TIME: Almanac 1993/TIME Almanac 1993.iso/time/102891/1028510.000

Text File | 1992-08-28 | 10.3 KB | 263 lines

                                                                                INTERVIEW, Page 18

The Man Who Fired a Dog To Save a Buck


Tired of cramped seats in planes? Angry at rising fares?
American Airlines chairman ROBERT CRANDALL argues that you are
still better off in the deregulated skies.

By JANICE CASTRO and RICHARD WOODBURY and Robert Crandall


    Q. A lot of people feel that the big carriers have got to
be reined in, that we need more public control over air service
in this country.

    A. Senators and Congressmen who want to tell the airlines
what to do are not sticking up for consumers. It's consumers
who pay when we are forced to operate in inefficient ways.

    Suppose they said, "We don't want you guys to lose our
bags anymore. And every time you lose a bag we're going to fine
you a million dollars." Well, I can fix that tomorrow morning!
We will never lose another bag. But it will be very
inconvenient to travel. Today you come into Dallas-Fort Worth
from all these different places, and in 45 minutes you make your
connection and you go out. But in the world of the future, where
bags are never lost, I'm going to keep you there for three
hours, because I'm going to make sure I get every bag.


    Q. In 1978 Washington began to deregulate the airlines
with the goals of increasing competition and improving service.
Yet critics say deregulation has backfired, that it has
enriched the biggest airlines but has hurt passengers by
producing less competition, higher fares and fewer choices.

    A. It would be hard to be more wrong. Studies by the
Brookings Institution show that during the first 10 years of
deregulation, passengers saved $1 billion.


    Q. Well, of course fares were lower during the '80s. But
that was during the shake-out, during the bloodiest fare wars
in airline history. That wasn't a normal period.

    A. What is? The problem isn't deregulation; it was
regulation. For 40 years, the government regulated the airlines,
and did a perfectly awful job of it.


    Q. That's not how consumers remember it.

    A. That's because regulation distorted reality. When the
government was running things, regulators designed any kind of
routes and service they wanted, with no regard whatsoever for
matching consumer desires or providing something that people
were willing to pay for.


    Q. Still, one result is that air travel is less
convenient. Left to their own devices, airlines have eliminated
many direct flights and have forced passengers into the
Cuisinart machine of a system that forces people to fly to hubs
like Chicago or Atlanta in order to catch planes to their real
destination.

    A. Let me ask you this: Do you have a grocery store right
next to your house? Well, why not? Wouldn't it be more
convenient for you? Of course it would! If you could regulate
grocery stores, you might be able to have a rule that there
would be a grocery store on every block. But how many grocery
stores can one neighborhood support? That's what airline
regulation did. The government required us to put in all kinds
of service that consumers didn't need. And we've been trying to
sort it out ever since. The hub-and-spoke system helps to hold
down prices.


    Q. Then why are average fares higher at the hubs?

    A. Because the best flights are available there. Nonstop
flights cost more, and a lot of people choose them. If you are
in Dallas-Fort Worth and you want to go to La Guardia, you can
fly nonstop and pay a premium for that convenience. Or you can
save some money by flying a connecting flight, say through
Chicago. The notion that we're gouging people is crazy. It's
sort of like asking, What's the average room rate at the Ritz
Carlton and Motel 6? Well, it's higher at the Ritz Carlton. It's
nicer there. You get what you pay for. If you want a lower
price, you can go to Motel 6.


    Q. You have defended the fact that the seats are so much
closer together . . .

    A. Because that's what the public wants.


    Q. Cramps?

    A. We can only provide the service that the public is
willing to buy. The public selects airlines on the basis of
three factors: price, price and price. So it is imperative that
we do all we can to offer the maximum possible service for the
lowest reasonable price. Deregulation works. There are more
flights, and there is more competition than there was in 1978.


    Q. And yet after 10 years, American, United and Delta
control almost 60% of all U.S. air traffic, and will soon
control about a fourth of all world traffic. The big carriers
keep getting bigger, and most of the small ones are going out
of business.

    A. Look around the world: almost every other country has
one airline. Why? Because airlines are enormously expensive to
operate. They are not a business that can be practiced in just
one place. We have to buy a lot of airplanes and move them
across a vast network to carry people from many places by way
of interchange points to other places.


    Q. What about concerns that the financial stress of
deregulation has hurt safety?

    A. Anyone who says that is wrong. The FAA is responsible
for safety. Safety was not deregulated. The safety record of
the airline industry is materially and dramatically better than
it was during regulation.


    Q. Now that American is so big, now that you've won the
game, you're insisting that fares must rise.

    A. Well, of course they've got to. The airline business is
losing billions of dollars. Last year was the worst this
industry has ever had. Right now, almost 30% of our airline
service in this country is being provided by carriers that are
bankrupt or nearly so. Now how can you possibly say the fares
are too high? They must go up, or we're not going to have an
airline industry at all.


    Q. But air traffic has fallen this year. If your fares go
too high, don't you drive away consumers?

    A. No question about it. More than half of airline travel
in this country is for leisure. As airline prices rise, people
who would like to travel are going to stay home. They're going
to buy more lawn mowers, more tickets to the local ball game,
and fewer airline tickets. But we cannot continue to produce and
sell a product for less than its full cost.


    Q. Why is it so difficult to bring your costs in line with
your revenues?

    A. Running an airline is not like making dog food. In the
dog-food business, if you get a recession, you just close a
couple of plants and make less dog food for a while. Nobody
cares where you make it. They buy it in all the same places.

    But it doesn't work that way in the airline business. You
cannot inventory a backlog and slow down production for a while.
We make our product every day. If you reduce capacity, your
costs rise.

    Let me give you an example: let's say an airline has three
flights a day out of a city, which is our average. Say you have
a flight at 8 a.m., another at noon and one at 5 p.m. Let's say
I eliminate the flight at noon to cut costs. Now, none of that
business is going to fly on my 8 a.m. flight or my 5 p.m.
flight. It all goes on my competitor's flight at 12 o'clock. So
the result of reducing capacity is to increase my unit costs.


    Q. Why do you oppose cities spending so much to expand
their airports? Isn't that good for your business?

    A. Because airports cost a lot of money. Look, the public
doesn't build airports, we do. When a city decides to build or
expand an airport, they sell bonds, and the bonds are guaranteed
by the airlines on the basis of long-term leases.

    Capacity draws business, but only if you add it in the
right places, where people want to go. Many cities seem to think
that if you build an airport big enough to be a hub, it will
become a hub. It's like they are building the Field of Dreams.


    Q. "If we build it, they will come."

    A. But we won't! Not if it doesn't make sense.


    Q. Where is that happening?

    A. Denver. A lot of money is being poured into building a
great big new airport way out in the boonies, and they're going
to close Stapleton Airport. There's no need for a new airport
in Denver. Stapleton is already one-third empty.


    Q. Where do we need airport expansion?

    A. Chicago is overcrowded and clearly needs more runways.


    Q. What's the problem?

    A. Environmental concerns. Airports that need new capacity
are blocked because people want everything to be quiet. They
say that if we fly more airplanes, there will be more noise.
Well, of course there will. We don't fly gliders. But if they
don't have any growth, there won't be any jobs, and there won't
be any new wealth. And then it will get real quiet.


    Q. You've earned a reputation over the years as the
financial whiz of this industry. You invented frequent-flyer
plans and supersaver fares. You are also known as perhaps the
most relentless cost cutter in the business.

    A. We look and we look and we look. We're always trying to
find a cheaper way to do it, to avoid paying for something that
people do not value.


    Q. Is it true that you once fired a dog to save money?

    A. It's true. We had a cargo warehouse in the Caribbean,
and we had a guy there guarding it all night long. I was
reviewing the budget, and I wanted to reduce costs. My people
said we needed him to prevent thefts. So I said, Put him on part
time and rotate his nights so nobody knows when he will be
there. And the next year I wanted to reduce costs, and I told
them, Why don't we substitute a dog? Turn a dog loose in the
warehouse. So we did, and it worked. Now the following year, I
needed to get the costs down some more, and my guy said, Well,
we're down to a dog! So I said, Why don't you just record the
dog snarling? And we did. And it worked! Nobody was really sure
whether there was a dog in there or not.


    Q. You have said that you sit in this huge office
overlooking the Dallas-Fort Worth airport and never look out the
window, that all you do is work and eat and sleep and exercise.

    A. Yup, that's the kind of business it is. It's not a
business for dreamers or dealmakers.


    Q. People say you're pretty tough.

    A. I think I understand the mission of the company. When
we must do something, we will do it. Even if it is unpleasant.