Friday, November 21, 2014

American Airlines: Bankruptcy (2011-2013)

American Airlines logo
In 2011, American Airlines filed for bankruptcy, the same day the new CEO, Tom Horton took control of the company. Over the prior 10 years, American Airlines had lost over $10 billion, putting the company in a precarious financial position. In efforts to reduce costs, Horton proposed a variety of so-called solutions. One of his proposed solutions was to cut over 13,000 jobs, which the bankruptcy court didn’t allow. Instead, Horton cut pay and benefits for pilots, which resulted in many flight delays and cancellations that year. Over the two years Horton spent as CEO of American, he only marginally improved the company’s deficit. Horton decided to leave the company in 2013 and hand the position over to Doug Parker, who is currently the CEO of American Airlines. Upon Horton’s departure, he requested a $20 million severance package, otherwise known as a golden parachute, all while the company was still in bankruptcy. The bankruptcy court ruled against the severance package; however Horton fought against it claiming that he had assisted with the company merging with its biggest competitor, United Airlines and that he still deserved the severance package. In the end, Horton received a $17 million golden parachute as well as 171,000 shares of American Airlines stock, despite the fact that the company was in bankruptcy at the time and the investors should have been the top priority. 

Tom Horton, former CEO of American Airlines
American Airlines over the years has been seen in a negative light by its stakeholders, which as a result has damaged the company’s reputation and tarnished the faith of investors. American Airlines has three major groups of stakeholders: its employees, its investors, and its customers. American Airlines’ largest group of stakeholders are likely its investors because they were the ones who primarily financed American Airlines’ operations. By allowing Horton to take a severance package that large, it is essentially robbing the investors of the capital they put forward for American. The other group of stakeholders for American are its customers because they are the ones who purchase American’s tickets and provide the company with revenue that they need to operate. By cutting pay and not maximizing the return to investors, American provides its customers with a subpar flying experience, which as a result provides them with less revenue as they choose to fly other airlines. Finally, another large group of stakeholders are American’s employees because they rely on American for a job. If the company isn’t maximizing profits and is giving their CEO enormous severance packages while cutting employee pay and benefits, they are doing their employees a disservice and potentially costing them their jobs in the future.

Individualism is an important aspect of business ethics. Originally coined by Milton Freedman, individualism states that “the only goal of business is to profit, so the only obligation that the business person has is to maximize the profit for the owner or the stockholders”. In respect to this case, American Airlines did not comply with the ethical concept of individualism. Not only did Horton not help American Airlines much in terms of generating profit for the company, but he also counteracted the maximization of profit for the shareholders by claiming a large sum of money for himself. An individualist would most likely recommend that Horton took a smaller severance package and redistributed the money back to the shareholders who have lost so much on their investments in the defunct airline. Like most business decisions, the stakeholders are always affected, and under the principle of individualism, the stakeholders are the ones who should have received compensation for the poor business decisions that American Airlines has made. 
Above: Summary of American Airlines' (AAL) financial statements during Horton's years as the company's CEO.
Utilitarianism is the belief that decisions made should be made to benefit the greater good. Essentially what this means is that when making decisions it is important to give the most amount of good to the most amount of people. This, in a way builds off of individualism in the sense that the company should be focused on the bigger picture and the people it impacts, rather than itself. Where utilitarianism differs, however, is that it considers more than just the stakeholders. In American Airlines’ situation, the CEO did not make decisions with utilitarianism in mind. It is apparent that the only person that CEO Tom Horton wanted to benefit was himself. Unfortunately, for many businesses, greed is a major issue – an issue that utilitarianism tries to mitigate. By taking a $20 million severance package, it does not reflect the beliefs of utilitarianism whatsoever. Even if American Airlines decided not to compensate its investors, they could have reinvested the money back into the airline and making it better for its customer base, thus benefiting the greater good. When Horton was confronted about receiving such a large severance package while the company was losing money, he defended himself by stating the company was able to cut labor costs by 20%. In other words, the former CEO defended his extravagant severance package by cutting jobs and hours of many employees who earn much less than him. A utilitarian would absolutely agree that Horton has gone against every utilitarian value with his statement. There are a number of things American Airlines could have done to align with utilitarianism, but it’s obvious that greed is a major factor that got in the way.

Doug Parker, CEO of American Airlines following Tom Horton
Kantianism is the study of the ethical beliefs of Immanuel Kant, which fall into four major categories. Act rationally, allow and help people to make rational decisions, respect people and their needs and differences, and to be motivated by good will and seek to do what’s right because it’s right. The second and third points of Kantianism really do not apply to this particular case; however the first and last points relate perfectly. Horton’s decision was completely irrational and filled with greed. A rational person would not cut jobs and hours in order to receive a golden parachute. One could argue that Horton’s decision was rational if he was in desperate need of money; however, Horton received over a million dollars a year in salary and stock units. It is completely irrational for someone who makes roughly $1.25 million per year to request a severance package nearly 40x their base salary, at the expense of others. Leading off of that, the last point of Kantianism is to be motivated by good will and seek to do what’s right because it’s right. It is evident that Horton was motivated by greed rather than good, and had no intention to do right, whether it was good or not. Horton seized an opportunity to be CEO of a failing company, run it into the ground and cash out. 

Virtue Theory
Aristotle believed in four virtues that allowed things to function properly: courage, honesty, temperance and justice. Unfortunately, Tom Horton didn’t see things the same way as Aristotle. The first virtue, courage, essentially means to stand with what is right. As discussed in the paper, we know that Horton stood with what was wrong and was opposed by the majority of people. However, due to his own personal desires, he chose to stand with the wrong decision, despite the obvious objections. This leads us to the temperance virtue which states that people should have self-control and to have reasonable expectations and desires. Most people would agree that a severance package that is 40x larger than a base salary for doing a sub-par job leading a company out of bankruptcy is completely unreasonable, yet, Horton seemed to think otherwise, which leads us to justice. The justice virtue revolves around fairness in decisions and good ideas. Horton’s view on this matter included laying off employees, cutting pay and benefits for pilots, charging unnecessary fees to customers and raising airfare while taking large bonuses and other compensation. The act of greed is anything but just, and it negatively impacted many stakeholders and people who relied on American Airlines to be a successful and profitable company. The final virtue doesn’t apply much to this case considering Horton was honest regarding his decisions; however, due to the greedy nature of his decisions, one could argue Horton had an ulterior motive in the merger between United and American Airlines which is one of the main reasons Horton received his severance package in the first place, which can be portrayed as dishonest. Regardless, Horton’s decisions by definition were not virtuous at all and were a step backwards for the company that current CEO Doug Parker hopes to correct.

Works Cited
American Airlines. Becoming a new American. n.d. 2 October 2014. <>.
American Airlines CEO Quits. 25 April 2003. 30 September 2014. <>.
Carey, Susan. American Airlines Raises New CEO's Pay. 27 January 2014. 2 October 2014. <>.
Finger, Richard. Paid To Fail: Bankrupt American Airlines CEO Slated For $20 Million Severance. 29 March 2013. 2 October 2014. <>.
Martin, Hugo. American Airlines' former CEO gets $17-million severance package. 11 December 2013. 2 October 2014. <>.
The Associated Press. A timeline of events in American Airlines' history. 12 November 2013. 30 September 2014. <>.

Yahoo! Finance. AAL Income Statement | American Airlines Group Inc. (AAL). n.d. 2 October 2014. <>.

1 comment:

  1. The overview of the company and the case was done well so that I can easily understand what is happening in the case. It might be helpful to make the chart that is present in the blog larger so that it is easier to read. I thought the theories were done well and you related them to the case nicely. For individualism, one could say that the CEO was maximizing profits for himself, which in a way is what individualism is. However, I agree with you more so that he was not maximizing profits for the company as a whole. I think that is the larger, main point. The CEO definitely was not concerned with achieving happiness for all. This case is completely against Utilitarianism. Also, I like how you used the four virtues in relation to the case at hand.