12.23.2007 « Putting a Few Packages (of Airline Industry Issues) Under the Tree for Readers to Unwrap »
Labor
In an industry that is associated with 3-letter identifier codes and with labor’s expectations that “concession recovery” is right around the corner, we should start to think about replacing NMB with PEB. Oh I know that a PEB requires time with the NMB, but …… I never remember a time where neither labor nor management has any meaningful leverage entering a negotiating cycle. I open with this one because trains and Christmas trees are synonymous.
Along those same lines, and with labor’s “one trick pony” leverage point being executive compensation, maybe we should be questioning whether the seniority system really works for airline labor and management. Imagine a real free market where individual airlines actually bid for individual labor's services? Would this type of a "free market" cause airlines to rethink their individual approach to invest in product similar to that provided by the global elite carriers? Free agency has generally been good for compensation levels – average and otherwise.
Isn’t it interesting to see AMFA being challenged on multiple fronts? Most observers expect them to lose their challenge from the Teamsters at United. It seems to me that this is nothing more than a story coming full circle. Just as AMFA challenged the IAM and won at each United and Northwest, by making promises it could not keep while exploiting situations where concessions could not be avoided. It is most interesting to note that by early 2008 AMFA could be gone from its two largest properties. OverPromise and UnderDeliver will be a term discussed more and more over the coming 3 years.
US Economy
With nearly $1 trillion in mortgage resets coming in 2008, doesn’t consumer spending have to be affected at some point?
It has been a long time since I remember reading so many stories and analysis which offer the mixed signals du jour on the direction of the US economy. From recession to inflation, the gamut is covered. The job market and manufacturing have each cooled which suggest a slowdown. Yet the consumer continues to lead the way as retail sales remain strong. But profit margins are less suggesting costs are exceeding the ability to price. Go figure. There is always demand at some price – the US airline business sure captures that concept.
US Government
With New York JFK and Newark operations capped by the US government, and the industry applauding the actions, which major US market will be affected next? What exactly does “new and real” capacity mean when considering a leasing of capacity program?
Remember when jetBlue was lauded as the best capitalized startup in US history? If something were to result in jetBlue failing, what would happen to those JFK slots “given” to the carrier?
Was Virgin America late to the party, or is their timing right? I am intrigued by their recent city pair market choices.
Is it really possible that Singapore Airlines will be serving the New York – London market and the Houston – Moscow – Singapore market in addition to New York – Frankfurt, Los Angeles – Taipei, Los Angeles – Tokyo, San Francisco – Hong Kong and San Francisco – Seoul by the end of 2008? Yes -- the signs of what lies ahead. Where is the home country?
Miscellaneous
Wouldn’t it have been ironic if the New England Patriots went 19-0 and won the Super Bowl, when in the same year the Miami Dolphins went 0-16? Well we know half of the story.
Aren’t you just tired of the same voices making statements that it just cannot be done because it hasn’t worked in the past?
Happy Holidays,
Swelbar
Reader Comments (12)
Swelblog said...
"Imagine a real free market where individual airlines actually bid for individual labor's services? Would this type of a "free market" cause airlines to rethink their individual approach to invest in product similar to that provided by the global elite carriers? Free agency has generally been good for compensation levels – average and otherwise."
This is like telling us to "imagine" a world without friction, gravity or heat loss. Sure, such models is useful for an "elementary" insights. But these "elementary" models not only fail miserably to predict outcomes in the physical world, they fail just as miserably in the economic world as well. These "elementary/imaginary" models have serious shortcomings precisely because they are "imaginary" and NOT REAL.
In the "REAL WORLD" economics....Oligopolistic employers (like airlines) disrupt or "add friction" to "market" driven outcomes for the price of airline labor. Specifically, Pilot labor. Collective bargaining units are established precisely to "counter" the marketplace distortion of monoposonistic employers.
The world you want us to "imagine" does not exist in the US airline industry. And it certainly doesn't exist on the European continent.
Do you believe, your "global elite players" like Air France, British Airways and Luftansa face the type of "frictionless" marketplace you imagine? You're kidding, right?!
One thing the French and Germans do very well...is exercise their collective bargaining rights. Factor in their higher social costs of doing business; along with higher real wage rates and stronger currencies. And I'd say that US labor is a "bargain" viewed through the eyes of these these "globally elite players".
How about we introduce your readers to "real world" economic models that already adequately describe the marketplace behavior in the airline industry. By comparison your "frictionless" world of unskilled laborers ain't worth bus fare in this regard. Especially with respect to pilot labor.
You've got an MBA, right?....Surely you've studied Game Theory? Let your readers "imagine" the marketplace dynamics of this world.
Game Theory is a "Real World" model that adequately accounts for the very friction, gravity and heat loss....you try to "imagine" does not exist.
Like Santa's village....imaginary worlds do not exist. But hey....it's Christmas time....a magical time for "imaginary" every things. But I "unwrap" your "imaginary" gift and I'm as disappointed as a small child who discovers that Santa does not exist. Shame on you!
My gift to your readership is Game Theory. "Imagine" a marketplace where Game Theory determines the outcome and the "price" of everything.
Enjoy!
Razor
I did nothing more than throw some things out to think about. Nothing more, nothing less. I have spoken to the issue of the skilled v. the unskilled here and I think we agree on some level. Not just pilots but mechanics as well. So do not try to put words in my mouth. You spend enough time to here to know that.
Whether the "single point" raised in your view is right or wrong, something is not working with the current labor construct as it is outmoded. Trying to apply a collective bargaining system that is burdened with language that was written when the jet airplane was introduced seems to me to have little relevance in today's world.
Ideas/points/thoughts in this post, and others, are not deemed by me to be the answer other than to challenge areas that have historically been too sacred to even raise.
In closing, the aviation world is no longer just about the US and Europe.
Swelblog said...
"With nearly $1 trillion in mortgage resets coming in 2008, doesn’t consumer spending have to be affected at some point?"
Your implication is that this will have a great impact on the airlines? To which I say......which ones?
The disruption in the mortgage market is specifically in the "subprime market". Who's target customer is this? How often does a subprime mortgage maker fly? What are his destinations?
I would argue that the subprime mortgage maker does not travel very often. If he does fly it is most likely a heavily restricted fare to Vegas or Disney World. Just a guess.
In short, the biggest impact will be on the LCCs. Already, SWA has stated that their advance bookings are down. However, the network carriers advance book is still strong.
Let's consider the purchaser of a subprime mortgage....like Barclays. Do you think that when/if these loans begin to fail that the enormous Balance Sheet of Barclays will feel it? Don't you think that their investments are diversified enough to handle a failures in the subprime market?
Regardless....will your typical Barclay's executive fly less because of a meltdown with subprime mortgages? I doubt it? Mortgage making is only a small part of global commerce. Who will a Barclay's executive generally fly with? JetBlu? Southwest? Yeah right?!
Nope........Any fallout from the subprime meltdown will impact specific carriers who make it their business target these "cash-strapped" customers.
You are right....the economy is cyclical. The Bureau of Economic Analysis clearly shows that upturns are followed by brief downturns throughout the history of this country.
So....if pundits are right. And the economy is "poised" for a brief downturn. What's the prognosis for an ensuing upturn? What's the probability that an upturn will follow a downturn? Answer....P=1.00
Should the threat of an economic downturn impact my union's negotiating strategy? No!
Swelblog said...
"Trying to apply a collective bargaining system that is burdened with language that was written when the jet airplane was introduced seems to me to have little relevance in today's world."
Do you actually believe that in the wake of 9-11, that the language in this industry's pilot contract is "written with language that was written when the jet airplane was introduced"?
Our contract was butchered and shaped into what management wanted. The same with Bankrupt carriers.
APA's contract looks NOTHING like a contract from the 1960s! WOW!
Your argument has absolutely no merit.
To suggest I said a "great" impact is again putting words in my mouth. I merely asked about a possible cause and effect on consumer spending generally. Most forecasts of reduced airline profitability for 2008 do not cite the subprime market and its impacts as a primary reason for those reduced estimates.
I agree to some extent with your general point on the consumer and airlines. But, given economic activity - airline or non - is a result of both direct and induced benefits, I was just merely posing the question.
Razor, if nothing else I do appreciate and enjoy your thoughts and the attention you give to your world. I am guessing you are a Massachusetts person, so if you want to catch up at some point when I am there I would be happy to.
Your strategy is your strategy. I am just not convinced that current tactics are the way for labor to enjoy the upside. Fixed rates of pay are not that answer and I know you and I have had that discussion before so we do not need to do it again.
Occam razor brings forth "Game Theory." Not being familiar with this concept, I did a Google search on the topic. Stanford University did an interesting analysis on it and it can be found at:
http://plato.stanford.edu/entries/game-theory/
In reading this piece, two very key elements of "game theory" caught my attention -- "formal reasoning" and "economically rational players."
In seeing the proposals put forth by APA union officials and their cost analysis, combined with the continual emotional drumbeat of executive bonuses, questions arise as to prerequisite of "formal reason" and "economic rationality." I would also add that a similar argument could be made on the management side of the bargaining table as well.
I think Bill's commentary was merely pointing out that the current approach has not done a very good job at protecting the stakeholders associated with the airline industry. In my view, the "game theory" will only be useful if the premise of "formal reasoning" and "economic rationality" are satisfied.
Just a thought
With so much emphasis on keeping it "REAL," how about identifying who you really are?
Carmen Villani
Carmen
Happy Holidays and thanks for weighing in. As I know you know, game theory requires more space than we possibly have here, but your fundamental points regarding such are appreciated. Your point on "economically rational" can indeed be applied to both parties and I thank you for appreciating that my posts here do attempt to address a system that does not work. But sadly I am not sure we can rid ourselves of emotion in order to engage in "formal reasoning". Happy New Year to you.
Villani said...
"In reading this piece, two very key elements of "game theory" caught my attention -- "formal reasoning" and "economically rational players.""
You haven't even scratched the surface of Game Theory. And your attempt to link it to APA-AA negotiations in the manner you describe is laughable. But that was your intent....wasn't it?
If you want to understand the airline industry and where "labor" fits into the equation. You need to go deeper than just "rational players" interacting in the frictionless world of elementary Supply and Demand. Better known as Perfect Competition.
Game Theory satisfactorily explains "Imperfect Competition" which characterizes the airline industry. How is it, that Rational players appear to behave irrationally? The answer lies in high fixed costs and low marginal costs. This condition creates an inherently "unstable" situation where there is literally NO equilibrium to a market. There is no intersection of supply and demand curves. No equilibrium. The supply curves become discontinous. Or more precisely, NO CORE. What this means is that there is NO OUTCOME acceptable to all players (buyers or sellers) in the industry, hence NO EQUILIBRIUM. This is also known as Destructive Competition, and it was precisely because of this phenomenon that airlines were regulated to begin with. Alfred Kahn admitted as much. The underlying condition has not changed because it was deregulated.....it always will be an unstable industry. And pay scheme will change this fact.
The next concept you need to read up on is Core Theory.
Because the Airline industry has NO CORE......there is literally no reason for pilots to concede anything! No amount of Concessions will create a CORE where one does not exist! Even, if pilots all worked for free, you could NOT prevent periodic meltdowns in the airline industry that is due the fact that "THERE EXISTS NO OUTCOME ACCEPTABLE TO ALL PLAYERS."
No flexible compensation plan, no paycut or concession, no pay raise or bonus scheme will change the nature of an industry with NO CORE. The only thing that will is re-regulation and we don't seem to be heading in that direction do we?
So.....The next time you visit MIT, you would be well served to stop by Economics department and have them explain "The Theory of the Core" to you.
You have to stay within the realms of reason here. All of this is academia egghead thinking if you truly think Air Nirvana is going to take flight. A true waste of band width here.
You might as well tackle the Middle East conflict and solve that quagmire as a pre-season warm up game before you delve into the RLA and “questioning whether the seniority system really works for airline labor and management.” To sit in the laboratory and debate the finer nuances of Air Nirvana while out in the real world the employees of UA and AA keep getting kicked in the teeth by upper management is ludicrous.
No one has a more keener interest in the financial success of an airline than an employee with a seniority number. Through thick and thin a seniority number is a marriage vow while someone in management is only as loyal as yesterdays closing stock price.
“Labor’s “one trick pony” leverage point being executive compensation” was a gift from the skies to rally the troops around. Not since the sweat shops of the 1800s and black lung of the coal mines has labor been more focus on the ball.
The current leadership of AMR is both ethically and morally bankrupt. The troops know this and have rallied around this “one trick pony” because they have been lied to by someone who they place their trust in. After Crandall and Carty everyone held out hopes for Arpey but what a disappointment he has been.
Razor
Not sure if you are writing to Mr. Villani or me. There was nothing in the post that even mentioned APA, they were just thoughts.
Honestly, if you do not like what is being written here, then simply stop reading. It is not difficult. There are plenty of other venues for you to display your knowledge of economic theory. To be sure, I am less interested in theory and much more interested in the real world application of economic issues facing the airline industry.
As for APA, if there is nothing interesting to write on the state of negotiations in Ft. Worth, I probably won't.
I understand that Villani refers to you as his "good friend". So consider my last comments addressed to you both.
When you try to put in place a "real world applications" like flexible compensation for airline employees. And rewriting our already decimated wages and work rules (which look nothing like those in place during the "dawn of the jet age")....you'd better have a theoretical underpinning as to how that's supposed to improve my position.
I submit to you.......based on my understanding of the nature of this industry. That such an offer is an "empty core".
There is no payment scheme that can stabilize an industry that is unstable at its core. Why? Because the price of pilot labor has nothing to do with the inherent instability of the airline industry.
If your ideas have no theoretical underpinning, your efforts are a fool's errand. "Real world applications" have theoretical underpinnings to them.
Rather than telling me to go away.....you should sparring with me. I am the very mind you seek to enlighten with your "new" ideas.
Razor
You are right. I need an idea to write on in the coming days. So rather than respond to your comment, I will give you something to comment on in the next week or so.
Swelbar