How one airline flew back into the black

Emulating low-cost competitors, American uses workers' expertise.

Two American Airlines mechanics didn't like having to toss out $200 drill bits once they got dull. So they rigged up some old machine parts - a vacuum-cleaner belt and a motor from a science project - and built "Thumping Ralph." It's essentially a drill-bit sharpener that allows them to get more use out of each bit. The savings, according to the company: as much as $300,000 a year.

And it was a group of pilots who realized that they could taxi just as safely with one engine as with two. That was instituted as policy has helped cut American's fuel consumption even as prices have continued to rise to record levels.

From the maintenance floor to the cockpit, American Airlines is daily scouring operations to increase efficiency and find even the smallest cost savings. It's paid off: Last week, the company announced its first profit in almost five years.

While the other so-called legacy carriers are also slashing labor costs and increasing efficiency in an effort to compete with successful low-cost airlines, American has been the most aggressive in emulating the positive employee relations of low-cost rivals. Indeed, when American's management intensified its cost-saving efforts, it didn't turn to high-priced outside consultants. Rather, it asked its employees, since they do their jobs day in and out and know them probably better than anyone else.

"Communication lines were suddenly open," says Justin Fuller, an American engineer in Tulsa, Okla. "Before, people had ideas, but they didn't know where to take them. They also thought it wouldn't make any difference if they did. Now, the groundwork has been laid so people know where to take their ideas and how to get them implemented."

In an industry long noted for hostile labor-management relations, American's new approach is garnering high praise. But analysts caution that the change may not be enough to help turn the airline around completely. Fuel prices continue at record highs - double what they were a year ago - and, even though fares have nudged up only slightly, passengers are still demanding bargain-basement fares.

The combination continues to hobble most of the major US carriers. United, Delta, and Northwest are all struggling to either emerge from bankruptcy or avoid it. At Northwest, the clock has started ticking on a potential strike.

Of the major legacy carriers, only American and Continental showed a profit in the second quarter - usually the industry's strongest. Although the earnings are good news, analysts say that American still faces a long haul.

"There's some potential looking forward. Things are better," says airline analyst Helane Becker of the Benchmark Co. in New York. "But the worst isn't over yet. Fuel costs are still very high."

Two years ago, American was dodging bankruptcy, and labor strife hit a peak after unions voted to accept steep pay cuts, only to find out that management had given itself big bonuses and protected their pension plans from creditors in the case of bankruptcy. Unions were livid and temporarily suspended approval of the givebacks.

Call that the nadir. The board reacted almost immediately, ousting CEO Donald Carty and eventually bringing in Gerard Arpey, who put into place the current employee-based turnaround plan.

"American seemed to figure out sooner than United or Delta that the kind of cost structures they had through the '90s weren't going to make it, and they went about changing them in a much less confrontational way than the other carriers," says Clint Oster, an aviation economist at Indiana University in Bloomington. "There've been lots of jokes made about American's decision to pull the pillows out of certain flights. And while you can argue that is pretty silly, it does show that detailed attention to costs."

At the same time that it streamlines its operations, American is also focusing on strengthening them. While other carriers are outsourcing maintenance to save money, American is expanding its main maintenance facility in Tulsa. And it's challenging its employees to come up with $500 million in savings there during the next year.

"They're going to get to that goal ... by finding simpler ways to get their jobs done, lowering costs, and increasing productivity," says James Beer, American's chief financial officer. "As a result, we believe we'll be able to bring in other maintenance work [from other airlines] into the Tulsa organization."

For instance, on a tip from a maintenance crew, engineer Blakle Burgess came up with a way to save 90 percent on bathroom mirrors when they need to be replaced. Instead of ordering them prefabricated, Ms. Burgess helped design a way to make them on site with far cheaper raw materials. That way, when maintenance needs to replace a mirror, they can make it without having to go through the process of ordering and waiting for one to be delivered.

"Keeping stuff in house also spurs a sense of us working together," says Burgess. "People are seeing that we're doing something different. We're trying to keep work in while other airlines are taking a cheaper route and outsourcing."

Although there remain employee skeptics who are quick to note the company's history of labor troubles, most are reserving judgment.

And one thing is clear: The report that the company finally turned a profit, albeit a small one, is having an impact.

"It brings a smile to a lot of our faces," says mechanic Mick Davenport.