Bob Crandall Upfront on Industry Bailouts
By Robert Mark on March 26th, 2020Bob Crandall retired in 1998 as chairman, president, and CEO of AMR, parent organization to American Airlines and while many people today might not remember his name, they’ll pretty quickly recognize what he created while he was at the helm.
Bob Crandall (L) with another industry giant, the late Herb Kelleher, co-founder of Southwest Airlines.
Crandall is the often combative, no-nonsense finance-marketing focused guy who, while at American created American Advantage, the industry’s first frequent flyer program. A strong opponent to deregulation before it took hold in 1978, Bob Crandall is also the brain behind modern-day yield-management that pointed to the path other airlines followed to squeeze every last penny out of an unused airline seat, right up to the moment the tug pushes the airplane back from the gate. He was also created SABRE, the first robust airline industry reservation system.
Crandall became the scourge of unionized airline pilots though in 1983 when he created the notorious B-scale pay system as a tool to fight the flurry of then evolving emerging low-cost airlines. He managed to convince pilots the airline could never afford shiny new aircraft if they didn’t figure out how to cut their labor costs. The move essentially put airline pilots everywhere on a war-time footing with their own management teams and facilitated the 1985 pilot strike at United.
Bob Crandall Today
Because Crandall always been a notorious industry pundit, Bloomberg.com on Tuesday probed him about airline bailouts, as well as Boeing’s push for cash for the aerospace industry in the wake of the economic downturn created by the Coronavirus. Boeing CEO David Calhoun said his company would only accept bailout money on the company’s terms and would not allow the government to take an equity stake in the aerospace giant. With the 737 Max debacle still fresh in people’s minds, some interpreted Calhoun’s mention of a bailout itself as nothing short of heresy. In fact, Boeing board member Nikki Haley resigned last week because she did not believe in offering cash to one industry giant while ignoring others.
Keeping Crandall’s comments in context, the International Air Transport Association (IATA) on Tuesday said, “Owing to the severity of travel restrictions and the expected global recession, IATA now estimates that industry passenger revenues could plummet $252 billion or 44% below 2019’s figure.”
Despite 20 years away from the airline industry, Crandall’s thoughts on Bloomberg shocked some and surprised others. Early on, he said he didn’t believe the airline industry needed a bailout, but that “it does need support” calling the airlines one of America’s most basic forms of transportation. “You can’t simply let these companies go away,” he said. “But these companies need to understand there needs to be some kind of controls put in place. It probably needs to be regulated like some form of utility.”
Crandall pointed out that, “In the last six years, the industry has spent more than its total free cash flow buying back stock and took on a mountain of new debt. So now we’re saying to the public, we used a lot of our free cash flow to buy back stock, which in a business like the airlines, I would say you should never do. And now we need some support. The airline needs to realize it can’t use its other resources in other ways.” Crandall warned that support might be needed for quite a while since it’s going to take time for people to willingly gather in groups again.
Remembering that Crandall is the dean of yield management, he was also clear about the fact that the airlines can no longer, “continue jamming seats onto an airplane and making the public unhappy. And they can’t spend their free money buying back stock.”
Does he think Boeing needs saving? “We don’t want to lose our leadership position in aviation, therefore we need to help Boeing … whatever it needs to sustain Boeing.” He was less certain about whether the Seattle plane maker might be headed for Chapter 11. “But when we put public support into a company, the public has the right to expect that once you [Boeing] recover, part of the rewards of recovery come to us. These companies need to be ready to give up being completely unrestricted.”
Will people travel less once the virus is under better control? “All the research we’ve ever done says consumers want to travel more. Five years from now, I think travel will be as robust as it is now.” But Crandall admitted the road to that recovery could be pretty rocky, especially in the near term. “Right now, I think we might be underestimating the near term effect of the virus.”
Does that mean returning to a time when the government set routes and pricing? While Bob Crandall thinks nationalization is probably overkill, he believes the government may need to make a substantial investment in the airline industry. He said, “We all need to decide what conditions we want to impose on the airlines until they pay us back.” He was adamant that during this recovery period, “an airline can’t just walk away from a city if that means they lose all airline service.”
With Congress having just passed its initial bailout legislation, we won’t need to wait much longer to see what happens next.
Rob Mark
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April 8th, 2020 at 11:11 am
Nikki Haley, who just resigned from Boeing’s board of directors, says the company has $24 billion in cash and doesn’t need a taxpayer bailout.
Seems to me that Boeing owes the country, their stockholders, and the flying public much more than we owe Boeing. Let’s start with improved behavior by Boeing employees, like no more FOD in the fuel tanks and no more secret avionics tricks to surprise the pilots.
June 24th, 2020 at 7:35 pm
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July 7th, 2020 at 1:11 pm
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