Amr Corporation Business Information, Profile, and History

Company Perspectives:

To be the world's leading airline by focusing on industry leadership in the areas of: Safety, Service, Network, Product, Technology, Culture.

History of Amr Corporation

AMR Corporation is a holding company whose principal subsidiary is American Airlines, Inc., which was founded in 1934. With the acquisition of Trans World Airlines, Inc. (TWA), American became the world's largest airline. It provides scheduled service to 170 destinations throughout North America, the Caribbean, Latin America, Europe, and the Pacific Rim. American's hub cities are Dallas/Fort Worth, Chicago, St. Louis, Miami, and San Juan, Puerto Rico.

In the 20th century, American helped define the full-service airline, pioneering computer reservation systems, frequent-flier miles, coast-to-coast jet flights, the hub-and-spoke system, and advance-purchase discount fares. Under Bob Crandall, the company even learned to thrive during the challenge of deregulation. In the early years of the millennium, however, American was cutting costs and seeking new approaches in the most difficult environment the industry had ever faced.

Early History

American Airlines is a product of the merger of a number of small airline companies. One of these founding enterprises was the Robertson Aircraft Company of Missouri, which employed Charles Lindbergh to pilot its first airmail run in 1926. In April 1927 another of these small companies, Juan Trippe's Colonial Air Transport, made the first scheduled passenger run between Boston and New York City. The nucleus of these and the 82 other companies that eventually merged to form American Airlines was a company called Embry-Riddle, which later evolved into the Aviation Corporation (AVCO), one of the United States' first airline conglomerates. The conglomerate was headed by a Wall Street group, led by Avrell Harriman and Robert Lehman, that was not conversant with the new airline business.

In 1930 Charles Coburn formally united the various airlines under the name American Airways Company. American flew a variety of planes, including the Pilgrim 10A. In 1930 the company was granted control of 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 under the conditions that previous contract holders were disqualified from bidding and companies could not have the same officers and directors. American Airways thus changed its name to American Airlines and, under the leadership of Lester Seymour, resumed its airmail business, but due to the damage already caused by this interruption, was unable to maintain a profit.

During this period, a Texan named Cyrus Rowlett Smith was becoming a popular figure at American. Smith was originally the vice-president and treasurer of Southern Air Transport, a division later acquired by American. Seymour recognized Smith's ability and made him a vice-president of American in charge of the Southern Division.

In 1934 new American President Smith persuaded Donald Douglas, an aircraft manufacturer, to develop a new airplane to replace the popular DC-2. The company produced 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 and, in large part as a result of the successful new plane, went on to become the number one airline by the close of the decade. The DC-3 proved to be a very popular airplane; its innovative and simple design made it durable and easy to service.

During 1937, in reaction to a public scare over airline safety, American ran a printed advertisement that directly asked, "Afraid to Fly?" Citing the statistical improbability 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.

Aiding the World War II Effort

When World War II started, American Airlines devoted more than 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 American's archrival, United Airlines, was still flying DC-3s, while American had already sold its last DC-3s.

Following World War II, American Airlines purchased American Export Airlines (AEA) from American Export Steamship Lines. The steamship company was forced to sell AEA 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. American Airlines sold AEA to Pan Am in 1950.

In the late 1940s American suffered another financial crisis, caused mainly by the grounding of the DC-6. The airplanes were experiencing operational problems that led to crashes, 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 facing financial difficulties, company management attempted to raise cash by selling overseas routes served by the Amex (AEA) flying boats. The sale was blocked by the Civil Aeronautics Board (CAB). American needed the cash, and Juan Trippe at Pan Am actually wanted to purchase the overseas routes. As a result, they jointly lobbied the administration of President Harry S. Truman to overturn the CAB decision, but the timing was inauspicious. It was June 1950, and the president was focused 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. Thus the company avoided a debilitating financial crisis.

American made the first scheduled nonstop transcontinental flights in 1953 with the 80-passenger DC-7. In 1955 American ordered its first jetliners, Boeing 707s, which were delivered in 1959. With larger and faster aircraft on the drawing boards, American became interested in, and eventually purchased, jumbo B-747s in the late 1960s. 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 American in 1968 for a position in the administration of President Lyndon B. Johnson, serving as secretary of commerce. Smith was succeeded at American by a lawyer named George A. Spater, who changed the company's marketing strategy and attempted to make the airline more attractive to vacationers instead of to the traditional business traveler, a plan that ultimately failed. Spater's presidency lasted only until 1973, when he admitted to making an illegal $55,000 corporate contribution to President Richard Nixon's reelection campaign. Some believe the gift was intended to procure favorable treatment from the Civil Aeronautics Board for American. As a result, American's board of directors decided to fire Spater and draft Smith out of retirement at the age of 74 to head the company again.

Relocating Headquarters to Dallas/Fort Worth in 1979

Smith retired after only seven months when the board of directors persuaded Albert V. Casey to leave the TimesMirror Company in Los Angeles to 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 moved the airline's headquarters from New York City to Dallas/Fort Worth in 1979. Although some said Casey was unhappy with his inability to gain acceptance in New York's social circles, Casey reasoned that a domestic airline should be based between the coasts. Believing the company needed to be shaken out of its lethargy, he felt that American would benefit from the relocation.

Soon afterward, 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.

Also in 1977 American was 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, an American DC-10 crashed at Chicago's O'Hare airport. Later blamed on inadequate maintenance procedures, the crash resulted in 273 deaths and a fine of $500,000 by the Federal Aviation Administration (FAA). Although the company collected $24.3 million in insurance benefits, it was forced to pay wrongful death settlements averaging $475,000 per passenger.

The Airline Deregulation Act of 1978 had the effect of making the airline industry suddenly volatile and competitive. American could adjust to deregulation in one of several ways. First, it could sell its jetliners once they were written down, and move into other, more promising businesses. Second, it could scale down only partially, leaving a more efficient operation to compete with new airlines such as 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.

The Creation of AMR Corporation in 1982

Robert Crandall, formerly with Eastman Kodak, Hallmark, TWA, and Bloomingdale's, [fs1.5]joined American in 1973 and became its president in 1980. On October 1, 1982, Crandall oversaw the creation of a holding company, the AMR Corporation. According to the company's 1982 annual report, this move would not affect daily business, but would "provide the company with access to sources of financing that otherwise might be unavailable." 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 7,000 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 1980s by phasing in B-767s and MD-80s. The MD-80s had two major advantages over other aircraft: a two-person cockpit crew and high fuel efficiency. Crandall noted that American was developing a new, inexpensive airline inside the old one.

By the early 1980s, AMR had developed its Sabre computer reservations system into what was widely regarded as the best in the industry. The Sabre system allowed agents to assign seats, reserve tickets for Broadway plays, book lodgings, and even arrange to send flowers to passengers. Extremely successful in filling space on American flights efficiently and inexpensively, the Sabre system eventually expanded by beginning operations in Europe.

As of 1982, American ran major hubs at Dallas/Fort Worth and O'Hare in Chicago. Secondary hubs in Nashville and Raleigh-Durham were intended to more firmly establish the airline in the Southeast. In addition to a multihub system and the reservations database, American contracted with smaller regional carriers.

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 served American and several other air carriers. In 1977 American created AA Development Corporation and AA Energy Corporation. These subsidiaries--merged in 1984 to create AMR Energy Corporation--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, serviced military and commercial contracts that provided training for pilots and mechanics. All three subsidiaries were sold in 1986.

In 1985 American surpassed United in passenger traffic and regained after 20 years the title of number one airline in the United States. Although the company had dealt reasonably well with disruptions in the industry, and despite its stated intention to grow internally, AMR announced in November 1986 that it would acquire ACI Holdings, Inc., the parent company of AirCal, for $225 million. This move came in response to announcements by American's competitors Delta and Northwest, which had entered into cooperation agreements with western air carriers. The addition of AirCal's western routes significantly increased American's exposure on the West Coast and gave it a base for expanding American services across the Pacific Ocean. The late 1980s also saw AMR delve further into the regional airline business, acquiring Nashville Eagle, establishing American Eagle, and buying additional regional airlines.

Late 1980s Challenges

As the decade of the 1980s ended, the airline industry was challenged by a weakening economy and such costly developments as the fuel price spike caused by the Persian Gulf War, which contributed to industry losses of $2.4 billion in 1990. American pursued a strategy of acquiring key overseas routes from troubled or failed airlines, cutting costs, and using its leading position to harry its opponents in price wars. In 1989 it purchased TWA's Chicago operations and London routes, to which it added, in 1991, six more TWA London routes at a price of $445 million. Also that year, American purchased from failed Eastern Airlines the routes to 20 Latin American sites. By the close of the 1980s American was purchasing planes at a rate of one every five days; its fleet stood among the world's newest. At the same time, Crandall cut executive perks and flight expenses in a general program of internal belt-tightening. The CEO once ordered the removal of olives from all salads served on American planes, saving $100,000 a year.

Throughout the late 1980s and early 1990s, Crandall's ruthless--and effective--competitive strategies were the focus of industry controversy. Smaller airlines, as well as such larger and financially troubled airlines as TWA, accused Crandall of using unfair, "cannibalistic" tactics to create a situation in which a few major carriers, having eliminated their competition, could agree to maintain high prices without fear of being undercut. Crandall countered, however, according to Business Week, that American's strategies were perfectly within reason in an "intensely, vigorously, bitterly, savagely competitive" industry. Any shifts within the industry, including the elimination of some weaker companies, he argued, were a necessary if painful part of restructuring an industry with a surplus of carriers. Further, he contended, many of American's ailing competitors brought their woes upon themselves by initiating fare wars, which forced all carriers to sell seats at losses that the smaller carriers ultimately could not afford. The airline industry, Crandall commented in an interview with Time, "is always in the grip of its dumbest competitors."

In April 1992 American introduced a new airfare system, designed to simplify rates that had been made complicated over the years by myriad restricted, cut-rate fare specials. The new system included only four fares: first-class, coach, 7-day advance purchase, and 21-day advance purchase. Each price represented a cut in the fare for that category--up to 50 percent for first-class tickets--but the new system also eliminated the promotions that enabled vacation travelers to buy coach tickets at bargain rates. American held that the old discount fares were damaging the industry and that the new rates would be fairer to consumers. Detractors charged that the fares would benefit business travelers far more than tourists, and that the pricing system was designed to drive financially weak carriers out of business by forcing them to make fare cuts they could not afford. American's competitors soon matched its prices, then countered with a new wave of restricted, reduced fares.

After four straight years in the red from 1990 through 1993, AMR finally returned to profitability in 1994. The turnaround was at least in part an industrywide one as the excess capacity and intense fare wars in the U.S. airline industry during the early 1990s disappeared. Lower fuel prices also played a key role. In December 1995 American Airlines suffered its first fatal crash in 16 years when one of its planes crashed near Cali, Colombia. The following year AMR reduced its stake in its Sabre unit by about 20 percent through a public offering.

Alliances and Divestments: 1996-2002

Key developments in the late 1990s included alliances and divestments. One of the most important trends in the airline industry in the 1990s was that of global alliance building. In 1996 American Airlines and British Airways plc announced that they would form an alliance in which the two airlines would virtually operate as a single unit on North Atlantic runs. The plan, however, ran into severe regulatory problems, including a stipulation by the U.S. government that an "open skies" treaty between the United States and Britain precede any granting of antitrust immunity to the British Airways-American link-up. By late 1998 the open skies negotiations had ground to a halt. As it became more likely that the alliance with British Airways might never get off the ground, American Airlines shifted gears and announced in September 1998 the formation of the oneworld alliance. Oneworld initially included American, British Airways, Canadian Airlines, Hong Kong's Cathay Pacific Airways, and Australia's Qantas Airways, with the partners agreeing to link their frequent-flier programs and give each other access to their airport lounge facilities. Finnair and Spain's Iberia were slated to join oneworld in 1999, and Linea Aerea Nacional de Chile (LanChile) agreed to become the eighth member starting in 2000. American also entered into a separate bilateral marketing alliance with US Airways in April 1998, again involving linked frequent-flier programs and reciprocal airport lounge facility access.

In September 1998 AMR announced that it would sell three subsidiaries that had been part of the Management Services Group in order to focus on its core airlines businesses. By the end of the year the company had reached agreements to sell all three, with AMR Combs Inc., an executive aviation services company, going to BBA Group plc of the United Kingdom for $170 million; TeleService Resources, a telemarketing firm, sold to Platinum Equity Holdings; and AMR Services, a ground services and cargo logistics unit, bought by New York merchant bank Castle Harlan. These divestments left AMR with two main lines of business: the Airline Group, which consisted of American Airlines and the American Eagle regional airline operations; and the Sabre Group, in which AMR held an 82.4 percent stake at the end of 1998.

American Airlines continued to be beset by labor troubles throughout the 1990s, including a brief strike by pilots in 1997 which ended after President Bill Clinton intervened, appointing a presidential emergency board to resolve the dispute through imposition of a new contract (under this pressure, the two sides soon reached their own agreement). When Crandall retired in May 1998, it appeared that better relations with labor might be on tap. Crandall's successor as chairman and CEO was Donald J. Carty, who had been president (a title he retained). Around the time of his promotion, Carty was quoted as having told union leaders that he planned to focus on employees because "happy employees make for happy customers, which make for happy shareholders." But trouble erupted following the December 1998 acquisition by AMR of low-cost carrier Reno Air, Inc. for $124 million. Reno Air had 27 planes in its fleet and hub cities in Reno, Nevada, and San Jose, California. Rather than operating it as a low-cost "airline-within-an-airline," AMR aimed to integrate Reno into American Airlines, thereby strengthening American's presence in the western United States. But when American attempted to integrate pilots from Reno Air without immediately giving pay raises to those Reno pilots moving into higher paying positions at American, members of the American Pilots Association (APA) began a sickout in early February 1999 that forced thousands of flight cancellations and crippled the airline. AMR sued the APA, winning a restraining order and an order for a return to work. After the pilots defied this order, a U.S. district judge found the union and its top two leaders in contempt of court for ignoring his order. This ended the sickout, but not before the eight-day action had cost AMR an estimated $150 million in lost business. In late February American and the APA agreed to attempt to resolve their dispute through nonbinding arbitration.

During 1999 American Airlines took delivery of 44 new airplanes, adding the Boeing 737 and 777 to its fleet. It was also in the midst of a $400 million program to overhaul the interiors of its 639-plane fleet, the first such change in 20 years. Sabre, meantime, rode the Internet wave of the late 1990s through Travelocity.com, its travel web site that was one of the leading sites for the purchase of airline tickets. These positive developments were tempered, however, by an antitrust lawsuit filed against American Airlines by the U.S. Department of Justice in May 1999. The Justice Department charged that the airliner in the mid-1990s had slashed fares upon the entry of low-cost rivals into its Dallas/Fort Worth hub, incurring losses in the process until the smaller competitors had been forced out. Following the departure of a rival, American would then raise fares and sometimes reduce service. American Airlines immediately responded with a vigorous denial of the charges, setting the stage for what could be a lengthy, contentious, and precedent-setting lawsuit--a lawsuit that was just one of the many challenges facing AMR at the end of the century.

AMR sold its remaining 82 percent stake in the Sabre computer reservations system group in March 2000. Travelocity, in which Sabre held a 70 percent stake, led all online ticket sales agencies with $1 billion in 1999 bookings. Sabre also provided American's IT services, and had contracts to do so until 2008.

In the summer of 2000, AMR pursued Northwest Airlines with a merger proposal. The company balked at NWA's high asking price, however. In January 2001, American announced a deal to buy ailing TWA and part of US Airways, which was being absorbed by United Airlines. AMR paid $742 million for TWA, which had been the eighth largest airline in the United States. The acquisition made American the world's largest airline, ahead of United. American agreed to hire most of TWA's 20,000 workers in the transaction.

American Airlines and British Airways had applied for antitrust immunity similar to what allowed KLM and Northwest to cooperate so closely, and effectively. U.S. authorities refused to grant this status to British Airways and American without the two giving up landing slots in London to rivals, and American withdrew its application in February 2002.

A New Environment in the New Millennium

AMR's total operating revenues were $19.7 billion in 2000, resulting in net earnings of $770 million. The year 2001 began poorly for AMR, however, like most U.S. airlines, and continued to get worse. The traditionally strong second quarter--AMR had made a net profit of $285 million a year earlier--saw a loss of $105 million at AMR. A drop in business travel was the main cause.

American lost two aircraft full of passengers and 36 employees in the September 11 hijackings. The FAA banned all civil air operations in the two days following the tragedy, which stranded American planes and passengers at various airports, and delayed the deployment of the company's crisis management team. When thousands of flight crew members felt unable to fly, their unions relaxed their rules and allowed others to give up their own time off to take their place. The crash of American Airlines Flight 587 upon takeoff from JFK Airport in November 2001 added further trauma to a horrific year.

The two-day flying suspension and a drop-off in passenger traffic and ticket prices following the attacks in New York and at the Pentagon hurt most of the major airlines. AMR soon cut its capacity 20 percent, but still lost about $600 million in revenue in the last 20 days of September alone. AMR posted a record quarterly operating loss of $414 million in the third quarter, in spite of $508 million in government aid.

AMR posted a full-year net loss of $1.8 billion on total operating revenues of $19 billion in 2001. The company reduced the workforce by 20 percent, or 20,000 employees. Capital spending for 2002 was reduced 40 percent, from a planned $3.5 billion.

The airline simplified its fleet, retiring its MD-11, MD-90, DC-10, MD-87, and DC airliners in 2001. The fleet numbered 712 planes at the end of the year. In mid-2002, American retired its short-haul Boeing 717 fleet, acquired from the TWA takeover, in favor of the similar-sized Fokker F100s already in its fleet. The carrier aimed to operate only seven types of aircraft by the end of the year, down from 14 in 2000. Soon, the Fokkers also were added to the list of planes to be retired.

American lost $1.1 billion in the first half of 2002--a quarter of the amount lost by all U.S. airlines--and lost another $924 million in the third quarter alone. As business travelers disappeared, management was trying to adopt the budget airline methodology of such carriers as Southwest Airlines Co. It removed magazines from planes and skipped meals on flights of less than four hours. Arrivals and departures schedules were rearranged for efficiency, resulting in longer layovers. American's hub-and-spoke system, large and unionized workforce, and other manifestations of the archetypical full-service airline, however, were deeply entrenched in the company's culture. CEO Donald Carty told the Wall Street Journal the airline was looking for a middle ground "neither preoccupied solely with cost nor solely with revenue."

A sweeping overhaul was announced in August 2002. The company was cutting another 7,000 jobs. First-class service was removed on most flights, with the exception of major international routes. Economic instability in Latin America, an American Airlines stronghold, added to the considerable challenges the carrier was facing. The world's largest airline was still among the strongest financially, but AMR was still searching for a way to thrive in a dramatically different industry from the one it dominated for much of the 20th century.

Principal Subsidiaries: American Airlines, Inc.; American Eagle Airlines, Inc.; AMR Investment Services.

Principal Divisions: Passenger-American Airlines; TWA LLC; AMR Eagle; Cargo.

Principal Competitors: Continental Airlines, Inc.; Delta Air Lines, Inc.; Southwest Airlines Co.; UAL Corporation.

Chronology

• Key Dates:
• 1930: American Airways Company is formed from a number of smaller airlines and related businesses.
• 1934: American Airways is renamed American Airlines; the company gains an airmail contract.
• 1950: American Airlines sells flying boat routes from newly acquired American Export Airlines to Pan Am.
• 1953: DC-7s allow American to launch nonstop transcontinental flights.
• 1959: American begins operating its first jets, Boeing 707s.
• 1978: American posts a record profit of $134 million; American adopts two-tier wage policy.
• 1979: American relocates its headquarters from New York to Dallas-Fort Worth.
• 1982: AMR Corporation is formed as the parent company of American Airlines.
• 1998: American forms oneworld alliance with several world airlines.
• 2000: The Sabre Group is spun off.
• 2001: American buys TWA; two jets carrying a full load of passengers and crew are lost in the September 11 terrorist hijackings.
• 2002: Major restructuring is underway.