeed, employees voted in favor of slashing their own salaries to help the company survive. Meanwhile, Carty hid the fact that he and top executives, including Arpey, had agreed to accept huge retention bonuses and lucrative pension deals. When the cover-up was revealed to the public, enraged employees and union officials stirred up a furor; Carty was fired. Arpey was thrust into the position of CEO, albeit amid serious concerns from union leaders, financial analysts, and employees about his involvement in the executive compensation debacle. Maynard quoted Kevin Mitchell, president of the Business Travel Coalition, who expressed the reservations of many when he said, "My concern with him is that he was right there. What was his advice and counsel on what should have been done?" (April 25, 2003).

Regardless of the overarching skepticism, American's shares jumped 96 percent following the announcement that Arpey would replace Carty. Highly regarded for his analytical skills, determination, company loyalty, and strong belief in its employees, Arpey took over the helm of American when the company was carrying $11 billion in long-term debt and employee morale was at its lowest—and he was obligated to ask employees to sacrifice even more. In Business Week , Wendy Zellner quoted Arpey as saying, "People are being asked to work harder for less pay. That obviously does not create an environment for happiness" (March 22, 2003).

Arpey set about the Herculean task of keeping the company airborne, realizing that little could be done successfully until teamwork and trust were reestablished. Pilot Thomas W. Hoban, whose $157,000 annual salary became $95,000 while his hours on the job increased, had high regard for Arpey's ability. "I think he understands the employee relationship problem we have here and the impact it has on the bottom line," he told Zellner (March 22, 2003). A spokesman for the Allied Pilots Association commented that the union had "quite favorable dealings" with Arpey over the years, and, according to Goo, association president John Darrah expressed confidence in Arpey. "I can honestly tell you there's not a person I have more respect for or trust in, not only at this company, but on the planet," he said (April 25, 2003).

BUILDS EMPLOYEE CONFIDENCE

While some industry analysts, union executives, and employees still held reservations about Arpey's credibility, there was a consensus that he was making a concerted effort to communicate with employees in rehabilitating the company with his "pull together and win" attitude. John Ward, president of the flight attendants union, was instrumental in negotiating a new cost-cutting program with Arpey. Ward said that although his union would not fly by faith alone, he was encouraged by Arpey's willingness to negotiate openly, a phenomenon that was virtually nonexistent during Carty's tenure. Arpey firmly believed in open communication and even more firmly in cooperative involvement. He maintained that inviting employees to participate in the decision-making process was essential to their understanding of the conclusions eventually reached at the top.

Operating under his belief that actions speak louder than words, Arpey selected high-level managers who not only had the necessary technical skills to help turn the corporation around but also were people oriented. Furthermore, he agreed to have senior executives meet on a regular basis with union leaders. Goo quoted him as saying, "There is definite need to rebuild trust within our company, and that starts at the top" (April 25, 2003). In an action that spoke volumes to employees, Arpey did more than reject a pay increase when he was promoted: he took a 14 percent pay cut and refused stock awards for the upcoming year. In a novel approach that allowed managers and board members to engage in dialogue openly, he invited senior executives to make slide presentations at a board meeting to explain their new business strategies and present their own thoughts and ideas. Board member David L. Boren was quoted by Edward Wong of the New York Times as calling the approach "refreshing—what I see as a board member is more strategic thinking about the future going on from the leadership than we've seen in recent years" (October 10, 2003).

One industry analyst felt that while Arpey had a decent rapport with employees, who saw him as being gentle yet firm, he was still part of the leadership team that had created the aura of mistrust and disillusion in the first place. On the other hand, another analyst thought that Arpey was highly appropriate for the position because of his extensive experience with the corporation. The latter analyst expressed hope that Arpey would learn from the mistakes of his predecessors.

BANKRUPTCY AVOIDED, BUT A LONG ROAD AHEAD

By the end of 2003 Arpey—one of the youngest CEOs in the corporation's history—had adopted several major plans that proved to be milestones in the company's recuperation. He implemented his Turnaround Plan, which aimed at making American more competitive, and created employee stock-option and profit-sharing plans that would kick in when pretax profits exceeded $500 million. He sold the company's 26 percent interest in a computer-reservation company for $180 million in cash and negotiated a savings of $175 million with suppliers, all in all more than doubling American's unrestricted cash balance. Less tangibly, he changed the stuffy and arrogant image American had earned over the years to a more open and relaxed one. As evidence of this, corporate executives became exempt from having to wear neckties.

Veteran captain Tim Whitby expressed his elation at Arpey's election as CEO in an interview with Lisa DiCarlo of Forbes (April 30, 2003). Whitby recalled how he had sent a scathing letter to corporate management while Carty was still CEO, documenting how "screwed up and shabby the company was in terms of service and attitude." When Arpey took over, he called Whitby to his office. Whitby had felt he was going to be fired but was instead invited to lunch at a restaurant in a strip mall that was, according to Whitby, "a complete dump." "The funny part is," he said of Arpey, "the staff all knew his name." Over tacos and enchiladas, Arpey listened attentively to Whitby's opinions and agreed that changes needed to be made. Whitby said it was amazing to him that Arpey wanted to hear employees' "gripes" and was willing to take them into account in order to help turn the company's image around.

In December 2003 Captain Sam Mayer, chairman of American's crew base at La Guardia, New York, expressed confidence in Arpey's skills but skepticism about his ability to overcome twenty years of company inertia. According to Margaret Allen of the Dallas Business Journal , Mayer said, "It's like trying to turn a battleship, which takes miles and miles. I just don't know if he's going to have the horsepower to do it" (December 26, 2003). In point of fact, as employee confidence in Arpey gradually increased, financial losses steadily decreased. His financial strategy raised revenues by 4 percent over the eight-month period following his appointment as CEO and cut costs by almost 12 percent. Although the corporation still lost money, net losses were reduced from $3.51 billion in 2002 to $1.23 billion in 2003. The amount lost per share dropped from $22.57 in 2002 to $7.76 in 2003. Fourth-quarter losses per share equaled $0.70 in 2003 compared with $3.39 in 2002, which defied industry analysts' predictions of losses of at least $1 per share.
As difficult as it is to admit for airline executive recruiters, the best leadership transitions often come from within. Examples abound - Air Canada, American Airlines, Cathay Pacific Airways, Continental Airlines, Lufthansa, Emirates Airline, Qantas and Singapore Airlines to name a few - of major international airlines that have successfully pulled of internal CEO succession moves, often more than once.

An examination of each of these airlines tells us that, more than likely, each also stands to find its next CEO from within. Tom Horton could readily succeed Gerard Arpey at American. Jeff Smisek's recent promotion to President & Chief Operating Officer at Continental puts him in very good shape to succeed Larry Kellner. John Slosar's return from other Swire Group holdings to Cathay Pacific as COO surely puts him in the lead seat to step in behind Tony Tyler as CEO. Christoph Franz, a former Lufthansa executive who rejoined the Lufthansa Group and currently leads Swiss International Airlines, is a potential successor to Wolfgang Mayrhuber.

In truth, leadership stability can be found at the core of many of the world's best airlines. A careful look at some of the best managed airlines reveals common similarities in their leadership development and succession practices:

Often, but not always, a "duo" at the top, with one person taking the externally-focused CEO role and the other the more internally-oriented President and/or COO position;
A small cadre of highly qualified potential successors one level down, typically at the Executive Vice President level (or equivalent), in commercial, operations, and finance;
A fairly clear indication of who is in line for the next one or two succession moves;
A high degree of commitment on the part of the best-placed individuals to stay with the organization, despite the efforts of others to lure them away;
Regular rotation of the top executives across functional areas so as to round them out in preparation for general management; and
An effective management development and rotational program feeding the succession funnel from below.
Basic conditions for smooth transition
As well, successful airline CEO successions tend to occur when four other basic conditions are in place at the board-management interface:

Succession planning is viewed as a fundamental and ongoing board responsibility closely tied to management development;
There is clarity about the CEO's role versus that of the board in the succession process;
There is a common understanding of the corporate strategy among the board and CEO; and
There is an ongoing, logical and measurable role for the CEO in the succession process.
Well managed airlines have usually been working the CEO succession process for a prolonged period of time, using the passage of time to prepare would-be successor(s) as well as other key stakeholders such as the board, labor, and partners. Far too often, airlines are so focused on their near-term "survival" issues that they neglect this important task, leaving it far too late to yield a meaningful outcome. As the Japanese proverb goes, "When you're dying of thirst, it's too late to think about digging a well."

Carriers adopting such practices are usually among the best managed in the global airline industry and, not surprisingly, among the most consistently profitable. The benefits of leadership stability and internal succession are clear: (a) alignment and consistency of strategic direction, (b) consistent propagation of organizational culture, and (c) less distraction for the organizational overall given the disruptions that usually come with wholesale leadership change. Such airlines don't often run the risk of a botched CEO transition with all of its pitfalls and downstream ramifications.

Most of the examples cited above involved a time-phased, planned "logical succession" scenario, as is ideal. More often than not, such scenarios permit for active involvement of the incumbent CEO in the process, if not as "kingmaker" then at least as "strong recommender." Robert Milton hand-picked Montie Brewer and prepared him to be Air Canada's CEO. Wolfgang Mayrhuber was groomed for the job by his predecessor Jurgen Weber. Maurice Flanagan mentored Tim Clark for the CEO job at Emirates for over a decade. Jean-Cyril Spinetta has done likewise with Pierre-Henri Gourgeon, who is taking over as Group CEO of Air France/KLM as of January 2009.

In some occasions, the tremendous success of a long-tenured CEO can set up a challenging succession situation when the time finally comes to hand over the reigns. For example, Herb Kelleher's anointed successor at Southwest Airlines, Jim Parker, had huge shoes to fill and did not last long in them. It will be interesting to see how the successors to iconic Latin American airline CEOs such as Enrique Cueto at LAN and Pedro Heilbron at Copa Airlines will fare when given their shot.

Providing for different scenarios
That said, such "logical succession" scenarios aren't the only ones that airlines should be prepared to deal with. Well managed carriers often have plans in hand to handle the two other primary scenarios - "emergency succession" and "accelerated succession." The power of labor unions in the U.S. has contributed to the rapid departure of several major airline CEOs and the airlines were caught flat-footed.

Notable among these were Dave Siegel's departure from US Airways, John Edwardson's departure from the United Airlines' presidency when it became clear labor would not back him in the role, and Don Carty's hasty retreat from the American Airlines CEO job after labor upset over the airline's executive pension program. Only in the case of American Airlines did the rapid-fire succession job "stick", with Gerard Arpey still in the role today. In the other two cases, the "quick fix" solution lasted less than one year.

The powerful trade unions in Alitalia have effectively shortened the tenures of more than one CEO at the flag carrier.

Introducing an outsider
By choice or by force, airlines often do go outside for their CEOs. Introducing an outsider straight into the CEO ranks poses a number of challenges, including: (a) weak cultural fit, (b) credibility issues with the workforce, (c) ramp-up time to learn the industry and/or the company, particularly for industry outsiders. These risks become particularly active when the airline introducing the new CEO is under duress and in a fight for survival. Examples of less-than-successful external CEO introductions include Andre Dose at Gulf Air and Gary Toomey at Air New Zealand, and Philippe Vander Putten at Brussels Airlines, all of whom had short-lived tenures at the top.

Many airlines have borne witness to the destructive effects of a revolving door at the top - Aerolineas Argentinas, Air Jamaica, Gulf Air, and US Airways (before its merger with America West Airlines) to name a few. Not only did such carriers have to weather the changes in strategic direction that external CEO changes brought. They also have to bear the burden when some of those CEOs leave suddenly, often along with the other executives they brought along with them.

On the other hand, there are several examples wherein a company outsider has been "just what the doctor ordered" in terms of moving the carrier in the right direction. Richard Anderson's tenure at Delta Air Lines, while only a year old, is already paying dividends. The airline's merger with Northwest Airlines - Anderson's former carrier - has received Department of Justice approval and merger planning is well advanced. Despite his non-Delta like management style, Anderson has been well received and has given the airline newfound momentum. Anderson's charismatic yet hard-nosed approach would likely not have worked at more genteel Delta a decade ago but the airline has since been hardened by a Chapter 11 filing and other crises.

Fernando Pinto has provided strong leadership to TAP Air Portugal since his arrival in October 2000. Speaking the language and being sensitive to Portuguese cultural norms given his Brazilian heritage undoubtedly gave Pinto a leg up on others facing a similar transition. Despite some air turbulence along the way particularly around the T5 launch, Willie Walsh is making headway at British Airways and has the airline engaged in numerous potential landmark M&A discussions.

Introducing outsiders can bring many important benefits. Outsiders can usually bring about bolder and more substantial change than can their inside counterparts, largely because they are not shackled with corporate history and culture. Their arrival can also be used to create the "burning platform" sense of urgency that can be used as leverage to extract concessions from labor and suppliers. Their sheer newness and fresh ideas can often invigorate an airline and motivate staff to new levels of commitment and performance. Such was the case with the arrival of Coleman Andrews as chief executive of South African Airways in 1998. Stealing several pages out of the Continental Airlines airline turnaround playbook, Andrews did much to reinvigorate a once-proud airline franchise and its staff before running headlong into political challenges a few years later.

Internal appointments "safer", although not always best
So, while it's not clear that the internal solution is always best, evidence would suggest that it is likely the safer route to go. Of course, retaining a high caliber group of CEO-ready executives pending a succession move presents other risks, namely the GE syndrome. When it finally came time for Jack Welsh to retire from GE, he had developed three strong successors, each of whom was ready to assume the role. Of course, only one could and the other two quickly took flight to other organizations as CEOs.

This exact phenomenon is currently playing out at Qantas Group. When CFO Peter Gregg was passed over for the CEO spot in favor of Alan Joyce in August 2008, he promptly resigned.

The GE syndrome almost played out at Delta Air Lines when the two would-be successors to former CEO Jerry Grinstein - COO Jim Whitehurst and CFO Ed Bastian - were surprised that the new board formed emerging from bankruptcy wanted to test the external marketplace. In the end, Anderson's appointment led to Whitehurst's departure and it took appointing Bastian President to make it worth his while to stick around. Moreover, Anderson has had to heal internal divisions at Delta as various senior executives and groups lined up behind Whitehurst or Bastian at various times, thinking that either might get the nod.

Whilst such "horse races" are good for breeding thoroughbreds, and have led to exceptional CEOs at world class companies such as GE, Procter & Gamble, GlaxoSmithKline, and Abbott Laboratories, they're apparently not always the best for keeping those same thoroughbreds in the stable.

The difficulties confronting airline leadership succession
Ensuring effective leadership succession in airlines is much easier said than done for several important reasons:

Poor economic returns in the airline industry often make it difficult to both attract and retain top talent;
Airlines are notorious for raiding each other's top management ranks, often seeing airline industry experience as a must for their leadership solutions;
Developing internal solutions requires hard work over years, if not decades;
There often just isn't enough "room at the top" for a good CEO and a credible lieutenant, particularly at small and mid-sized carriers; and
Airline organizational structures are devoid of profit-and-loss platforms.
The last point warrants elaboration. Most multi-billion dollar enterprises are effective portfolios of profit-and-loss units. In a retailer, virtually every store can be considered a profit-and-loss unit. Yet, given the network nature and functional operational nature of airlines, there is usually only one profit-and-loss statement in an airline and it comes together at the very top. As a result, only the CEO of a large airline gains experience managing a profit-and-loss. Of late, that platform has been shared with a President in the context of a duo managing the airline at the top.

Value in establishing a Group structure
Some carriers have taken steps to address this issue by creating large "group" structures - ACE Aviation Holdings (Air Canada), Air France Group, Emirates Group, Lufthansa Group, and Qantas Group being good examples. By segregating out businesses - such as maintenance, ground handling, catering, cargo, information systems, loyalty management - into arms-length units, such groups have created multiple profit-and-loss platforms, each with its own leadership team.

Other airlines have made very effective use of their subsidiaries as P&L development grounds for their futures CEOs. Alan Joyce's promotion to the CEO job at Qantas stunned many, largely because he hop-scotched over two strong internal candidates in the mainline carrier en route - John Borghetti and Peter Gregg. That said, Joyce not only proved that he could create and nurture a successful enterprise as a general manager at Jetstar but also used the opportunity to gain the low-cost carrier experience that is now so highly coveted.

Dave Siegel moved from Continental Airlines into the leadership of Continental Express, fundamentally transforming the airline while in the role. Whereas he did not move back into the mainline carrier, he went on to CEO roles at Avis, Budget, US Airways, Gate Gourmet, and now XOJet and clearly benefited from the general management experience at Express.

Succession becoming a key board agenda
Regardless of their current circumstances or their prior success, or lack thereof, in CEO succession planning, it is becoming imperative that airlines address the issue. Spencer Stuart research has shown that three factors are pushing CEO succession to the forefront and onto the top of the board's agenda:

Corporate governance reforms have raised the level of accountability for executives and independent directors alike;
Those same reforms have empowered shareholders to take a more active stance against management failings and board that do not rectify those failings; and
The primary role of the CEO in the boardroom has been lessened by the emergence of the lead independent director and, in certain cases, by the appointment of a separate chairman to lead the board.
The latter point is especially coming true in the North America where multiple airlines have recently separated the Chair and CEO roles that were previously occupied by one person - Air Canada, Delta Air Lines, JetBlue Airways, and Northwest Airlines. More and more, we are witnessing the emergence of stronger Non-Executive Chairman at airlines and, with that, a willingness to put younger and, by definition, less experienced executives in the CEO slot, along the lines of Alan Joyce's appointment at Qantas.

More and more company boards are becoming activist in controlling the CEO succession process. Previously, many such boards were loathe or unable to stray into the territory for a variety of reasons (a) distractions by other factors, (b) sensitivity of the subject and wanting to avoid upsetting the incumbent, (c) a reluctant CEO, (d) complacency, and (e) lack of objectivity. Other boards didn't act on the issue because they either weren't aligned behind the ideal CEO profile or feared for lack of suitable talent within the enterprise.

Some airline boards have stepped in far too late to address CEO succession issues. Notable among these was Philippe Bruggisser's tenure as CEO of the failed SAir Group (Swissair and related companies).

Clearly, effective CEO succession is central to the long-term profitability, and viability of any airline. In an industry noted for cataclysmic change and constant volatility, the CEO suite is one place where stability and sanity should reign supreme.
 
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