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My Lunch With Bob Crandall:

One of the best aspects of Harvard Business School is the amazing access students have to business leaders. Last week I flew to D.C. to meet with the CEO of Maxjet, then to Atlanta to interview the President of Delta and on to West Palm to have lunch with Bob Crandall, former CEO of American Airlines.
Crandall had invited Robert Carey (OH), Christian Charnaux (OC) and me to have lunch at his home in West Palm Beach, FL so we could interview him for our field-study project.

Crandall was named “the man who changed the way the world flies” by The Wall Street Journal after 25 years at American Airlines. He joined the airline in 1973 as CFO, became President in 1980 and then CEO from 1985 to 1998. He led American Airlines to sky-high profits through the creation of the first frequent-flier program, deep-discount fares and cutting-edge reservation systems-all innovations that soon became industry standards.

In 1983 he launched an expansion program which more than tripled American’s size and transformed it from a medium-sized domestic carrier to one of the world’s leading international airlines with revenues of more than $20 billion.

Crandall spent the first five minutes of the interview shooting down the new airline concept we had developed for our field study. But that’s his style: opinionated and direct. He then shared his incredible life story and thoughts on the future of the industry.

Crandall was a controversial figure at the airline. However, he is now in much better favour because the changes he led are widely recognized as having transforming the airline. In fact, now employees even tell him they wish he were back in charge.
Looking back on his introduction of the first airline rewards program, Crandall seemed proud. “The key to the success was that we automated the system. It took the other airlines two years to catch us. In the meantime, they had to give out stamps!” he said. The program captured substantial market share while other airlines struggled to catch up.

Looking to the future of the industry, Crandall expressed mixed views. Unlike many in the industry, he believes air taxis and fractional ownership will not disrupt the major airlines. According to Crandall, “Even if you have 500 VLJ’s flying, you probably won’t produce more seat miles than a couple of 767s. I doubt these small airplanes will have much impact on the major carriers.”

Crandall was pessimistic about the future of new start-ups Eos, Virgin America and Skybus because of the aggressive nature of competition in the industry. “If you come into my market I’m going to do all I can to drive you out. I will drop my prices and double frequency,” he exclaimed. He saw a new entrant’s cost advantage as irrelevant, because it would not prevent a competitive response. The major airlines cannot give up their markets and will match any price. “There’s so much dumb money funding these start-ups. Why won’t they accept that some things will not work,” he said.

Crandall thinks the so-called “legacy carriers” will get through their tough times and continue as mainstays of the industry for years to come. He does think some of today’s hubs – places like Cincinnati and Salt Lake – will cease to function as hubs, a development that will make the legacies stronger by enabling them to more appropriately price short-haul routes.

According to Crandall, “The hubs are the key to how the U.S. airline market will look in the future.” He believes short-haul flying is too cheap, especially flying into hubs, and that short-haul prices must rise sharply.

The former American CEO does not see the broad improvements needed in union relations. Airlines cannot afford strikes, which means airline unions will remain strong.

“Unhappily,” he said, “U.S. bankruptcy laws encourage airlines to dwell in bankruptcy and emerge with lower costs, thus enabling them to threaten the welfare of the airlines that have not gone bankrupt. And although the unions lose something during bankruptcy, the penalties are not sufficient to make them the responsible negotiating partners they need to be.”

Crandall is vehemently against the government’s Open Skies policy. “Open skies are a disaster for the U.S. carriers,” he said, adding, “The U.S. accounts for more than 50 percent of world traffic, and there is no point in allowing foreign carriers to participate in that traffic. It is particularly stupid to allow foreign carriers to buy interests in U.S. airlines since there is no shortage of capital in the U.S. The only reason an international carrier would buy a U.S. carrier is to eliminate competition.”

It will be interesting to see just how accurate Crandall’s predictions are. He reminded us of the saying “He who refuses to learn from history is doomed to repeat it.” Given his lifetime in the industry, one would certainly expect him to be spot on.

April 10, 2006
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