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Organizational Behaviour

Case Analysis HRM at American Airlines

Submitted By :
Akash Kumar Rajput MBA (1st Year)

Executive Summary :
American Airlines (AA) was largest airline in the western world in the beginning of 1992. AA had more than tripled its revenues since 1980, while maintaining profit for 7 consecutive years (1983-1989). In 1991, due to Persian Gulf war(a recession) and more rapidly increasing costs compared to revenue AMR, AAs parent, registered a loss of $240 million on $12.9 billion revenue. During 1980s, AAs Growth Plan lowered the average cost of transporting a passenger supported by cost reductions (particularly labor costs). However, between 1988 and 1991 revenue growth was outpaced by sharp increase in unit costs. So Robert Crandall, CEO and Chairman of AA cut $8 billion out of AAs $21 billion five-year capital spending plan setting expense growth targets well below the growth rate of capacity. Labor costs were AAs largest operating expense and the contracts signed in Feb. 1991 with pilots, in Oct. 1991 with mechanics & ramp workers, in May 1992 with ticket & reservation agents implied more increase in labor cost. So in Jan. 1992 AA announced staff reduction in several cities affecting 1,250 jobs. The competition in airlines business occurred on the basis of route structure, quality of service, marketing program & price. The main competitors for AA were United and Delta. AA introduced SABRE reservation system and spent $150 million on computer system which allows workers to track down and correct incidents of late arriving or lost luggage to provide a higher level of customer service. As Crandall became president & CEO of AA, he started cost reduction by applying some innovative ideas. AA embarked on a growth strategy to average down costs by reducing both the number of employees per dollar of revenue and the cost of employing them. The first initiative taken by Crandall was bargaining with TWU to reduce wages and work rules by threating to shrinking or liquidating airline.

Crandall used this negotiation to broach the idea of a two tier compensation system under which all new employees hired would start at significantly lower wages- roughly 50% of existing AA levels- while old employees continued working under the existing agreements. This new two tier system helped AA to reduce costs and increase revenue. Despite low starting wages AA was flooded with new applications because of incentives, i.e. very low travel rates for employees. Crandall realized that restraining labor costs would be a two part effort: one part wage rate reduction and one part efficiency improvement. He launched many campaigns as Presidents Conferences in 1981, QWL program in 1983 to increase better communication with employees. In 1987, AA started a Peak Performance through Commitment (PPC) program to counsel, coach and motivate employees. In 1988, Committing to Leadership (CTL) program was initiated where classroom training was held for management personnel, lead agents, crew chiefs, Admirals Club Chief Skippers and flight attendants. In the period between 1983 and 1989, intervening contracts had altered the two tier structure such that while new pilots, co-pilots and flight engineers still entered at lower market rates, they merged with the higher pay scales after a few years. This brought an end to two tier system. Growth had taken AA from 244 planes, 2 hubs and 42500 employees in 1983, to 622 planes, 7 hubs and 114,000 employees in 1991.

Problem Analysis : The biggest problem for AA was to reduce operating cost and make it manageable with the increase in revenue. The cost which contributed in operating cost most was labor cost. The component which contributed most in labor cost was the wages of pilots and co-pilots, which needed to be controlled. Total labor cost accounted for 33% of operating costs with pilots alone constituting roughly 9 % of operating costs.

The new problem was that from the beginning of August to the end of October 1990, the cost of fuel jumped by more than 70%. For AA, a 1 % rise in the price of a gallon of fuel added $2 million a month to costs. One bigger problem was to continue to forge the employee relations necessary to achieve a strategy premised on cost reduction and an industry leading customer service, with jeopardizing all of AAs previous efforts towards commitment building.

Alternative Analysis/ Recommendations: Outline of Solution:

AA needs the support of all its employees and staff to implement effective strategy for cost reduction. The employee satisfaction in accordance to the strategies implemented for cost reduction is extremely necessary. The major part in cost is played by the wages and salaries of employees especially pilots and co-pilots. So, proper contracts need to be employed which will be in favor of both the parties and will not jeopardize AA by the threats of strikes or increased wages. AA needs to be prepared for unexpected future unit cost changes such as fuel cost increase in 1990 such that these un-expectancies do not affect the companys operation. The company also needs to satisfy unionized as well as non-unionized worker and employees apart from pilots and co-pilots because they also have the power to hinder the companys operations.

Justification :

The success of any company depends on the balance of its strategy and the cooperation level of its employees towards the strategies. So, if AA wants to reduce costs in order to balance its revenue, employees support is essential. The biggest participant in the operating cost is the labor cost, so the labor costs need to take under control while as well as providing employee satisfaction as well as gaining employee support. Every company needs to be prepared for future unpredictability so that it does not create a heist. So, AA needs to be well prepared for such circumstances.

Argument :
It can be argued my solution suffers from the following drawbacksIt is extremely difficult to provide satisfaction to each and every employee of the company. More efforts towards this strategy may result in leverage on employees part and reduced efficiency. Forecasting is not an exact science, so it is almost impossible to predict all uncertainties that company might be encountering in future. Sometimes, focusing on one aspect of a problem leaves all the other aspects unnoticed. While, AA is focusing on cost reduction by reducing wages and improving efficiency, some other factors may be encountered in future that will increase AAs operating cost and are left unnoticed by the company. So, the company needs to have a broader view of problems. If the company keeps on accepting all the demands of employees, especially pilots and co-pilots, it will create a negative impression on AAs management and will further increase the chance of same thing happening again and again.

Counter Argument:

If the employees are not satisfied they will not give their 100%, which will reduce the companys efficiency as a whole. Without predicting future uncertainties up to an extent will leave company vulnerable to future changes. If AA does not focus on the major problem it is encountering, i.e. labor cost then in spite of having a broader view the company will not contain operating cost.

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