03.1.2010 « Airline Stuff: A Little of Last Week; A Little of This Week; A lot of Cynicism »
Consolidation; the National Mediation Board; APFA; Republic Holdings and Captain Prater
Last week, Reuters held its Travel and Leisure Summit in New York. A number of airline CFOs participated, including Kathryn Mikells of United, Tom Horton of American, Derek Kerr of US Airways and Laura Wright of Southwest. It was, overall, a really good group of voices who spoke pretty much in concert about the challenges facing the airline industry. Then came the sour note, from another invitee, Captain John Prater, president of the Air Line Pilots Association, whose. comments nearly caused me to choke on Cheerios. But more on that later.
Consolidation was the big storyline in the coverage. Southwest continues to not rule out the possibility of a merger, although Wright made it clear that organic growth is its preferred route. Mikells talked more broadly about consolidation and did not limit herself to discussing consolidation within sovereign borders. Kerr, too, spoke favorably about consolidation but suggested that merger activity would have a more positive effect on the industry’s fundamentals if it involved a carrier with a US domestic presence.
"It's five major carriers, it's too fragmented," Kerr said of the U.S. airline industry. "You have too many hubs, all chasing the same passengers trying to connect through the country. We believe that it needs to be consolidated."
One issue that puzzles me though is that the consolidation discussion focuses only on the five legacy carriers. I think the most interesting sector for consolidation is the regional sector (on which, as it turns out, Prater appears to agree with me.) But why are names like Alaska, jetBlue and AirTran not part of the discussion? What about Air Canada? Is consolidation limited to just two carriers? What if United, or American, or US Airways, wanted to sell part of their domestic operation to one carrier and another part to a third carrier? That concept is not so different than the slot swap deal that Delta and US Airways negotiated only to have the government make such dramatic changes to the terms of the deal that it now makes no sense.
Now back to Prater. In his remarks, Prater said that ALPA is for what he called the “right: consolidation – one that “actually protects and enhances jobs and creates a profitable carrier." Just to be sure, I read it twice. Yep, those were the words of the same pilot leader who has done little to nothing for his membership for the past three years. Then I remembered that it is an election year at ALPA. Maybe that is why Prater’s words and tone have changed to better mirror what Captain Moak said and carried out at Delta during its largely successful merger with Northwest.
Where was Prater when the US Airways and America West guys needed leadership? If my memory serves, I believe he was flexing his muscles after winning election on a “we will take it back” campaign. Of course, there is still little evidence to suggest that United is any better positioned than any other legacy carrier to return to the days of the bloated and inefficient labor contracts that helped tipped the carrier into bankruptcy. So Prater might be testing out a new campaign platform to convince UAL pilots that he deserves a second term.
From the management perspective, the CFOs wholeheartedly agreed that capacity discipline is the key for the industry to become and possibly remain profitable. They also agreed that alliances are here to stay as the industry’s answer to mergers across borders that are forbidden by rules and regulations.
"What you will see United and other industry participants doing, is basically within the regulatory framework that we have today, trying to get some merger-like benefits without merging," United's Mikells said. The discussion that followed focused on the big three alliances and their efforts to find cost synergies as well as the revenue synergies already in place.
And that’s where airline labor comes in. In the past, many unions have been cool to any merger that might threaten the union’s stranglehold on flying for its own members, even when that flying comes at a high price. Prater’s ALPA, for example, is a loud opponent of global mergers, even when the alliances in place today support so many pilot jobs in the US. Surely he does not think that each of the five legacy carriers would be as big as they are even today if they were not carrying alliance partner traffic? So the “consolidation that actually protects and enhances jobs” he talks about actually occurs every day when that United flight leaves Washington Dulles for Frankfurt with 60 percent of its passengers bound for points beyond Frankfurt on STAR partner Lufthansa. Just like the American Airlines flight leaving Washington Dulles for Los Angeles that is carrying a cabin full of passengers connecting with Qantas to Sydney and beyond?
Republic Is Confusing, Confounding
What the Hell Is Republic Doing? I get notes from really smart people in the industry asking me this question. After all, I was really jazzed over the prospects for Republic’s purchase of Frontier and wrote a lot about the possibilities here on swelblog. Now I am confused. First, I have not understood the level of management energy spent on the presumption that Midwest can be reborn. TPG had already destroyed the carrier literally and figuratively. I can see the possibilities of keeping in place some of Midwest’s best flying. But messing with Frontier’s brand to right-size Milwaukee makes absolutely no sense.
Ann Schrader of the Denver Post wrote about Republic’s “bumpy integration” in her February 21 story Merger muddles Republic Airways' branding. I appreciate that piecing together an airline is much easier said than done. But every day Republic seems to further confuse the confusion. And if serious industry watchers are confused, then just imagine how former loyalists to Midwest and Frontier must feel. It is those loyalists that are the brand – or maybe were the brand? I am a Daniel Shurz fan and I have every confidence that he can get the right aircraft in the right place at the right time. But there is much more to this delicate exercise than moving airplanes and picking markets.
I will buy the decision to dismantle Lynx (Frontier’s regional operation) given that it would have taken many more aircraft in the Q400 fleet to realize scale economics. Now Republic has placed an order for Bombardier’s C-Series airplane. On paper the aircraft is interesting – but why have orders been so hard to come by – unless someone needed to trade out of an aircraft type? Then Republic puts an unproven engine on a not yet embraced airframe. Confused.
A big part of the Frontier and Midwest brands was the people. This is about as bad a job of managing work forces as I have witnessed. Given the new representation rules likely coming this week from the National Mediation Board, Bedford’s Republic promises to be a ripe target for union organizers. Surely this is not Bedford making these calls? I have gone so far to say that Republic will play in tomorrow’s US domestic market in a meaningful way. Now I am not so sure. And I am simply confounded by any decision to upset the work force at Frontier.
The way this seems to be playing out is that under Republic, both the Frontier and Midwest names will disappear. So why then buy Frontier, an acquisition clever because Republic was buying a great brand. The deal in fact gave Republic an actual airline – something Republic is not. The purchase also bought Republic a management team that knew how to run an airline and an IT infrastructure that made the deal really interesting. But now it seems that Republic’s management team thinks you can feed a cookie (Midwest) to Grizwald or Montana (Frontier) and out comes Herman the Duck (Republic). Remember that brand?
The National Mediation Board
This is a week to pay attention to the National Mediation Board. Jennifer Michaels at Aviation Week reports that the Board’s “cram down” representation rule change will be published in the Federal Register on Friday. I believe that there will have to be some comment time or at least that is the way things used to work in Washington prior to this administration. Unfortunately this issue is playing out the way the health care debate is playing out – along party lines.
The other story playing at the NMB this week involves American Airlines’ which is again in “lock down” negotiations with its flight attendant union, APFA. The APFA already has threatened to request a release from the NMB if the two sides fail to reach a deal by the end of this round of talks. Whether the NMB will do so is questionable given what I see as the administration’s reluctance to risk a strike in the midst of a fragile recovery. Moreover, we typically do not see releases during the busy travel season – particularly when economic recovery is at stake. And rarely do we see releases when, by all reports, the parties are still pretty far apart based on what the union is demanding and the company believes it can afford.
The APFA, in all that I have read, does not seem willing to embrace any productivity in return for increased income for its members. American has been transparent in communicating its proposals, including on a public website. So what might the NMB do with the parties if a deal is not reached? Grant the APFA a release? No. Grant the APFA its release with the full intention of creating a Presidential Emergency Board? Maybe. Put the negotiations on ice? Maybe. Set new dates for the parties to resume negotiations? I think not.
Will the Board be proactive in trying to close a deal? That is the question. It is what watchers of this incredibly difficult round are trying to discern. How will this NMB deal? So far, with only a few airline labor negotiations cases closed, the NMB has not yet been pushed to the brink. But there are still 82 open cases. The AA – flight attendant deal might be the first big test.
Europe and Strikes
Speaking of the APFA and its loose-lipped talk of strikes, last week was most interesting in Europe. The Lufthansa pilots. The BA flight attendants. The French air traffic controllers. And of course, all things Greece
Europe is undergoing today what the US airline industry has been experiencing for the past 20+ years: the need to continually transform business models with relatively high cost structures in the face of declining revenues. Unbridled competition in the US domestic market was its catalyst to reduce costs, particularly labor costs. The decline in premium class revenue and the blurring of borders that used to protect individual flag carriers will serve as the catalyst for the European carriers to also reduce their labor costs.
The labor instability in the European airline industry demonstrates an expected collision of socialist policies promoting entitlement with an industry forced to adapt to market forces. I expect that there will be more weeks like this one as the European unions come to grips with market realities that could make any number of flag carriers irrelevant in tomorrow’s global airline industry. Unless, that is, those unions instead choose to adapt to the industry’s evolution . . . a story that has played out in the US in the names of Pan Am, TWA and Eastern Airlines to name a few.
It’s not just Europe. Look at what is happening in Japan where JAL, another legacy carrier with outsized costs relative to revenue, is in bankruptcy. Following 9/11, more than half of the US airline industry was in bankruptcy at one time. European airlines – and their respective unions - are not immune to the same market forces. And there are certainly lessons that can be learned from the US experience.
Reader Comments (11)
Interesting reading as always.
Regarding Republic's transition, I think you underestimate the competing interests between Frontier and Midwest loyalists (both in terms of customers and employees). Republic is truly in a tough spot, trying to manage expectations of two hometown markets and integrate several work forces (with each work force believing they bring the most to the table). What I think we are seeing transpire is really the predictable and inevitable transition period as the value of each (or a possibly new) airline is sorted out. Difficult as it may be, I certainly don't feel they have jumped the shark.
The latest press releases reveal they are conducting surveys, and I can guess what those surveys are saying: Abandon the cookie? Heresy! Paint over the tail animals? Sacrilege! Relocate operations to Indianapolis (or Milwaukee or Denver, depending on the airline)? Traitor! Seems to me the company is at this stage trying to manage the airline(s) without wholesale turning off one group of stakeholders. It may be inevitable, but I don't blame them for refusing to take an ax to one side or the other in the short time frame (a mere 5 months) that has so far transpired.
Avi8or
I hear you that it has only been 5 months. My concern is that with the loss of Menke and others they do not have the management team in place to get this very tough job done - and with success. I want to believe that this transition can work, but I am having real doubts. I believe in Bedford and Shurz and Frontier had some good people in pricing -- but is the bench deep enough?
As the rest of the industry gets incrementally stronger with an improving economy and a pricing environment benefiting from management actions in past years, this company appears to be floundering. If I am a competitor of Midwest/Frontier I am enjoying watching the floundering and with each day that passes I identify yet one more weakness to exploit.
I am not writing the obituary, but I also do not believe time is their friend. I am now doubting if they have even tried to answer a most important question like; what kind of an airline do I want to be? I wanted to believe that buying the two airlines came with a plan - now it appears as if the shotgun went off and there was a wedding.
Swelbar
I understand your point. Except I guess I just I don't see them "floundering" even if the transition is not smooth as glass (did anyone really ever think it would be?)
Maybe floundering is a little harsh, but ...... they are not blessed with much room for mistakes. MKE is not big enough for 3 airlines and neither is DEN. If I am Southwest and AirTran I am just waiting to pounce and do anything to woo the "loyalists". I never thought it would be smooth, but I did expect to hear an articulation of a vision for the branded operation by now.
I am surprised that you are confused about Republic.
With the exception of the brand name issue, it seems ot me it is all playing out exactly as Bryan Bedford said it would, months ago.
I have no doubt Sean Menke's resignation was a considerable hiccup to that, but it was a shock to me, too. I have long been one of Mr. Menk's strongest supporters. and I was disappointed - in him - by his action, or at least, the timing of it. It made Republic's already difficult job a tad harder.
At the same time, it may be the best thing that could have happened - it is all on Mr. Bedford now, there is no confusion of vision. And I admire that vision.
Like you, I also admire Mr. Shurz, and I am thrilled by what he is doing. For the first time in years, I see a cogent philosophy behind the route map decisions, not simply darts at a map.
As to Southwest, nothing will stop their assault on DEN. They clearly intend to be at least #2 at DEN and why stand in their way? When I first discovered Frontier, they had less than 10% market share at DEN - but they were profitable.
There are, I agree, a number of questions, but some relate to other airlines, such as why has Airtran not cancelled the FF agreement with Frontier?
I suppose I am simply relieved to see some order being brought to Frontier/Midwest. Lynx may have been a great idea, but it had real problems in practise and there is proven resistance to the turboprop..
Since you have raised Ms. Schrader's articles, I can only say that, over the years, I have had cause to wonder if perhaps the Denver Post has shares in Southwest.
In another article, Ms. Schrader gives great play to negative comments about Republic/Frontier by Mr, Fazakis of the IBT. But there is no industrial memory here. At the time of the bk, Mr Fazakis publicly mused that it might be better to let Frontier liquidate.
There are a lot of agendas at work.
Davy
Thanks for writing. I sense your passion for this project to work. I want it to work as well. Honestly I saw Republic participating in the continued consoldation of domestic capacity among the mainline carriers. I am a Bedford and Shurz fan. In basketball terms I have a point guard and a center on a team that made the 65-team field with 3 other starters and a bench before they left the team. That is my struggle.
Republic was/is not an airline. Frontier was. Republic sold a commodity - an airline seat to a willing buyer at a negotiated price. This is as difficult a transformation as we have witnessed here in the US. This transformation does not have a judge to run interference. The path of the transformation needs to be lit very clearly to all necessary in the implementation and from my perch that is not the case.
So I will continue to watch. Continue to hope for the best. And continue to wish my confusion and confoundedness away. Maybe I just simply need a lens change - or not.
Swelbar, thanks for the response. I am still a little confused.
I have a very clear understanding, based on what Mr. Bedford has said, of where he wants to go - he wants to build an airline capable of joining a major alliance, perhaps, but not necessarily, SkyTeam.
That statement, in and of itself, carries a multitude of signposts to the future.
I've only been aware of the man for about a year, but that has always been true of him. When Southwest made their first bid for Frontier, everyone looked at Mr. Bedford, expecting - what - a testosterone attack?
He didn't do that. He simply said he would not raise his bid. That should have set alarm bells ringing at Southwest.
But that didn't happen. After the auction, Mr. Kelly said (WSJ) that "unbeknown to us, Republic had been planning their bid for some time."
How could it be "unbeknown"? I live in New Zealand, and I knew. And I knew what Southwest had to do to counter his bid, they had to neutralize Republic's $150 million unsecured claim.
But - they didn't. So I was the least surprised person in the world when Republic won.
It applies to everything he is doing, nothing is surprising to me. I know where he wants to go and how he plans to get there.
I don't know the detail of it - but that is only the housekeeping. Maybe the old rule applies - saying less can often mean a great deal more.
'The APFA, in all that I have read, does not seem willing to embrace any productivity in return for increased income for its members. American has been transparent in communicating its proposals, including on a public website."
Maybe rather then drawing conclusions based upon news reporting you should call APFA and get the bottom line. Do your own research before you make statements. APFA has offered a great deal in the way of productivity gains for AA. The airline is happy drag their feet until the are forced to settle.
American has been anything but transparent. What they say to the members and the public is very different then what is being said at the table. Part of the reason we elect a bargaining team is so they speak on our behalf. The BS the company is trying to do by going directly to members is just getting people even more motivated for any self-help we might have to take in the future.
While the past has been tough for the airline, the future is looking better.
Regarding alliances that major airlines have partnered with globally, you speak of job creation. Can you give me any exact statistics showing which jobs have been created due to expansion by a US airline that can be directly linked to these alliances It seems since global alliances have come into play US carriers have actually shrunk their international and domestic operations making me wonder where all these jobs have been created? What I have observed is the foreign carriers operating increasingly into major US hubs carrying American, United, and other's customers.
Ain't gonna happen.
Using the executive pay scales, an F/O on a 320 style equipment should be paid some $240 per hour, now. I am certain many would settle for some $180 per hour.
On another note: Scope was to protect the flying public from inexperienced pilots. It failed with the Buffalo crash, among other incidents. Corporations like US have used the scope clauses to cause FOs on the 190 to register for food stamps. It is not the unions, but the pilots who would vote for such crappy contracts that are the problem children.
IntelVet
You are serious? Ever look at the signature page of your collective bargaining agreement? Yes people voted for the agreement, but ask yourself who negotiated the agreement that people voted on?
Sadly, Swelbar