In case you didn’t know, “pigs” is now spelled PIIGS. No, not the source of bacon at the breakfast table; rather the troubled nations in Europe that threaten to undermine the Euro – and the heath of the world’s economic recovery - as a result of their respective weak economies; Portugal, Ireland, Italy, Greece and Spain – PIIGS.
I awoke this morning thinking about the last two cover articles of The Economist: “The World Economy: Sticky Patch or Meltdown?” and “If Greece Goes…” In a very simplistic way, there are similarities between the story playing out in Greece and the U.S. airline industry. Both are about economies that have long lived beyond their means, that borrow from tomorrow to fund yesterday and are rich in entitlement thinking -- even if the facts suggest yesterday’s promises just no longer work. What’s happening in Greece is, admittedly, much more complicated, but there are parallels and, more importantly, it offers a stark lesson that change is mandatory.
Just like society and its governing bodies, there are multiple stakeholders in the airline industry: unions; distribution systems (where three providers control 85% of the business); airports, associated communities, local, state and federal governments (taxing authority); MROs (where the top five control 50% of the business) and, of course, the airlines themselves (management, shareholders, employees, and multiple other vendors). All of them have to change if there is to be a vibrant industry that serves as the economic facilitator to the world. All these stakeholders have been financial winners at some point, but usually at the expense of the industry that keeps them in business.
Everyone supports austerity or “fiscal common sense” - except when it requires them to change. Think of it as the economic version of “NIMBY” – Not In My Back Yard. This is particularly true of the Global Distribution Systems (GDS) that are stuck in the 1980s. It’s somewhat true of the unions that somehow think they can still negotiate guaranteed job security as well as pay and benefit increases that hamstring employers – like what the pilots at United did to the company in 2000.
The Economist article, “If Greece Goes …,” challenges the leaders of the EU. The piece criticizes their “strategy of denial” – refusing to accept Greece cannot pay its debts. The article suggests that strategy is untenable for three reasons.
I love this European story and believe there are parallels to the U.S. airline industry pre-restructuring and the current industry negotiating its first agreements since the bankruptcy-laden 2000s. But no major deals have been done other than the practical Frontier pilots recognizing balance sheet fixes at the parent company are necessary and the deal done between the Delta and Northwest pilots to facilitate their airlines’ merger that works to ensure their survival today.
Here’s my definition of PIIGS as it pertains to the U.S. airline industry today. While it would be easy to start with “P” for “pattern,” the fact is – and one many unions and analysts have trouble accepting – is there is no “one size fits all” in the airline industry. Every carrier has different business models, strengths, weaknesses and, yes, even very different labor needs and rules.
The entanglements among stakeholders in the airline industry are a series of triangles that remind me of a Southwest route map in its infancy and as it has added routes over the years.
So my “P” is for “paralysis,” which is union leadership’s most difficult hurdle to overcome. On one side of the theoretical concentric triangle of interests I have the union’s leadership, then management, and on the third side, members/employees.
The dictionary defines paralysis as a failure to take action or make progress. As a result, paralysis easily defines pilot negotiations at each of three U.S. network carriers: Continental/United; US Airways East/US Airways West; and American Airlines. Hard to believe American’s pilots might have the best chance for a deal after three years of absolute paralysis as they were over -promised and under-served by former Allied Pilots Association (APA) president Capt. Lloyd Hill. The new union head, Capt. David Bates, actually talks about progress and common-sense deals.
The latest saga surrounding United/Continental finds Continental pilots filing grievances against the company for allegedly moving flying to United pilots. I can’t say one side violated protocols because I don’t know, but I have to admit, I’m not sure what filing grievances gain the Continental pilots. They and their counterparts at United are both represented by ALPA, and when the FAA grants a single operating certificate later this year they’ll be a single entity. Posturing simply slows everything down.
So here we go again. The company cannot run itself in the way it deems best for all employees because the pilots tell them so. Paralysis. Then we have the showdown between United pilot leader Wendy Morse and Continental pilot head Jay Pierce over control of the negotiations. Paralysis. Nothing will get done without leadership – and of course it will all be management’s fault that negotiations do not move as fast as pilots want toward a merged pilot agreement. Paralysis.
Nothing is going to get done at United’s pilot – or flight attendant bargaining table - as long as everything negotiated somehow comes back to seniority. Delta supplied the blueprint. First, negotiate a collective bargaining agreement. (Delta’s arguably took much of the best from both the Northwest and Delta contracts.) After determining how the combined work force would be governed, seniority issues were decided. A collective bargaining agreement does little more than determine the number of heads necessary to do the flying proposed by the company. There was no paralysis at Delta and a major deal got done benefitting all stakeholders because there was leadership.
At United/Continental, I think Morse is the leader with the most credibility because she has experienced the extremes at the bargaining table. She helped negotiate the pilot contract that cost so much, the airline ultimately went bankrupt. Then she helped negotiate the agreement in bankruptcy that took many of the unsustainable gains away. Pierce doesn’t have that background. To me, the latest grievances are a charade, a stall tactic to show the membership the union (even though they’ll soon be the same union) is in control instead of really making decisions to get things done.
The pilots at the new Delta have already shown negotiating a joint agreement is not that hard – well, at least it can be done in historically short order. If Smisek and his team give in, then United did not negotiate an agreement in the best interests of all employees and the airline’s stakeholders.
Ineptitude
When it comes to US Airways, I do not know what the shape of the triangle is. Synonyms for ineptitude include lack of ability, lack of skill, clumsiness and ineffectiveness. Any one of these descriptors can be used for the leadership at USAPA, the union representing the professional air men and women at US Airways. What a sad state of affairs when the company has to go to court to understand what they can and cannot do as it pertains to bargaining with its own employees. It has been nearly six years since America West’s merger with US Airways served as the latter’s ticket out of bankruptcy II. Calling the handling of the pilot situation at the carrier clumsy and the union leadership ineffective is an understatement of the new decade – and the previous one for that matter. How about a straight line to nowhere?
Incongruence
Incongruence is defined “as not corresponding in structure or content.” Most flight crews I know want to come to work, do their best job and go home. But when you start negotiating staffing levels is where you find incongruence. Management and union leadership know the most competitive business model is one where the maximum level of flying can be done with the minimum number of people. Unions, though, are also business with a self-interest served by having more customers (members). So they continue to insist on less pay for the greatest number of people when a much better standard of living can be negotiated with fewer people. Common sense says that thinking simply costs everyone – management, pilots, and other employees – in the long-run because, like Greece, it’s not a sustainable model and devalues the product.
Government
The government has skewed the triangle of management, labor and potential members. The government appears to be trying to level (make congruent) the playing field for unionism when the market for representation seems to be saying something else. The triangle should be based on market forces and to artificially change the parameters seems to be bastardizing the concept. The government is doing exactly what it says it’s trying to prevent by unbalancing interests.
The government has skewed the interests of airline companies, airline customers, and those that serve the airline industry – all in the name of consumer protection. I get angry when I hear the consumer is disserviced by the airline industry. My simple take is that you get what you pay for. That is true in any business. The government has over stepped it’s bounds as it pertains to taxes, fees, 3-hour tarmac delay headline-making unnecessary rules – by the way, where is Kate Hanni? Now it wants full transparency on fees. What about government fees? The fact that 20%of a ticket goes to taxes and fees probably goes unnoticed to the average air travel consumer.
The government is nearly conspiring with labor and consumers to ensure there is no market. Ted Reed of TheStreet.com asks the pertinent question: Is the Obama Administration Labor's Best Friend?
Stakeholders
Earlier in this piece we defined a number of stakeholders in the industry. While the global airline industry defines fragmentation, vendors and suppliers to this industry can be defined as anything but. Airlines will, of course, survive... at least, most of them. Some will die as cost structures will ultimately determine their fate.
This is not a U.S. domestic story even though that might be how it reads. At current cost structures, American Airlines cannot afford to compete for purely domestic traffic over the long term. Neither can United or Delta. US Airways can because of the labor arbitrage produced by their pilots’ paralysis. Nobody has to be more careful of how much it pays labor than US Airways because of its heavy reliance on the U.S. domestic market – when and if it is ever allowed to give employees a raise. American remains in the tenuous spot of being the high-cost producer and going first in an industry that loves pattern bargaining. It already has a proposal on the table that pays flight attendants too much.
Final Thoughts
In no way am I calling anyone stakeholder in this article a pig. Rather I am taking liberty with a significant international story, and an ensuing acronym, to describe problems with change in the U.S. airline industry. As is typical with this blog, I am expecting friends nowhere and enemies everywhere. But let’s get it together. If it means short-term labor negotiating and working feverishly in the interim to find new-age, long-term solutions… then so be it. The GDS have to evolve or dissolve. The government has to wake up and smell the coffee that the U.S. air travel consumer is the big – and only – winner of deregulation.
At the end of the day, labor and government have to stop standing in the way of progress or it will run each of them over. Just look at the steel industry.
Perhaps what’s most important is to understand the same way of doing things –then or now – simply won’t cut it. The airline industry needs to not only think about, but implement, change. Or, as is the case with Greece, it will find change disorienting, volatile, damaging and most of all, painful.