Topics:   Corporate Governance,Strategy

Topics:   Corporate Governance,Strategy

November 9, 2017

Governance at 30,000 Feet

November 9, 2017

American Airlines Group director Alberto Ibargüen recently led a fireside chat with the company’s CEO and Chair Doug Parker during the NACD Florida Chapter’s season kick-off event at Miami International Airport. With more than 100 in attendance, the program featured insights into the highly competitive airline industry along with some key considerations for directors.

A New Day for the Airline Industry

From left to right: Sherrill Hudson, NACD Florida Chapter Chairman; Lauren Smith, NACD Florida Chapter President: Doug Parker, American Airlines Group Inc. and American Airlines CEO and Chairman, and American Airlines director Alberto Ibargüen

From 1978 until deregulation of the airlines, the airline industry yielded no return on capital; however, since the merger of American Airlines and US Airways less than four years ago, American has generated $20 billion in profits. Three airlines—American, Delta, and United—are now leading the pack in rationalizing and leveraging the hub model to offer passenger service across the globe while generating positive returns. Parker insists this is the industry’s “new normal” and spends a great deal of time convincing constituents that the industry is not simply experiencing a temporary “up” in a long-term cycle.

Parker explained that the company must now invest in its people and its products, taking a long-term view of the business. For example, American invested in new aircraft and now has the youngest fleet of any U.S. airline. With regard to employees, many of whom are unionized, Parker raised wages in the middle of a contract term in order to fulfill his promises to them during the merger. He explained, “I use the ‘look them in the eye’ test when it comes to the 120,000 people on the American payroll,” emphasizing the importance of transparent communication with employees. Another area of investment is data protection, and the board routinely raises the issue of cyber risk.

Merger Advice

“Never undertake a merger when there’s not a clear strategy,” cautioned Parker, when talking about the successful US Airways and American merger. Recognizing the herculean amount of work required to meld systems and go-to-market philosophies, he added, “You shouldn’t put your team through one unless two plus two will equal five, not 4.2.”

In terms of building a post-merger board, the merged company board consisted of two American board members, three US Airways board members, including Parker, and five members from the creditors’ committee. With this blended group, directors did not focus on the “this is how we did things” historical perspective, but rather the group was able to move forward as a relatively cohesive unit from the beginning.

Communication and tone at the top became priorities for the board and management after the merger as well. Parker began holding town hall-style meetings, taking questions from employees. These sessions are recorded and offered to American’s employees worldwide.

A Strategic-Asset Board Focused on the Customer Experience

Parker emphasized that by asking the right questions, the board has had an enormous impact on management, “ensuring that the team has a strategic focus.” Given the day-to-day demands of running an airline, pulling the team from those responsibilities can be challenging. Still, the board insisted on an offsite focused on strategic planning, which proved to be very valuable. “I put off the retreat for two years because we were so busy with the integration,” said Parker. “But the offsite was valuable because we were forced to articulate our strategy in a way that could be understood by others, like the teams and investors.”

American Airlines director Susan Kronick, who was in the audience, added that the board works well because it is diverse. “Our board is diverse in terms of gender, ethnicity, and, most importantly, points of view,” she said. “We have rich discussions, and everyone is moving forward together.” She added that a keen focus on the customer experience is a unifying factor. “We take the proactive perspective that the culture of the company is a competitive advantage for us with customers.”

Parker added that the board members aren’t afraid to speak up, and his job is to ensure his team is communicating well to the board. He also echoed the board’s focus on the customer.

“We are transporting people at 525 miles per hour, so we are constrained by the laws of physics,” said Parker. “But we can make sure the rest of the experience is as efficient and comfortable as possible.”

The NACD Florida Chapter would like to thank American Airlines and Miami International Airport for supporting this event and the behind-the-scenes airport tour that preceded the program.

Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.


sankar krishnaswamyDecember 11, 2017

Kimberly, sorry for insinuating that the major airlines AA, US Air and UA got merged. Actually UA merged with continental and competing well with AA&US Air. As I mentioned, the market needed some consolidation and the left out merged companies can each of some pie. In this case a big pie for both AA group and UA group.

Hope this clarifies my comments better

sankar krishnaswamyNovember 16, 2017

Great blog by Kimberly. This is a classic merger where the myth that Airlines cannot make money for the shareholders, it is a dying business etc., were broken. Congrats to the bold executives and BOD who understood that the competition between AA, UA and US airways literally made all of them victims of competition. Game theory would have revealed possible benefits and consolidating the three big airlines and taking advantage of economies of scale, I am sure would have resulted in 20B$ profit. Once again congrats. However as the author says they have to invest in newer vehicles, employees etc. and I could not agree more. In addition, I think they should invest in superior information systems, big data analytics and make all the processes – from procurement to delivering services very efficient focusing on excellent customer service. I noticed that seats are narrow in both 787 and Airbus new series (flew recently) and they need to give little more leg room (by eliminating some seats). Any delay in departures over 45 mins irrespective of the source of the problem, the AA has to give some refreshment to the waiting passengers. So the big ship is going in the right (profitable) direction and now the management and BOD should focus on leveraging this and take them to new frontiers in service excellence. Thanks Kimberly for the blog. Good read.

Bruce EpsteinNovember 09, 2017

While Doug is dong a good job, he fails to empower a good leader in design and comfort in the interior of their new aircraft. His failure to admit the gigantic error in the layout of the business class interior of the 787’s with the backward seating, especially the middle last row seats (almost seated in the galley), smallish seats and over 35% broken seats, by a failing vendor. I hope you have listened to your PLT members who fly these crap seats and follow the norm and re-work the cabins and seats in business on the 787. Also, don’t screw up the new A-350’s. I have flown them in EU and the business cabin is wonderful.