A Race to the Bottom

I shouldn’t have been surprised to read that the Air Line Pilots Association (ALPA) has joined forces with several U.S. carriers in fighting a foreign carrier permit for Norwegian Air.  After all, in ALPA’s view, the Ireland-based carrier is in a “race to the bottom” in establishing wage rates and working conditions for its workers.

This blog isn’t, however, about Norwegian. It’s about the race to the bottom that has been a part of the network carriers’ DNA for decades.  It is about the relationship between mainline and regional carriers.  It is about the fact that low labor rates at regional carriers cross-subsidize the higher rates paid at the mainline, and what that could mean to hundreds of communities.

I need more than fingers and toes to count the number of smaller airports that are deeply concerned about their future as a dot on the airline network grid.  Many of these communities have strong underlying economics that suggest that their place on that map is safe.  But as the industry evolves, that is not necessarily the case.  The real question is whether the network carriers will actually need all of the feed from their regional partners to fill those mainline tubes as they serve only bigger and bigger markets?  At risk is service to smaller communities as airlines gravitate to only the largest markets in a network map that could look much like it did when deregulation began with the primary difference being a map that is hub-centric.

In my opinion, the industry went too far during restructuring in its use of third-party providers in the out stations. It made sense when the industry was trying to bank every possible nickel and, perhaps, makes some economic sense today.  But the fact is that no third-party provider really cares about an airline’s customers the way an in-house employee does.  As airlines compete more on service, this has to change.

I fear that, in investing in this industry, the focus on the mainline ignores the critical piece of the network served exclusively by regional carriers.  When it comes to regional lift, business still goes to the lowest bidder.  And one result is that regional pilots get whipsawed despite the fact that there is a real live pilot shortage that will impact the industry well beyond the regionals. 

Part of the blame goes to Congress which, in its infinite wisdom, now requires 1500 hours of flying to qualify for a commercial pilot license.  And while Congress mulls more hearings, the regional carriers are suffering the consequences, intended or otherwise.

New flight and duty time rules only compound the problem.  With the day’s last inbound flight often canceled, the first departure in the morning is also affected. And in small communities, these are the flights that allow business to be conducted in a day. This is not the fault of the airlines any more than it is the fault of employees who are “timed out” for the day. The customers, however, pay the price, as do the small communities so reliant on reliable air service.

Meanwhile airfares for service to those small communities continue to rise even as larger markets gain the benefit of more competition. Those customers are not, however, getting more for their money.

Don’t get me wrong. I am a fervent believer in the direction the mainline airlines are going.  Recent investments in the fleets, cabins, services and people of the mainline carriers are making for a much better product– domestically and internationally.  But I am disgusted with the price the regional carriers and their people are paying, be it through the whipsaw or the general neglect of a critical component of our domestic air service.

When a market doesn’t fit, it’s time to attrite. So let’s start trimming back that service now rather than delaying the inevitable.  Let’s begin to build a pool of pilots to service the 250 or so markets that will make the cut – a pool big enough to meet the demand driven by Washington’s arbitrary regulations. ALPA advocated for consolidation for all of the right reasons, first and foremost a stable industry. So why is it only the mainline pilots who should enjoy that benefit?

ALPA cannot make its race to the bottom case against Norwegian without first addressing the race to the bottom here at home – a downward plunge the union itself created. The economics of the regional market are distorted, influenced by middlemen and unresponsive to consumer demand. Now is the time for the industry to work with ALPA to fix the problem – and that probably involves bringing some, if not all, of the work back in-house. 

The United and Continental Pilots Engage In MISInformational Picketing

Today in Newark; tomorrow in Houston; and on December 1 in front of UAL Headquarters in downtown Chicago the United and Continental pilots have announced they will engage in “informational picketing” regarding the new company’s decision to redeploy certain United 70-seat regional jet flying into former Continental hubs Newark, Cleveland and Houston.  In return for that redeployment, certain Continental 50-seat jets will replace the United 70-seat jets flying out of certain former United hubs.  Note the tradeoff:  no one loses flying; no one loses a job; no mainline flying is impacted; and everyone benefits from a network made stronger by matching the right-sized aircraft to routes that either need a larger or smaller aircraft.

Yet the message from the "informational picketing" will deflect what has been going on between the United and Continental pilots of late and make the company the villain.

Seems so simple.  Just like the combined Delta and Northwest networks moved quickly to best match aircraft size to markets with commensurate demand, Continental and United are moving to do the same. 

Part of the Continental and United pilots message to the public will be that the combined company is violating their respective collective bargaining agreements, in particular the section called scope that swelblog has covered so extensively..    In a November 12, 2010 Continental pilot communiqué, the call to arms read as follows:  “It’s time to get serious and stand united against outsourcing. In response to management’s attack on our current scope provisions, and their clear leveraging of it in negotiations for a new JCBA, the CAL SPSC, in cooperation with the UAL SPSC, will jointly organize informational picketing at both Newark and Houston airports as well as United world headquarters in downtown Chicago. It is time to show the new United management and the public that ideas and plans to violate our contract and outsource our jobs to the lowest bidder will NOT be tolerated by pilots.”

OUTSOURCING

The pilots first fallacy is ‘outsourcing”.  The fact is that the pilots’ union, ALPA, has played a major role in creating the labor Ponzi scheme that survives at the legacy airlines. Over the past 15 years, how did ALPA find a way to pay mainline pilots more?  By agreeing to allow another group of pilots to fly where mainline flying is no longer economic and to be paid less to do so in order to buy “better” contracts for the mainline pilots they represent. 

What the Continental and United pilots fail to share is ALPA’s dirty little secret: that the wage rates, working conditions, training provisions and other particulars they criticize at the regional carriers were negotiated by their very own union. ALPA represents the majority of regional pilots flying in the US today.  So maybe ALPA needs to step up and take some responsibility for its contribution to building the regional sector of the industry that they now deprecate.  Only by agreeing to lower rates of pay and more flying time at the regional carriers can ALPA justify and sustain the generous pay, benefits and work rules that benefit pilots at the mainline airlines. 

Look at any significant relaxation of the scope clause at the mainline carrier that allows the airline to increase its use of jets 70 seats or less. In just about every case the mainline pilots received a significant pay boost – or were able reduce the level of concession - in return for that “concession” as they were given economic credit for allowing the deployment of regional jet flying by regional partners.

Stop calling it outsourcing.  It is not.  It is a convenient word to use given the disdain for the practice by the now lame duck Chairman of the House Transportation and Infrastructure Committee.  The practice of relaxing scope to permit regional partners to perform uneconomic flying has kept more mainline pilots on the payrolls than it has cost jobs as the network has been kept largely intact when routes would have needed to have been cut because it was not economic for 100+ seat aircraft to perform the flying.

SOME FACTS

This redeployment, or better said a swap of one-sized regional jet for another, has gone so far that an expedited grievance has been filed by the joint Continental and United pilots.  On November 15, 2010 the union filed grievance:  File 11.10.041CG.  “Pursuant to the Collective Bargaining Agreement (CBA) between Continental Airlines, Inc. and the airline pilots in its service, as represented by the Air Line Pilots Association, International, (ALPA) the undersigned hereby files this grievance, on behalf of all affected pilots, protesting the Company’s violation of Section 1 (Scope) and all related sections of the CBA by placing and planning to place the CO code on United Express flights using jet aircraft with an FAA certification of fifty-one or greater seats to and from CLE, EWR and IAH.  As a remedy, ALPA requests that the Company cease and desist advertising and placing the CO code on such flights, and all other relief that may be appropriate.”

The union’s position “is that Section 1, Part 3-A of the CBA clearly prohibits the Company action, unless it is authorized by some other Part of Section 1. No other Part of Section 1 authorizes the Company course of action, as none of the express carriers performing the work is a Company affiliate; only 50-seat and turboprop flying, not 70-seat jet flying, is permitted by Part 4; and flying to a Company hub (if not to or from a hub of the other carrier) is not permitted by Part 5.”

The union says that the Company’s position relies on Part 7, arguing that it is flying by another air carrier while participating in a Complete Transaction in accordance with Part 7. The union suggests, however, that while Part 7 specifies rules for separation and merger of mainline operations, Part 7 does not change the rules in Parts 4 or 5 for operation of Express carriers or Complementary Carriers. Nor does Part 7 license Continental to permit United Express carriers SkyWest or Shuttle America to carry the CO code without observing the limits in Parts 4 or 5, because neither of them is a "participant" in a Complete Transaction. Neither express carrier is acquiring any part of Continental, nor is it becoming a Parent of the Company. Nor is Continental acquiring Control of assets of either carrier. Further, if either of these air carriers were participating in a Complete Transaction with the Company, that participation would trigger a series of obligations that the Company has not applied.

Note to self:  Then what comprised the United network at the time the combination was contemplated?  and the transaction closed?  Mainline flying only?  I think not.

The union says the Company also argues that following the merger closing, United and Continental will each continue to operate as an air carrier, but they are not prohibited from integrating their marketing, reservations systems and livery, ultimately marketing and operating their service under a blend of the United name and Continental livery. But this argument relies on general actions associated with a merger to dissolve specific protections at the heart of the CBA, as well as mixing those actions which the Company can undertake now with those that must wait until after a JCBA (and integrated seniority list) are reached.

Note to self:  Why should the company wait to maximize revenue when it can do so today?

The union concludes, their [the company’s] actions are not an effort to transition Continental and Continental Express operations to the single UA code, but to replace 50-seat jets in Continental hubs with 70-seat jets and to connect them with Continental flights, branded as Continental flights under the CO code, strictly as a way of carrying more passengers and thus making more money.

A Paper Tiger

A paper tiger is seemingly dangerous and powerful but is in fact timid, or as Frederick Forsyth put it: "They are paper tigers, weak and indecisive."

Sometimes the actions of pilots and scope are like that of a paper tiger – a mighty roar but no real threat. I thought the pilots of the combined carrier were looking to share in the synergies of the combined carrier.  In this instance, they talk about the company redeploying regional lift – remember no loss of jobs – as a way of carrying more passengers and thus making more money.  If the carrier makes more money, then don’t the UA and CO pilots potentially make more money?

The pilots claim that this is about the company trying to gain leverage in negotiations.  Let’s not forget that on August 27, 2010, the United and Continental pilots made a proposal to management to end outsourcing to regional airlines.  This is the issue pure and simple.  The joint UA and CO pilots are fishing for ways to block the carrier from finding the most economic way to serve cities of all sizes all the while somehow making the case that the same network economics can be achieved at the mainline level for performing tomorrow the regional flying of today.  It cannot be done absent significant concessions at the mainline level.

Finally, the joint bargaining teams have been publicly lobbing grenades at one another over compensation proposals that might favor one group over another during the seniority list integration process.  This is a group that has said publicly that they will first negotiate a joint collective bargaining agreement before engaging in the seniority list integration process, just like the Northwest and Delta pilots did so successfully.  If memory serves me, the Delta – Northwest negotiation was not without its disagreements and wrinkles.  That said, the Delta – Northwest agreement ultimately paved the way for sufficient numbers of 70+ seat flying to be performed by a number of regional partners. 

At least in Delta’s case, the union recognized that the regional flying being performed today was critical to supporting mainline jobs.  Regional carriers were contracted to perform domestic flying in markets where the poor underlying domestic economics remain.  The Continental and United pilots should be looking at the very same thing.  The unintended consequence of undoing the regional relationships today will be a smaller mainline tomorrow.  Smaller network architecture does not produce the synergies promised by a combined United and Continental.

Less in generated synergies means less to be shared among the pilots of the combined company.  Less in generated synergies means that the collective bargaining agreement ultimately reached will have less upside and will look more like the agreements that would have been ultimately reached if the companies remained as standalone entities. Less in generated synergies means that the combined entity will likely not attain its status as the world’s best airline.

There is a financial concept lost on union leaders today:  Net Present Value or NPV.   It means simply that cash flows realized in the short term have more value to the firm (or individual) than cash flows generated years down the road.  Captain Jay Pierce, the head of the Continental ALPA unit, argues rightly that the company’s action of swapping five 70 seat jets in Continental’s hubs for five 50 seat jets is strictly a way of carrying more passengers and thus making more money.  It is what companies should be doing - maximizing the revenue earning power of the network.

The benefits to the new United’s actions in this limited case are obvious.  The risks are, well,  timid and weak as no jobs are being lost.  Energy spent during one of the most traveled weeks of the year should be spent negotiating a joint collective bargaining agreement and not preparing for an arbitration that in reality is nothing more than a desperate grab of leverage that - if the pilots prevail - will result in fewer jobs, less mainline flying, fewer synergies to be shared among pilots and a degradation of the combined carrier’s status within the STAR Alliance.