Business Insight Zone

Smooth landing ahead for American?

Since last week, I’ve been mulling what to say about the cuts that American Airlines and Ford Motor each announced. (More details on the restructurings here and here.) While I’m not sure how much good the changes will do for each company, I am pretty sure that both companies are at least thinking along the right track.

Here’s the deal: In the golden age of mass air travel, the airlines could afford to carry your checked bags for free and serve you meals or snacks at a moderate price in no small part because fuel was cheap. This is a fairly straightforward proposition, and regardless of how well or how poorly American has been managed in recent years, its CEO, Gerard Arpey, was right when he said “The U.S. airline industry as it is constituted today was not built for $125- or $130-per-barrel oil.” The system as it currently exists wasn’t built to withstand fuel prices this high.

Ford, similarly, grew to great size in an era when fuel wasn’t a big concern because it was abundant and inexpensive. In fact, Ford was the biggest car maker in the world during the early 20th century, when the United States was also the world’s top producer of crude oil. When cheap fuel is as ubiquitous as clean tap water is for Americans, you tend not to think about it. When the stuff is repriced at two . . . three . . . four times what it was just a couple of years ago, something has to give.

Thus, higher ticket prices. Thus, less pickups and more small cars. Welcome to the new order of things.

Keep in mind, there have been huge structural problems in the U.S. airline business anyway. There have been persistent disconnects with reality in the U.S. automotive business anyway. Both of those industries have needed wrenching change for a long time. Some companies in those industries have changed the game for themselves by managing themselves better; the poster children for this are Southwest under the recently-retired Herb Kelleher and the amazing U.S. arm of Toyota. But the industries as a whole have continued to change at a geologic pace. They’ve been retarded by layer upon layer of resistance, whether from government regulation, tough bargaining on labor contracts, or what have you.

But much of that resistance is crumbling in the face of the broad, historic shift in oil prices. It’s still going to be a long time before the U.S. airline industry rights itself (if it ever does), and Detroit regains its relevance (if it even can). You don’t turn one large company on a dime, much less an industry filled with them, and much less when the industries are as capital-intensive as airlines and car makers.

If you’re smart, though, you pay attention to the big shifts — you distinguish changes in the “landscape” from changes in the “weather” — and you start turning the wheel. Probably you take a hit in your stock price. (American’s shares have started to rebound a little since last week; Ford’s shares, not so much.) Probably you take flak for unpopular moves like charging $15 for checked bags. But you start the process of change.

Because that change must come sooner or later, and it must come for all the players who hope to survive in the new landscape. Earlier movers like American and Ford might get the jump on the “hard” changes to inventory and logistics, which should free them up sooner to make “soft” changes to things like, I don’t know, abysmal customer service and lackluster car designs.

It’s gonna be hard for the workers who get laid off. Hard, too, for suppliers, managers, and the workers who are left to pick up the slack. In the long run, though, it should be better for customers — and for the companies themselves.

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(Photo by egmb757lover.)