Contact: Meredith Dickenson or Ellen Sterner
mmdicken@smu.edu
(214) 768-7654

September 11, 2003

Don Carty Transcript:
September 11, 2003

1 P R O C E E D I N G S

 

2 MR. ATTANASIO: I'm sure everyone

 

3 remembers where they were two years ago on September

 

4 11th.

 

5 I was listening to a radio station, getting

 

6 ready for school, and a story came over saying that a

 

7 small plane had crashed into the World Trade Center.

 

8 And I was like, Gosh, that would be a horrible thing

 

9 even if a small plane crashed into the World Trade

 

10 Center.

 

11 And I turned on CNN. CNN was already on the

 

12 spot. And they thought it was a small plane that had

 

13 crashed into the World Trade Center. And there was a

 

14 thought of terrorism, but not much. And a few minutes

 

15 later, a large plane crashed into the other tower of the

 

16 World Trade Center, and the whole world changed.

 

17 So what I'd like to do, to begin, is if we

 

18 could pause for a few moments and remember those who

 

19 suffered tragedy that day, passed away that day, and

 

20 then we'll begin.

 

21 (Moment of silence.)

 

22 MR. ATTANASIO: Okay. It gives me great

 

23 pleasure to introduce our distinguished panel today.

 

24 Mr. William Coleman became the nation's fourth

 

25 Secretary of Transportation on March 17th, 1975, when he


2

 

1 was administered the oath of office in a ceremony

 

2 conducted by President Gerald Ford at the White House.

 

3 Secretary Coleman entered office following a

 

4 distinguished career in law, business, and public

 

5 service, that included advisory consultant -- that had

 

6 included advisory and consultant to six former

 

7 Presidents and the current president of the United

 

8 States.

 

9 At the time of his nomination, he was

 

10 practicing law as a senior partner. He was also

 

11 director of Pan American, World Airways, Penn Mutual

 

12 Life Insurance Company, First Pennsylvania Corporation,

 

13 Philadelphia Electric Company, and Western Saving Fund.

 

14 He was also a member of the Board of Governors of the

 

15 American Stock Exchange and a Trustee of both the Rand

 

16 Corporation and The Brookings Institute.

 

17 Secretary Coleman graduated magna cum laude in

 

18 1941 from the University of Pennsylvania. And in 1946,

 

19 he graduated magna cum laude from Harvard Law School,

 

20 where he was first in his class and a member of the

 

21 Board of Editors of the Harvard Law Review.

 

22 He was certainly an underachiever. It always

 

23 helps the rest of us to say something like that.

 

24 He clerked for a United States Supreme Court

 

25 Justice, Justice Frankfurter. In 1959, he was a member


3

 

1 of the 24th session of the United Nations General

 

2 Assembly. He's held any number of government jobs, but

 

3 since we want to get to this, I won't go through all

 

4 those.

 

5 He's an ardent defender of civil rights. He

 

6 was one of the authors of the legal brief that persuaded

 

7 the Supreme Court of the United States, in 1954, to

 

8 outlaw segregation of public schools, that would be

 

9 Brown versus Board of Education, of which we're about to

 

10 celebrate the 50th anniversary.

 

11 He served as a member of the National Legal

 

12 Committee, Director of the Executive Committee, and

 

13 President of the NAACP Legal Defense and Education Fund.

 

14 He's served on the Board of Directors of Chase

 

15 Manhattan Bank, IBM, Pan American, World Airways,

 

16 PepsiCo, the American Stock Exchange, among others.

 

17 He holds honorary degrees from Harvard and

 

18 from Yale, University of Pennsylvania, Howard, Tulane,

 

19 Georgetown, and Columbia, to name a few of them.

 

20 In 1979, the President of France nominated him

 

21 as officer of the National Order of Legion of Honor. In

 

22 1995, he received the Presidential Metal of Valor.

 

23 Please welcome William Coleman.

 

24 (Audience applauding.)

 

25 MR. ATTANASIO: Donald J. Carty is


4

 

1 retired Chairman and Chief Executive Officer of AMR

 

2 Corporation. He had served in that position since 1998.

 

3 He also held the role of President of AMR Corporation,

 

4 and prior to that, served as President of the AMR

 

5 Airline Group, American Airlines.

 

6 Between 1989 and 1995, Mr. Carty was Executive

 

7 Vice President for Finance and Planning for AMR and

 

8 American Airlines, overseeing a broad range of strategic

 

9 planning matters and a wide array of critical financial

 

10 activities.

 

11 Mr. Carty had been American's Senior Vice

 

12 President and Controller before leaving the airline in

 

13 March of '85 to become president and CEO and CP of Air

 

14 Canada.

 

15 In March of 1987, he returned to American and

 

16 was elected Senior Vice President -- Senior Vice

 

17 President for Airline Planning.

 

18 Before joining American, Mr. Carty spent seven

 

19 years in various management positions in Celanese

 

20 Canada, Air Canada, and the Canadian Pacific Railway.

 

21 Mr. Carty is a graduate of Queen's University

 

22 in Kingston, Canada, where he holds an honorary -- he

 

23 holds an Honorary Doctorate, and also from Harvard

 

24 Graduate School of Business Administration. He is

 

25 recipient, as I said, of an Honorary Doctorate from


5

 

1 Queens.

 

2 He serves on the Board of Directors of Dell

 

3 Corporation, Sears Roebuck & Company, as well as Big

 

4 Brothers Big Sisters of America, and a number of local

 

5 civic organizations.

 

6 He is a member of the Board of Trustees at

 

7 SMU -- he's playing hooky for lunch today, which is very

 

8 important. We thank President Turner for loaning him to

 

9 us for this session -- as well as the Harvard Business

 

10 School Visiting Committee, the Advisory Board of the

 

11 Kellogg Graduate School of Management at Northwestern

 

12 University, and the SMU Cox School of Business Executive

 

13 Board.

 

14 In September of 2002, he was appointed by

 

15 President Bush to the National Infrastructure Advisory

 

16 Committee. In January 2003, he was named an Officer of

 

17 The Order of Canada, that country's highest honor for

 

18 lifetime achievement.

 

19 Please welcome Mr. Donald Carty.

 

20 (Audience applauding.)

 

21 MR. ATTANASIO: John J. Nance is a

 

22 graduate of this law school. He is a licensed attorney

 

23 who received his bachelor's degree from SMU and his JD

 

24 from the SMU School of Law.

 

25 He is a decorated Air Force pilot, a veteran


6

 

1 of Vietnam and Operation Desert Storm/Desert Shield. He

 

2 is also Lieutenant Colonel in the United States Air

 

3 Force Reserve, well known for his involvement in Air

 

4 Force human factors flight safety education.

 

5 John has piloted many aircraft. He flies his

 

6 own aircraft and is a veteran Boeing 737 captain for a

 

7 major airline. He's flown 727s, 737s, 747s and C-147s

 

8 for the Air Force. He's logged over 13,000 hours in the

 

9 air.

 

10 He's an internationally recognized air safety

 

11 analyst and advocate, best known to North American

 

12 television audiences as aviation analyst for ABC

 

13 Television Network, and is aviation editor for Good

 

14 Morning America. As such, he was intimately involved in

 

15 the reporting of the events of September 11th.

 

16 John has had multiple appearances on Larry

 

17 King Live ... (inaudible) ... the Oprah Winfrey Show,

 

18 NPR, The Today Show, and many, many others. His

 

19 editorials have been published in newspapers nationwide,

 

20 including USA Today and New York Times.

 

21 He is a nationally known author of 13 major

 

22 books, including four non-fiction and eight fiction best

 

23 sellers, two of which, Pandora's Clock and Medusa's

 

24 Child, both aired as major successful two-part mini

 

25 series on television. You can do other things besides


7

 

1 practice law with a law degree.

 

2 John is well known in ... (inaudible) ...

 

3 resource management and expanded human performance

 

4 training, and is a dynamic professional speaker and

 

5 consultant. In fact, he's so dynamic, he's going to

 

6 have to leave here a little bit early because he has a

 

7 speaking engagement in Las Colinas. And so we're

 

8 delighted he came for this period of time.

 

9 He speaks to a wide variety of audiences,

 

10 including medical and pharmaceutical professionals, CEOs

 

11 of major business-oriented corporations, and

 

12 environmental, aviation, engineering, and travel

 

13 oriented groups.

 

14 He is a founding member of the Executive

 

15 Committee of the National Patient Safety Foundation, and

 

16 he is a member of the Executive Board of Dedman School

 

17 of Law.

 

18 Please join me in welcoming John Nance.

 

19 (Audience applauding.)

 

20 MR. ATTANASIO: Before turning the podium

 

21 on to John Nance, I need to thank a couple of people.

 

22 One is Brent Walsh of the Air Law Journal for sponsoring

 

23 this. Another is Al Casey, former CEO of American

 

24 Airlines and a number of other companies, former

 

25 Postmaster General.


8

 

1 Al, John Nance, and I did a conference a few

 

2 years ago on the events of September 11th with the Air

 

3 Law Journal, and this is a follow on to that conference.

 

4 So I want to thank Al and the Journal in particular.

 

5 (Audience applauding.)

 

6 MR. NANCE: Thank you very much, John.

 

7 It's a bit humbling to be here in the presence

 

8 of such talent here, not only our good Dean, but also,

 

9 of course, Mr. Coleman, with whom I have been familiar

 

10 for many, many years, and Don Carty the same thing.

 

11 Tremendous achievements on both people's behalf for so

 

12 long in aviation.

 

13 Let's start with this: 100 years ago, one

 

14 century ago, there was a powered flight. I mean, we all

 

15 know that. This year, in December, is the celebration

 

16 of the Wright brothers' first flight.

 

17 I made the statement not too many years ago

 

18 that arguably the greatest technological achievement of

 

19 mankind was aviation, and commercial aviation in

 

20 particular. I thought I was going to get shot at, but

 

21 nobody has taken me to test for it. Arguably, I say.

 

22 That's always a good lawyer thing to throw in.

 

23 What I want to do is focus on the future of

 

24 aviation, the next three to five years, as well as

 

25 further down the road today.


9

 

1 I know that I've got a lot of my fellow

 

2 journalists here in the room. And if you would, please,

 

3 when we get to the question-and-answer portion, we want

 

4 to confine it to the future. Now, anything that you

 

5 want to ask of Mr. Carty or Mr. Coleman later on is

 

6 between you and them. But in the meantime, in the

 

7 question-and-answer session, we want to stay focused on

 

8 the future, because we have something to focus on.

 

9 And I will have to excuse myself, and I do

 

10 apologize in advance. I will have to get out the door

 

11 here and turn it over to John at a certain point.

 

12 But let me start this way: Before we can

 

13 truly discuss the effects of the free market, terrorism,

 

14 change in customer habits, expenses led by new security

 

15 measures, rising fuel costs, and the need to grabble

 

16 with all the other things the airline industry has been

 

17 faced with since 9/11, I think we need to focus on a

 

18 couple of questions. I'm going to lay them out here and

 

19 then go on and pose them to the panelists first. These

 

20 questions are these. I'd like everybody to think about

 

21 this:

 

22 How important is the airline industry to the

 

23 people of the United States as a stable and predictable

 

24 entity? That's something we take for granted, but we

 

25 really need to focus on that, because it's a predicate


10

 

1 for everything else that we're going to discuss. How

 

2 important is the industry? Secondly, how important is

 

3 the airline industry to the economy of the United

 

4 States?

 

5 Two years ago, one of the questions that we

 

6 grabbled with was, What's going to happen if the airline

 

7 industry does not recover? And we're still limping

 

8 along in many different respects. So if you'd use that

 

9 as a predicate, gentlemen.

 

10 Let me start, if I could, with former

 

11 Secretary Coleman and say -- well, the first question

 

12 that I would like you to grabble with is this one: If

 

13 you were giving a state-of-the-industry speech today on

 

14 the airline industry, what would your summary outline

 

15 say?

 

16 MR. COLEMAN: Well, I probably would go

 

17 and first ask you to write it.

 

18 I think that the American people should

 

19 recognize that the airline industry is a very, very

 

20 extremely important industry. In fact, I think that at

 

21 least 3 million people get their jobs directly or

 

22 indirectly from the airline industry. Not only do you

 

23 have those on the airline, but you have those in the

 

24 aerospace industry, you have the federal screeners, you

 

25 have the food shops at the airport.


11

 

1 In fact, I've seen documents that would say

 

2 somewhere between 12 and 13 percent of the American

 

3 economy depends directly or indirectly upon the airline

 

4 industry, including the aerospace part of it.

 

5 Secondly -- and there's an argument both ways,

 

6 and I've heard it both ways, that either the airline

 

7 industry is, in part, subsidizing defense industry in

 

8 connection with building new aircraft, or vice versa,

 

9 the defense industry is subsidizing the airline

 

10 industry. Now, I've heard that argument both ways, but

 

11 either way it shows it's a plus.

 

12 Having said that, I think the airline industry

 

13 today faces about eight basic problems. And if they can

 

14 recognize those, then I think they will have a solution

 

15 to having profitability that they should have.

 

16 I take it I should stop here and hope somebody

 

17 will ask me, first, what are the eight basic points;

 

18 secondly, how do you get out of the box? And therefore,

 

19 I turn it over to you, sir.

 

20 MR. NANCE: Thank you.

 

21 John Carty, let me ask you the same question.

 

22 If you were giving a state-of-the-industry speech, what

 

23 would it -- how would you assess it?

 

24 MR. CARTY: Well, you've got to agree

 

25 with Bill's conclusion. The airline business is


12

 

1 certainly fundamental to this country. And it is, after

 

2 all, our only form of inter-city transportation that's

 

3 worth speaking of, and is likely to be for some time.

 

4 It's just the nature of our geography and demographics

 

5 and those kinds of things. And it's going to be

 

6 increasingly important as other industry globalizes,

 

7 because, again, it's the only way of connecting places

 

8 around the world.

 

9 The state of the industry, however, is

 

10 obviously -- the entire industry is in pretty rough

 

11 shape. Even the relatively successful carriers are

 

12 struggling mightily.

 

13 Obviously, this is an industry that's

 

14 cyclical; there's a tendency for the business to be

 

15 cyclical, to be affected by another downturn.

 

16 But we have never seen the confluence of

 

17 events that have impacted the industry in the last few

 

18 years, ever in its history of a hundred years. Not only

 

19 have we had an economic downturn, we've had the events

 

20 of 9/11. Then the follow-up to all of that; which meant

 

21 increased cost of security; which meant the fear of

 

22 flying for many passengers; which meant concern about

 

23 the harassment of flying as a consequence of those

 

24 security measures; the resulting dramatic increase in

 

25 the cost of insurance for this industry; the subsequent


13

 

1 sky rocketing price of fuel as we anticipated the

 

2 situation in Iraq; a major accident by American

 

3 Airlines, that again, I think, shocked the confidence of

 

4 much of the traveling public, at least with respect to

 

5 one aircraft type. And if that weren't enough, we then

 

6 had Iraq; we had SARS; and in the case of American

 

7 Airlines, of course, we had a hailstorm out here at

 

8 Dallas Fort Worth that put a hundred airplanes out of

 

9 circulation.

 

10 So the industry is terribly damaged

 

11 financially. The balance sheets of these companies are

 

12 in the worst shape they've been in in many, many years.

 

13 A number of the major carriers are bankrupt, and others

 

14 are teetering on the brink.

 

15 And even, as I say, the successful new

 

16 business model carriers, like Southwest, are having as

 

17 much of a financial struggle as they've had in their

 

18 30-year history. So it's a tough time.

 

19 MR. NANCE: Let me follow up on that and

 

20 ask you this: When we have this kind of challenge --

 

21 two years ago, after 9/11, you had gone, and so many of

 

22 the other chairman, were almost instantly on Capitol

 

23 Hill, just like the head of Boeing was, saying that

 

24 something's got to be done, got to be done fast. We're

 

25 leaking money at an incredible rate. This industry is


14

 

1 too important for the Congress and the United States to

 

2 ignore.

 

3 This is predicated, it seems to me, on a

 

4 consideration, not only of a national interest in the

 

5 airline industry and a continuation of that and the jobs

 

6 and the economic impact, but also it brings forth a

 

7 question of just exactly what should be done by the

 

8 public and what should be done by the payors.

 

9 There is an increasing, in my view, stampede

 

10 towards the idea of fee for service on everything. So

 

11 that if we got it down to ludicrous extreme, in

 

12 governmental units we would have a toll booth at the

 

13 beginning of every residential street, because I don't

 

14 want to pay for your street, and I certainly don't want

 

15 to pay for his bridge. And we have this idea of

 

16 privatization of various things, including air traffic

 

17 control, coming up.

 

18 Within that context, considering that these

 

19 are businesses, even though vital, and even though we've

 

20 somewhat discarded the definition of public utility in

 

21 dealing with deregulation, what should we do, as a

 

22 people? How should we handle this?

 

23 Let me start with you, Bill.

 

24 MR. COLEMAN: Well, I think that the

 

25 airlines, in my judgment, acted rapidly, and Congress


15

 

1 responded rapidly, and I don't think that they really

 

2 came to grips with the real problem. And I also think

 

3 that's a problem that did come with it in that the

 

4 airlines haven't taken advantage of it correctly.

 

5 The Congress did pass the Transportation

 

6 Safety System Stabilization Act. They committed

 

7 $10 billion. The purpose of that bill really was to

 

8 induce the airlines to reorganize. They haven't really

 

9 done that.

 

10 Instead, those that have gotten the guarantee

 

11 under that $10 billion are not the airlines, with all

 

12 due respect, that are going to make the difference in

 

13 the long run. And whereas, with respect to United and

 

14 U.S. Airways, they haven't been able to convince the

 

15 government that they should get it. I think that

 

16 before -- part of government stepping in, they first

 

17 have to face up to the labor problem.

 

18 Now, having never run for public office, I'm

 

19 not qualified to tell a Congressman or Senator as to

 

20 what you should do, because obviously the unions excise

 

21 great pressure, but just look at it.

 

22 I think the airline industry is the worst

 

23 industry in the world with respect to the theory of how

 

24 you carry out a labor dispute. When they walk off,

 

25 that's the end of the service.


16

 

1 If you have a strike in the automobile

 

2 industry, people can say, Well, I'll just put off buying

 

3 the car until General Motors or Ford starts up again.

 

4 But in the airline industry, once you lose that

 

5 passenger who's going from Fort Worth to Washington

 

6 today or tomorrow, that passenger is gone forever.

 

7 I think that you're going to have to

 

8 reorganize that industry. And the best precedent I know

 

9 with respect to the labor negotiation is what they've

 

10 done in the baseball league. You finally negotiated --

 

11 you finally have two offers, and a mediator steps in and

 

12 determines which is the fair offer, and that's it.

 

13 That's the first problem.

 

14 Everybody that says we are going to reorganize

 

15 the airlines, you've got to control the course. When

 

16 you control the course, in part the labor movement, by

 

17 having a labor compensation which makes sense based upon

 

18 the amount of money you're making. Secondly -- you have

 

19 the other problem, so I think that's the one thing that

 

20 they have to do before they can do it.

 

21 Secondly, I think it's a tragedy -- I saw the

 

22 other day in the New York Times where the money they put

 

23 up in New York for the people that were adversely

 

24 affected by the incident of 9/11, it turns out that most

 

25 of that money has been paid to members of law firms or


17

 

1 investment banking firms, because they could demonstrate

 

2 for two or three days they couldn't sit at a computer

 

3 and make a buck.

 

4 I mean, that is no way that public money

 

5 should've been spent. And those people that really

 

6 suffered have not gotten much of that money.

 

7 And I think that if you go back and examine

 

8 what the airlines actually got, I don't think they got

 

9 the money for things which would make a difference in

 

10 the long run.

 

11 MR. CARTY: I have to say this: I mean,

 

12 I think the government did act quickly, as quickly as

 

13 they've ever acted, and they did so even though a number

 

14 of them initially were skeptical.

 

15 When they understood the magnitude of the

 

16 problem that this breach of national security had

 

17 caused, and the magnitude of the financial cost that had

 

18 been posed on the airlines as a consequence of the new

 

19 security requirements and new insurance requirements,

 

20 all were convinced and that bill moved very quickly

 

21 through both the House and the Senate, as fast as any

 

22 bill has ever moved through. And I think those in the

 

23 airline industry were grateful for that.

 

24 But I think I agree with Bill in this sense:

 

25 It's time that the government sat back and re-examined,


18

 

1 from a public policy, what their role needs to be and

 

2 what the airlines need to do.

 

3 I'm not a great believer in the government

 

4 intruding into the day-to-day commercial aspects of the

 

5 business. I don't think that's necessary. I think a

 

6 vibrant and competitive market has worked well for the

 

7 consumers in this country since deregulation. And I

 

8 think once these businesses manage to transform

 

9 themselves as they need to for the future, it will be

 

10 good for the airlines as well.

 

11 What the government does have to do, I think,

 

12 however, is they do have to take responsibility for

 

13 national security. That isn't an airline -- your

 

14 question of, should you be paying for your neighbor's

 

15 street. It seems to me it's really clear that the

 

16 government has a responsibility for national security to

 

17 all of us.

 

18 At one time, aviation security was about

 

19 aviation. When airplanes started flying into the World

 

20 Trade Center, it's not about aviation anymore, it's

 

21 about a much bigger issue than just airlines. And I

 

22 think the government shouldn't necessarily impose that

 

23 on either the airlines or the passengers uniquely. I

 

24 think it's part of government's role.

 

25 I think -- I think Bill raises another


19

 

1 interesting question, and that is the question -- and

 

2 I've commented on this in the past -- of whether or not

 

3 the existing labor laws are working in the airline

 

4 industry in the employees' interest, in the consumers'

 

5 interest, or the shareholders' interest.

 

6 And I -- I wouldn't -- after -- after the 50

 

7 or so years that bill has been in place, it probably is

 

8 ripe for re-examination and re-formulation.

 

9 But I would say this: That I think too often

 

10 airline management, particularly the airline -- the

 

11 management that manage these traditional airlines that

 

12 grew up in a regulated environment, have used the cost

 

13 of labor as an excuse for not transforming parts of the

 

14 business that management can control.

 

15 I think one of the great things about what has

 

16 happened, at least in a number of carriers -- and I'm

 

17 very proud of what's happened at American, because

 

18 there's been a really fundamental transformation of many

 

19 of the aspects of doing business there -- the management

 

20 team out there putting those in place, which will have a

 

21 radical impact on the cost structure and the

 

22 competitiveness of this airline with or without the

 

23 labor savings. Now, initially, they obviously needed

 

24 labor savings. But airline management can't constantly

 

25 be saying this is uniquely a labor problem. A new form


20

 

1 of business model entered this business, and management

 

2 has to be responsible.

 

3 MR. NANCE: Well, there was, I believe, a

 

4 quote by Don King: There is no right to strike against

 

5 public interest anytime, anywhere, by anyone.

 

6 And I personally have lived under two binding

 

7 arbitration contracts, one for Braniff International,

 

8 the long-gone, fondly remembered local airline, and

 

9 Alaska Airlines, from which I just early retired. And

 

10 I'm proud of those. I'm proud of the fact that I never

 

11 ended up in a strike situation. That's just a personal

 

12 comment.

 

13 But it does seem to me that we've got to move

 

14 in a direction boldly to eliminate the possibility of

 

15 this kind of labor strike, especially with the

 

16 reorganization we're facing, because the market simply

 

17 will not take the level of rates that are being paid out

 

18 there. Any fundamental disagreement with that?

 

19 MR. COLEMAN: No. I also agree that

 

20 there has to be a fundamental decision made as to what

 

21 the government should do with respect to safety issues

 

22 and what should be the burden on the airline. And I

 

23 think that someone has to study that issue.

 

24 You know, the threat that around the airport

 

25 somebody could have a rifle on his arm and be able to


21

 

1 shoot down an airline, if that is a valid threat, I

 

2 think that you have to sit down and say, Is that a

 

3 function that the airline should take care of, by either

 

4 raising its fare or having an additional ticket tax by

 

5 the passengers, or is that just another normal defense

 

6 function that should be borne by the general public?

 

7 But I think that the airlines have to get

 

8 together, and not trying to grab too much, but make an

 

9 absolute decision on that and come in and try to

 

10 convince Congress with respect to that.

 

11 But I also think that it's important that the

 

12 airlines are going -- I don't think that when

 

13 deregulation was done, those that supported it felt that

 

14 you would end up with two distinct types of carriers,

 

15 one so-called network carrier, and the other one, the

 

16 low-cost carrier, and then the low-cost carrier gets big

 

17 enough to be able to snatch off the best routes of the

 

18 other network carrier.

 

19 And now you have the threat of Europe. You

 

20 know, you've got a whole Eastern Europe developing. It

 

21 is highly possible that they will be bright enough to

 

22 abandon the idea that every nation has to have its own

 

23 aircraft and put together one or two major aircraft

 

24 companies. And that would be a completely different

 

25 threat to the United States than you have today.


22

 

1 And those are the types of issues which I

 

2 think management has to sit down -- I said I have eight

 

3 of them, and I'd love to be able to lay them out.

 

4 MR. CARTY: I'd kind of like to hear the

 

5 eight.

 

6 MR. COLEMAN: Well...

 

7 MR. NANCE: Go ahead, Bill.

 

8 MR. COLEMAN: The airline is in a

 

9 business which is basically fungible. It's the same

 

10 airplane, they take off about the same time, they land

 

11 at the same airport, and therefore that's their

 

12 business, and therefore it's very hard to compete

 

13 saying, I'm doing something different than the other

 

14 one.

 

15 Next, I talked about the strike situation. I

 

16 know of no other industry where the employee can have

 

17 such a tremendous control over the negotiations.

 

18 Then you have this whole problem with low-cost

 

19 carrier against the network carriers. And I think that

 

20 there is an answer but I don't think anybody has ever

 

21 sat down and said, What should be the answer?

 

22 After that, you have what I mentioned, the

 

23 international problem, where you have Eastern Europe

 

24 developing in such a way, indeed all of Europe is

 

25 developing in a way, and if they got together and had


23

 

1 fewer airlines, I think they would pose a greater

 

2 competitive threat on the American airlines.

 

3 Then you have, in the federal statutes, a

 

4 provision that no foreigner can own more than 25 percent

 

5 of an American airline. The administration, and I think

 

6 the previous administration, have tried to increase that

 

7 to 49 percent, but Congress so far hasn't gone along. I

 

8 think that it should go up to 49, perhaps it should go

 

9 even higher.

 

10 And one of the difficulties by having these

 

11 percentages is that those lawyers trained at SMU and

 

12 other good law schools somehow know to get around them.

 

13 And you get around them in such a way where you're not

 

14 quite as efficient as you would be if you didn't have

 

15 to. I'll maybe describe the transaction to you where

 

16 you've been able to get around them.

 

17 Then you next are facing today, because Judge

 

18 Calisty (phonetic) cited, believe it or not, that the

 

19 families of the people in here -- in September 11 had

 

20 sued the airline, because the airlines should have the

 

21 vision that this would happen and be able to take care

 

22 of it. I think that that will cause difficulty.

 

23 Now, I think there's something in the statute

 

24 which says the maximum liability is 6 billion. Frankly,

 

25 I haven't read the statute closely enough, or if I had,


24

 

1 I don't remember, whether that's 6 billion per airline

 

2 or 6 billion over the whole industry. But either way,

 

3 6 billion is not that much money today when you start

 

4 getting involved in class actions.

 

5 The difficulty, as I see it, with the

 

6 Transportation Safety System Stabilization Act is at

 

7 least twofold:

 

8 One is that I don't think that to just lend

 

9 the money or give a guarantee so the airline can get

 

10 back in business makes sense. They were supposed to

 

11 reorganize. I don't think those that have asked for the

 

12 money have been doing that.

 

13 But secondly, can you imagine a governmental

 

14 official, if two airlines come to him asking -- or her,

 

15 thank God, today -- come to him asking for a new route

 

16 or new landing rights, and he or she knows that one

 

17 airline has a guarantee from the federal government of

 

18 2 billion, which they have to pay back, and the other

 

19 one doesn't, now -- and if you make the argument, Well,

 

20 if you give me this advantage, I'll be able to pay you

 

21 back your $2 billion. In other words, you put those

 

22 airlines at an advantage, which I think is really

 

23 unfair.

 

24 Then you have the whole co-sharing problem.

 

25 And those -- you also have the question of taxes, as to


25

 

1 whether some of the taxes, which have been levied over

 

2 the years on the airline and the passengers, should be

 

3 reconsidered. Then you have the whole question of where

 

4 you locate the new airports.

 

5 Now, once you master those eight problems --

 

6 and I hope my arithmetic is right -- then I think you

 

7 can sit down and advise the airlines what they should do

 

8 to be able to have the proper service that they deserve

 

9 and ought to have the American people really think they

 

10 should have.

 

11 MR. CARTY: I have a couple of

 

12 observations about a couple of points Bill made. First

 

13 issue is low-cost versus traditional network carriers.

 

14 I think if we talk about the future, if you

 

15 look out four or five years, network carriers will only

 

16 survive if they have transformed themselves in a way

 

17 that recognizes the existence of the new business model.

 

18 Now, that doesn't mean they have to be

 

19 Southwest, or they don't have to be Jet Blue, but they

 

20 have to be cognizant that most of their markets, there

 

21 is going to be a marketing presence characterized by

 

22 very low-cost competition and very low prices. And if

 

23 they can engineer their organization to be cognizant of

 

24 that and still be profitable, they will be -- they will

 

25 thrive.


26

 

1 There is no single business model that endures

 

2 forever. The problem with the traditional network

 

3 carriers is a lot of the transformation that they've

 

4 achieved since deregulation has been focused

 

5 competitively on each other.

 

6 And now the low-cost carriers are so

 

7 pervasive, cover so many markets, that they need to be

 

8 further re-engineered to be cognizant of that

 

9 competitive fact as well.

 

10 I think that is going on. I think sometimes

 

11 it takes a real hard time to make it happen, but I think

 

12 it's now going on. I think it's well underway at

 

13 American, and I think it's well underway at a number of

 

14 other carriers. If that isn't achieved at carriers,

 

15 they won't -- they won't exist.

 

16 Remember, we had -- we had 11 major carriers

 

17 at the time of deregulation, and every one of them,

 

18 except for Delta and American, have filed for bankruptcy

 

19 or are reorganizing in bankruptcy. So there's been a

 

20 radical change in the industry by traditional carriers

 

21 not managing to transform themselves.

 

22 And it's not uniquely an American phenomenon.

 

23 You're starting to see the same thing in Europe. You're

 

24 certainly seeing it in Canada with the Canadian carrier

 

25 bankrupt.


27

 

1 So one way or another these companies are

 

2 either going to go away, they're going to reorganize in

 

3 bankruptcy, or they're going to transform themselves

 

4 consensually, as American has been trying to do, and as

 

5 Delta's been trying to do. And there really is no other

 

6 option.

 

7 With respect to Bill's comment of foreign

 

8 ownership. I couldn't agree more. The long run of this

 

9 industry -- I think as we all sit here 20 years from

 

10 now, it's hard to believe there will be something called

 

11 flag airlines. We don't have flag chemical companies,

 

12 we don't have flag shoe companies, why would we have

 

13 flag airlines? And I think the foreign ownership rules

 

14 will go away.

 

15 I think now is the time to engage in that

 

16 debate aggressively and show some American leadership in

 

17 changing it. Because I think the American carriers, if

 

18 they transform themselves into much competitive

 

19 entities, will be able to play a significant role on the

 

20 world stage.

 

21 And I think the problem with co-sharing, as

 

22 Bill talked about, will go away when foreign ownership

 

23 goes away. Co-sharing is simply a way of globalizing

 

24 under the constraints of not being able to grow

 

25 internationally.


28

 

1 And I think all this is going to take some

 

2 time, but I have an easier time, John, answering the

 

3 question, what does the industry look like 20 years from

 

4 now, than what does it look three years from now.

 

5 Because this period of transformation has a

 

6 lot of uncertainty associated with it, uncertainty about

 

7 whether -- which and what airlines will do the right

 

8 things, which will do the wrong things, and how long

 

9 will it take to go from the government to get policy

 

10 written.

 

11 MR. NANCE: I must leave you, but I'm

 

12 going to pose a question in front of both -- in front of

 

13 all of you that's very, I think, apropos in regard to

 

14 all the changes we've talked about.

 

15 There is a tidal wave, if you will, of

 

16 vicarious transportation methodologies coming down the

 

17 pike, in the form of communications, and we've already

 

18 seen impact of this from September 11th.

 

19 So as I turn this over to John, and thank you

 

20 all very much, maybe I can put that in front of you

 

21 first, Don.

 

22 MR. CARTY: It's a very good question,

 

23 John, and it sort of runs to the earlier comments.

 

24 With the change in technology and

 

25 telecommunications, will airlines and transportation


29

 

1 remain as important an element of the economic

 

2 infrastructure as it did for a long time? Afterall, do

 

3 we really need to go there, or do we need to communicate

 

4 as effectively as we can?

 

5 Thus far in the industry, I think what we've

 

6 seen in commerce is the advance in telecommunication and

 

7 technology have accelerated the pace of globalization.

 

8 And ironically, instead of that hurting the airline

 

9 business, it's helped it. Because ultimately you do

 

10 have one-to-one contact with people you do business with

 

11 around the world.

 

12 It's put a lot more pressure on us being more

 

13 sophisticated in developing better networks

 

14 internationally than we had 20 years ago, but it's been

 

15 a net plus.

 

16 As we go forward, however, I do think the

 

17 advances in telecommunication and technology are going

 

18 to reduce the demand, or certainly slow the growth of

 

19 demand for business transportation.

 

20 But while that's happening, of course, we have

 

21 always known there's in insatiable demand for liesure

 

22 travel, and all you need to do is adjust the price to

 

23 tap into that.

 

24 And again, I think that makes it so important

 

25 that a carrier that wishes to survive becomes a far more


30

 

1 efficient entity than many of these entities have been

 

2 for the last 20 years, so the price of that product can

 

3 reach the consumer that wants to consume it. Because

 

4 people love to go places, places they've never been.

 

5 So even if commercial aviation --

 

6 aviation-related economic activity between businesses

 

7 decreases, I think the industry has got a lot, a lot of

 

8 growth left in it, particularly some less developed

 

9 parts of the world.

 

10 MR. COLEMAN: Don, I had occasion to pull

 

11 the testimony of the Under Secretary of Transportation

 

12 to the Senate Committee on Commerce, Finance --

 

13 Commerce, Science and Transportation that he gave on

 

14 January 9 of this year.

 

15 And he said that the economy between the

 

16 lost-cost carrier and the Internet carrier is that the

 

17 Internet carrier appeals to the business people, and

 

18 that's where they expect to get the large part of their

 

19 business from.

 

20 Now, what used to be the case, that you have

 

21 the airplane, and you have the business people in first

 

22 class and in business, in the back of the airplane you

 

23 have the lower fares and you have the liesure travel.

 

24 But what's happened now, oftentime, the businessperson

 

25 has a private jet. And, secondly, oftentime, instead of


31

 

1 flying down to Dallas for a meeting with the client, you

 

2 have a conference call.

 

3 So I do think there's some threat to say that

 

4 if your business plan makes the assumption that you're

 

5 going to get the business traveler, and the liesure

 

6 travel is going to go to low-cost carrier, which I think

 

7 is happening.

 

8 And I think that if you're really going to

 

9 resolve this problem, you have to face up to the fact

 

10 that once you agree that it's essential that they be

 

11 large, profitable carriers, then how do you make the

 

12 rules so that that's the result you come up with?

 

13 I think to have a low-cost carrier, they come

 

14 into the industry later, they don't usually have the

 

15 same labor problems, in terms of the same amount. And

 

16 then, once they begin to develop, they then say, what

 

17 are the best routes, and they pick those off. And as a

 

18 result of that, the major carriers are losing some of

 

19 their business to the private jets, they're losing other

 

20 of it to the conference call.

 

21 And thirdly the low-cost carriers -- you know,

 

22 the same way when Willy Sutton says, Why do you rob a

 

23 bank? That's where the money is -- that they know where

 

24 the business is and therefore they will say I have

 

25 enough airplanes now that I can fly from Chicago to


32

 

1 Atlanta, Georgia, and I will take some of the business

 

2 people. And, in fact, a good corporate manager may say,

 

3 Look, you can fly on this route by half the fare it

 

4 takes to go on American, so that's what you have to do.

 

5 So I really think that this is a challenge

 

6 that you have to look at before you decide which is the

 

7 business plan that's going to work.

 

8 MR. ATTANASIO: Before I open it up to

 

9 the audience, I'd like to shift gears a little bit and

 

10 ask -- focus you both, because you both have such

 

11 expertise on this, on how much of an impact did the

 

12 airlines have on the economy.

 

13 Not so much you mentioned earlier, Secretary

 

14 Coleman, that how many people were employed directly or

 

15 indirectly, but what I'm after is what kind of

 

16 leveraging effect transportation provided.

 

17 You mentioned earlier, Mr. Carty, that the

 

18 airlines have an enormous impact, in terms of how many

 

19 people they fly. How much impact? How many passengers

 

20 are we talking about in a day? How much in the way of

 

21 goods moves? How many business passengers as against

 

22 how many liesure passengers? What are we talking about?

 

23 MR. CARTY: Obviously, we're talking

 

24 about hundreds and hundreds of millions of passengers a

 

25 year, seven or eight-hundred million passengers. Now,


33

 

1 it's shortened a little bit in the last economic

 

2 downturn, but it's that order of magnitude.

 

3 MR. ATTANASIO: And in what area? In the

 

4 United States or --

 

5 MR. CARTY: In the U.S.

 

6 MR. ATTANASIO: U.S. traffic.

 

7 MR. CARTY: And that's a huge number of

 

8 people moving every day. You know, all you've got to go

 

9 and do is go to one of the hub airports and watch the

 

10 activity.

 

11 You know, at DFW in a big day, 50,000 plus

 

12 passengers come in through DFW is not an uncommon event.

 

13 The same thing would be true of Delta's hub in Atlanta

 

14 and Both United and American's hub in Chicago and

 

15 Northwest hubs in Detroit. Huge numbers of people

 

16 traveling.

 

17 Now, historically, that's kind of split evenly

 

18 50/50 between business and liesure. In economic

 

19 downturn, you get the effect that Bill talked about,

 

20 that liesure becomes a greater percentage of it. It

 

21 become a greater percentage partialy because the

 

22 business traveler can't be stimulated, he's not going to

 

23 travel unless there's an opportunity, the liesure

 

24 passenger can be.

 

25 As the economy turns down, the airlines


34

 

1 average price weekend -- as the business travelers goes

 

2 away, he gets replaced by the lowest possible fare,

 

3 because you push the fare down a little bit to capture

 

4 more passengers. And that's why it's such a cyclical

 

5 business. You lose the best of your business and you

 

6 stimulate the worst of your business. Now, when I say

 

7 "worst," I mean in terms of price.

 

8 But I haven't seen recent months' data, but in

 

9 the summer of an economic downturn, which is what we've

 

10 just been through, I would be surprised if it wasn't 70

 

11 or 80 percent.

 

12 MR. COLEMAN: And you're also -- and I

 

13 guess most people are too young to remember what -- if

 

14 you can get a picture of what Dulles looked like before

 

15 it opened in Washington, and then you thought it was way

 

16 out in the wilderness, nothing was around it, if you

 

17 land at Dulles now you'll see nothing but major

 

18 buildings and advertisements of all types of companies

 

19 that have their businesses around there. And I think

 

20 that's true throughout the country.

 

21 I think, for example, in Pittsburgh, where

 

22 U.S. Airways has a hub, they have shopping centers.

 

23 It's the biggest mall in Pittsburgh. And it's a dynamic

 

24 business. I really think that you have to recognize

 

25 that, just when you go through the airport and see all


35

 

1 the different type of people.

 

2 And then you have the whole question of

 

3 liesure travel. People do travel, they want to travel.

 

4 And I thought that the original concept, when Boeing

 

5 built the 747, was that you -- those people who travel

 

6 in the back of the bus, but those people who travel back

 

7 three seats to a row, they pay a much lower fare, and

 

8 they'd get there the same time, and that, I thought, was

 

9 the way that it was supposed to work.

 

10 When I was Secretary and we were faced with

 

11 the question of deregulation, and we did not pass it in

 

12 the airline business, I was told that the moment you had

 

13 this, you're going to have 79 airlines, and they're

 

14 going to compete with each other, and therefore they're

 

15 going to take care of the prices, you'll have no

 

16 problem.

 

17 It hasn't worked out that way. The major

 

18 airlines are going down, as John said. Some of them

 

19 have disappeared. And now you have the small ones that

 

20 started going, serving small cities, but now they will

 

21 run from someplace in California very convenient to

 

22 someplace in Washington. And they obviously have to be

 

23 taking business from United and from American Airlines

 

24 and the other airlines that would run that route. And

 

25 whether you go out of L.A. or go out of Santa Barbara,


36

 

1 it really doesn't make that much difference.

 

2 And that's what's happening in the business,

 

3 and I do think the businessmen and businesswomen have to

 

4 face up to that and decide, how do you go about managing

 

5 a very, very valuable, necessary asset, but do it in

 

6 such a way that you make money on it. Because in a

 

7 capitalist society, if you don't make money on it, then

 

8 it has to deteriorate in quality and it just doesn't

 

9 work.

 

10 MR. CARTY: It's a fundamental part of

 

11 our economy, John. But the challenge of business

 

12 transformation is not unique to this industry.

 

13 If we had said to ourself at a conference 20

 

14 years ago and said, My goodness, if Wal-Mart drives

 

15 Montgomery Ward out of business, we'll be in terrible

 

16 shape. But that wasn't true. Montgomery Ward is gone

 

17 and Wal-Mart is five times bigger than what was then the

 

18 biggest retailer in the country.

 

19 What happens if IBM goes out of the PC

 

20 business? Well, they're not out of the PC business, but

 

21 their marketshare, compared to a Dell or anybody else,

 

22 is inconsequential.

 

23 I think the market takes care of itself. But

 

24 the challenge for existing airlines is to recognize that

 

25 and transform themselves. And if they can't transform


37

 

1 themselves, they'll be the Montgomery Wards of the

 

2 future.

 

3 And they're faced with enormous challenges,

 

4 because the change that gave rise to this new

 

5 competitive set was a change in regulation. And we had

 

6 adopted ourselves for a regulated environment with a

 

7 certain set of rules.

 

8 So the challenge of the CEO -- with all due

 

9 respect to my good friend Herb Calliher, the challenge

 

10 of Jerald Arpy at American Airlines versus Herb

 

11 Calliher -- if Herb Callaher runs a great airlines, he

 

12 does; if Jerald Arpy is to run a great airlines and he

 

13 doesn't, he's got to change the tires when he's going

 

14 down the highway at a hundred miles an hour.

 

15 But that's the challenge. If they don't

 

16 transform themselves, they won't be successful. And so

 

17 many companies and so many airlines and so many

 

18 industries have.

 

19 We will have an airline industry. What it

 

20 will look like, and who are the players in it, is going

 

21 to depend on the innovative and creative new start-ups,

 

22 and the creativity and management's and leadership's

 

23 skills to transform the existing companies.

 

24 MR. COLEMAN: John, may I ask you a

 

25 question?


38

 

1 MR. CARTY: You bet.

 

2 MR. COLEMAN: Suppose you were Secretary

 

3 of Transportation. The President of the United States

 

4 called you and said, Look, John, this industry lost

 

5 $10 billion last year. The major carriers seem to be

 

6 failing. What should I do and what should be the

 

7 policy?

 

8 I want to scrape everything we're doing, but I

 

9 want you to come up with a policy for the government,

 

10 which will get us back to where you have airlines

 

11 profitable, serving the people, and to the extent that

 

12 we have competition from abroad, we can manage that in

 

13 such a way that it's not a great disadvantage. Now, how

 

14 would you redo the airline?

 

15 MR. CARTY: I would very much focus on

 

16 what both you and I talked about: Taking responsibility

 

17 for security and safety oversight and enforcing those

 

18 rules and freeing up the market as much as I could. And

 

19 that would include not only the domestic market, it

 

20 would include the international markets.

 

21 Because American ingenuity in business has

 

22 been successful. Where we've had failure, we've had

 

23 tremendous success, tremendous re-invention.

 

24 Again, I will be go back to PC example. Five

 

25 years ago, ten years ago, there were a lot of people


39

 

1 saying the Japanese were going to take over the PC

 

2 business. Well, no one told Michael Dell. And now the

 

3 Japanese are a pale shadow of Michael Dell.

 

4 I think we need a marketplace that enables

 

5 Americans to use their creativity. Great challenge to

 

6 traditional guys. We may lose and see the bankruptcy of

 

7 more of them. It will be unfortunate.

 

8 But I think the best thing the government can

 

9 do is take responsibility for government things, safety,

 

10 security, the airspace. I think there's a lot of work

 

11 the government needs to do on the airspace to really

 

12 free up the airspace in the competitive environment,

 

13 provide the technology that's available to us. And I

 

14 think those are the things the Secretary of

 

15 Transportation should impose.

 

16 MR. ATTANASIO: One last question before

 

17 I open it up to the audience.

 

18 How much has terrorism impacted business?

 

19 MR. CARTY: Well, it's impacted in a

 

20 number of ways, John. In the first instance, of course,

 

21 it scared people off. And I think we've largely

 

22 recovered from that.

 

23 The second thing it did is it imposed an

 

24 economic burden on the airlines and ultimately its

 

25 customers of the cost of the security we put in place to


40

 

1 try to diminish the threat of terrorism.

 

2 And initially we put in place a system that

 

3 not only cost a lot of money but imposed on our

 

4 passengers a tremendous harassment factor, if you like.

 

5 I think the government is making progress

 

6 there. This was all done in an enormously short amount

 

7 of time. And I think people now are focused on how do

 

8 we automate, how do we take advantage of technology,

 

9 doing all the things that -- in fact, my way of

 

10 thinking, the government has done a better job than I'd

 

11 thought they'd do a year and a half ago when they

 

12 started this. I think we've had some good leadership in

 

13 Washington on that.

 

14 But to say it hasn't effected us in terms of

 

15 cost and therefore price to the consumer would be very

 

16 naive.

 

17 And to think that it didn't accelerate the

 

18 bankruptcy of U.S. Air and United -- they probably

 

19 would've gone bankrupt anyway, but it clearly did

 

20 accelerate that. And it accelerated this terrible

 

21 economic spiral that the airlines are in.

 

22 But before September 11th, 2001, management at

 

23 American sat down around a table and said, We are moving

 

24 into an economic downturn. Economic downturns are

 

25 always tough on airlines. What do we need to do to take


41

 

1 the next step in restructuring this business?

 

2 We thought it would be an evolutionary

 

3 restructure over four or five years, and we woke up six

 

4 months later to find out it had to be accomplished in a

 

5 year or we would be out of money. And I think that's

 

6 the biggest short-term impact that this change had on

 

7 us.

 

8 MR. ATTANASIO: Secretary Coleman, do you

 

9 have any marks on that before we open it up?

 

10 MR. COLEMAN: No. I think -- I must say

 

11 that American does it better than the airline that I

 

12 flew to Jacksonville, Florida on Monday does, so -- I

 

13 won't identify which one that was, but I wasn't very

 

14 impressed with them.

 

15 MR. ATTANASIO: It's okay.

 

16 MR. COLEMAN: But I was very impressed

 

17 with American and the way they could move you through,

 

18 and it was much faster and just made more sense.

 

19 I think -- I think they -- you know, the

 

20 American people have responded to unthinkable challenge

 

21 much better than we give them credit for. You know, you

 

22 always thought that those two oceans really protected

 

23 you. We saw that it didn't.

 

24 And in six months thereafter, the Congress

 

25 instructed the Department of Transportation and other


42

 

1 parts of government to come up with a plan. And I think

 

2 in six months they did a tremendous job.

 

3 I also would say that I have great admiration

 

4 for Secretary Vanetta, that the moment he heard of the

 

5 crisis his first order was to get every one of those

 

6 commercial American airplanes down to the ground. And

 

7 that's the only reason why, I think, we picked up the

 

8 fact that one plane over Pennsylvania was headed for the

 

9 White House.

 

10 So I really think that -- we criticize

 

11 politicians, you know, on the night shows, but I really

 

12 think that he acted responsibly and correctly.

 

13 And I think the airlines have done a good job

 

14 in trying to meet what is really a threat but yet do it,

 

15 as far as possible, consistent with our right of privacy

 

16 and the fact that we don't like distinctions made based

 

17 upon things which we ... (inaudible)

 

18 MR. ATTANASIO: We've got a few minutes

 

19 of questions from the audience.

 

20 AUDIENCE MEMBER: My name is Pete

 

21 Shelton, second-year law student here at SMU.

 

22 But in the last four years, I've flown

 

23 probably 200,000 miles. I work for one of the big four

 

24 accounting firms, flew about every week. And being

 

25 based in Dallas, you can imagine what airline I flew 95


43

 

1 percent of the time.

 

2 MR. CARTY: Thank you.

 

3 AUDIENCE MEMBER: On top of that, you

 

4 know, you fly enough -- for people that don't fly --

 

5 you're a status on an airlines.

 

6 Before September 11th, it was a nice to go sit

 

7 up in first class. It was a pleasure to get in American

 

8 Airlines, say, I hope I get the upgrade and sit in first

 

9 class.

 

10 Well, this summer I was again traveling for

 

11 work, and I was flying American Airlines. And I know

 

12 after September 11th American Airlines and other

 

13 carriers cut a lot of their meals and a lot of their

 

14 services.

 

15 First class is not like it used to be, okay?

 

16 There's nothing special about it. It's almost like

 

17 flying in coach. So this summer I had an opportunity to

 

18 fly Jet Blue, which is one of the low-cost airlines in

 

19 New York City, and I actually -- I'm not to bashing a

 

20 particular airline -- I any had better service on Jet

 

21 Blue than I did on American Airlines.

 

22 So my question is this: That is your

 

23 competitive advantage. The network airlines have the

 

24 first classes, the low-cost carriers don't, because it

 

25 keeps their costs down.


44

 

1 American Airlines and the other carriers have

 

2 already stopped providing a lot of the services that

 

3 attract business travelers to first class.

 

4 How do you change business travelers', like

 

5 myself, mentalities, saying, hey, it's nice to be

 

6 pampered in first class, it's nice to spend $1200 versus

 

7 $400 for the same flight?

 

8 MR. ATTANASIO: You've destroyed the

 

9 image of the poor law student forever.

 

10 MR. CARTY: It's a very good question.

 

11 Obviously, what these traditional carriers are

 

12 trying to do is they're trying to find the balance, the

 

13 right economic balance across their product line between

 

14 various services customers want and various services

 

15 customers value.

 

16 And wanting things is easy, but what they're

 

17 trying to determine is, how can they have -- because the

 

18 nature of these operations is they're going to have

 

19 somewhat higher costs than other carriers anyway. You

 

20 can't fly to Tokyo on a 737, so you're going to need a

 

21 different airplane to do that.

 

22 The question is, what kind of revenue premium,

 

23 what kind of appeal can you make to the customer which

 

24 will create unique revenue pools that a low-cost

 

25 carriers can't get out, and what services does it take


45

 

1 to put those together, then how do you make sure that

 

2 the revenue pool that you achieve that gives you the

 

3 revenue doesn't exceed the cost premium? Because if it

 

4 does, you don't have a viable business model in today's

 

5 world.

 

6 Because the single thing that customers value

 

7 most is pricing. And that's not just leisure passengers

 

8 anymore, because so much business travel is bought on a

 

9 negotiated basis. So the notion that there's a $1200

 

10 fare out there, try to find someone to pay it. There is

 

11 no business that would pay $1200 anymore. They sit

 

12 down -- you know, if you're a member of the big four, I

 

13 can guarantee you PriceWaterhouse or Ernst & Young have

 

14 a contract with three or four major airlines, and they

 

15 don't pay list price.

 

16 So that's the reality of the marketplace. The

 

17 price and schedule are far more important than any of

 

18 these other services.

 

19 With that being said, we want to identify

 

20 those that have values and will help us create unique

 

21 revenue pools and unique revenue premiums, but they

 

22 can't create such unique cost premiums that you're out

 

23 of business.

 

24 That's the transformation I'm talking about.

 

25 It's partly that, and it's partly simply re-examining


46

 

1 your entire doing business and re-engineering it; in

 

2 fact, that's underway as well.

 

3 But have they got exactly the right answer

 

4 yet? The answer, obviously not. That will be a

 

5 constant juggling thing .

 

6 But it is clear the majority of the people

 

7 that don't want to sit in first or business class for

 

8 price and value reasons aren't prepared to pay you a

 

9 huge amount of money for food. They like it, they'd

 

10 like you to give them a meal, but they're not going to

 

11 pay anything for it.

 

12 They will ride a Southwest that won't give you

 

13 a meal if the price is different, which is their way of

 

14 saying, I'm not going to pay for a meal. That's

 

15 balancing act.

 

16 AUDIENCE MEMBER: I'm Lisa Tolk.

 

17 And Secretary Coleman was discussing the

 

18 United States District Court Judge who went ahead and

 

19 ruled that it's okay for 9/11 victims to sue the

 

20 airlines.

 

21 Do you think this sets a dangerous precedent

 

22 for unreasonable and unforeseeable instance that occur

 

23 on the airlines, and what impact do you think that will

 

24 have in the future?

 

25 MR. CARTY: Well, you guys are the legal


47

 

1 minds, and I'm not. All I can say is it's the most

 

2 stupid thing I've heard in my life. And that isn't a

 

3 legal opinion, that's a personal opinion.

 

4 The fact of the matter is, the legislation

 

5 that the Secretary referred to, at the time that the

 

6 government passed this act, it did three things:

 

7 One, they simply gave a grant of money to the

 

8 airlines to pay for the downtime and lost traffic; then,

 

9 as Bill pointed out, they created a pool of money that

 

10 carriers could potentially borrow, and that was the

 

11 $10 billion pool; the third, which was enormously

 

12 important to American and United, because we saw this

 

13 coming was, to cap our liability at the limits of our

 

14 insurance, and, at the same time they did this, they

 

15 created a fund that they hoped most of the victims would

 

16 access.

 

17 Now, because there are lawyers out there, some

 

18 were convinced not to access that fund. And I think

 

19 we're going to have a series of -- we're obviously going

 

20 to have some litigation here, and how it will end up, I

 

21 don't know.

 

22 I do know the insurance company also

 

23 rigorously defend this one. The notion that they

 

24 should've participated the airplane being ceased and

 

25 flown into the building, to me, is just crazy.


48

 

1 MR. ATTANASIO: Counsel?

 

2 MR. COLEMAN: Well, I was -- I haven't

 

3 checked our new business. I don't know which side we're

 

4 on.

 

5 MR. ATTANASIO: Tell us what you really

 

6 think.

 

7 MR. COLEMAN: I say that -- I remember

 

8 one time I was in New York and Judge Rifkin, who is a

 

9 great judge, had just joined the firm.

 

10 So like every young associate, I said, Well, I

 

11 have to appear before this guy to impress him to maybe

 

12 next time he has a big case he ought to ask me to be one

 

13 of the associates.

 

14 So I had a problem I was working on. I

 

15 prepared it better than anything else I've ever done in

 

16 my life. And I asked to see the judge. I said, I have

 

17 a problem, I went in, and I laid out the problem the

 

18 best way, at the end of which he said, Well, I'm sorry,

 

19 Mr. Coleman, you haven't told me the most important

 

20 fact. Now, you can imagine my shagreen. I said what do

 

21 you mean, sir? You haven't told us who our client is.

 

22 So I have some caution to say. But I was

 

23 surprised and it scars me that part of the plaintiffs

 

24 are actually insurance companies, and it does raise an

 

25 issue.


49

 

1 But you knew it was coming because the funds

 

2 set up -- Mr. Fineberg, who I thought did a good job,

 

3 and had worked it out where people got somewhere between

 

4 350,000 to 6.1 million, reported the other day that only

 

5 30 percent of the possible applicants have made their

 

6 application yet, and you've got to make it by the 22nd

 

7 of December.

 

8 So it's clear that the -- part of the bar has

 

9 gotten a chance for a much better lawsuit, and that's

 

10 why you have this lawsuit.

 

11 And the question is, can the Congress now

 

12 amend the statute so as to limit the liability here?

 

13 But I think it's a serious threat to the industry that

 

14 this type of lawsuit will go on and probably go on for

 

15 the next five or six years.

 

16 MR. ATTANASIO: One more question.

 

17 AUDIENCE MEMBER: As you know, there's a

 

18 significant debate going on now about the Patriot Act

 

19 and its impact on civil liberties and what have you.

 

20 Can you tell us whether or not the Patriot Act

 

21 is having an impact on the airlines in terms of

 

22 requirements, and if so whether, it's good or bad?

 

23 MR. CARTY: I'm hesitating because I may

 

24 or may not be entirely current with all of it.

 

25 But it certainty -- it wasn't having an impact


50

 

1 on it when I left the company the spring of this year.

 

2 There were a lot of issues about privacy early on that

 

3 we juggled with with the Department and Homeland

 

4 Security folks day in and day out. But whether the --

 

5 whether there's direct impact from the Act, I can't tell

 

6 you the answer to that.

 

7 Do you know, Bill?

 

8 MR. COLEMAN: Well, one of the difficult

 

9 problems, and I don't know whether it's because of the

 

10 Patriot Act, is the whole question of, how you develop

 

11 the rules of the person that you will check as against

 

12 the person you let go through.

 

13 Now, you know, the assumption is that any

 

14 person 80 years of age, with white hair, and with a

 

15 crutch, is not one who's going to do something in an

 

16 airplane. On the other hand, someone who appears to be

 

17 from the Middle East, 21, that may be or maybe not, but

 

18 yet the whole question of profile has come up, and I

 

19 think that's one of the questions that has got to be

 

20 worked out.

 

21 I think another question that you've got to

 

22 face is that the constitutional law -- and I will be the

 

23 first one to say, to say something is constitutional is

 

24 the least good you can say about it. And oftentime the

 

25 government has to do much more.


51

 

1 But in reading the cases, other than a case of

 

2 Bevins versus the FBI, I don't think there's a case

 

3 which says that if a federal official stops you and

 

4 searches you and then lets you go, that that violates

 

5 the fourth amendments.

 

6 And I just put to you the question that if one

 

7 of those people going through security at Boston had

 

8 been stopped and searched, could he have a lawsuit

 

9 because they picked something on him? And I really

 

10 think that this whole issue has to be really looked at.

 

11 And I would be the first one to say that as you approach

 

12 these problems now they will be different for the way

 

13 you will look at them four years from now when we

 

14 make -- what's the name -- where right after you did

 

15 what you did on the west coast, but four years later in

 

16 you said you couldn't hold the same people in the middle

 

17 part of the country, because we were near to winning the

 

18 war.

 

19 And I just think that as you criticize what

 

20 the government is doing, that you've got to take a look

 

21 at history and see, over long run history, what people

 

22 have done.

 

23 MR. CARTY: We're compelled as airlines

 

24 to have our systems interface with the government

 

25 computer that has the profiling, but it isn't our


52

 

1 profiling algorithm. And we simply do what we're told.

 

2 The question I think that Bill makes is good,

 

3 but it's government debate so that what algorithm can

 

4 look like, what is appropriate, and what's not

 

5 appropriate. I think that's public policy.

 

6 MR. COLEMAN: You take, you know, the

 

7 instance where that person took his children in New

 

8 Hampshire, drove them across the country. Well, he was

 

9 picked up only because he used a credit card, and they

 

10 had the credit card and they sent out the word, and

 

11 that's how they picked them up.

 

12 And if you can make the argument that if the

 

13 government had been able to get every credit card and

 

14 found out that the 19 people were flying across the

 

15 country using credit cards, paying for their training

 

16 and pick that up, I think it's kind of hard to say,

 

17 well, gee, that's an invasion of privacy if that saved

 

18 3,000 lives.

 

19 So I really think this is a real, real debate,

 

20 but I really think, as you look at it, the everybody has

 

21 to really examine what the issues are and what -- you

 

22 know, what the result ought to be based upon this

 

23 recognizing as the threat changed.

 

24 MR. ATTANASIO: Well, as Mr. Carty has to

 

25 get to the Board of Trustees meeting, and I don't want


53

 

1 to get in trouble, we better conclude this at this

 

2 point.

 

3 I want to thank Al Casey for organizing this.

 

4 I want to thank our distinguished parties for being with

 

5 us today. Thank you.

 


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