The American Dream

CHRIS HAMILTON FOR TIME
MAKING NICE: CEO Arpey meets with employees in Fort Worth, Texas

(2 of 2)

Even longtime veterans got into the act. In a corner of the huge maintenance complex in Tulsa, Ralph Dwain Garrison and Jack (Robin) Hood schemed to save drill bits costing as much as $200 each that were routinely being tossed after a few uses. Garrison took the motor from his son's science project and slapped on a vacuum-cleaner belt to create "Thumpin' Ralph"--a machine to sharpen old drill bits for reuse. Savings? Over $300,000. "The old mind-set unions vs. management it's still there for about 10% of the people," says machinist Jim Messick. "But if we want to survive as unions and as a company, we have to work together."

Not everyone is happy, of course. Morale is lowest among the 19,500 beleaguered flight attendants, who took 15% pay cuts and frequently work on quick turnarounds with little sleep. They plan to hold a press conference in Washington this week to raise concerns that exhaustion could compromise safety. "Company relations with employees, in particular flight attendants, are as strained as ever if not worse," says John Ward, president of the Association of Professional Flight Attendants, pointing to an "insulting" management memo leaked on the Internet last month. The letter quoted corporate travel agents complaining that American attendants were "not enthusiastic" and aired the airline's "dirty laundry" on flights. "You can hire all the suits you want to give advice," says Ward. "But we're the ones being taken to task when customers are unhappy that service is not what it once was."

Keeping business travelers happy is crucial to American's future. Once the darling of such premium-paying customers, who liked the airline's service along with being able to rack up frequent-flyer miles on transcontinental flights, American has lost some even to the likes of JetBlue, a low-cost alternative with amenities like seat-back TVs. "The business traveler used to be American's bread and butter, but the butter is a little thinner these days," admits executive vice president Dan Garton. But American's elite clientele will see improvements this summer a low-carb, high-protein breakfast as well as more power ports and more frequent service on the main bicoastal routes, like New York to Los Angeles.

The company's pension burden weighs on profitability, though Congress recently allowed American to defer some payments to underfunded pensions for two years. This year management has put $319 million away for pensions and will spend an additional $300 million on retirees' medical benefits an expense its younger competitors don't have. These low-cost carriers "pay people a lot less, and they don't provide good benefits," says Arpey. "I do believe people in big public companies should retire with benefits, but we've got to find a way to pay for it."

While American's turnaround has surprised skeptics, the long-term survival of such old-line carriers is still an open question. No-frills carriers, once just 8% of the U.S. market, now grab about 25% and compete with American on 8 out of every 10 routes the airline flies. Last week vintage carrier U.S. Airways said it may have to consider its second bankruptcy filing in two years, while United Airlines is still waiting to hear if the government will guarantee a $1.6 billion loan. Delta and its pilots' union are headed for a dustup that could roil the company's future. At American, losses for the first three months this year were lower: $166 million vs. $1 billion last year. But jet fuel prices are up more than 40% in the past year, and every penny of increase costs American $30 million annually. Arpey is acutely aware that his airline still faces a bumpy ride. Sitting on his desk is a purple papier-mache dinosaur his 6-year-old daughter gave him for his first "show and tell" with executives after the near miss with bankruptcy. "She says it has special flying powers," says Arpey, "and boy, do we need that right now."