The one thing that analysts and industry watchers have wanted to see in American Airlines is something better than the incremental strategy of holding the line and hoping other competitors costs rise.  They want to see something transformational instead.

To the outside, the big aircraft order announced by American Airlines was transformational and it certainly obscured the bad news of the 2nd quarter financial results.  American had lost millions while its chief competitors earned millions. 

The aircraft order really wasn’t transformational.  If anything, it reflects AA’s incremental approach to its problems.  Those aircraft aren’t arriving next year.  In fact, they’re not arriving for 2 more years and even then they’ll be arriving over roughly a 10 year period with the re-engine aircraft not arriving until 2017 (Airbus) and 2018 (Boeing). 

In the meantime, American has to deal with American today in 2011.  It’s increased numbers of newer, more efficient aircraft don’t start until 2013.   So what does it have on its plate today?

First, my favorite bone to pick:  it has not gotten labor agreements with its unions and what is worse, they appear not only to be far away from these agreements.  In many cases, talks have been largely on hold or barely running for the past year.  This has had two effects.   The markets don’t like the uncertainty in this area and rightfully so.  It indicates that the airline isn’t taking its costs seriously enough and the same is true for its service product.  In addition, it (AA) has created a serious morale problem among its employees.

Second, how long can a huge airline continue to operate with losses that approach $1 Billion per year?  You can mortgage your assets for more cash all you want but at the end of the day $1 Billion per year is one hell of a loss to sustain over and over again.  The truth is, airlines can operate for years with losses because of the cash flow they produce.  However, they are never too big to fail. 

In addition, there is always a day of reckoning that arrives when problems aren’t dealt with .  Again, in the airline industry, you can put this off for years but that day of reckoning has a way of arriving that surprises everyone when it does come.  The perfect storm of bad conditions for an airline finally coalesces and we start reading that the airline is in such a dire situation it can’t make its payroll much less its fuel bill.

American’s board of directors and, more specifically, its executive leadership in the form of Gerard Arpey, Bella Goren, Tom Horton and Dan Garton seem intent on preserving current shareholder value as opposed to leading an airline into the next decade.  This team resembles the wealthy guy that never seems to have problems who we one day discover is living in a beautiful house with no furniture because he had to sell it all to maintain his image. 

There is no question that having astute financial managers is critical for airlines today.  There is equally no question that no airline succeeds and earns a profit without being innovative and market leading and paying attention to the customer. 

Look at every airline earning a substantial profit (relative to their revenues).  Every last one of them is being led by a team that is focused on its customers and its service model.  They are open with their employees, focused on making their customers happy and investing constantly for the future.  When they have problems, they dig into them and find real solutions.   And they make no lame apologies for poor performance when that happens.

American Airlines is the antithesis of this.  And lest you believe this exists only in American Airlines, I would point you to jetBlue who, since David Neeleman’s departure, has been focused on the status quo as well.  They aren’t earning and they certainly aren’t enjoying real growth.   And take a look at failed airlines of the past such as Pan Am, TWA and Eastern Airlines.  The resemblence to American Airlines behavior is shocking.  Each of those airlines engaged in a similar pattern of behaviour for a long time and suddenly found themselves in the middle of that perfect storm that led to their demise (arguably TWA had righted itself but, unfortunately, this was done about 2 years too late.) 

And take a look at the airlines who turned themselves around.  The most popular story told is that of Continental Airlines.  Any airline that has had to recover itself has done so with transformational behaviour, not with incremental steps.  That transformational behaviour has always focused first on improving employee relations and, second, improving customer experiences.  It’s never been about floating more debt to survive.

Transformational behaviour comes from leaders, not managers.  They are different animals.  Great leaders hire great managers but they lead from the front rather than hiding behind a telephone conference call with analysts every quarter.  They get out there and work like crazy to communicate and set good examples and to connect with customers.  They lead and their employees follow that leadership.

Yes, economic times are very tough today and many companies have real problems.  For many businesses, this is an era of survival and I get that regrouping is sometimes necessary.  But even the other industries that were in far worse shape than the airline industry are engaged in transformational change.  GM is suddenly producing cars that by any measure are the equal of Toyota’s and they’re earning real profits.  Ford got exactly the right guy for leading their company through such an intense crisis in the car manufacturing business and he managed to avoid bankruptcy where the other two didn’t. 

And we have American Airlines relying on partnerships with other, healthier airlines who, in many cases, are engaged in transformational behaviour and, at the least, who are led by people who are leaders rather than managers.  The intent of these partnerships, in AA’s view, is to add incremental revenue.  AA has signaled its intent on letting its partners be transformational and hopes that it can skim the benefits wherever possible. 

But AA doesn’t take a hint from these other airlines and it isn’t taking risks and it isn’t being transformational.  How long before its own partners begin to doubt the value of being aligned with American Airlines?

I don’t know why anyone would buy one share of stock in AA today.  The current leadership team has been in place more or less for 10+ years.  In that time, its fought battles with the intent of maintaining the status quo rather than winning.  There is absolutely no evidence, none whatsoever, that this team wants to lead.  What value is there in investing in a company that isn’t being honest with itself?  Invest in Southwest Airlines or even United Airlines.  Invest in Costco or J.P. Morgan Chase.  Invest in companies that are acting honestly and addressing their own issues honestly (successfully or not).  Invest in companies that show leadership rather than mere deft cash management.

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