From Ozzy Osbourne's "Crazy Train"

I thought it might be appropriate this week to talk about what is, in some respects, the Crazy Train.... of Bankruptcy.

I was reminded of the song Crazy Train by something Allied Pilots Association President Dave Bates wrote in his letter to his fellow APA members April 20th after the news broke that he and his fellow union presidents were supporting a US Airways merger.

While writing about AMR's plans for the APA contract that were put forth in the 1113 hearing, Captain Bates noted: "They are on the Harvey Miller high-speed train to terminate our contract in bankruptcy court (Miller was Frank Lorenzo's lawyer at Continental and Eastern. He is now AMR's lead restructuring attorney)."

We kind of liked the high-speed train metaphor a lot, (mainly because we think high speed rail should be built all over the country) but we like the Crazy Train metaphor even more -- primarily because of the "ay ay ay ay" that only Ozzy can pull off. And just wait until that earworm takes hold. Try it. Go listen to it online. You will still be hearing it in your ear after you get done reading this week's issue of PlaneBusiness Banter.

So who is Harvey Miller anyway?

Some of you no doubt remember that Harvey Miller was the infamous lead attorney in the Eastern Air Lines bankruptcy case in the 1980s. If you Google "Frank Lorenzo Harvey Miller" a book called "Grounded" will pop up (by Aaron Bernstein) that chronicles the Frank/Harvey show during the Texas Air/Eastern Air Lines case.

As the book documents, it was 1983 when Miller "first helped craft the Chapter 11 proceeding that enabled Lorenzo to break the union contracts of the company's Continental Airlines subsidiary. As a result, Lorenzo was able to create a cost structure for the carrier significantly lower than that of its competitors."

Sound familiar?

During the Eastern bankruptcy Harvey was especially intent on making sure that Lorenzo, not the unions, kept control of Eastern.

To help get this done, Harvey made sure the Eastern case was heard in New York City, where a bankruptcy judge would likely be more sympathetic to the debtor.

Once the case started, the unions asked the Court to appoint a trustee over the case (which in essence would have taken control of the company out of Lorenzo's hands and moved it under the oversight of a Court-appointed trustee). Harvey and Lorenzo, as you would expect, were violently opposed to this idea and Harvey, some might say, slow rolled the process by refusing to show up for a meeting where it was widely anticipated that an agreement to appoint a trustee would be announced.

That's right. He simply refused to show up.

In the case of AMR, I think the refusal of management to sit down and consider a merger, or to even acknowledge the possibility that a merger might be highly advantageous for the airline, also amounts to a refusal to show up.

Reading from Bernstein's book we learn more: "During the negotiations, [Harvey] Miller lost his temper several times, at one point pounding the conference room table and calling the unions ''crazy.'' He insisted that Lorenzo would never assent to the appointment of a trustee and threatened the examiner with a hearing that would thoroughly air the matter of Eastern's exclusion from the weekend talks. In the face of this opposition, Judge Lifland backed down from the trustee issue, leaving the unions without the sale they desired and virtually without a say in the proceedings."

Later Bernstein reports: "Miller and the Weil, Gotshal lawyers had fulfilled their mission: they had continued to buy time for Lorenzo to resolve his problems with Eastern. Their client was still in control of the company."

All aboard Ozzy's "Crazy Train" to points best left unvisited.

The Lorenzo/Eastern fight was certainly before I began covering the industry, but after Captain Bates made the reference to Miller, I felt I needed to nose around a little more about this guy.

After going back and re-reading the history of Harvey Miller in the Eastern Air Lines case, some of what is happening (or maybe said a better way, what isn't happening) makes perfect sense once you understand the cast of characters involved.

Yes, Tom Horton is still in control of AMR. No, Tom Horton is not interested in an alternative plan. And no, he's certainly not interested in the alternative plan being advocated by his employees. Or by Wall Street.

Those "crazy" unions. Those batty analysts. What are they thinking? They've obviously been sold a bill of goods by those Fast Talkers from Tempe.

Yes, but, this is not the 1980s and a whole lot has changed in the world of business and airline bankruptcies since the Lorenzo/Eastern days. Heck, as I have written before, this isn't even close to the more recent United Airlines' more-or-less-unchallenged waltz through Chapter 11.

As I have also said before, if it were the company's desire to signal that it was motivated to negotiate with the unions after entering into Chapter 11 protection -- why would it hire Miller? Someone there had to know that by merely hiring this guy it would serve as a lightning rod for the union leadership, along with union members, at American -- a move that could conceivably push them even farther away and make negotiations that much more contentious. This guy is not there to "negotiate."

But then again, perhaps that was the reason he was hired in the first place.

Good thing AMR has deep pockets. According to the latest bankruptcy filings, Harvey's hourly rate is $1075 an hour, and in February his share of the Weil Gotshal & Manges billings came to just over $150K. The firm billed in total more than $3.8 million in legal fees for the month.

By the way, if you'd like to read "Grounded: Frank Lorenzo and the Destruction of Eastern Airlines" you can order it through Amazon.

The AMR Business Model Has A Name: The Limp-Along Strategy.

As most of you are aware, last week was the kickoff of the 1113 hearings in the AMR bankruptcy case. The company started the week by presenting its testimony and arguments as to why the union contracts should be tossed out.


There was a lot of back and forth during the week but the most provocative comments came from the executives testifying on behalf of AMR: Chief Restructuring Officer Bev Goulet and SVP, Human Resources Jeff Brundage, who we might add, is no longer the SVP of Human Resources, his departure having been confirmed Tuesday morning by a press release from American.


Forget the "Cornerstone" strategy. Little did JP Morgan analyst Jamie Baker know that when he asked Tom Horton and Gerard Arpey, "Is that all ya got?" that there was, in fact, another strategic plan in place. The "Limp-Along Plan."


Actually, we found out there was a second plan as well -- the "Kick the Can Plan." But this one was virtually the same as the "Limp-Along Plan" -- it was just Jeff Brundage's way of describing the same strategy.

In Bev's testimony, we learn more about how American sat and watched as other network carriers reduced their costs, increased their revenue, and explored strategic merger and acquisition strategies that would allow their airlines to be profitable. As she recounted on the stand: "Meanwhile, its (meaning American's) network competitors took advantage of their post-bankruptcy restructured balance sheets and reduced labor costs to merge, creating two mega-carriers (United and Delta) with networks larger than American's. These restructured and newly-merged network carriers have been able to reverse their losses and earn profits."


She went on to say that AMR has lost, on a cumulative basis, $10 billion over the last decade. And the reason for those losses primarily? That's right. Labor. Or more specifically, uncompetitive labor costs.

Sure, other factors came into play, like aggressive pricing from smaller carriers, and 9/11, and the volatility of the cost of oil, and the economic downturn, and, according to her testimony, the "ill-timed" TWA acquisition, and, and weather. "Demand was also negatively impacted by the Iraq War beginning in 2003, the SARS outbreak of 2002-2003 and the H1N1 influenza outbreak of 2009, which hit Latin America traffic particularly hard. Negative shocks continued to affect the Company's results in 2011, with the devastating tsunami in Northern Japan."


I don't know about you, but listening to Bev's testimony was like looking back at my high school yearbook. Or listening to that person you can't stand -- you know the one -- the one that blames everyone else for their inability to take control of their own life. Some of these factors that are cited haven't had a negative impact on an airline's performance in nearly a decade. But even more recently, while influenza outbreaks and tsunamis were occurring, what exactly was AMR management doing?

Turns out they were talking about a strategy, and executing quite well on that strategy. And the name of that strategy was (drumroll please?) The Limp-Along Plan.


As Bev said in her testimony, "With its operating losses and high debt levels, AMR had no alternative but to under-invest in the business, adopting a 'limp-along' strategy just to survive."

So, now we know. The secret is out, Jamie. After all these years. American decided it had to continue to "under-invest" and just, well, limp along. I'm not going to take the time and bore you by pointing out all the changes and innovations that we were seeing from other airlines during this period of time. And some of these airlines had a lot less "natural resources" than AMR.