08.28.2011 « It Shouldn’t Be About Scope This Time – Rather Benefiting More Than One Stakeholder Is Key »
It is Friday, August 26, 2011 and I am aboard United flight #701 bound for Albuquerque to participate in the 16th Annual Boyd Group International Aviation Forecast Summit. Many third rail issues get addressed at this widely attended conference and this year promises to be no exception. The conference will address what Boyd refers to as futurist issues that will ultimately result in structural change to the architecture of the industry. And I have been asked to help Mike open the conference along with Captain Michael Baiada. I cannot wait.
What is significant about United flight #701? Seven years ago, a significant part of my career was assisting communities to attract airlines to begin new service. I was working with a talented air service development team at the Metropolitan Washington Airports Authority and my former firm, Eclat, and at the time there was very little domestic service to relevant markets that Washington Dulles did not have, whether regionally, mid-con or trans-con.
But there were unserved markets like San Antonio and Albuquerque that were made interesting with regional aircraft service. We approached United about a regional service from Dulles to the Land of Enchantment starting with a regional jet. United agreed that the market could support a 50-seat aircraft on that route. Over time, that route could support a 70-seat plane. Tonight I sit aboard a United mainline A-319 flown by a United mainline crew.
If not for the ability to initiate a route that had fledgling demand with a right-sized aircraft, there would not be a mainline flight today that would get passengers from Washington Dulles to New Mexico in three hours and nineteen minutes. And this is but one example of many similar stories.
Today's pilot unions might look at this through a different lens. How can we talk about any positive development stemming from the relationship between a mainline carrier and a regional partner? In the view of many, any flight flown under the flagship name should be flown by mainline pilots. That's why unions negotiate scope clauses. That's job protection.
Or is it?
Ahh -- the law of unintended consequences rears its head in union halls. Scope language is negotiated – in the mind of the pilot unions - to protect jobs. But it does not. Just note the loss of more than 800 mainline narrowbody shells and nearly 15,000 mainline flight crew members over the past decade and ask how successful the pilot unions have been at protecting jobs.
More cuts will come if management negotiates the wrong scope language this time – language that limits their ability to remain agile when responding to competitive threats. Domestic mainline network attrition will occur by 300-400 additional paper cuts per airline if done otherwise. Nothing can artificially alter market forces. Airlines have found ways around regulations governing international air transport and they have found ways around the biggest regulator of all – unions and scope language.
All I hear from negotiations at United/Continental, American and a renegade wannabe union challenging ALPA at Delta is that this round is about Scope, Scope and more Scope. And I smile and wonder where the magic will come this time as lower cost competition remains keen to take full advantage of its labor and other cost advantages to find future growth opportunities.
Jeff Smisek, President and CEO of United Continental Holdings, recently lambasted the federal government - the other regulator - in a presentation at the Global Business Travel Association Convention in Denver. Where might the U.S. look for a model of more effective air policy? Dubai, Smisek said, according to an article by Fred Gebhart in Travel Market Report.
“Emirates is a good example of an airline with a government that has good aviation policy,” Smisek said.
“Dubai recognizes the importance of air. It has an intelligent policy with a government that cares about the success of the air sector. It doesn’t throw up roadblocks, doesn’t over-tax it, and doesn’t beat it down at every opportunity. The U.S. government does all those things every day.”
As usual, Smisek is spot on.
He talked of wanting to make United an airline that customers want to fly and investors want to invest in. But while he spoke, Gebhart reports, nearly three dozen pilots and staffers picketed Smisek outside the conference, claiming that the company was "outsourcing jobs while creating unsafe working and flying conditions for employees and passengers.”
Nothing, and I mean nothing, disgusts me more than the actions of the US Airways and United/Continental pilots playing the safety card to create leverage in negotiating a collective bargaining agreement. Is it really useful to try to frighten passengers? The vast majority of employees recognize that the best job security is a successful company and successful companies need customers to provide the revenue and shareholders to provide the capital.
Keep in mind that the pilots doing the picketing agreed to the language that allows the outsourcing of certain flying. If not for the regional partners as a lower cost alternative, United, Continental, Delta and US Airways mainline operations would be but a shadow of the shadow they are today.
The United/Continental and US Airways pilot groups should get out of the court room and the arbitration tribunal business and get back to the bargaining table and negotiate an agreement that takes into account their companies' unique strengths and weaknesses.
Scope is not their problem. Global competition is the challenge, and no scope language is going to protect them from that. Any attempt to hamstring the airlines from making decisions that are in the best interests of all employees/stakeholders will only weaken the companies down the line. When it comes to United/Continental and US Airways ability to survive, Smisek and Parker are not the enemy; Emirates and Southwest/AirTran and Air Asia are.
Qantas Compared to the US Network Carriers
Speaking of being hamstrung by labor - the Qantas story playing out has strong parallels to the US network carriers that used the bankruptcy process to remake their operations during the 2002 – 2007 period. The only real difference is that Qantas is quickly losing its competitive advantages to the emerging international “low cost” network carriers whereas the US network carriers lost their competitive advantage to the emerging domestic low cost carriers.
Last week Qantas outlined for the world the initial phase of an intended restructuring in its international operations designed to get its operating costs down – beginning with a new, high end, narrowbody intra-Asia operation with 11 Airbus aircraft. Needless to say, Qantas CEO Alan Joyce’s decision to embark on such a strategy only poured more fuel on the fire burning between the kangaroo and its unionized pilots.
Joyce is one tough leader. Last week, Qantas announced that its profits doubled. You know if you are making money why would you need to possibly embark on a radical, non-Australia based operation? Because the international operation is under fire from Emirates and Air Asia and Virgin Australia and . . . Qantas announced that the mainline domestic and international – not subsidiary JetStar - made AUD 228 million, an improvement of 240 percent over the prior year period. So what’s the problem? The international operation lost AUD 200 million, meaning a very small domestic operation made a staggering AUD 428 million. Therein lays the problem. A money losing international operation, given the large fixed investment made, could quickly land a smallish carrier like Qantas in the memory bank.
Not only does Qantas suffer a structural geographic disadvantage of being at the end of a network system easily making its markets captive by the competition, it also suffers from a labor cost disadvantage, particularly in its international operations. With successful competitors springing up in all sectors of Asian commercial aviation, the Qantas brand is potentially isolated and damned for extinction unless the network procreates outside of Australia.
This is why Joyce is making his move and doing so before it is too late. And that is what the unions do not understand. Scope is only as valuable as a met condition makes it. Scope is negotiated before the future landscape is fully known and understood. Airlines overpay for scope because the opportunity costs to shareholders are disregarded. And this must come to an end because it only hurts the bottom line and job protection in the future.
Smisek, Anderson, Parker and Arpey (and maybe even Kelly as his airline gets more complicated) should take a long hard look at the history of scope. Has it produced the desired consequences for employees, shareholders and the company? Has it produced the kind of goodwill a company might expect from negotiating job protection measures in collective bargaining agreements? Has it stopped unions from using the "safety card" to attack their own airlines by making customers leery of flying?
I challenge each of the US CEOs to resist caving into union demands for scope language in negotiations with the unions. There is no job security for any employee if the company is made weaker because management tried to buy labor peace with short-sided, limiting "job protection" clauses designed to make one employee group feel better. In today's airline industry, the root of job security is the ability to fly profitably and with the flexibility to fly the right aircraft with the right costs on the right routes for the network.
More to come later this week.
Reader Comments (18)
I can't beleive you have any clue about anything you just wrote about. You are like a news organization that gives only 1/4 of the facts and makes up the rest to look like you know what youre talking about. what an idiot
Gee Swell, after reading your argument for relaxation of scope I am dumbfounded. You state that companies with strong scope clauses in their pilots CBA are financially weakened. However when I look back at the last decade I see US Air, United, Delta, and Northwest in bankruptcy and they arguably had the least restrictive pilot scope clauses, but Southwest has the most restrictive scope clause in the industry, all flying done for the company is done by pilots on the Southwest seniority list, and they are undoubtedly the most successful over the past decade. Continental and American had the more restrictive scope clauses of the traditional network carriers and they avoided bankruptcy. History seems to point the opposite of your diatribe.
Your argument has absolutely no historical economic backing. Who are you? Do you really do research on the industry or do you just spew the drivel the ATA feeds you? Does MIT know you are spouting this off the wall non academic opinion while you under their employ?
You make a great case for why small aircraft such as 50 and 70 seat regional jets are necessary, but you never explain what scope has to do with this? I agree completely with the notion that having smaller aircraft is a great way to open up new markets or keep frequency, but why not have these flown by the network/legacy/mainline pilot group? Can you please elaborate on your logic for how having flying done by contract carriers promotes better job security for anyone--including the pilots of those contract carriers?
Obviously a very management-centric ideology. Anyone with more facts and additional research of OTHER sides of the story would have a more acceptable article. This sadly, falls way short.
Continental did not have the most restrictive scope clause. True that Continental scope did not allow any jets over 50 seats, but they had fully 270 50 seat regional jets flying for them and allowed turbo props up to 74 seats. in terms of capacity allowed, Continental probably had the least restrictive scope and they never seriously flirted with bankruptcy, as even American did.
I am one of those so called "regional airline" pilot. I am truly enraged and disgusted that you are pro relaxation of scope clause at mainline level. If you are a mainline employee, why should you let some other company that no one has ever heard of disguise as your company and take your work away? And why do employees at regionals have to be compensated at ridiculously low rates and suffer with inferior work rules, even though they are flying same passengers as the mainline pilots? You are sadly confusing scope clause battle and the existence of RJs.What DPA (and myself) wants is the RJs flown by pilots on mainline seniority list, not just getting rid of all RJs. When RJ was first introduced, the Delta management suggested Delta ALPA to operate the jets. they declined for many reasons; they are now wanting it back. So what is the problem with that may I ask?
"Scope language is negotiated – in the mind of the pilot unions - to protect jobs. But it does not. Just note the loss of more than 800 mainline narrowbody shells and nearly 15,000 mainline flight crew members over the past decade and ask how successful the pilot unions have been at protecting jobs"
What a bunch of twisted dishonest propaganda!
How many of the seats on those parked airplanes have been taken over by non-unionized regional operators flying 50, 70 or even 90 seat jets? How many of thoise planes were parked becasue legacy airlines lost passengers to BETTER MANAGED low cost airlines like Southwest who are unionized and pay far above what legacy carriers pay their pilots to fly simular airplanes. Yes of course scope language is intended to protect jobs but when airline management is determined to practice labor arbitrage they have been pretty successful at finding ways to get around scope clauses. They can hire gunslinger "consultants" like yourself and of course, lawyers, who will see scope clauses defeated through our corrupt judicial system. When that doesn't work they can just ignore scope and do what they want anyway and usually they don't recieve more than a very inexpensive slap on the wrist from a buisness friendly judge.
Only a toal idiot could fall for the load of goods you're selling.
Shame on you Billy Swelbar, I hope you enjoy those checks rolling in from airline execs like your buddy Smisek. I hope to God you and yor kind aren't successful in your attempts to turn the United States into a middle-eastern autocratic sheikdom with no unions, no civil liberites and no protection of law for its citizens. You and Smisek both should go move to the UAE if you think its so wonderful there.
Wow, not one person agrees with you, proof that you are lost and don't have a clue. However keep it coming. Your blog is a good source for anyone who wants to become a pilot. I used to have to take the time and explain my career to potential future airline pilots, needless to say they changed their minds, now I can just direct them here and it saves me the time. You are making it easier in reducing the future supply. I wonder how in the near future one can justify spending $150k on an education, to then go work for $19k under ridiculous conditions.
Sorry pilots. I agree 100% with Swel here. honestly, airlines dont exist to give pilots a job. I know of no other industry where one labor group can so forcefully exist so much pressure. yes, you need skilled pilots. But just because you're a skilled pilot does NOT mean you have any idea how the business fundamentals of an airline work. Sorry, you're bus drivers of the sky. skilled bus drivers, that is (which I understand). Leave the planning and business to management, and they'll leave the flying to you.
A few comments about William's "No apologies. No reservations. No sacred cows" blog. Which, by the way, has yet to be any of those things.
First the easiest. To tag onto justapilot's post, for those of you who I direct to this blog to display what the future of the airline pilot profession will look like if airline management has its way, this particular blog is another example of what I am talking about. Mainline pilots, according to Swelbar (a person who consults airline management), should get rid of scope and outsource good paying, high quality, mainline pilot jobs to the regional airlines. Again, parents and career changers, when you're thinking about shelling out close to $100,000 (or more) for a college education and flight training, think about the implications of this blog. The good, US mainline pilot jobs, in the future, may be going more and more to low paying, low quality, regional airlines on the low end. Further, consider that the "good" widebody flying could be going to foreign airlines through codeshare deals, revenue sharing, and possibly cabotage arrangements, where cheaper pilot labor can be found.
I will reiterate the question I have posed to all of you. Do you want to spend significant amounts of your money and your time to pursue a profession that may go the way of the 1970's factory worker if airline management and their consultants, have their way? You have seen what has happened in the past 10 years, and this blog illustrates the relentless pursuit of still further outsourcing. If you decide to enter this profession, I hope you go in eyes wide open to what the future will look like.
To continue...
Your point about 15,000 mainline jobs and 800 mainline narrowbody aircraft being parked goes to show exactly why unions need to do a better job protecting pilot careers through scope. In the early and mid 1990's, they went along with airline management's story that these new regional jets would open new markets and promote mainline growth. Unfortunately, that turned out not to be the case.
Now, airline management is replacing mainline, narrowbody flying with these regional jets, pursuant to the large leeway airline unions gave airline management in the 1990's, with the balance of scope taken away by the threat of bankruptcy or the gavel of a bankruptcy judge in the early 2000's.
After a decade of seeing the results of the great "mainline growth" these regional jets were supposed to provide, they've learned their lesson. Certainly it is true that regional airline flying does provide some amount of growth, but what does the airline pilot care if that outsourcing parks a fleet of jets as it did at United and he now doesn't have a job? What does the mainline airline pilot care about the "growth" these RJs are supposed to provide if he has been moving backwards at his airline for the past decade? All this "growth" that the RJs were supposed to provide hasn't manifested itself. The unfettered growth of RJs has done nothing but damage mainline pilot career expectations.
If airline management wants to fly regional jets, they are free to do so, but with mainline pilots in the pilot seat. Pilot costs between what would be junior mainline pilots and regional airlines with pilot rosters rapidly getting more and more senior every day is narrowing anyway, so having mainline pilots fly these jets is an easy solution to the scope problem.
As far as your comment about your "disgust" about United and US Air playing the safety card...nothing disgusts me more then when guys like you, who don't have an interest in opening your eyes as to what is going on in the regional airline industry, make comments about things you know nothing about.
Again, William, let me bring you back to the Colgan Airline crash in NY. Do you HONESTLY believe that Colgan management wasn't compromising safety when they hired the two pilots who were responsible for killing all of those people? Do you really thing that Colgan didn't put $$ before safety when they hired a Captain with a history of training problems and checkride failures? Do you really think Colgan hired that inexperienced first officer because she was the "best and the brightest" the pilot profession had to offer? Or did they hire her because she was one of the few who would be willing to work for under $20,000/year? Do you honestly believe that if there is a squeeze on pilots again like there was in 2007 that the regional airlines wouldn't do the same exact thing again? Are you understanding what I am talking about? Or are you going to keep the blinders on until more people die?
Let me give you another example. Let's say you became wildly successful as a consultant (let's dream a little) and you became wealthy enough to buy your own business jet. In this jet, you would fly yourself and your friends and family, the people who mean the most to you, to places all over the world.
Would you hire a Captain with a history of training problems to Captain your jet? Would you hire a low time first officer to pair with him? If you had a brain in your head, you wouldn't. But why did/do the regional airline do that? What is that OK? Are you seeing what those US Air and United pilots are talking about now? Of course you do, but you won't say it. It's not in your interest to agree with me or to open your eyes to the problem. Again, so much for the "no apologies, no sacred cows, blah, blah, blah" portion of your blog.
In conclusion, when will you write a blog about exorbitant airline management compensation? How airline management salaries are artificially inflated by rubber-stamping BOD's? How airline management salaries don't reflect market rates? You could start your blog by Google-ing "Upgrading an exec's exit at United/Continental" and go from there. I won't hold my breath, however.
Just a point here about how "exorbitant" airline management salaries are - you have no clue what you're talking about. It's easy to pass airline management off as out of touch in their ivory tower, but I'm one of thousands of employees working at HQ for a legacy airline and I'm paid far below market wage for my role and I haven't seen a raise for years. Managers here are underpaid relative to other industries and work very hard on complex issues every day trying to keep this place generating enough cash so that we're not all out of the job. I can't speak for those in the C suite, but the misconception that everyone is vastly overpaid and out of touch with reality is absurd. They make a lot of money, but look at any other company that generates $20-$30B in revenue per year and tell me what CEO isn't paid more than most airline CEO's? This is one of the toughest industries on earth to manage. Profits and paychecks follow accordingly. The majority of people working in airline management could make more elsewhere. We stay because we love the business, it's challenging and complex and unlike any other industry out there.
I respect the job that pilots do, I just think they're overpaid and there is a huge oversupply, which is why nobody can move up. Pilots that have been paid handsomely for years and have one of the most relaxable, flexible, and enjoyable jobs out there, international captain jobs, have absolutely no incentive to retire. If I was a widebody captain, I wouldn't DREAM of retiring until I hit mandatory retirement, and you probably don't either. But if you did, it would certainly help those pilots below you start to move up.
Archaic work rules and scope clauses throughout the business leave the hands of the airlines tied. Unions reduce the ability for management to quickly adapt to supply and demand. Take a look at the financial results of American Airlines this year. If everyone doesn't acknowledge that it's not just management that carries some of that blame, they need a sanity check. Workgroups across the company would rather put down the wrenches or play the "safety" card or have organized groups call in sick than show up and do they job they're paid above market wages to do because they're out of touch with reality. Financial illiteracy is ruining this country.
Bart
My correspondence has been concerning executive salaries, not middle management in the trenches where the rubber meets the road. I honestly know very little about airline middle management, but I do follow executive compensation as I come across the topic reading SEC filings and such. However, if I am to believe what you write about airline middle management, about enjoying their jobs so much that they are willing to work for a salary that is less than their peers in other profession, then if they aren't getting raises or paid what they deserve, it sounds like their own fault if they truly are underpaid!
As far as CEO salaries go, I think there are plenty of people (maybe even you?) who would do a fantastic job managing an airline, and who would do it for far less than the "going rate" currently offered airline CEOs. US CEOs are grossly overpaid when compared to their peers in similar corporations in other industrialized nations, and that is something that needs to be fixed in my opinion. Hence my comments.
Maybe we will all be lucky and Swelbar will be on the next flight which will suffer the consequences of his ideology! That will shut him up for good!
Classy comment whatever. Classy.
There is a reason why every other group in an airline hates the pilot group.The majority of pilots are shortsighted, greedy, and don't understand anything at all about business, economics or markets. They bully management into an unworkable agreement through the threat of bankruptcy and then sit around with their nose up that management isn't competent enough to work their way out of the labor handcuffs placed on them. Somehow, pilots believe it's possible to manage the most difficult business on earth through common sense, or often just nonsense. I have sat through meeting after meeting with pilot unions listening to pilot ideas, and every single one has been based on the premise of:
Pay pilots more.
Hire more pilots.
Charge more for tickets.
As has been said in another comment, no one in an airline makes a competitive salary. The executives make a lot (they always do), but they still make less at an airline than they do elsewhere. Besides that, pilots benchmarking their wages to the top executives is stupidity. Hiring an executive to run a multi-billion dollar, high risk complex enterprise for bargain rates? Stupid, and indicative you don't have the acumen to run a Tim Hortons. And if pilots didn't take every last cent of profit for themselves, there would be profit leftover to improve the operation and to make the airline an attractive investment to acquire capital and grow the airline (and guess what - hire more pilots!). Hopefully once these legacy fossils go under we'll finally see an exciting, competitive, and innovative marketplace in aviation.
Swelbar said...
"Classy comment whatever. Classy."
Swelbar,
You have to admit, there's a certain poetic irony to the image of you in a smokin' hole and another Captain Renslow at the controls.
Careful what you ask for.
Bill,
The unions are out of touch with reality. The rhetoric has not changed since the days of a regulated environment. ALPA is only concerned with pattern bargaining whereas the pilots of each individual carrier need to negotiate what is best for their own pilot group and their own company. Southwest's pilots could care less about ALPA's plight and their bottom line has reflected that year after year.
A classic example of this was Continental approached the pilots about the flying the 170/190 several years ago. They would have been flown by CAL pilots, under the CAL contract and would be a moot argument during this negotiation cycle. CAL wanted reasonable rates of pay that would reflect the revenue of the aircraft and the rates where north of $120 for Captains but the union in their infinite wisdom demanded small narrow body rates. They were so entrenched with that ideal they would net even let the pilots make the decision to vote in favor or against the proposal. Yet ALPA on the other hand went out to the commuters with the same lawyers and subject matter experts and negotiated rates of pay well below what CAL mgmt. had proposed.
ALPA, with their change to the merger policy after the DAL/NW merger was doing nothing more than protecting ALPA's revenue stream not the pilots they represented. Their fear of another AW/USAir debacle was their internal logic and drive for these changes.
Until such time ALL pilot groups realize the symbiotic relationship with their OWN company
instead of Boiler Plate contracts they will be doomed to relive Groundhogs Day throughout their careers. History does repeat itself.
Regards
Greybeard