On the Ethics of AMR's Chapter 11 filing

So this past week, the inevitable finally happened: AMR filed for Chapter 11 bankruptcy protection.  In the process, CEO Gerard Arpey resigned not because of a board coup, but because he saw bankruptcy as a moral problem.  In a NYT Op-Ed, Gordon College president Michael Lindsey lauded Arpey for defying traditional American corporate culture and holding to his moral convictions, even resigning without a severance package.  I agree with Lindsey insofar as Arpey is the atypical American CEO who had a moral conviction he was willing to hold on to regardless of the cost.  We need people like Arpey in business.  But what I do want to challenge is (1) the notion that because Arpey stuck to his guns in not declaring bankruptcy, he is somehow more moral than other CEOs.  In fact, his actions may have put the company in a position where it cannot sustain itself in the long run, which would endanger the employment of many more people than if he declared bankruptcy in the first place.  (2) Christian ethics needs to do more than just lift up poster-boys of good ethical behavior and challenge the structures that make good ethical behavior exceptional rather than the norm.

Whether Arpey's decision not to file for Chapter 11 bankruptcy protection in 2002 (when other legacy airlines did) was a moral issue is something I don't think we understand.  That is why Christian ethicists need a fruitful conversation with business practitioners, even if those practitioners were utilitarian drones.  It is easy to discuss Christian ethics from outside the real world, but the price you pay is an abstraction that fails to account for human reality.  This is the heart of Dietrich Bonhoeffer's ethical strategy that, I think, many evangelicals forget... or don't read. (Check his book Ethics, especially his chapters on History and Good).

First of all, the Chapter 11 bankruptcy filings of United, Continental, Delta, etc. were all made in 2002 in the wake of 9/11 and a spike in fuel prices following that.  Filing for Chapter 11 protection affords airlines a quick means by which contracts can be negotiated.  Of course, the ethical dilemma with it is that (1) it wipes out shareholder value, and (2) all contracts are voided.  The significance of the second is that while most of those contracts are renegotiated, they tend to be less attractive to the bottom rung of the workers.

To address #1, I see only an ethical dilemma existing between management and predominant shareholders who invested in the company for purposes of its well-being.  Many investors, however, invest for purposes of profit-maximization.  If you adopt such a libertarian investment philosophy, then you have to abide by the fact that with great risk comes great losses.  Airlines have always been known to be risky investments - this is almost axiomatic.  For that reason, management does not have any moral obligation towards these investors.  Of course, what about people with retirement accounts who had AMR stock?  Well, if I'm correct, most retirement accounts are not personally managed by the retired individuals, but by portfolio managers.  Thus, even though the retired who invested in AMR Corp. lose, the issue lies with their portfolio managers who made the decision to buy, not in AMR itself.

#2 is the bigger ethical dilemma, in my view.  More specifically, it seems very unfair that corporations have an easy means to void all contracts and renegotiate them.  Perhaps that is what made Gerard Arpey balk at filing for Ch. 11 protection.  But what needs to be considered is that if the company is not viable in the long term, the net job loss would be much greater.  Unions often do not provide very ideal bargaining terms to make a turnaround financially viable because union leaders are paid to secure higher benefits on behalf of the workers.  That AMR has failed to secure a financially sound plan from the unions is evidence that, however important unions are in safeguarding the basic rights of workers, they do not uphold the company's well-being if it became another rent-seeking mechanism in the company.

The notion that Arpey was, somehow, a moral CEO that would've agreed with the aims of Occupy Wall Street is befuddling.  If Arpey were interested in smoother negotiations with the unions, he should have cut his own pay and benefits.  His pay in 2009 was nearly $700,000 although his benefits gave him a total of $5.5 million in compensation.  What if he cut those by half and entered negotiations?  But he didn't.  Thus, I do not quite see the point that Lindsey is making, that Arpey would've agreed with Occupy Wall Street.  The OWS movement was rooted in the fact that the economic losses are not borne proportionately by the top 1%.  Arpey does not fit the bill of someone who has lost.  Furthermore, even though he leaves with no severance package, he did leave with several million dollars in pay, which he accumulated over the course of his many years working at AMR.  For that reason, I do not buy the reason that he was somehow more morally upright than other CEOs in the airline industry.

But if the company chooses to maintain its course and not declare bankruptcy, it cannot maintain profitability for long, because the costs cannot be cut in an efficient manner.  AMR, for example, were unable to cut costs to the extent the other legacy airlines did.  This led to an inability to upgrade aircraft and facilities.  If Arpey continued in his insistence, AMR would have necessitated liquidation in 5 years, which would mean the automatic loss of all jobs.  This is made even more difficult by the fact that other airlines have cut costs, upgraded their aircraft and facilities, etc.

In fact, Arpey may have denied the airline from recovering well.  After United, Continental, Delta, and Northwest's bankruptcy, they merged into the new United and the new Delta, both of which secured lucrative routes between Asia, Europe, and the US.  Although AMR had some access to Asia and Europe, it was nowhere near as extensive as United and Delta.  The talk of the industry is that AMR needs to merge with US Airways, but that won't help as much because US Airways has almost no access to Asia, which is AMR's Achilles Heel.  All in all, by not declaring Chapter 11 bankruptcy, I think Arpey has denied AMR a fighting chance in a market that has fundamentally changed.

Furthermore, it is a fact that profitable airlines do pay better because their profitability allows management to hire better workers.  The Asian airlines (notably Cathay Pacific and Singapore Airlines) were able to stay profitable, thanks to geographical considerations, during the market downturn and poach better employees from other companies.  United and Delta have, in their profitability, upgraded facilities and services, although economy flights still don't get complimentary food and we have to pay to check our bags (grr....).  Come two years from now, United will be the first US airline to operate the very fuel-efficient Boeing 787.  AMR, however, has been unable to upgrade its fleet of amazingly fuel-inefficient MD-80s (United and Delta use either the newer generation 737s or Airbus 300s for its workhorses).

My fundamental claim in all this is that Arpey is a great man and a business leader of great moral conviction.  That rightly makes him a needle in the Wall Street haystack.  But what is "moral" and are those convictions appropriate given the market environment he is operating in?  I don't think it's quite so easy.  My view is that Arpey should be commended for his willingness to stick to his moral principles even at the cost of his severance package.  But is he a model for CEOs?  With millions in his bank account and the fact that he's not likely to be looking desperately for a job, I think he is a nicer version of the Wall Street CEO.  A man of the Main Street he is not.

What Christians need to challenge is more than just to have a poster-boy of a good Christian CEO.  We need to ask ourselves what is a Christian CEO?  Is it a CEO that lives his/her values publicly?  If so, is it morally acceptable to have multi-million dollar compensation?  We need, in other words, to challenge the political and economic structures that allow CEOs to make multi-million dollar compensations and to have little fear of a difficult life upon severance, compared to the typical laid-off worker in the bottom rung of the corporate ladder.  We need to challenge systems whereby the ethical is exceptional.  That is why I find the fascination of Denver Broncos' QB Tim Tebow's Christianity very off.  I support his public acts of piety - it's his prerogative and, given his very conservative upbringing, it's an action that's true to himself.  But to lift Tebow up as a poster-boy of a good Christian NFL player defines Christian holiness on the basis of the NFL.  Why isn't Ben Lowe a poster-boy for Christianity, then?  Why isn't your pastor a poster-boy for Christianity?  Why is it that these famous people are?  I cannot help but suspect that many American Christians are confusing faith with fame and power.

That is why I find it befuddling to suggest that Arpey is a morally upstanding person for viewing bankruptcy protection as a moral failing while suggesting nothing about the morality of his multi-million dollar compensation.  I am quite concerned that Lindsey did not address this.  And what about those who were laid off?  I would be much more inclined to extol the morality of a Christian CEO if he/she laid off people but helped all of them find new jobs!  Name me a CEO that does that, and I shall call him/her moral! I personally do not find him that much different from other airline CEOs, frankly.

The article also makes one important assumption: that a chapter 11 bankruptcy protection filing is in se immoral.  I don't think it is that clear-cut.  To do so will require us to investigate what Catholic tradition has said about moral action given certain conditions.  That, however, is a topic for another day.