American Airlines

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American Airlines

P.O. Box 619616
Dallas/Fort Worth Airport, Texas 75261
U.S.A.
(817) 355-1234

Wholly-owned subsidiary of AMR Corporation
Incorporated: April 11, 1934
Employees: 37,500
Sales: $6.018 billion
Market Value: $3.304 billion
Stock Index: New York

Given the difficult conditions created for the airline industry by deregulation, the success of many airline companies is difficult to assess. American Airlines, however, has mastered the new deregulation market and has grown to become the United States’ number one airline. As large as the company is, it is able to maintain a highly flexible and responsive attitude toward the changing conditions of the airline market.

American Airlines is a product of the conglomeration of a number of small airline companies. One of these founding companies was the Robertson Aircraft Company of Missouri, which employed Charles Lindbergh on the first mail run in 1926. In April of 1927 another of these small companies, Juan Trippe’s Colonial Air Transport, made the first passenger run between Boston and New York. The nucleus of these and the 82 other companies that eventually merged to form American Airlines was a company called Embry-Riddle. It later organized the Aviation Corporation of the Americas, one of America’s first airline conglomerates. The conglomerate was run by a Wall Street group who were not very conversant with the new airline business. This group was led by Avrell Harri-man and Robert Lehman.

In 1930 Charles Coburn formally merged the various airlines into one concern named the American Airways Company. American flew a varied assortment of planes, including the Pilgrim 10A. In 1930 American was awarded the Southern airmail corridor from the East Coast to California. In 1934 the government suspended all private airmail contracts only to reinstate them a few months later. American resumed its airmail business but, due to the damage already caused by this interruption, was unable to maintain a profit.

The company was soon in financial trouble. It was rather easily acquired by a corporate raider named E. L. Cord who changed the name of the company to American Airlines. Harriman and Lehman resigned in protest when Cord installed an ineffective man named Lester Seymour as president. Both men returned to Wall Street, and Harriman later served as the wartime ambassador to the Soviet Union.

During this period of time, a Texan named Cyrus Rowlett Smith was quickly becoming a popular figure at American. Smith was originally the head of Southern Air Transport, a division later acquired by American. Cord recognized Smith’s ability and later made him vice-president of American, despite the fact that they didn’t like each other personally.

In the early 1930’s Smith persuaded Donald Douglas to develop a new airplane to replace the popular but obsolete DC-2. Douglas’ airplane company developed a larger 21 passenger airplane, designated the DC-3. Cooperation between the manufacturer and the airline throughout the project set an example for similar joint ventures in the future. American was flying the DC-3s by 1936. It became the number one airline by the close of the decade, largely as a result of the successful new plane. The DC-3, called the “flying whore” because it had “no visible means of support,” proved to be a very popular airplane; its innovative and simple design made it durable and easy to service. Smith said the DC-3 was “the first airplane that could make money just by hauling passengers.”

During 1937, in reaction to a public scare over airline safety, American ran a printed advertisement which directly asked, “Afraid to Fly?” Citing the statistical impossibility of dying in a crash, the copy discussed the problem in a straightforward and reassuring way. “People are afraid of things they do not know about,” the advertisement read, “there is only one way to overcome the fear—and that is, to fly.” The promotion succeeded in allaying passenger fears and increasing the airline’s business.

When World War II started American Airlines devoted over half of its resources to the army. American DC-3s shuttled the Signal Corps and supplies to Brazil for the transatlantic ferry. Smith himself volunteered his services to the Air Transport Command. American’s president, Ralph Damon, went to the Republic Aircraft Company to supervise the building of fighter airplanes.

After the war American returned to its normal operations, and Smith set out to completely retool the company with modern equipment. The modernization went smoothly and quickly. In 1949 Smith had a good laugh, so to speak, when arch-rival United was still flying DC-3s and American had already donated its last DC-3 to a museum.

American Airlines acquired a fleet of “flying boats” when it purchased Amex Airlines from American Export Steamship Lines. The steamship company was forced to sell Amex when the U.S. Congress decreed that transportation companies could not conduct business in more than one “mode.” It was an attempt to prevent industrial vertical monopolies from forming. Pan Am, until then the only airline with flying boats, began to experience competition from American on its overseas routes.

In the late 1940’s American suffered another financial crisis, in large part caused by the grounding of the DC-6. The airplanes were experiencing operational problems which led to their crashing, and the federal government wanted all of them thoroughly inspected. Six weeks later they were back in service, but the interruption cost American a large amount of money. When banks restricted American’s line of credit, Smith joined representatives of TWA and United on Capitol Hill to lobby for fare increases. Subsequently, as part of a compromise, American was awarded an airmail subsidy.

Still experiencing financial difficulties, company management attempted to raise cash by selling the overseas routes served by the Amex flying boats. The sale was blocked by the Civil Aeronautics Board. American needed the cash and Juan Trippe at Pan Am actually wanted to purchase the overseas routes. As a result, they jointly lobbied the Truman administration to overturn the CAB decision, but the timing was inauspicious. The time was June of 1950 and the President’s mind was on the war in Korea. A few weeks later, after the Korean situation stabilized, Truman did finally rule in favor of the airlines and American was allowed the sale. In this way the company avoided a debilitating financial crisis.

American made the first scheduled non-stop transcontinental flights in 1953 with the 80-passenger DC-7. In 1955 American ordered its first jetlines, Boeing 707s. The 707s were delivered in 1959 and entered service at American with several new Lockheed Electras. With larger and faster aircraft on the drawing boards, American became interested in, and eventually purchased, jumbo B-747s in the late 1960’s. The company also ordered a number of supersonic transports, but was forced to cancel these orders when congress halted funding to Boeing for their development.

C.R. Smith left the airline in 1968 for a position in the Johnson Administration, serving the President as Secretary of Commerce. Smith was succeeded at American by a lawyer named George A. Spater. After taking command, Spater changed the marketing strategy and attempted to make the airline more attractive to vacation-goers instead of to the traditional business traveler. The strategy failed. His presidency lasted only until 1973, when he admitted to making an illegal $55,000 corporate contribution to the Nixon re-election campaign. Some believe the gift was intended to procure favorable treatment from the Civil Aeronautics Board for American. As a result, the board fired Spater and drafted Smith out of retirement at the age of 74 to head the company again.

Smith retired after only seven months when the board of directors persuaded Albert V. Casey to leave the Times-Mirror Company in Los Angeles and join American. As the new chief executive officer Casey reversed the company’s fortunes from a deficit of $20 million in 1975 to a record profit of $134 million in 1978. To everyone’s surprise Casey decided to move the airline’s headquarters from New York to Dallas/Fort Worth. Interestingly enough Casey’s brother, John, was a vice chairman of Braniff International, which was also based in Dallas. Some said Casey was unhappy with his inability to gain acceptance in New York’s social circles. Casey’s response was that a domestic airline “belongs in Mid-America.” Believing the company needed to be shaken out of its lethargy he said, “the company had to get repotted, replanted.”

Soon afterwards, American introduced “Super Saver” fares during 1977 in an innovative attempt to fill passenger seats on coast-to-coast flights. TWA and United followed suit after they failed to persuade the CAB to intervene.

During that year American was also forced to rehire 300 flight attendants who were fired between 1965 and 1970 because they had become pregnant. The award also included $2.7 million in back pay. Compounding these setbacks, on May 25, 1979, American lost a DC-10 at Chicago’s O’Hare airport. 273 people died in the crash, which was later blamed on inadequate maintenance procedures. As a result, American was fined a half million dollars by the Federal Aviation Administration (FAA). Although the company collected $24.3 million from insurance, it has been forced to pay wrongful death settlements averaging $475,000 per passenger.

To better protect itself from crises in the industry, Casey set up a holding company for the airline and a number of its other businesses. The new parent company was called the AMR Corporation. Many airlines created holding companies to diversify their resources in the event of serious hardship in the industry.

The Airline Deregulation Act of 1978 had the effect of making the airline industry suddenly volatile and competitive. AMR had several options with which to deal with deregulation. First, it could divest itself of the airline, selling its jetliners once they were written down, and moving into other more promising businesses. Second, it could scale down only partially, leaving a more efficient operation to compete with new airlines like New York Air and People Express. A third option was to ask employees to accept salary reductions and other concessions as Frank Borman did at Eastern. In the end, American was not forced to take any of these measures. The company secured a two-tier wage contract with its employees and this new agreement reduced labor costs by as much as $10,000 a year per new employee. In addition, workers were given a profit sharing interest in the company.

Robert Crandall, formerly with Eastman Kodak, Hallmark, TWA and Bloomingdale’s, joined American in 1973 and became its president in 1980. Known for his impatient and aggressive manner, Crandall may be credited with American’s successful, but not completely painless, readjustment to the post-deregulation era. Crandall fired approximately 7000 employees in an austerity drive, a decision that severely damaged his standing with the unions.

American updated its jetliner fleet to meet the new conditions in the industry during the 1980’s by phasing in B-767s and MD-80s. The MD-80s have two major advantages over other aircraft: a two-person cockpit crew and high fuel efficiency. American is relying heavily on the success of the MD-80, having already received 67 of them with the option to purchase up to 100 more. Crandall says, “American is growing a new, low-cost airline inside the old one.” With an interest in purchasing the MD-80s and the stretched MD-82, American is relying on McDonnell Douglas to provide much of its planned fleet of over 330 jetliners by 1990.

American’s Sabre computer reservations system dominates the business, and it is widely regarded as the best in the industry. The Sabre system allows agents to assign seats, book Broadway plays or lodging, and can even arrange to send flowers to passengers. Naturally, the system is biased toward American, listing the airline ahead of all the others. The system has proved extremely successful in filling space on American efficiently and at low cost. Recently, the Sabre system has expanded by beginning operation in Europe.

American runs a major hub at Dallas/Fort Worth and at Chicago. Secondary hubs in Nashville and Raleigh/Durham are intended to more firmly establish the airline in the Southeast. In addition to a multi-hub system and the reservations database, American contracts with smaller regional carriers, called “American Eagle Partners,” to feed traffic into the American system.

American owned a number of subsidiaries when it created the AMR holding company. An airline catering business called Sky Chefs was started in 1942, and serves American and a number of other air carriers. In 1977 American created AA Development Corporation and AA Energy Corporation. These subsidiaries participated in the exploration and development of oil and natural gas resources, many of which were successful. The American Airlines Training Corporation, created in 1979, services military and commerical contracts that provide for pilot and mechanic training.

In 1985 American surpassed United in passenger traffic and regained after twenty years the title of number one airline in the United States. Although the company has dealt reasonable well with disruptions in the industry, and despite its stated intention to grow internally, American announced in November of 1986 that it would acquire ACI Holdings, Incorporated, the parent company of AirCal, for $225 million. American’s competitors, Delta and Northwest, recently announced cooperation agreements with western air carriers. Management at American was afraid that the company would be eliminated from the West Coast market if it did not move quickly. The addition of AirCal’s western routes significantly increases American’s exposure on the West Coast, and would possible lead to American services across the Pacific.