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The Long Haul

As airlines struggle to survive, the role of finance in decision-making takes off.

Another obstacle he sees: “The natural instinct of CFOs is to maintain liquidity, because that maintains their flexibility. I’m not suggesting that the obsession with liquidity is wrong, but building up cash reserves has been a problem” in cases where airlines have other needs, such as keeping the labor force happy.

American “Wins”

In terms of actual flexibility — the basic ability to change with the times and make money — America West, the nation’s eighth-largest airline, has shown some signs of developing into a survivor that could one day rival number-six Southwest.

From their conference room looking north across Arizona’s Salt River to the red mesas beyond, Doug Parker and his CFO, Derek Kerr, talk about their experiences since their high-school days together in Farmington, Michigan. Kerr became an aerospace engineer, working for a time on the B-2 bomber program before moving to American, and later Northwest, to work with Parker in finance. Parker joined America West as CFO in 1995, and Kerr followed the next year, becoming senior director of planning. The two men clearly believe that legacy carriers have handicapped themselves in recent years by failing to recognize their real low-cost competition.

“I think they looked too much at each other; they viewed the industry as American, United, Northwest, and Delta,” says the 43-year-old Parker, three years Kerr’s senior. “American was clearly interested in making sure it was better than United. And at the end of the day, it won that game: it was bigger and more profitable, so United went into bankruptcy first.” Meanwhile, though, “Southwest was doing much better than all of them put together. And that opened the door to others that could do a good job of keeping their costs low.”

When it started up in 1983, America West, too, used the legacy-carrier model, worrying less about fare competition than about offering full service through its hubs in Phoenix, Las Vegas, and Columbus, Ohio. While designed with a lower cost structure than its rivals, America West lost some of that advantage in the small-margin Las Vegas market. Like most competitors, it had severe ups and downs. Overexpansion led it into bankruptcy in the early 1990s, but it then established a solid profit-making record until economic woes hit the airline hard early in 2001. The terrorist attacks caught it cash-short, making it among the first carriers to seek a federal loan guarantee.

Parker, named CEO only days before 9/11, says that corporate “near-death experience” had a profound effect on his view of the future. “The fact that we got that close makes you rethink the entire business model,” he says. His conclusion: “Let’s just change everything we’ve ever thought about ourselves.”

Good-Bye, Columbus

The airline’s recovery plan started with a study of the carriers that performed best after 9/11. “There were smaller airlines getting higher revenues than we were,” notes Parker. “Frontier was one, because it had a price advantage.” The major carriers, he says, had decided not to match Frontier’s initiative of reducing fares for tickets purchased less than seven days in advance, the kind of business service that gave airlines a large price premium. The following March, America West eliminated the Saturday-stay requirement and matched Frontier’s late-purchase discounts.

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