Human Resources
The American Airlines (AA) was the biggest airline in the western part of the world at the start of 1992. AA had acquired over three times its revenue since 1980 that enabled to grow in the market stage. This went on while as it sustained profit for seven years in a row. In 1991, because of the Persian Gulf War there was a recession that led to a rise on costs in regard to revenue AMR, AA’s parent recorded a loss of about $240 million that placed strains on the operation of the company.
In the 1980s, AA’s Growth Strategy led to the decline of the average price of moving a passenger backed by cost declines; more so labor costs. But, in 1988 and 1991 the revenue growth was surpassed by a fats rise in the unit costs (Gary, 1991). This led to Robert Crandall, the CEO and Chairman of AA to trim $8 billion of the company’s $21 billion capital that set expense growth pointers to be lower than the growth ate capacity.
Labor costs played a huge role in AA’s operational expenses and the contracts signed 1991 with pilots and mechanics, ticket and reservation agents that stated increase in labor cost. Hence in 1992, AA declared a trim in the staff size in most cities (Gary, 1991). This was bound to affect close to 1200 jobs.
The competition in the airline industry took place with regard to model, quality of service, market and cost. Most of the competitors for AA were United and Delta. AA came up with a reservation system, SABRE and used close to $150 million in the computer system that made it possible for the staff to track and rectify incidents of late arrival or loads that are lost to offer great level of client service.
Crandall’s move to presidency and CEO of the Airlines Company led to a decline in cost through the use of some innovative methods. The company started to use growth strategy to average a decline in costs through a drop in the size of staff for every dollar of revenue and cost of using them (Gary, 1991). The first step he used was bargaining with TWU to bring down the salary and use policies through threatening to liquidate the company. He applied this negotiation to follow the idea of two tier compensation model where all of the new staff acquired had to begin at a greatly lower salary – about half the present levels – while the senior staffs went on to follow the existing contracts.
This new two tier model would facilitate the American Airline company to limit costs and raise revenue. Even though there were reduced salary, the company was swamped with applications due to incentives that is reduced travel rates for the staff. The move to restrain labor costs would involve two strategies; one was salary reduction and the other one was efficiency enhancement, Crandall was well aware of this. Several promotion efforts in 1981, the President’s Conferences and 1983 the QWL program so as to enhance communication with the staff (Gary, 1991).
In 1987, the American Airlines began a Peak Performance through Commitment (PPC) initiative and a program to train staff on motivation (Gary, 1991). The leadership program was incepted with a focus in training the staff, agents, attendants and crew. The tier structure was changed making the new recruits to the pilot and engineers as they got in at poor market rates, they got integrated with the huge pay scales after some time (Gary, 1991). This rendered an end to the two tie model. Growth had made American Airlines to develop from 244 planes to 2 hubs and 42500 in staff to 622 places, 7 hubs and 114000 in staff for seven years.
The biggest elements facing American Airline was to drop the operating cost and make it effective with the rise in revenue. The cost that led to high operating cost was labor cost that was noted in the salaries of the pilot that called for control. This labor cost accrued to 33% with the pilots adding 9% of the cost.
A new issue that faced the company was the rise in the cost of fuel that increased by over 70%. This led to addition of costs of the fuel of about $2 million hence increased pressure (Gary, 1991). A bigger issue was to manipulate staff relation that was vital to acquire strategy based in the cost decline and a front line client service, with affecting all of the company’s prior actions to formation of commitment.
American Airlines ought to uphold its staff for an effective cost decline. Satisfaction of the staff is necessary for the decline strategy of the wages. The pilots, more so, play a greater role. Hence, effective agreements ought to be used that will in the favor of the parties and will not affect the company in terms of strikes or threats (Gary, 1991). The company ought to be ready for the impending life like fuel cost and that the company’s operation. Additionally, AA ought to meet the needs of the unions and other staff as they have the ability to protect the company’s operations.
These steps are based on the success of the company on the balance plan and the cooperation of it staff. Hence for the drop in wages, the staff have to be involved. The most notable contributor in the operation cost is labor cost which calls for good management so as to offer staff satisfaction and acquire staff backing.
The steps may however, suffer from certain limitations; it is hard to offer satisfaction to company staff. Additional efforts to this plan may lead to leverage on staff’s part and a decline in efficiency. Forecasting would be hard as it does not give an exact figure of what it is (Gary, 1991). Another thing is that the focus on one issue would lead to other issues. Like the focus on decline in labor cost may lead to other issues cropping up that would affect operating cost. Moreover, the company is bound to face additional issues by bending to staff demands this could adversely affect AA’s management in the coming period.
Opposing views state that if staff are not contented, they will not accord complete commitment and this would affect the company’s efficiency. Moreover, by not projecting anticipated issues to a certain level, it may make the company be vulnerable to impending aspects. Additionally, if the AA does not accord focus to major issue it is facing, like labor cost, hence even with extensive focus on the company, it will not comprise of operating cost. The company is therefore placed at a difficult point that may affect its operations.
Reference
W. Gary (1991). Human Resource Management at American Airlines. Harvard: Harvard Business Review.
