American Airlines, Labor Leverage, US Airways and Chicken Little

Labor Leverage and Other Thoughts

Since American’s filing for bankruptcy protection last week, I’ve received many notes asking why I am not writing about American - about a potential combination with US Airways or what I expect the company to win from the unions.  I haven’t written because, frankly, I already talked about the potential consequences of bankruptcy for the airline, unions and the industry in my most recent piece.

On Monday, I intended to write about leverage and how the Allied Pilots Association was seriously misjudging the leverage it thought it had. Tuesday’s filing kind of made that point moot.   As the Sections 1113 and 1114 negotiating process wends its way through a court supervised restructuring, the pilots and all unionized employees will either reach consensual agreements with the company or the company will look to the court to terminate the existing agreements.  Whichever outcome, the new contracts will look nothing like the potential deals the unions could have negotiated at various times over the past five plus years.

I know, I know… “American could have reached a deal if it wanted.” It does take two to tango, but in this round of negotiations, American and its unions were listening to vastly different music. American’s offers provided cost benefits that would be realized over the long-term while still maintaining what can only be described as an industry-best benefits package. That wasn’t going to sit well with analysts and Wall Street types who fervently believed the airline needed immediate gains to remain viable.

The unions, seemingly, wanted everything to magically return to past patterns and routinely called for restoration of the pay and benefits they conceded in 2003 to stave off bankruptcy. A common refrain has been no union members have seen substantial increases in wages since 2001. Peers at other airlines did get raises, but American’s employees were – and are - still better off.  It’s a simple, provable truth and it meant there was no going back to 2003 or 1993. It’s a different industry and a different world.

That’s key to understanding there is no leverage for either side in this round of negotiations. (Are you listening, United pilots?) It’s also why this negotiations cycle has been so difficult. Few agreements have been struck. American will likely get deals well before we see contracts – or even tentative agreements - at United and US Airways.  As the bankruptcy process plays out, the American pilots and flight attendants will no longer have industry leading contracts among the network legacy carriers – Delta will.

And guess who comes up next for negotiation – the Delta pilots.  Like American’s management over the past five years, Delta’s management will have to negotiate improved terms and conditions on the highest cost labor contract in existence. All the while, the United/Continental pilots will spend more time asking who is on first than they will spend at a negotiation table.  Looks to me like all of that “leverage” being created by the United pilots alleging poor safety policies by management is NOT moving the parties quickly toward a deal.

While I expect the Delta pilot negotiations to be complicated and difficult for the company, at least the pilots enjoyed some benefit following the merger with Northwest and the bankruptcy agreements that preceded it.  Delta’s pilots will have the richest compensation package in the industry after American completes its bankruptcy negotiations. That means they won’t have any leverage over the company even as pilots squawk about the liberal scope clause in the current agreement. 

In this process, there is a different kind of “trickle down” theory. Case in point: The TWU employees at American. Talk about no leverage.  The more removed from the flight deck, the more leverage dwindles. American’s below-the-wing employees currently earn a total compensation package of roughly $25 per hour. That work can be outsourced for 40 cents on the dollar.   Add the fact  American outsources the least amount of maintenance work in the industry, and that it has more ground workers than any other airline, well, you get the feeling things are going to change. If you’re a TWU worker, that’s probably no comfort.  

All This Talk About A Merger With US Airways

I am surprised – no, blown away - by just how much attention the US Airways – American merger possibility is getting.  In the first 36 hours after AA filed for protection it seemed the world was suggesting a merger with US Airways was the only viable exit strategy.  I don’t believe it.  American will have the exclusive right to file a Plan of Reorganization (POR) for 180 days – a right that is typically extended multiple times by the presiding judge.

Keep in mind, all three of American’s unions were appointed to the unsecured creditors committee. Any plan of reorganization by a party other than AA will have to convince the committee their plan is better for all stakeholders.  Given the messy labor situation that remains at US – six years after its merger with America West – I sincerely doubt anyone would find a US bid credible… especially American’s unionized workforce.  

That’s why, at least right now, I simply don’t see a merger happening, despite industry analyst Vaughn Cordle’s contention that, “regardless of the ugly nature of merging two suboptimal business models and different unions, American's best option is to merge with US Airways.”  My first question is, why would you even think of merging two suboptimal business models in the first place?  So that you can compete directly against balance sheet and network rich United and Delta?

There is another option I don’t think many analysts have considered.  I could see a competing plan led by British Airways and other oneworld partners that would have the potential to win if the AA case gets to the point where outside parties are free to submit alternative PORs – even at today’s 25% foreign ownership limit.  If you believe AA will become a smaller entity over the coming months, the one sure thing is AA’s network will be optimized to maximize revenue generation with its new joint venture partners.  That’s precisely what STAR is doing through United and SkyTeam with Delta. 

The Sky Is Not Falling

Over at Terry Maxon’s AirlineBiz blog is a letter from TWU President Jim Little decrying American’s filing with $4.1 billion in cash and thus a near term ability to pay its current obligations.  I urge you to read the letter in full and the lack of reasoning throughout.  What did Little expect the company to do when he refused on numerous occasions to step-up and tell his TWU members the cold truth that something is better than nothing?  He has had a number of opportunities over the past five years to negotiate an agreement with American that the company could afford. 

The bottom line is bankruptcy is not a big deal.  This is not the industry’s first rodeo.  American’s problems are bigger than a check labor could write outside of bankruptcy, but sadly, the employees will pay much more inside of bankruptcy.   As APA President Dave Bates told The Wall Street Journal, "Sometimes in life it's easier to have something imposed upon a person than have them agree to it voluntarily."  Sad commentary indeed.

FORT WORTH, Texas: The Longer It Goes, The Worse It Will Get

Another Sunday in the Washington D.C. area means being forced to watch the Redskins if you want to watch some football.  I wanted to watch some football, but catching up on my reading was much more interesting.  As is typically the case, my starting point is Terry Maxon's Airline Biz Blog.  Three of Maxon’s last four posts pertain to the negotiations between American Airlines and the Allied Pilots Association.

Each of the parties issued a statement regarding the decision not to negotiate over the past weekend with both pointing fingers at each other.  The understanding, at least for those of us on the outside looking in, is the company is seeking to reach an agreement in principle with pilots before this week’s regularly scheduled AMR Board of Director’s Meeting. 

I have participated in numerous troubled negotiations between management and labor, and taking time off because someone is tired prior to a deadline just does not make any sense.   Maybe the APA doesn’t think it is negotiating against a deadline.  I am also someone who knows a little bit about Board of Directors meetings and fiduciary duty, so if I was the APA, I would be taking Wednesday’s meeting seriously.

After all of the news, reviews and Wall Street’s muse over American’s financial blues I am guessing that AMR’s Board of Directors is feeling under pressure.  And Boards under investor pressure often feel the need to act.  As I wrote in American: Limited Options, Pain Likely, something at the Fort Worth, Texas carrier likely needs to give if no labor deals are reached – particularly a pilot deal that could serve as a template for other work group agreements.  The potential scenarios are, of course, bankruptcy, getting significantly smaller outside of bankruptcy or getting smaller inside of court-assisted restructuring.

Some of the messages I received on that piece suggested bankruptcy is an acceptable solution for American’s situation, particularly when dealing with the current management.  I think all of American’s union groups, and especially the pilots, should be very careful what they wish for.  Never forget the truism that it is probably best to deal with the devil you know.

The fact is employees at American still have their benefits, including pensions, because CEO Gerard Arpey chose not to use bankruptcy proceedings to cut costs the way everyone else in the industry did. Whether the unions like or dislike Arpey, though, is moot. If American files Chapter 11, creditors and the courts probably won’t let Arpey guide the airline during its time in bankruptcy.  They’ll want a restructuring guy, possibly in the mold of United’s Glenn Tilton, who turned his back on company history and acted in the best interests of financial capital, not employees to reposition the enterprise. That caused some serious labor/management relationship wounds.

American can survive labor discord as it has since Robert Crandall was in charge. I’m not as sure American comes out of bankruptcy unscathed – at least, not the American Airlines that we’ve known for the last 85 years. A much different airline would likely emerge, if at all, so emotionally-charged employees might rue their actions today.

Let’s review a few facts about bankruptcy and North American airlines.  Since 1991 there have been 14 airline bankruptcies and only one carrier remains a stand-alone airline today – financially troubled Air Canada.  Eight of the airlines have been liquidated or ceased operations:  Pan Am, TWA, Aloha, ATA, Skybus, EOS, Arrow and Mexicana (Eastern filed for bankruptcy in March of 1989 and ceased flying in January of 1991).  The remaining five airlines have been merged:  US Airways, United, Delta, Northwest and Frontier.

While the merged companies are stronger, they lost most – if not all - of their individual identity.  A merger partner with American in its current financial and labor condition is unlikely.  Private equity would only be interested in American after a deep cleansing of labor contracts in bankruptcy.  After all, even private equity wants clean fingernails when the entity emerges from court protection.

Union groups need to think long and hard about what that means for them. For American’s flight attendants and ground workers, a Chapter 11 filing would be the end of the world as they know it.

American’s flight attendants fly the least of any cabin crew in the U.S. airline industry. They currently pay less for medical coverage than their peers and still have pensions and retiree medical that are but faded memories for flight attendants at other carriers.

There are roughly 25,000 TWU members employed at American – mechanics, baggage handlers, cabin cleaners. A bankrupt American would dramatically slash that number, outsourcing a majority of jobs as much of the industry already does. Pensions, retiree medical – all gone. The reverberations would shake big cities like Miami and communities like Tulsa where the American maintenance base is the largest private corporate taxpayer.

Pilots like to think they’re different, more crucial to the operation, more prepared to handle anything that arises. That’s their job, and most are very, very good at what they do. The members at the Allied Pilots Association, though, should use the same reasoning and spend some time rethinking their position.

As MIT’s Airline Data Project shows, on average, American’s pilots are already making about two-percent more than their peers. The thing that should make pilots uneasy, though, is when you look at their benefits, which are worth about 40+ percent more than what pilots at other network carriers make. There is not a bankruptcy judge in the country who won’t immediately allow the company to toss all of that out the window.  It is not the wages per se; it is the benefit package and relatively poor productivity that makes the American pilot agreement uneconomic when compared to peer carriers. 

I’m not privy to what’s being talked about at the table between pilots and American, but the company is posting all of its proposals on its public web site, AANegotiations.com. From what I’ve seen, American’s current offers don’t dramatically change pilot benefits… they would still be significantly better than other carriers. What hasn’t been posted is any item on scope, and I’m sure the pilots would vehemently oppose any changes, no matter how necessary or warranted they might be.

If anyone on the APA Board foolishly thinks bankruptcy wouldn’t be so bad, they should review those facts I mentioned earlier. Besides the loss of pensions and work rules, a post-bankruptcy American would either be much smaller – meaning fewer pilots needed-- or prey to other airlines circling its carcass. If it’s plucked as a weak-sister acquisition, those APA pilots would most likely lose their seniority taking a backseat – or right seat – to their new colleagues.  And that assumes that acquiring airlines would even want former American employees – particularly in seniority order.

I could absolutely envision a U.S. airline industry without American.  Think of the value of the Heathrow slots, the LaGuardia slots, the JFK slots, the Washington National slots, the related real estate at each of the former, a ready-made Deep South America operation in Miami and an opportunity for network and low-cost carriers alike to finally get necessary real estate at Chicago O’Hare to mount a competitive operation.  American’s parts could be worth more than its whole to creditors and other airlines.

From a Board of Directors perspective, there are some basic facts to contend with. You cannot restructure the price of jet fuel.  Most, if not all, of American’s assets are pledged as collateral so little might be achieved in the airplane area other than rejecting certain leases on the oldest and most inefficient narrowbody fleet in the industry.  The company faces significant loan repayments and pension contributions.  In other words, AMR has every reason to file.

The pilots and the APA can belay that. They can be the leaders they think they are; not just for themselves, but for every other employee at American. Negotiating a deal now sends a signal to Wall Street, creditors and even consumers that things really can change. It also lessens the pressure on AMR’s Board of Directors to take a more active role in the company’s day-to-day dealings. Without it, the only pragmatic course for the Board would be to seriously examine its next steps. It can’t wait on the promise of a labor deal, especially if the APA mistakenly believes it has leverage and wants to try and use it.  Even if an agreement were reached today, it will be sometime in the first quarter of 2012 before the voting on a new agreement is concluded - that is why time is not on the side of the pilots and why AMR's Board is likely to grow restless if something does not happen soon.

Should a Chapter 11 restructuring end in Chapter 7 for some reason (a probability greater than 0 given that the company may be forced to cede control of its right to file a plan of reorganization), one can envision U.S. air transport system without American Airlines.  History suggests that the capacity void left will be filled in short order by the remaining players.  If a profitable hub opportunity exists for a remaining airline, it will be filled.  Will there need to be a hub at DFW?  No.  But there is plenty of local traffic to fill new service from existing airlines as well as Southwest at Love Field.  American’s aircraft order will likely be absorbed by the remaining carriers over the coming years to help fill the void left.

I just wrote “An Unpleasant Situation That Continually Repeats” last week that focused on unions thinking they know what is best for the company at both Qantas and Air Canada.  Maybe American was the sequel I was thinking about when I wrote that piece.  If that sequel includes bankruptcy, I know the story ends badly for the working men and women at American.  The rest of the industry will applaud the demise.

“An Unpleasant Situation That Continually Repeats”

Remember the movie “Groundhog Day?” Well, Qantas is starring in the current airline version with Air Canada in the supporting cast. The basic plotline has unions pretending to know how to run companies while portraying management teams as the dastardly villains whose only aim is to run carriers into the ground, milk their pay and destroy organized labor.

If you’re thinking you’ve seen this one before, that’s because you have. Outside of Hollywood, there is no better industry at recycling the same old material than U.S. airlines and their workers.  Like any movie fan, I love a good sequel, but the all-knowing unions versus incompetent management is the same story run more times than a 1950s B Western.

Still, the version from Down Under is quite possibly the most intriguing adaptation in recent years. At the crux of the Qantas story is CEO Alan Joyce.  During the past several months, Joyce has faced numerous intermittent strikes by employees; received alleged death threats as he seeks to change the course of Qantas; threw his hands up, shut down the airline and locked out employees for a weekend (the same weekend the Australian government was hosting a major conference); took a lashing for doing so from the Prime Minister and other Australian lawmakers; and, in a move reminiscent of U.S. airline stories, tried to explain the business to a dysfunctional government lacking a complete understanding of air transportation.

Joyce recognizes very clearly that Qantas must change, otherwise the Flying Kangaroo will land in a gravesite alongside Pan Am and TWA and not on a runway in Sydney.  Joyce wants/needs to establish a low-cost presence in Asia.  It already has a low-cost alternative called JetStar in Australia.

Qantas is a geographically disadvantaged airline – its home market is an end point on the global airline map.  Airlines in the Middle East have targeted Qantas’ traffic base using their geographic advantage to route traffic to points in Europe, North America, Africa and the Middle East.  Because of their lower costs, Emirates, Etihad and Qatar can offer much lower fares.  Singapore, Malaysia and Air Asia can do the same thing for the same reasons.  Imagine what will happen if (or when) the Chinese carriers become formidable competitors.

The union response? Rolling, intermittent strikes by the Transport Workers Union, the Australian Licensed Engineers Union and the Australian and International Pilots Union. This destructive industrial action forced Qantas to cancel more than 600 flights affecting 70,000 passengers, creating uncertainty for businesses and damaging the tourism industry.

I know some regular readers will say I’m once again bashing unions and sticking-up for management, but that isn’t the case. I think labor has some legitimate beefs with Qantas, but the reaction by the unions simply isn’t rational. When an airline is struggling, you don’t plunge it further into economic turmoil, especially when the heart of the dispute is job security. All the Australian unions have to do is look at past versions of this story to see how that works out.   It just makes no sense.

What makes this round of bargaining different than past rounds in the U.S. is there are major, structural claims that management cannot accept without putting the enterprise at risk.  It is one of the reasons I write so often about scope.

Joyce very eloquently outlined Qantas’ position: “No responsible company would let a small number of unions dictate how the business is run.  What the unions are actually trying to do is secure a veto on change. They demand the retention of outdated work practices that do not reflect the realities of modern aviation. They want Jetstar pilots to be paid at the same rates as Qantas pilots, a move that would drive up ticket prices for leisure travellers. These are major, structural claims that we cannot accept.”

I applaud Joyce for standing up and saying enough is enough.  Some very smart people have said Joyce’s major error was not informing the government of his intended actions, thus embarrassing the current administration. Truth is, whatever decision Joyce made to combat the union’s actions, he was damned.  If he did nothing, he was left in charge of an airline that had no idea if it could deliver service to customers because the unions could strike at any time.  He was damned if he shut the airline down, inconveniencing those same customers as well as humiliating the government. And if he gave the unions even half of what they wanted, he’d forever be known as the man who doomed Australia’s national airline.  

Like it or not, decisions made in management suites and board rooms are all about preserving the enterprise - - even if it means making unpopular choices.  That’s what makes the airline business different today than in the past.  The irony is both management and the unions really want the same thing; to keep the airline a viable enterprise into the future, thus securing jobs. It’s about building the best job protector that can be built – a healthy company.

That’s why so many U.S. aviation workers really should be tuning in to what’s happening at Qantas and, to a lesser extent, at Air Canada. Pilots and flight attendants at United/Continental, the pilots and all other groups in negotiations at American as well as the pilots and flight attendants at US Airways don’t have to produce their version of “Groundhog Day.” They can recognize reality and start a new script that guarantees good paying jobs for their members and helps keep their respective airlines competitive. Think of it as an adaptation of the UAW play.

To be stuck in the same place, with the same unproductive mindset and doing the same things over and over isn’t going to be any more effective in the Qantas story – or any other version – than we’ve seen in the past.  

Bill Murray’s character in “Groundhog Day” has a telling line I don’t want to see as airline unions’ epitaph. After trying to break the repetitive cycle he’s stuck in, Murray’s Phil Connors says, “I’ve killed myself so many times, I don’t even exist anymore.”  If management and unions don’t change the script soon, that’s exactly what will happen.

Jet Fuel and Labor Part II: Commenting on the Comments

The message of this blog as it pertains to the current round of industry-wide negotiations can be boiled down into six words:  Doing More With Less For More.  Honestly, I have not heard management teams say they are seeking concessionary contracts.  I have not heard anything suggesting W2 wage reductions are being sought.  What I have heard is productivity is needed in return for an increase in W2 compensation.  So Doing More (flying/working more productive/smarter time) With Less (fewer headcount needed to staff some level of flying) For More (increase in wage and salary compensation).

When I posted my last blog item, Oil and Water; Jet Fuel and Labor, I expected colorful comments from readers.  And I wasn’t disappointed.  You can’t have had my career and not ruffle some feathers.  And I did.  The comments were also instructive, showing sections of my blog that needed additional explanation and clarification.

Yesterday, I had a private exchange with a thoughtful pilot leader.  After some initial back and forth over the merits [or lack thereof] of my blog piece, he wrote, “My pilots and I have been living under a concessionary contract for X years now.  Our work rules were gutted down to the FAA Minimum....the CEO and the officers seem to be doing quite well though, aren't they?  Nobody is looking to break the bank.  I don't begrudge what anyone else makes. I just get tired of the excuses that there is no more left for the working guys after everyone at the top has already skimmed off all the cream!”

I lead with this exchange because it captures the essence of many of the comments made.  It’s pertinent for its truths and its misconceptions, just as many of the other comments were. For instance:

1. $100+ oil may be the new reality, but you cannot expect any workforce to accept wages from 2001.  SWELBAR:  The industry has drastically changed since the heyday of 2000 and oil prices in 2008 and now in 2011 are but part of the catalyst.  For instance, according to MIT's Airline Data Project in 2001, U.S. airlines employed 89,349 flight attendants.  In the nine years since, nearly a quarter of those jobs - more than 25,000 - have disappeared.  No one likes to be told that they're not as in demand or cannot command the wages they once did.  Millions of U.S. workers - union, non-union, auto workers in Detroit to tech nerds in Seattle - face the same dilemma airline workers must come to grips with.
2. Unions need to wake up to the new reality and give up the long lost dream from the regulated era and the flying public needs to acknowledge that good service from a safe airline might actually cost something more than the bus fare they want to pay.  SWELBAR: I agree up to a point, but what about the price elasticity of demand?  At some point consumers (and I mean the all important business and premium passengers) will simply decide it's not worth the expense and simply stop flying.  The acknowledgment needs to come from management and employees that they're providing a consumer-driven commodity.  That's all.  You price consumers out of the market and you price yourself out of a job.
3. Continually beating the "it's the union's fault" drum is old, hollow, and doesn't reflect the reality of the situation.  SWELBAR: When it comes to oil prices, I'm certainly not blaming the unions.  The unions have the same control over oil prices as management - NONE.  What I said, and have said, was the history of pattern bargaining in the airline industry was created when oil prices were not a factor.  They are now.  To make the U.S. aviation model work, everyone needs to realize, and accept, that things are not the same and there is no going back.  If you want a relevant example, look no further than the auto industry.  Fuel is a factor for automakers too and they have been been forced to shrink the workforce all the while ensuring that the smaller workforce is efficient - ways to escape the burden of unsustainable contracts yet still turn out a safe, reliable product consumers want while facing increased competition from domestic and global competitors.
4. Regardless, to try to base employee costs on the cost of oil is absurd.  They are unrelated, just as is the cost of airframes, engines or catering is to oil.  SWELBAR:  In a word, wrong.  Every cost affects the bottom line through its consumption of the revenue pool; it's just a matter of by what factor?  When jet fuel remained at the equivalent of $29 per barrel for 25 years, it had little impact on the bottom line for most airlines and, thus, employees.  That's obviously changed, as it would with any cost where a penny increase can mean tens of millions of dollars in increased expense.  If engine prices suddenly rose 100 percent, don't you think airlines would have to drastically rethink their consumption of engines?  This is about controllable costs, which oil isn't.  Something has to give.
5. Keep this up and Air India will have continuing service to OMA because the only ones who will have labor cost that is acceptable to your masters will be third world countries who will be laying over in East LA at the Days Inn with the entire crew sharing two rooms and thinking this is a great layover.  SWELBAR:  This actually raises a good point.  Increased competition is a factor for the U.S. aviation industry no matter the cost of Jet A.  The shape and makeup of the industry will continue to evolve and will further embrace multi-national carriers.  Oil could accelerate that process by culling some carriers or impede it by slowing international growth.  If U.S. airlines - management and unions - don't rethink the business model, accounting for oil - then it really does not matter what "acceptable labor costs" might be.  Does it?  A major message in this blog is instead of fighting tooth and nail for what once was, maybe it is time to think of what has to be. 

Going back to my exchange with the learned pilot leader, this is how I responded, “I have been around a long time like you, and if someone can say the past volatility in labor’s earnings worked nicely for them then ….. there is just not much to say.  Many of the business practices in this industry are built on a model of growth.  When there is no growth, then something has to be done to those costs that are controllable.  There is no more need to file for bankruptcy because oil is not controllable.  [Inserted today:  The price of oil cannot be restructured].  Not a damn thing that can done.”

I went on to say if people would take the time to move beyond their visceral reactions and think about my arguments, they’d see I believe  flight crews are less an issue than “below the wing employees” where differentials have grown significantly at some carriers. “I want you to have yours too.  But the zealots saying ”I am going to get it all back and more” when the environment is diametrically different – as it is –  then someone in a (labor)  leadership role is not doing their job.” 

“There is enough to go around, as I will write later in the week.  But [pilots] and flight attendants working 40 hard hours per month are not an answer.  Too much headcount for the amount of flying to be done.  Ground workers at an all in rate of $25 when it can be outsourced for a fraction, which is what many of the LCCs do, is simply not good business.  The restructuring is not done.  Doing More With Less For More needs to be a mantra.  If oil keeps going, and my dart board is as good as anyone’s, then capacity will again get cut in the fall.  2008 all over again – just not as deep.”

“As for management doing nothing, this is the first time in 30+ years where capacity actually reflects a business environment where costs can be passed through.  Even Southwest is a participant.  That is but one change that had to happen.“

Final Thoughts

There is no question the key to success for this industry going forward is raising fares.  And that’s happening, thanks to Southwest now taking a lead versus being the carrier always fighting the industry on pushing through an increase.  Since December 2010, Southwest has been part of five – read five – fare increases.  No longer does the lower cost carrier enjoy a unit fuel cost advantage either - Southwest isn’t hedged like it was between 2004 – 2008.

As one commenter said, “This notion that airlines cannot control domestic pricing is absurd.”  Then the same person actually outlines how airlines are finding new revenue streams from unbundling attempts.  Here’s the catch: The unbundling was done in response to high oil prices in 2008 because there was no industry consensus on increasing base fares. If one carrier doesn’t raise fares like everyone else, the attempt to increase ticket prices typically fails.  To say that management has done nothing to address a poor revenue environment is simply wrong.

Any discussion of management compensation on this blog is a non-starter - as I have learned.  The comment section is not big enough to house the emotions that spew forth over the subject.  Few things at the Board of Directors level are more difficult than management compensation plans; especially with the level of scrutiny those plans now receive.  Because of the outcry, the chairperson of the Compensation Committee might be even more important than the chairperson of the Audit Committee. That’s just not right.  Management has their contracts.  Organized labor has theirs.  Given the volatility in costs and the push to see pay-for-performance as the rule and not the exception, labor should be making it a part of their overall compensation as well.

That I’m somehow tying labor costs to oil costs is absurd.  I suggested volatile - and increasing - fuel prices consume more of a finite revenue pie.  I should have explained that better.  The pie is finite when base fares are considered because the industry has to agree.  The unbundling strategy being employed is designed to increase the size of that pie.  It is working.  But when an industry is profitable primarily because of fees collected, one can easily read that as a negative simply because it’s not sustainable.

A long-time critic of the message of this blog stated, “Even Wall Street says there is no blood left to squeeze out of the employees yet you still beat that drum over and over and over........ Get some new material.  You being a shill for the ATA I assume the always lower labor cost mantra will continue until everyone is working for free.”

I challenge anyone to read this blog and find where I said airline workers should work for free.  Further, I dare anyone to find where I suggest contracts in this round need to be concessionary (less total cost than the previous contract).  I have said time and again expectations that the industry can afford to repeat its past patterns of repaying concessions, plus more, have to stop.  I have also said productivity improvements are paramount in the industry as it is still operating with too much headcount.  This is where the business of unions needs to look in the mirror and ask, “Is it better to negotiate a great agreement for fewer people or an OK agreement for many people”?

This is about Doing More With Less For More – that’s the reality. While I understand the emotions that can be triggered when talking about people’s livelihoods, it doesn’t change the reality. My hope is the sooner a truculent industry embraces what it is, the better off every ground worker, pilot, flight attendant, shareholder and, yes, even management will be.

Oil and Water; Jet Fuel and Labor

On June 25, 2008 I blogged asking the question:  Is Oil A Cancer Or A Cure?  At that time, the price of a barrel of oil had not yet reached its apex of $147 per barrel, but was well on its way.  Based on findings by the Air Transport Association’s superb economic analysis team led by chief economist John Heimlich, the U.S. airline industry paid the equivalent of $174.64 per barrel [price of a barrel of oil plus the equivalent cost to refine crude into jet fuel (the crack spread)] on July 11, 2008.  By December 23, 2008 the price of a barrel of West Texas Intermediate had fallen to $30.28 per barrel.  So far in 2011, we’ve seen a similar surge in oil prices, but based on current geopolitical events, I am not expecting another $117 drop in the price of a barrel of oil like we witnessed in 2008.

I’m actually wondering what happens if the wave of Mideast political upheaval washes over Algeria? Or Saudi Arabia? Some economic experts say the price of oil could rocket past the $200 threshold.

In 2011, the industry has paid an average of $89.15 per barrel of crude and another $25.80 in the crack spread for a total cost of “in the wing” jet fuel of nearly $115 per barrel.  Since February 22, 2011 the industry has paid more than the equivalent of $120 per barrel for jet fuel.  On March 1, 2011 the industry paid the equivalent of $132.17 per barrel for jet fuel including the crack spread of $32.54.  For all of 2008, the industry paid the equivalent of $25 per barrel to refine crude into jet fuel.  In the last five days of trading the crack spread paid by the industry is nearly $30 per barrel. 

That’s a lot of numbers, so let me put this in a way that might shock even the most ardent follower of the airline industry: Today’s cost of just refining oil into jet fuel is roughly equal to the total jet fuel price per barrel paid by the industry every year between 1978 and 2001.

1978 – 2001

The mindset of many airline stakeholders - and particularly labor - is based on the period between 1978 and 2001.  Deregulation began in 1978 and 2001 marks the beginning of wholesale industry restructuring. .. which actually should have started 24 years earlier.  To put this period into an oil perspective, over the first 25 years of a deregulated industry, the equivalent per barrel price of jet fuel was $28.93.  Oil was cheap (more than four times cheaper than in 2011) and it was the basis for the industry to grow too big, too fast.   After all, the biggest “uncontrollable cost” was a blip.  There was little change in either the price of a barrel of crude or the crack spread.

Based on analysis at MIT's Airline Data Project, between 1978 and 2001, the industry grew nearly 2.5 times in terms of available seat miles.  Traffic grew faster than capacity.  The great enabler in the growth in addition to the cost of jet fuel was the fact industry yields, or the amount the customer pays per mile, declined by 39% when adjusted for inflation.  Domestic yields fell by an inflation-adjusted 41 percent over the same period.  In other words, cheap seats. The price of an airline ticket was one of the great consumer bargains.  This fact ultimately led the network carriers to refocus their operations on international flying because their high cost structures struggled to conform to the realities of the domestic market economics.

As the industry added capacity, employment grew by nearly 220,000 full-time equivalents.  During the same period, the total cost of an employee to the industry declined by eight percent in real terms.  I can hear it now, ”no way – my salary is significantly less.”  Yes, it is true salary costs when adjusted for inflation have decreased. On the other hand, the cost of pension and benefits paid to airline workers has grown at a rate faster than inflation.  The cost of an employee to a company is not based on salary alone.

Over the 24 year period being discussed here, it is true that employee productivity in terms of available seat miles per employee and enplanements per employee increased 44 percent and 30 percent respectively.  Much of that is again driven by cutthroat competition driving prices downward in order to stimulate demand.  Here is the kicker.  The number of available seat miles produced per dollar spent on labor fell by 42 percent.  Or, labor is producing more output but the cost of that output is increasingly expensive.  This fact alone was unsustainable and the restructuring process was used to address the underlying economics.

Many areas of the income statement were addressed by managements over the period with the most noteworthy being the decision to stop paying legacy commission rates to travel agents.  This action alone saves the industry nearly $6 billion dollars per year although we can also say that the savings are largely competed away in the form of lower fares.  Food and advertising expenses were also reduced.  Each of these cost areas, like labor, is considered controllable costs.  Oil is not.  What the industry did realize over the period was a 30 percent efficiency improvement in the consumption of fuel.

2002 – Today

As 2001 came to a close, unit costs at the network carriers in the face of free falling unit revenue became the story.  US Airways was the first carrier to file for bankruptcy.  United was second.  And American followed with an out of court restructuring.  Each carrier had extremely high overall unit costs relative to the industry as shown by the MIT Airline Data Project.  The ADP also shows the three carriers were out-of-market with respect to unit labor costs relative to the industry.  The network carriers mentioned simply had costs so high, there was no choice but to seek some sort of a consensual restructuring either through bankruptcy or out of court if they were to live and fight another day.  The scary part is, oil was still reasonable during this time. The industry jet fuel price per barrel equivalent as restructuring commenced was $30.07.

While jet fuel prices are uncontrollable, so too is airline pricing, particularly in the U.S. domestic market.  Since 2001, the industry has only increased capacity by 2.5 percent as capacity discipline became the mantra.  Again traffic grew faster than capacity as inflation adjusted yields fell another 12.5 percent.  The nominal level of capacity growth can be attributed to the growth in regional carrier and low cost carrier flying.  Since 2001, mainline carriers have shed nearly 24 percent of their previous domestic capacity with nearly one-third of that capacity removed since the 2008 fuel spike.

Capacity cutting was all that was left in the face of high oil prices.  When carriers delete capacity, they also eliminate jobs.  Since 2001 the industry has shed nearly 155,000 jobs – a period when the jet fuel equivalent price per barrel averaged $73.08.  Labor productivity has improved significantly as the network carriers restructured.  But as I’ve talked about before, the problem with a seniority-based system is that average costs increase as the less expensive employees are the first to be let go.  In 2002, when the restructuring began, the average cost of a full time equivalent airline employee was $74,910.  Today, the average cost of a full-time equivalent employee is $83,869.  More troubling is the benefit and pension package for full- time employees in 2001 cost $11,560.  Today, the cost of that package is $18,195 reflecting seniority as well the country’s inability to reign in medical costs. 

So Here We Sit

The history of pattern bargaining - and resultant expectations - between labor and management was created on a basis of $30 per barrel for jet fuel.  Today, the cost of jet fuel is the equivalent of $132+ per barrel.  Yet labor doesn’t seem to acknowledge the fact that times – and oil prices – have changed.  There are 52 airline cases under the auspices of the National Mediation Board and I will wager few, if any, of the labor negotiating teams consider oil a major factor in a future contract. It’s “management’s problem.”

Well, it’s also labor’s. While the industry has been creative in finding new revenue to address the reality of fuel costs, consumer pass-throughs generally lag behind the rise in the price of fuel. The bigger issue, the one labor has trouble admitting, is the size of the revenue pie is finite.

Oil is uncontrollable and therefore difficult to predict how much of the revenue pie it will consume.  Cost reductions in many areas of the operation have already been largely realized.  And that’s where oil prices become labor’s problem.  Employees – rightfully - want their share of the pie, and they’d like to make-up the concessions of the past.  The problem is the pre-restructuring high water mark, when oil was around $30, is what labor wants to return to. That’s not possible and it’s certainly not sustainable.   

I have heard it said many times, "labor is not going to subsidize the price of oil again".  Well, truthfully, labor didn’t the first time. When restructuring began and adjustments to labor costs were realized the price of jet fuel was not the issue.  It was declining revenue.  After much pain inflicted on virtually every stakeholder group over the past decade, $100 per barrel jet fuel is the new reality.  Expectations of returning to the past should be forgotten.  I like to use history, but history is useless in evaluating this industry because the fundamentals that now govern the industry’s structure like oil and the economies of China and Germany and Brazil are new and rapidly evolving.

I had someone say to me the other day that shouldn’t we throw away the past and just start again making this apex the new reality?  The simple answer is yes.

Swelblog: On Election Morn

This has been a busy month for the US airline industry with earnings and all.  As a result there has been lots of news and most of it good. Of course, two quarters do not make a trend -- something I'm frequently reminding people when I'm out on the road speaking on all things airline industry. 

So as we sit awaiting results on what promises to be a most interesting mid-term election, I want to look back on what has been a very political two years

First up: labor. Unions are all politics all of the time and that has played a big role in the airline industry since President Obama took office.  A cynic would say -- and I might agree -- that unions are simplistic organizations that too often focus on only on the next contract or the next election.  The result is too often a strategy in which they do everything they can to “choke the golden goose” for all of the pay and benefits possible at the time, which only puts their successors in the difficult position of presiding over concessions when the "gains" are no longer economically viable. There are some who say that this blog is too quick to bash unions.  But as I've said before, I'm equal opportunity in calling out bad behavior when I see it. And when it comes to airline labor leadership, I've seen a lot of it.

I've spent a lot of time challenging the leadership at the two largest pilot unions: Captain Lloyd Hill of the Allied Pilots Association and John Prater of the Air Line Pilots Association, both who ended their terms as president this year.  My fundamental criticism was each man’s decision to run on the opportunistic platform that all concessions would be returned and more.  Unrealistic.  Unfortunate.  Unfulfilled.

Lo and behold, the two important pilot unions have replaced “over promise and under deliver” with two new but seasoned presidents: Captain David Bates at the APA and Captain Lee Moak at ALPA.  [Moak has been the subject of much commentary on this blog and I encourage you to learn more about him].  I had the opportunity to spend time with both men last week at the Boyd Group International’s 15^th Annual Aviation Forecast Summit in New Orleans.

I don’t want warm and fuzzy from union leaders and I don't expect it from management. What I want is a sense that each side understands and negotiates with a clear understanding of the economic environment in which the industry operates.  From both pilot leaders I am confident that principled negotiations and decisions will be the rule of the day.  From both pilot leaders I sense a potential to depart from gridlock and enter disciplined negotiations.  From management I want to see a renewed effort on communicating clearly the rigors of the business from a global perspective.  That would be true leadership.

Unions and management must break through the gridlock that leads to protracted contract talks and ultimately keeps money from pilots' pockets.  And both sides need to be honest with pilots about the extent to which the world has changed and the industry continues to change with it.  For example, today’s union negotiations should be less about who should fly 76-seat small jets and more about how to position an airline to challenge new and vigorous competition in Latin America, the Middle East and the Asia-Pacific regions. For the mainline carriers, competition is now more about Dubai than Duluth, and more about Auckland than Austin.

It is fast becoming clear that flight attendant union leaders are also increasingly out of touch.  And no one is more out of touch than the President of the Association of Professional Flight Attendants President Laura Glading. Glading, more than any union leader in the past or present, is too quick to threaten chaos and strikes without a clear understanding of the competitive realities that affect contract negotiations.

In her latest unconscionable act, Glading is calling on American Airlines flight attendants to write letters demanding a release to a "cooling off period" and possible strike from the National Mediation Board. Maybe Glading doesn't really understand the Board and its mission which, last I checked, is to try to prevent work actions that would threaten the nation's air transport system. Further, it would be unconscionable if the NMB were to cave into a letter writing campaign by a union that has done more to cause dissension in its ranks than promote the high level of customer service and professionalism the airline needs to compete. 

It has been interesting to watch the flight attendant negotiations at Continental and United. The Continental flight attendants actually voted down a tentative agreement that would have put money in their pockets immediately at a time the industry remains vulnerable economically. "Immediately" should have been an important factor considering that there will need be a representation election between the AFA-CWA and the IAM before any real negotiations can begin at the merged carrier.  My guess is that it could now take a couple of years before either the Continental or United flight attendants realize any economic gains over what they earn today.

As for negotiations with under-the-wing employees other than mechanics, the TWU negotiations at American provide a lens for one of the most difficult issues facing airlines: how to appropriately compensate ground workers.  In almost every case, this work could be outsourced for a fraction of the costs of keeping the work "in house" -- particularly when you consider the comparatively rich benefits package most airline employees receive. The baggage handlers are the most vulnerable yet the union group still holds out with demands for more. 

But if the unions may have a false sense of power because the worst-kept secret in the airline industry is the fact that baggage handlers have long ridden the coattails of the more skilled mechanic group, demanding wages that far exceed what these workers could command outside the airline industry. Said another way, because the skilled mechanic group has "carried" these less-skilled workers for so long, they have received less in negotiations over the years because the political structures of the TWU and the IAM includes baggage handlers in the same "class and craft" as a way to boost their ranks.

This week we will know the outcome of vote of the Delta and Northwest flight attendants, who are deciding whether to organize under the AFA-CWA banner (which would be a first for Delta flight attendants) or be a non-union group.  This election is the biggest yet under a new NMB rule that made the most significant change to the union election process under the Railway Labor Act in 75 years. That new rule likely will be the deciding factor in the outcome.  The change in the rule was all about politics, with a clear disregard for prior practice and arrogance in its refusal to address key subjects in the labor arena, including the ability of employees to decertify a union.

But that is reality in Washington today as it pertains to the airline industry.  We have had a number of issues become political in the name of consumer protection.  There are a number of matters being regulated or legislated in the name of safety.   A FAA Reauthorization bill cannot get passed because of all the non-FAA issues lawmakers stuck in the Senate and House versions as goodies for their own political constituencies.  But no matter the outcome of the national elections tomorrow, gridlock promises to rule the day in Washington for the next two years as well.

As British author Ernest Benn wrote:  “Politics is the art of looking for trouble, finding whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy.”  That sums up how Washington deals with an industry that delivers value and jobs to the economy each and every day.

Liquidity, Labor and Legislation

Earnings season is upon us and we all anxiously await guidance from airline executives on a forward looking basis. On the eve of past earning seasons, cues from industry executives have mostly used words starting with “C.” This time around, I want to hear commentary on topics starting with “L” namely:

Liquidity

I believe that we are nearing the final chapters for one carrier, possibly two. I do not know which they might be, only that there are not enough rabbits left in the hat for every airline to survive in this market.

Why?

- Because labor will not be the internal source of capital that it has been in the past;
- Fuel costs are uncontrollable;
- Maintenance repair and overhaul will not offer hundreds of millions of dollars in savings in the future as most airlines already have outsourced as much of that business as they can;
- Distribution costs already have been wrung out of the system at every airline;
- Airport costs ebb and flow with the level of traffic;
- Aircraft rentals and other vendor contracts are largely fixed;
- Commitments made to feed providers are contractual;
- Interest obligations are known.

In other words, there just is not much room on the income statement for airlines to maneuver.

In the U.S. airline industry, we could be fast approaching the tipping point– the critical juncture in an evolving situation that leads to a new and irreversible development. With credit tight, would you put money into an industry that has historically destroyed capital? Would you bankroll an industry that has few opportunities to reduce costs in a weak economy? Would you lend money to companies facing labor strife? To get to the bottom line, would you invest in a company in an industry that has never made a dime? In this economy, there may not be many takers.

The airline industry is not special. Like other industries, it needs a plan to earn at least its cost of capital and compete for a limited pool of funding. And those who hold the capital will likely look first toward companies and industries that reward their capital providers more than once or twice every two decades.

I share the belief of some others that the domestic market may be stabilizing, but think this recovery will be an uneven one. The real driver may be the international market and the global economy’s interdependencies that I do not pretend to fully grasp. So I have concerns about American, Continental, Delta and United. Asia has been troubled in certain spots for nearly a decade now. Europe was a strong performer while the US industry faltered, but now shows signs of weakness across the continent. And Latin America’s economy appears to be similarly troubled.

Beginning today, when American leads the first quarter’s earnings parade, I will be all ears. Because what I see for some is troubling. Others will benefit from the weakness.

Labor

The recalcitrant unions at American remain the lead story as outlined in Mike Esterl’s piece in an April 14 Wall Street Journal entitled: Labor Negotiations Cloud Outlook for American Airlines Parent. American is being joined by United which opens negotiations with all of its major unions this month. Between the two, there will be plenty to read and write about as union leaders at each airline continue to promise outcomes to their members that could not be met even in the best of times. Real leadership would instead recognize that no airline can long survive overpriced labor contracts that put them at a competitive disadvantage in the industry.

I read somewhere this week that the United Airlines flight attendants union is promising its members a new contract that will give them industry-leading pay rates. The American pilots union is taking an old page out of the Continental pilots’ playbook that “the loan is due” to gain back pay levels the industry no longer supports. The problem is that concessions granted or forced in past years were a necessary correction of market costs that had risen above the industry’s ability to absorb those costs. Those concessions were never a “loan” and there isn’t a labor contract in the industry that includes terms on rates or principal that would make them so.

American has a first – at least in my recollection – in having all of its negotiations in mediation at the same time. United could be in the same place as date certain contractual understandings are in place to file for mediation in the event no agreement is reached. As for US Airways and the labor unions that have not been able to complete an agreement following the airline’s merger with America West, I have given up trying to apply logic to that situation. The damage done to employees is done and that was the work of the unions involved.

OhhhhhhBama – Release Me (And Let Me Love Again)

The Allied Pilots Association, which represents American pilots, has been on an ill-conceived, death-march strategy that the leadership somehow believes will get them closer to a release from mediation. Negotiations began in September 2006 -- a long haul by any perspective – but the clock was reset when a new union president, Lloyd Hill, was elected in June 2007. I don’t pretend to know the union’s strategy in these negotiations beyond what plays out publicly, but I do know that the Hill administration has made contract demands that are so far removed from reality that I question whether he is really representing the best interests of AA pilots.

With each union that files for mediation, my guess is the American pilots move yet another group down the pecking order for a release and thus the ability to engage in Self Help. The APA should be taking a clue from the Obama administration and its dealings with the UAW. The UAW’s Gettelfinger demonstrated a real understanding of that industry in balancing the interests of his members with the economic reality, in part by working to preserve wages and benefits of current employees by negotiating lower rates for new employees. But even that didn’t change the reality that, as the economy continues to collapse; the UAW is still not close to having moved far enough from work rules and wage rates that put the Big Three at a huge cost disadvantage in the global auto industry.

Finally, to the pilot leadership, I can’t imagine what possible benefit you would gain through strikes or other work actions that few airlines could survive. First, there is little chance the White House would allow a union at a carrier the size of American or United or Continental to actually go on strike and potentially threaten the economy’s ability to recover. No matter how labor friendly the new administration is, I believe that any union will need to make a pretty powerful case to the White House as to why a strike is more important than the recovery of the United States economy. Any union that can make a case that restoration of inflation-adjusted wages can be easily paid for by the airlines may have a chance, but that’s going to be a tough case to make.

I refer to the American pilots union in this example, but it applies to any large airline. Too much stimulus is potentially threatened by a strike in an industry as crucial to commerce as the airline industry.

Here’s my bet on where pilot contract negotiations will end up at the legacy airlines: With the Delta deal done under the leadership of ALPA’s Captain Lee Moak, the remaining negotiations will be completed in the following order: 2) Continental; 3) United (following the lead taken in the CO negotiations); 4) US Airways (assuming a final resolution to the seniority issues scheduled for the end of April); and 5) American (and perhaps only after a “leadership” change takes place.)

Congrats to Southwest for having put to bed their negotiation with multiple groups at reasonable rate increases.  With little management distraction, the airline can focus on finding needed revenue.

Legislation

Finally, there are legislative issues important to this industry that deserves color in the upcoming earnings calls. First and foremost is a reauthorization bill that will fund the FAA’s activities. A committed industry must find a way to fund enhancements to the air traffic control system. Everyone in the industry recognizes the need to make changes. Now we’re just fighting over who will pay for them. It’s time to move forward and for the various factions to present a united front on "who will pay what".

Second on the legislative front is Oberstar’s bill to evaluate airline alliances every three years -- a clear attempt to make the formation of these alliances increasingly difficult. Never did I think I would write that former AMR Chairman Bob Crandall and Minnesota Congressman Jim Oberstar are on the same page regarding a controversial commercial issue, but I am - and I am even writing it in the same sentence.

In an interview with the National Journal’s Lisa Caruso, Crandall actually says: “In my view, an objective observer would have to look very hard to find a way in which alliances have benefited consumers.” His remarks point to the “dominance” of slots at Frankfurt and Paris by the aligned carriers. Is this any different than the structure "Crandall built" in the US domestic market where carriers were reluctant to offer service between the hubs of a competitor? Absolutely not. Instead, the competition offered a menu of one-stop competing services that presented the consumer a choice.

Are we not to acknowledge that the air travel consumer in Toledo benefited significantly from the Northwest – KLM alliance that offered seamless connecting service to Amsterdam and points beyond? Wasn’t it Crandall that coveted a partner in Brussels to partake in these very same traffic flows? Does Crandall really believe that Detroit and Minneapolis would have multiple non-stop services to Amsterdam if not for the alliance? Does Oberstar really believe that Minneapolis would have the international service to Europe it does without the network of KLM and now Air France on the other end?

Crandall even makes the point that the foreign carriers have been the beneficiaries at the expense of US carrier interests. Crandall is the one that brought the concept of time-of-day departures to the networks of the nation’s carriers. This alone has contributed to a significant amount of the uneconomic capacity that pervades the industry today. Do we really think that all of the departures that “Bob built” were good for anyone? If we did not have alliances to begin filling all of the ill-conceived capacity deployed in Crandall’s domestic network, then we would have even fewer US carrier domestic departures than we do today – even after all of the cuts.

For a guy I admired, Crandall’s comments leave me perplexed, confused and confounded. Some of his fixes are on point, like a changed labor structure. But Crandall should accept some of the blame for an industry struggling today as his pit bull instinct toward competition became a blueprint to build an industry too big. Or maybe he should explain to airline employees that his blueprint caused an industry to hire too many people that now believe they are entitled to wages higher than the industry can pay.

More to come on this one.

AA’s Labor Negotiation Scenarios Get Even More Interesting

I am thinking that we should consider changing the name of the NMB, National Mediation Board, to the AAMB or the American Airlines Mediation Board. Or the FWMB, the Fort Worth Mediation Board, because the docket at the Mediation Board is about to be anything but National.

Trebor Banstetter, at the Fort Worth Star-Telegram’s Sky Talk blog, reports that American Airline’s flight attendants represented by the Association of Professional Flight Attendants (APFA) have jointly filed with the company to the NMB to take over the talks. This one did catch me by surprise but as I think about it, this is a brilliant strategy.

If the application by American and APFA has indeed been made, it raises some very interesting scenarios. Terry Maxon asked on his AIRLINE BIZ blog the other day: Will TWU be first American Airlines union to impasse? Maxon’s question was spot on given that the company and the TWU, sans the mechanic group, had arguably narrowed their differences in a super negotiation session that concluded one week ago. I do appreciate that the starting point will be something other than the final issues remaining on the table, but the TWU and the company each made clear to one another what is important to each side in their negotiations.

We potentially have the majority of American’s employee groups in mediation. The one group not in mediation, the mechanics, is the one labor group at AA that have a sound platform from which to negotiate "gain-share" improvements given the outside work being conducted. This is not to say that there are not some difficult issues ahead in these negotiations given that AA is planning to park their older – maintenance heavy – MD80 fleet on an accelerated pace beginning in 2009. But the fact is this group has enabled AA to find new revenue sources.

Brilliant, Why?

Often, the NMB is forced to make a decision as to which negotiation on its docket has reached impasse first. Typically a decision is between airlines and not labor groups at the same airline. American now has an entire company in mediation. A release of any one group would certainly result in sympathy strikes from other groups with unresolved contracts.

How quickly would new President Obama agree to ground the nation’s second-largest airline? With nearly $2 trillion in economic stimulus to be injected into the economy during the early days of his administration, I am not sold that “labor’s savior” will be trigger quick to ground a company of American’s size in an industry that is inextricably tied to the health of the economy.

Another benefit is that the NMB will be able to truly gauge progress within each negotiation. This is particularly important when determining the “impasse pecking order”. With regard to the TWU and APFA groups, at least some movement has taken place in the non-economic areas. The APA cannot say the same as it has put itself into such a politically-tenuous position that it cannot move off of an opening proposal. A proposal that could not be afforded on the day it was presented – let alone now.

Mediation in this industry can be a good mechanism to work through issues but only after issues begin to narrow. That is how the process is designed to assist. Not to clear the underbrush from 30+ sections of a collective bargaining agreement.

I still think Maxon is right that the TWU group in mediation is number 1 on the “impasse pecking order” list. For the APA, you just moved to a distant third on that list – unless of course you get to participate in a sympathy strike. Or maybe, the APA will actually read the tea leaves and remove their opener and conduct a negotiation with the real world in mind and not the terms and conditions offered at Air Nirvana.

This really is fun to watch.

Dynamic, Dynamic, Dynamic; Bless Air Canada; and the Education of Stakeholders

Like Holly Hegeman at Planebuzz.com, I am having my own computer week from hell and as a result I am cranky. In my crankiness, I am actually thinking about the shot-gun wedding of airline labor and airline consumers, destined to fail, first initiated by the Business Travel Coalition.

This post is kinda about international alliances. Moreover, it is kinda about international alliances not being on the same page. I understand that without Anti-Trust Immunity (ATI), carriers are limited in their discussions with one another. But I find that Air Canada’s decision to rescind second bag charges at a time when United announced it would double its fee for a second bag to be a black eye for the STAR Alliance. North America is one thing. Tomorrow is not about North America.

What good is my STAR Alliance Gold Card if I do not have a clue? And I pay attention. Let’s be honest and frank here, Air Canada, under the leadership of Montie Brewer, has done great things with the internet. They have taught us about simplicity and transparency while teaching the air travel consumer about the concept of “value-added” services when making decisions to purchase an Air Canada product. These include preferred departure times, seats, meals etc.

Further, let’s not let it be lost that Air Canada’s approach, begun long before US carrier’s decisions about ancillary fees, gives them a leg up on the consumer education aspect. So, rather than charge for a second bag, Air Canada will roll its previously stated fuel surcharge associated with buying a seat on a particular sector into the base fare.

Ben Smith, Air Canada’s Executive Vice President and Chief Commercial Officer said: "These initiatives are made possible by the recent relief from all-time high oil prices and even though fares will remain dynamic”. Dynamic is the key word in this phrase. It simply means volatility. We can expect volatility going forward. The fact that a barrel of oil has dropped $55 per barrel in a little over 60 days after rising nearly $60 per barrel in a little over 200 days we should not immediately jump to the conclusion that the global industry is out of the woods. For statistical types: what is the standard deviation?

Air Canada does have it right. If dynamic cost increases are plaguing the industry, then let fares be dynamic. Addressing, and implementing, these processes goes a step further to educate the consumer and labor on the argument that the industry simply cannot sustain a fixed cost, fixed fare, environment that does not produce a profit for those providing the metal. Moreover, dynamic pricing is about addressing the boom and bust cycle that has plagued this industry for nearly three decades. It is about the education of stakeholders.

US carriers are using volatility to create rigidity through ancillary charges. And that is what defines legacy in many ways. Dynamic should be the word of the day. Dynamic is the action that needs to describe the immediate future of this industry as well as the outcome of the next labor negotiations – any airline’s largest controllable expense. Sadly, no US carrier is articulating this point.

Whereas labor continues to assimilate consumer issues into its leverage-grab for higher wages, dynamic base fares versus second bag charges best exemplify the issue describing why we need a flexible labor construct. This boom and bust cycle simply must end. We really need to think about this.

And if we are going to make an alliance argument, let's make one as differentiation is lost.

Campaign Season: Little Substance and Fewer Facts

At least in the race for the US Presidency, a winner will be declared. In the corporate campaigns being run by the American and United pilots against their respective employers, no one wins. 25 years ago, corporate campaigns had some effect as they were new. They are often targeted at individuals, either senior executives or board members in hopes of exposing something “dirty” in exchange for leverage that can be traded at the bargaining table. As we have written here before, this upcoming round of labor negotiations is odd in that neither side has significant leverage and the most important in history since the industry was deregulated.

So the pilots, the “professionals”, the “flying investment bankers”, at United and American have taken to erecting billboards, calling for the heads of their CEO, challenging executive compensation schemes, talking openly about safety and ensuring that each carrier’s operating statistics remain in the press long after they have been reported - all the while hiding behind the veil of improving the product for each carrier's customer base. And hiding behind the financial and still unknown economic condition of the industry. What a laughable approach that promises no more leverage than what they have today as the path to a Presidential Emergency Board is carved.

I could have entitled this blog: The Summer of 2008 Part II.

Presidential Campaign

Like many I talk to, I am disappointed that we have not heard peep #1 of substance from either McCain or Obama on transportation issues generally and nothing on the airline industry specifically as they march toward the November general election. Some band-aid ideas on energy from Obama and the energy solutions suggested by McCain would have a long road to hoe to be implemented. Nonetheless, I am disappointed at this juncture that little is being discussed regarding this battered industry.

Corporate Campaign(s)

My view of the antics undertaken by the Allied Pilots Association and their current leadership, who still can claim that they represent 8,300 airmen at American Airlines, has been well documented in this blog. But most of the unprofessional behavior demonstrated by this current administration has been displayed by leadership of this independent union during every other cycle in the past.

Not so long ago, a desperate grasp for leverage only cost APA’s members $45 million in dues dollars. Today, their inflexible bargaining position based on a dream and actions undertaken against the employer to try and bully the employer to accept their outlandish ask could cost the American pilot membership more. Maybe much more. But they have been there before………. And I am still betting that this one gets put on ice and lands before a Presidential Emergency Board 18 months from now - long after the Delta and Northwest pilots begin to enjoy the improved terms of their new collective bargaining agreement that required the loss of certain legacy mindsets.

One thing that has always perplexed me about this industry, and I was persuaded to pursue the same actions in my past as a union leader: why do this industry’s unions perpetually make deals that minimize the headcount reduction while maximizing the pay cut undertaken by all employees? I have talked about how the industry has always over-expanded in the up cycles and never taken enough uneconomic capacity out in the down cycles. Well the same is true with labor.

The unions choose bigger paycuts to preserve jobs in the down cycles. Stated another way, pay cuts have masked the fact that legacy labor has engaged in bargaining practices that have made them less and less productive in the down cycles. These practices then lead to the airline hiring more employees than needed in the subsequent up cycle. This is a classic example of another inefficiency that has compounded itself over three decades of deregulation. But no, we will try to injure the entire membership to protect 200. Makes a strong cost-benefit analysis case don’t you think?

Corporate Campaign #2: United Pilots Call for Tilton to Resign

I was beginning to believe that the corporate campaign season would be limited to the independent union suspects: APA; and USAPA. But no, we are now joined by the United Airlines chapter of the Air Line Pilots Association. [And anyone that knows a few things about ALPA politics know about the cowboys at United.] First we have a public cry challenging the safe maintenance of their airplanes by the company’s own mechanics. Then we have the claim of an unlawful action on the part of the union by the company. Now we have the pilots at United calling for their CEO’s head.

This Is Nothing New......

A little history would be helpful here. Let’s take a walk down memory lane of United pilot and CEO relationships. In 1981 I believe, the United pilots made a significant concessionary pact in productivity to the company called “Blue Skies”. The subsequent negotiations between the company and the pilots did not return those concessions to the pilots and the result was a six-week strike in May of 1985.

The pilots claimed that Richard Ferris, who remained Chairman and CEO following the strike, was diverting money from the airline to invest in Westin and Hertz, a combination that ultimately became known as Allegis and included United Airlines. The United pilots hire F. Lee Bailey and began a push to buy the company following the end of their strike. Ferris was pushed out and the company sold its interests in Hilton and Hertz along the way. The CEO and Chairman chairs were held warm until Stephen Wolf was named head of the airline in late 1987.

But the pilots at United were exercising their power over being disgruntled with Ferris’s actions and were making headway toward a leveraged buyout until “Black Monday” – the market crash in October of 1987. Yes, the stock market crash in October of 1987 ended their initial bid. A failed attempt where the pilot union still paid its advisors some $16 million. Ever think how much that was in 1987?

Then, in walks Wolf in late 1987, a deal-friendly CEO that had cashed out nicely at each Republic Airlines and the Flying Tiger Line. By late 1989, Wolf was Chairman and CEO, the Allegis name was dropped and the subsidiaries sold. As Wolf’s tenure in the Chairman and CEO chair began, the economics of the industry were generally strong. Then came 1991. High oil prices and a recession. In 1993, Wolf turned to the unions seeking concessions from contracts negotiated in a much better economic period. [What we did not know at the time was that an inside ALPA lawyer would be financially rewarded for being an intermediary to turn these talks from simple concessions to the vehicle that would be used to sell the company to the employees] The company sold the flight kitchens following a near $1 billion loss in 1992.

The 1993 concession negotiations ultimately led to the ESOP structure that was closed in July of 1994. Nearly seven years after their initial attempts, the United pilots had their wish. Wolf was paid off handsomely and in came former Chrysler CEO Gerry Greenwald to head the company and usher in this new era of employee relations. Greenwald was hand-picked by ALPA to head the new airline, as was his number 2, John Edwardson. And the pilot advisors were paid yet another $16 million in the process.

Employee seats on the board were negotiated with unprecedented and unhealthy corporate governance power. Greenwald makes himself a lame duck during this period by announcing half way through that he would only fulfill the initial 5-year term of his agreement. My guess is he fully appreciated that the economics and the governance construct would inevitably lead to a bad outcome. He left in 1999.

During 1998, employees that had made concessions to buy the airline were entitled to begin negotiating interim wage increases. Management recognized that the increases being sought could not be sustained. Then, using their power at the board level, ALPA and the IAM voiced strong opposition to John Edwardson – the chief opponent - and he was ultimately replaced by Jim Goodwin. Goodwin, was another President and COO that needed the blessing of the unions. Then in early 1999, following Greenwald’s departure, Goodwin was named Chairman and CEO.

The ESOP construct ended in 2000. But as the ESOP construct was ending, which meant that United had to negotiate new collective bargaining agreements with all of its bargaining units except the flight attendants, Goodwin began to pursue a merger with US Airways. Labor tensions mounted as the merger now posed many issues that could negatively impact the outcome of their negotiation of a new collective bargaining agreement.

The pilots ultimately won a ransome-like contract, based in part on their actions, that made virtually their entire portfolio of international flying unprofitable. Further the contract established a false market on the rates the industry could afford to pay for pilot labor. Ultimately the US Airways bid was abandoned in 2001. Then the events of September 11, 2001 unfolded, exactly one-year after ALPA agreed to accept its ransome. And surprise, surprise: as the unions still possessed the extraordinary governance powers negotiated during the ESOP transaction, Goodwin was gone by November of 2001. His chair was held warm by board member Jack Creighton until a successor could be found.

Like the rest of the industry, United suffered in the aftermath of 9/11. The company began negotiations with all of its unions seeking an unprecedented give of $2.5 billion annually. Creighton retires, as he was not the one to lead this company through this difficult period. With governance powers still in place, ALPA, the IAM and the board replace the retiring Creighton with Glenn Tilton. The former oil executive will be the one to lead United into, and out of, bankruptcy protection. Remember, it was ALPA that hired Tilton - like many before him citing that it was one expensive hire but definitely the very best of the candidates interviewed.

Concluding Thoughts

Now United is nearing the time to begin negotiations to replace the consensual agreements reached while the company was in bankruptcy. One of Tilton’s strongest attributes upon his hiring was his familiarity with the bankruptcy process so I guess in some ways that makes him a restructuring guy. It did not take him long to recognize that the negotiations with the unions that were concluded prior to the filing on December 9, 2002, were not going to be enough. And I do not think that Glenn believes the work is done at United yet.

For years, the United pilots have taken to calling for the head of each and every CEO that said no. They were more than willing to put in place those they believed would say yes. But even they had to say no at some point and when they did - they were gone. Tilton has said no and continues to say no so that means that the United pilots should keep with what they know and call for his head. But any good restructuring guy knows when the work is done and when it is not done. Many have stayed too long. I don’t think this will be the case as United works toward righting its operation in anticipation of an alliance with Continental Airlines.

I think some history is important for those looking at the United pilots calling for Tilton’s head as a significant event. It is not significant. It is nothing more than a piece of a tired, three-decade old tactic that the United pilots are using in Corporate Campaign 2008. If the United pilots are serious, as they were in the mid 1980’s, then buy the company again. Otherwise there are two choices: be creative and constructive; or be legacy-minded and destructive. United probably has a liquidation value that shareholders might just view as attractive.

I love how history repeats itself in this industry. This blog was largely written from memory as I have spent a lot of my life at United in these dealings. I am sure that I will be corrected if I have made a mistake on the chain of events.

And further, isn’t it interesting that on the day the pilots call for Tilton’s head, the Delta and Northwest pilots approve a new collective bargaining agreement that will be in place when the merger of the two companies is finally approved. At least at some carriers represented by ALPA there are constructive actions being undertaken to address a changing world.

More to come.

Maybe the Allied Pilots Association Is Really Onto Something

As I have written often and recently, the competitive position of the US legacy carriers in the global arena is a major concern to me. My thoughts on this topic are largely contained in a talk I gave at the ACI-NA International Aviation Issues Seminar in late November click here.

With the combined market capitalizations of the Big 3 EU legacy carriers (Air France/KLM, Lufthansa and British Airways) exceeding the market capitalizations of the Big 6 US legacy carriers (American, Continental, Delta, Northwest, United and US Airways) combined by nearly 33%, something clearly needs to change. And if Air France/KLM is successful in integrating troubled Alitalia into its fold, then the margin will become even more embarrassing for airlines carrying the US flag.

What a Cool Job

If there is a job I want in the airline space today, it would be the UPS whiteboard guy click here. Why? Because the UPS model, and the way they talk about it in their whiteboard campaign, demonstrates the futility of US carriers trying to operate successfully under collective bargaining provisions that are at least 35 years old. The UPS guy is not encumbered by existing lines or parameters as he connects UPS’s dots on the map. More importantly, the company actually connects the product to what customers want and demand –a novel concept! If there is a time to throw the past away (erase) and look to the future (redraw), it is now.

So maybe, just maybe, the Allied Pilots Association is on to something in its latest proposal to American Airlines. While I would never suggest that the APA “one liner” scope provision click here makes sense for the AA network as we know it today, anything that simplifies the ability of US airlines to implement commercial, tactical and strategic decisions to react to a changing domestic and global landscape makes very good sense to me. More importantly, anything that gets the mainline growing again is the best solution to some of the labor-related hostilities in the industry today.

Whiteboard Analysis – Regional and Codeshare Flying

What I like about the simplicity of the APA proposal is that it provides a starting point to begin serious negotiations – something the American Airlines negotiations are sorely lacking.

Given that scope defines who can do what flying necessary to operate the network, AA would get to go to the “whiteboard” and lay out for the APA the cost for feeder flying relative to the revenue generated by that flying, as well as the traffic and revenue contributions to its mainline domestic and international routes. As part of AA’s whiteboard exercise, they also get to demonstrate the value of revenue and traffic contribution the international codesharing partners now contribute.

If APA puts forward a scope proposal that reserves all flying for its member pilots and that makes economic sense, then there would be no need to scale back the current size of the network – all other things being equal. On the other hand, if APA is not willing to agree to terms – pay rates and work rules – that, when the interdependencies of all contractual issues are understood and at least match what AA pays today for this business, then the company would need to make some decisions about how much to shrink the current network.

Whiteboard Analysis – Mainline Flying

Let’s take it further.

The cost of the APA flying will ultimately determine the size of the network for regional and codeshare flying. The next calculation is the cost of operating the existing, or remaining, mainline network. If the network can sustain the 50+ percent increase in rates and all other items included in the union’s current proposal, then the APA will have realized its goal of restoring lost earning power to their members and establishing the pattern for the rest of the industry to follow.

Based on the cost of operating the mainline network under the APA proposal, there are two paths to explore on the decision tree: 1) if the remaining network cannot incorporate the cost of the entire APA proposal, then determine what portions can be operated profitably and the remaining network would need to be dismantled; or 2) determine how much increase in pilot cost the network could absorb and then ask the APA to adjust its proposal downward.

Whiteboard Analysis – What Is the Right Formula for US Legacy and LCCs?

This conversation is underway not only in union halls, but also on Wall Street and in corporate boardrooms. It is a topic on the Dallas Morning News’ airline blog click here. While Mr. Maxon sees the APA proposal is a bombshell, I see it as a starting point for negotiation that appears to be stuck. Historically, scope language is among the last issues negotiated in pilot contracts. Let’s switch it up this time and figure out exactly what unions want their respective companies to be - global leaders or niche players?

We talk a lot here about CEOs that are genuinely concerned about value creation versus value destruction – Glenn Tilton at UAL, Doug Parker at US Airways and Richard Anderson at Delta. But another CEO has been hard at work totally rethinking his business as well: Gary Kelly at Southwest. This past week, Kelly spoke directly to the “perils” facing the industry click here. Kelly and his pilots are also engaged in a discussion of scope language as their business is about to get more complicated with proposals for international flying and code shares as a way to boost revenue production.

With little to no clear investment thesis in the core business of airlines, UAL this week declared a special dividend to its shareholders click here, much to the chagrin of its employees and a very passionate Holly Hegeman who writes about the action in her blog, Planebuzz click here. If nothing else, Tilton and UAL are consistent in their focus on the shareholder – often the most ignored of stakeholders in the airline industry. While I can see the employee view, at-risk compensation is a way around this angst.

So unless the business of the business starts to have a clearer line of sight to the customer – meaning delivering a product that the customer is willing to pay more for – then the payment of special dividends, the selling of wholly owned subsidiaries, consolidation and/or a slow liquidation of US flag airlines will continue. You know, money talks and #$*&! walks.

Concluding Thoughts

I really think the APA is on to something with its scope proposal. Let’s talk about scope first among the tough questions that will determine the future shape of the US airlines. Once that question is answered we can move on to a meaningful discussion about how to better compensate a workforce because the current seniority-based, hourly rate system simply is not effective in the modern market.

Structured properly, this round of negotiations may just lead to finding the right network architecture to make the US carriers global leaders again. Or not. But doing business circa 1970 is not going to get it done. So let’s remove the clutter and the underbrush and start with a clean whiteboard. Maybe even do what the European carriers do and create business units that carry cost structures to match the sub markets they serve because they recognize that a one size fits all just does not work. And this approach could indeed be done with pilots on the APA list – just ask Northwest and US Airways.

Let’s stop saying it just cannot happen. It can.