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.

American Airlines and the Allied Pilots Association: A $3 Billion Question

On October 26, 2007, I wrote Just Put It On Ice: American’s Ability to Pay ≠ APA’s Expectations. I followed on in December of 2007 when I wrote Maybe the Allied Pilots Association Is Really Onto Something where I attempted a cynical response to address the union’s scope proposal. Today, May, 27, 2008, American management put a number to the cost of the APA’s numerous proposals and discussed it on their negotiations website.

When I made a back of the envelope attempt to price out the opener based on the proposals on the table in October (no new scope or new pension proposals had been made by APA at that time), I made the comment that this was one rich deal. And that the cost would be a three-comma number. And for making that educated guess, I received many comments from certain APA members (and I encourage you to (re)read them). Well, American estimates that the “all-in” number including wage increases, productivity improvements, scope standing in the way of revenue earned today that would be prohibited tomorrow and further improvements in the network carrier’s best pension program is: a cool $3 billion.

Yes, $3 billion annually as the number excludes the one-time payment of a signing bonus proposed by the APA . Whereas there may be some issue with the company’s costing, the number dwarfs even the “unaffordable” $700-800 million estimated by the Allied Pilots Association of its proposal. Based on a career spent around labor negotiations, the $3 billion zip code sounds about right.

A Failure In Leadership

And please do not write that a company gets the union it deserves.

I too listened to the APA podcast referenced by American in its statement today. I smiled as I listened to the enlightened Lloyd Hill suggest to Jason Goldberg in the canned interview that significant contractual improvements can be made during difficult economic periods. In fact, Hill referenced the contract won in the early 90’s. I guess he was suggesting that today’s issues are easier to navigate than the slowdown in the economy and the outbreak of the Gulf War at that time. NOT.

If I am a 50 year old American Airlines’ pilot today, I would be starting to get a little nervous. Erecting billboards; picketing the Board of Directors, Wall Street, and the airline's best customers; spreading misinformation across every available medium; may seem to have an effect and help to generate leverage. These reckless actions haven’t increased the union’s leverage and they won’t. All they are doing is cleaning the lens for everyone to better evaluate the APA’s asks and truly question their motives. This time, APA and all airline labor will learn that the leverage they are seeking to gain is held by capital and oil.

It has been said on this blog’s comments that I have a disdain for airline employees. My response is that I have nothing against airline employees, but I do have a disdain for reckless union leadership. And while reckless leadership can be found at many airlines today, there is none more reckless than the Allied Pilots Association. And every day that there is a new public action undertaken or announced by them, I am reminded of Eastern Airlines and the actions of one Charlie Bryan.

There Is Nothing to Mediate

When I wrote Just Put It On Ice last October, my back of the envelope calculations suggested that American management is faced with a pilot contract that should be cut by $500 million. Therefore based on the APA ask, my best guess is that the company and the union were $1.5 – 2 billion apart. But the company was not, and has not been, asking for reductions. So let’s call it $1.0 – 1.5 billion apart at the time. I certainly appreciate that my estimates have no weight. But if the company’s estimates discussed today are remotely close, what is there to mediate?

With differences of this magnitude, there is little to discuss and nothing to mediate. Even with the best one-sided economic analysis that the union can make, the gulf between APA’s ask and AA’s ability to pay cannot be closed sufficiently to even consider a meaningful mediation process. Other than mediating our way to a Presidential Emergency Board in 2 years or so I see little to be gained. And we still have not even discussed how we might improve the earnings of the vast majority of American’s employees.

As I wrote earlier, I am beginning to think that there is a silver lining in the high cost of fuel in that it will force a changed industry structure. Maybe there is the same silver lining in reckless union leadership at certain carriers during this fragile period in that the collateral damage would be limited. And the opportunities for the remainder of the industry to pick up the pieces will be greater – and in an American-less US industry, much greater.

Yawn

This post represents the longest period between pieces for me since I started swelblog.com in October of 2007. Change has been the theme to date. Change will continue to be a theme. Bloggers typically are not sources for news. Instead we rely on reports from the Wall Street Journal, the Financial Times, Bloomberg and other trusted sources for the news and views.

Last Monday, Susan Carey and Melanie Trottman wrote: Continental Rejects Merger Overtures. The subtitle read: Move Marks Rebuke to Rival United; Shifting Alliances? OK. That story ran on A1. Today Susan Carey writes a piece entitled: UAL Merger Discussions With US Airways Intensify. The subtitle reads: Companies See $1.5 Billion In Savings, Synergies; Decision Within 10 Days. Yawn. This story ran on B1. And of course the story comes replete with the now familiar disclaimer: “according to people familiar with the matter”.

In the past, news of airline mergers and potential structural changes in the industry had an air of intrigue and suggested something new in the age old debate was about to emerge. Not this time. Throughout this current period of M&A discussion, I have hoped for something that suggests a path toward transforming of the industry. Something different. Something that tests the current shackles that tie the industry to the same old, same old.

Something like British Airways testing the ownership limits and investing in American and/or Continental. Deal is intended to highlight the importance of the subject as the US and EU negotiate Phase II. Or, labor agrees to a single collective bargaining agreement that makes changes to scope that opens up the globe to new revenue sources all the while protecting US jobs and ensuring that growth will largely remain with the US carriers involved. In return, labor wins meaningful equity in the deal and ties compensation to the same metrics as management. The changed compensation structure begins the process of aligning interests in the company's success.

But I think the market will be the ultimate driver of change. Not the carriers themselves. But maybe that is the good news in all of this and honestly, the only way it can get done.

Transition v. Transformation (Labor Actions Hold A Key)

No matter what direction the industry was going to fly following the emergence of Delta and Northwest from Bankruptcy in early 2007, the subsequent five years or so was going to be a period of transition. The era was sure to be marked by increased competition from non-US carriers; higher oil prices; an economy that was tiring; and more than likely a recognition that no carrier that filed for protection probably had done enough, or tried to preserve too much, given the trajectory of the oil curve.

Then we were going to be faced by the demands of labor to return what was conceded during the restructuring period. Because that is the way it has always been. Right? So maybe it is labor, and their ultimate actions, that is the transition. The transition to transformation? And this transition holds a high probability of the death of an icon.

We already schooled on the many labor issues surrounding Delta and Northwest. But United and US Airways provide their own interesting twists. And those twists begin with the pilots.

No group of pilots has even approached the unrealistic and "head shaking" behaviors of the American Airlines’ pilots except for the former US Airways pilots (US Airways East). These are the pilots that chose to form an independent union by selling an unachievable (from this writer’s opinion, anyway) overturn of an arbitrator’s decision regarding seniority integration of the former America West and US Airways pilots.

But if United and US Airways do decide to join hands, some very interesting possibilities come to the fore. With 5,000 United pilots represented by ALPA; 2,200 former America West pilots that largely voted for ALPA I would guess; and the 2,700 or so former US Airways East pilots that bought the pipe dream sold by the USAPA upstart – an election for representation is all but ensured. And ALPA would likely win. The integration would more than likely get done - yet again. This is the best hope for the former US Airways' East pilots who should recognize that they were fortunate to have found a way out of Chapter 22.

As for the concept of rent sharing discussed in the previous post, a combination of United and US Airways would result in less transfer of capital from the deal and into hush money paid to labor given the relative proximity of average salaries and productivity levels of the two groups.

A United – US Airways combination would also prove most interesting for the flight attendant group as the AFA-CWA represents not only the United class and craft but each the former US Airways and former America West flight attendants as well. From my perspective, this could very well become a “game changer” in the AFA’s attempt to organize the current Delta flight attendants. AFA will be put under the spotlight as to how the union will deal with the integration of its own members that are sure to have varied interests.

As for the other represented groups in the United – US Airways combination, labor stories exist but they are less headline making than what could go on with each the pilots and flight attendants in this scenario.

Over The Weekend, A Comment From a Reader

In my most recent post, Swelblog.com: Let’s Just Continue the War of Attrition, cp5000 commented: “Bottom line is that in a free market, management and labor are free to do whatever they please and capital should be able to make its way to those companies that make arrangements with their work groups that make sense to the providers of capital. Letting the market place sort this all out is difficult for a politician, particularly for a politician from an area that will lose jobs due to the workings of the market. However, our political leaders should be able to see that the pain experienced by some in the past has led to many benefits today”.

cp was speaking to events like the loss of TWA that arguably provided for the opportunity for jetBlue to be granted the slots necessary at JFK that were instrumental to its successful start. The demise of Pan Am was critical to United building Asia and gaining early access to London Heathrow. It could be said that the loss of Eastern ultimately created the vacuum for AirTran today as it has morphed from its prior incarnation as ValuJet. And Southwest has just “triangulated” its way through it all and now has its footprint in all four corners of the US domestic market..

Charlie Bryan’s Tombstone Would Probably Like Some Company

Whether it be the integration of seniority, the overreach for corporate rents by various stakeholder groups, or the failure to recognize that the historic patterns of bargaining and capital recycling are over – labor will definitely play a role in this transition period.

In a post on October 21, 2007, I wrote a piece where I was addressing employee and community entitlement to employment and air service. “Defining Entitlement Economics: all are conferred a lifelong right to employment and/or abundant service despite the fact that the economics of the US airline industry, particularly its domestic operations, have changed significantly since the early 1990’s”. Nobody is entitled to a lifelong right of anything.

Why this period is not viewed as an opportunity by labor and policymakers, I just do not know. Instead opponents will point to executive compensation; service problems; loss of service; a menu of potential dislocations; and just plain ignore the economic reality that this industry needs to figure out how to make money. Period. That is the only thing that will benefit everyone.

Yawning at United – US Airways and the drumbeat in anticipation of it. Not sure if I am just weary of the tired refrain of executive compensation and entitlement of economics and seniority; or if bored because the arguments and scare tactics remain the same all the while the world around the arguments continues to change; or if oil is just sucking the oxygen out of the industry and limiting the interesting things that could be done proactively. But I will be patient as some great stories and perspective will emerge.

Or maybe it is simply because I celebrate five decades of life on Thursday. I probably should have written this piece on Mayday. But it is Cinco de Mayo.

April 15, 2008: A Day to Remember or a Day to Forget?

End the speculation. We can now begin to debate the facts surrounding the Delta-Northwest combination. I must say that I expected to see significant changes from the deal that wasn't. What appears unresolved today is not much different than what was unresolved yesterday. As this day closes, I am an industry observer that is pleased to see a consolidation round begin in earnest.

Over the coming days, weeks and months we will be hearing about how the sky is falling. I remain steadfast that consolidation is in the best interest of all US airline industry stakeholders in the long run at this juncture. For some, consolidation through merger and acquisition activity means that the sky is falling. For me this type of consolidation is much better than consolidation through liquidation. In that case, airlines are falling from the sky and dislocations are forever.

Over the coming days much will be written. I will write. In any number of conversations I had today, the issue of labor risk; technology risk; and any other risk that could be raised as standing in the way of a successful combination of Delta and Northwest required addressing. And oil, the number one catalyst (read risk) behind the discussion of consolidation traded at levels approaching $114 per barrel of crude. Assuming that the crack spread is similar to last week’s level, then the "in the wing" price for the industry approached $145 per barrel today.

All of us really do need to stop talking about oil in a per barrel of crude denomination. We have to remember to add the crack spread to the cost of a barrel of crude. Me included. John Heimlich, the Chief Economist at the Air Transport Association has made some additions to his presentation on oil and its impact on the industry. Read it as it provides great perspective and why we find the US industry in its current position.

There Was Other News

We cannot have a day with news of promise in the US without a story on the “Flying Pig”: Alitalia. Reuters reported on the ongoing saga and how, and why, newly elected Prime Minister Berlusconi vows to keep Alitalia flying. The article reports, “Alitalia's ready cash is shrinking by about 3 million euros a day and now has funds left only for the immediate future -- a question of weeks or at most a couple of months, observers say”. The article goes on to say, “IATA, the airline industry association, has told Alitalia it must provide guarantees to be able to stay in IATA's system to settle ticket purchases if it were to go into administration”. Time is a tickin’ in Milan.

And finally, as the day really does come to a close, I sit and watch Neil Cavuto interview Captain Sam Mayer representing the Allied Pilots Association regarding their march today on American Airlines’ largest customers and institutional investors. As I have written all too often, this situation of labor suggesting that they join with customers to force American (or the industry) to address internal issues is reckless and has a higher probability of backfiring than benefiting any one stakeholder at American Airlines (or any other carrier). This is about getting a contract. I just wonder if APA told these valued customers and investors about the magnitude of the ask in their proposal and that they claim that only minimal fare increases are necessary to fund their ask. Best I know, fare increases are what customers like to hear. I doubt it.

And Frontier Receives Notice of Delisting. This story for me truly underscores the fragility of the industry today and why liquidity is king. An interesting day indeed.

One step forward for some and steps back for others. But we will get there someway, somehow.

More to come.

Is American Airlines Playing the Final Round of the Masters on Thursday?

Some Thoughts for Gerard Arpey

With my mind firmly on Magnolia Lane and the Masters, my mind finds itself drifting from excitement and anticipation to Amon Carter Boulevard. As I do from time to time when I am online, I look to the Dallas Morning News' blog to take the temperature of airline happenings in the Metroplex. And what is going on with AA is no trip down Magnolia Lane. The Masters for me is the culmination of what I call the “Finest 30 Days in Sports Television”. The back nine of the Masters on Sunday provides the fitting bookend to the NCAA Men’s Basketball Tournament Selection Show.

For those of us who relish the tradition of each year’s first major golf tournament, we are familiar with the suggestion that the back nine at Augusta on Sunday is considered the most exciting two and one half hours of golf we will witness. Given the recent happenings at American surrounding the flight cancellations – not from a safety of flight perspective - I am beginning to feel like the company may be playing the final nine holes of the Masters on Thursday. If that were true, then all American could act on under the rules of golf would be to withdraw from this year’s first major. If that’s what the employees want, then the internal noise is equal to the external noise.

American Airlines is not going to withdraw. Or I hope not. But even I have to say it is time for American management to rethink its course strategy after shooting a 40 on the front nine. Tiger did demonstrate that the Masters can be won even after shooting 4 over on the outward nine. Mr. Arpey, I am not trying to put you in the unenviable place of being compared to Tiger, but you are the CEO of the world’s largest airline in terms of traffic and capacity and in some circles that makes you the world’s number one. And just like Tiger has to deal with cameras going off in his backswing, you are going to have to block it out, deal with fuel and an over-zealous FAA and find that will to win.

Mitchell Schnurman of the Ft. Worth Star-Telegram wrote a column this week about the situation at American where he took management and labor to the wood shed in the ongoing saga at American. While Mr. Schnurman and I have not always laughed at each other’s jokes, he does make some good points. My views about the TWU’s action toward Mr. Conley were written two posts ago. But the very idea that transformational change is needed at American, and in the industry can no longer be ignored as the industry’s problems continue to mount. And, if, somehow the foundation issue for your company is how management is compensated then it is time for your Board to consider making changes.

Mr. Arpey, as you make your way to the tenth tee, the bookmakers are starting to bet against you. For the second time in nearly as many days, 24/7 Wall Street mentions AMR as a bankruptcy candidate. Remember it is not about how much money you have made for Wall Street in the past or how many of your decisions and actions have preserved their capital, it is how much money you can make for capital now. With your labor groups, it is not that you have managed your company at a tremendous cost and balance sheet disadvantage because you did not file for bankruptcy; it is because you are deemed to be over-compensated as a result of your Board of Director’s design of AMR’s management compensation system.

I sit on a Board of Directors of a publicly traded company in the airline industry and it gives me a lens into your issues. I know how difficult it is to design a compensation structure that is not only fair and incents the best to stay yet meets today’s rigorous plan design rules. In fact, these rules were put in place to prevent business activities that earned headlines early in this decade. Every plan requires a funding mechanism and yours is stock price from what I can interpret. Other funding mechanisms can be used. But despite what your work groups may think, designing compensation plans today is much more difficult than it might appear.

In theory, stock price is an obvious funding source for a management compensation pool because stock price should be that self correcting mechanism. And that is sound thinking in theory and not always in reality. And that has proven true at AMR. The fault is that stock price reflects expected future earnings and not company performance that has just transpired. Mr. Arpey, your problem is that while you kept your company out of bankruptcy and industry fundamentals started to turn more positive in 2005/2006, your stock price far outperformed the industry. Shame on you for positioning your company that way [and please read this with tongue firmly in cheek].

I want to see this industry change. And change only occurs at the very foundation of how we do business. But, after watching your situation very closely through both good and bad, there is obviously something very wrong at the foundation of American Airlines. I am even more troubled by the public outcry about how this recent inspection has caused dislocations for many. And I am on record and believe fervently that this industry will never knowingly compromise safety. By absorbing tens of millions of dollars of losses for your company to adhere to the Airwothiness Directivenes, I know that you know that. And I will not comment on the unprofessional actions of the APA as I have been down that road way too many times.

What seems to be at the heart of all the bad news that emanates these days stems from AA’s senior management’s inability or unwillingness to communicate with employees and customers. I see you communicating through your actions to Wall Street and what you have done to your balance sheet is nothing short of remarkable with the lack of legal tools available to others. But now it seems that even capital is growing impatient not only with you but with the industry.

I am, and remain, a staunch proponent of variable compensation for both labor and management. This period of transition in our business will determine winners and losers. Whereas no Masters champion has ever shot over 75 on Thursday and been awarded the green jacket on Sunday, there is one champion who did shoot 4 over on the front nine of the first round. I know that there is nothing that can be done to change the management compensation plan design this time around or maybe even the next time. But it is time for you to urge your Board to consider making changes. And make that a priority because you have a lot of people rooting/depending on you.

Just as it hard to imagine a Sunday at the Masters without a Tiger on the prowl; it is just as hard to imagine a US airline industry without American Airlines.

There is still a lot of golf to play. But your course strategy needs to be rethought or you might be watching Saturday and Sunday on TV with the rest of us. And I am sure you do not want that.

Just Wondering, Or Am I Wandering?

A Few Issues in the Press

1. With the Euro reaching an all time high relative to the dollar yesterday, how will this impact international travel? Can the potential loss of US-origin customers that now deem an EU trip unaffordable because of the currency relationship be offset by EU-origin demand that will find the US cheap?

a. Headline in today’s Wall Street Journal: "Lufthansa Expects Growth in 2008". As the company’s net profit doubled in 2007 v. 2006, the company cites its broad business model that includes aviation services, catering, airports and other areas as a mitigation of downside macro risks. For the US, that might mean increasing the foreign ownership limits?

2. In late 2007, United warned of the potential to “put down” as much as 10 percent of its capacity if oil prices stayed above $100 per barrel. Well, yesterday oil actually traded over $110 per barrel. The $100 price point has become a level that most oil watchers expect to be sustained. My question for the politicians is: will there be more industry capacity removed as a result of oil prices or consolidation?

a. My suggestion to the "know all" politicians: Be very careful for what you say no to.

3. Yesterday, Jamie Baker of JP Morgan downgraded the US airline industry for all intents and purposes. Terry Maxon of the Dallas Morning News blogged on Baker’s research note that suggests a best case scenario, based on current oil prices and a minimal demand loss due to an economic slowdown, is for the US industry to lose $4 billion. The worse case scenario calls for an industry loss of $9 billion.

a. So much for the robust, and sustainable, industry turnaround we hear from labor leaders and others.

4. Speaking of labor, Baker makes a very powerful point, and one that I have used a number of times. He says that since 2002, the industry’s fuel cost will have increased in the neighborhood of $25 billion. This contrasts with his estimate of labor savings over the same period of $7 billion.

a. Will we ever hear the end of the refrain that the industry recovery has been built on the backs of labor? First, and again, what recovery? Then, and again, what is the industry’s ability to repay that $7 billion? This just underscores what will prove to be the most difficult labor negotiations cycle since deregulation.

5. As if the industry needs more weighty issues to test its resolve, the story at Southwest over maintenance practices is most troubling. I am in no way going to suggest anything regarding this situation until all of the facts are known. But, this story will not be going away for awhile.

a. If the economy can be expected to have a dampening effect on demand, will concerns over maintenance have a compounding effect?

b. Jim “Hell NO”berstar gets yet another bully pulpit issue.

6. On another labor issue. I find it interesting that, included in labor’s chants against consolidation of the industry it says it will be looking out for its members (OK, that is their job) and the traveling public?

a. I guess the threats from labor of a strike, or a slowdown, are beneficial to the consumer because the system can quickly reaccomodate demand and there will be minimal disruption to the affected consumer? NOT

7. Yesterday the Continental pilots rallied in Battery Park along with other ALPA carriers and independent unions to call for the repayment of the concessions that the Continental group calls a loan made to the company in 2005.

a. What loan? Did you negotiate terms like those negotiated when money is borrowed?

b. Isn’t it ironic that the labor groups chose Wall Street as the venue for their rally? There must have been a lot of sympathetic observers given that Wall Street employees largely rely on variable earnings to comprise their total compensation and not fixed rates of pay? Oh I digress.

8. The Allied Pilots Association have told us many times and through many different mediums that just a modest increase in passenger fares will pay for one of the most outrageous asks made by a union of a company in my career. NOT

a. In the face of current oil prices, at what point do “pass throughs” of increased fuel costs negatively impact demand? At what point do the US macro economic issues negatively impact demand as consumer disposable income is negatively impacted from a long list of possible reasons?

b. If demand begins to weaken, I do not think fare increases will be the tactic employed by the industry to address the issue.

b. Maybe the CR Smith Museum should be enlarged rather than being refurbished?

9. Politicians and labor should think real hard about the fallout that could stem from the current economic environment versus what the perceived fallout could be in a consolidation scenario.

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.

Just Put It On Ice: American’s Ability to Pay ≠ APA’s Expectations

As I read this morning’s Wall Street Journal, the headline on page 2 is “Economy’s Weak Signals Persist” and the headline on page 3 is “Oil Tops $90 on Range of Worries.” What this means for the airline industry is well documented in Planebuzz click here.

We said the eyes would be on Texas airline labor negotiations, and we got a good glimpse of that this week. The Allied Pilots Association presented its Section 6 opener to American Airlines on Tuesday. This writer’s take on what American is seeking is a cost-neutral contract (which in effect preserves APA’s industry leading position) where productivity gains could cross subsidize increases in other sections of the agreement. By contrast, APA asked for pay increases in the 50% percent range.

This is one rich deal. Add the productivity gains and the multiplier effect of wage increases on pension and benefit costs (and well before any opportunity costs or opportunities lost are analyzed), my back of the envelope calculation suggests the price tag on this proposal is comfortably a three comma number. Yes, the number starts with a B and not an M. And this is before negotiations start with the other unions representing the vast majority of AA employees.

Let’s put this in perspective: Today, American has a pilot cost per block hour disadvantage versus every single one of its major competitors in the US market click here. If American had a pilot contract along the lines of the Continental agreement, that is at or above the industry in terms of compensation and productivity, American would need to reduce its annual total pilot costs by as much as $500 million click here. But American is not seeking concessions; it is seeking a competitive contract recognizing the “gives” by labor outside of bankruptcy.

I argue that the APA proposal fails to serve its members. Not just because of the costly demands, including the proposal that pilots receive holiday pay if they fly Super Bowl Sunday, but because the union’s demands insist upon a return to 1992 wages adjusted for inflation. That sets completely unrealistic expectations when put in context of the massive change in the landscape for network carriers, and the US airline industry for that matter, since the mid-1990s. American’s average “nominal” domestic fares were actually lower in 2006 than they were in 1995 click here.

In the media coverage, the APA suggested that its opening proposal would lead to a quick settlement. I beg to differ.

When two sides are so far apart on an agreement that there is no basis for movement, it is said that negotiations are “put on ice.” For many reasons, this round of labor negotiations is the most important since deregulation. For the major airlines to have any hope of succeeding for the long term, this upcoming round of contract talks must produce agreements that are durable and sustainable and make strides toward eliminating the cyclicality that has plagued discussions between labor and management for the deregulation generation.

There remains a real opportunity for these negotiations to be “industry interesting” in a good way and think about ways for employees to share in any upside while still realizing some protection in the downturns. That’s what the unions should be aiming for in getting their members a deal.

But if, in the APA’s view, the upside means in a 50+% increase in base rates then there really is no starting point. Openers are supposed to be starting points, not the point of no return.

Executive Compensation

We cannot discuss industry economics and labor without also discussing executive compensation. For as long as I have been in this industry, airlines have been run for pilots, by pilots and in fear of what pilots might or might not do. As a former flight attendant – that is how I put myself through school - I constantly questioned it and still do. For virtually any carrier, in a list of the top 100, 200 or 500 most highly-compensated employees, the majority would be pilots.

This industry has never had a deep bench of management talent . . . in part because airline executive contracts have historically not been as rich as executive contracts in other industries. The executive management team in the airline industry is usually there because they have jet fuel running through their veins, not because the financial upside is so great.

Many say that there is no justification for the executive payouts in recent years across industry – not just the airline industry, but throughout corporate America. But the simple fact is that markets are at work. Not all markets are rational, but given that markets by definition operate on perfect information, ultimately they return to the trend line.

For CEO’s, CFO’s and CIO’s the market rates are set in New York, Des Moines, Singapore, London and Los Angeles as companies in the US and around the globe are seeking the same talent to do the job for them just as American seeks to find the best people to fill these positions as well.

The reality is, however, that a new market rate has been set for pilots and it is not 1992 times inflation to the sixteenth. It is $120,000 and not $180,000 click here.

For awhile, “pattern bargaining” fueled an unrealistic – and unsustainable – growth in average pilot wages. It began with Delta’s lucrative pilot contract in 1999, followed by United’s topper in 2000 as it followed the "Delta Dot" along the road to bankruptcy.

Now there’s a new pattern, and a new market reality, and that is the contracts reached in bankruptcy and ratified at United and US Airways in 2002 and 2003. That’s how the market works, and airlines – like companies in any other competitive industry – generally compensate management and employees at the going market rate and as necessary to retain its best people – period.

Don’t assume that I support executive compensation packages that have benefited senior leaders while workers have seen their lives negatively impacted. I do not. But, I am a believer in markets. The convergence of what is paid to pilots, flight attendants, ramp workers has found an equilibrium and that is what markets with perfect information do. Will the market rethink executive compensation as well? I think so.

So......

We can spend a lot of time thinking about the APA proposal or just recognize that negotiations in this round will take some time. During restructuring, the market realities dictated quick negotiations and resolution. This time it is different. Neither labor nor management has significant leverage. Labor is trying to create leverage using the executive compensation issue because there is little else that resonates as well with a broad base of employees and the public. Meanwhile, management teams are doing their job and actually posting profits at a time when pricing power continues to decline - with no adjustments for inflation. The only structural change now permitting increases in revenue is in reduced capacity and in the lofty levels where oil is trading and, finally, an industry willing to pass on a portion of those increases to the consumer.

There are many who say the industry’s recent profitability comes on the backs of labor. That argument ignores the fact that the recovery is the result of tactical and strategic decisions, combined with other management actions, to achieve profits in an environment that has been structurally changed.

Keep in mind: $4-5 billion in profits in an industry earning $130 billion in revenue does not signal a healthy recovery.

I’ve titled this post “On Ice” for more than one reason.

The first page I read in the newspaper is the sports page. In an interview in the October 25 USA Today, Paul Kelly, the new Executive Director of the National Hockey League’s Players Association had some profound thoughts to share click here.

1. "Do we need to understand where we should cooperate and where we should draw the line? Absolutely," Kelly said. "But anyone who thinks I'm going to fire the first shot across the bow of the NHL, they've got it all wrong."
2. "My view of the world is that unless you have a personal relationship, a real human relationship with someone, it's difficult to transact real difficult business," Kelly said. "I want to get to know Gary, and I want him to get to know me. And I understand that there is a line there — that we represent different interests."

Perhaps hockey and airlines have little in common. But negotiations are negotiations, and they are not done on an island.

At American, as well as across the industry, pilot negotiations are going to result in "transacting difficult business". Captain Hill, reach out to Gerard Arpey and begin a real negotiating process. Mr. Arpey, reach for Captain Hill and reiterate the commitment you have made, and kept, to maintain pension benefits and retaining the components of the pilot’s agreement that ensure that AA employees will have dignity in retirement and in their day to day living to the best of your ability to pay – something that cannot be said of all carriers in this industry. Otherwise it could be a long, cold winter in Ft. Worth.

All Eyes on Texas

As the airline industry turns away from the round of labor restructuring that began in 2002, it is now at a crossroads. Pilot negotiations now underway, or about to begin, at each of the Texas carriers underscore how difficult this next round will be. And depending on which side of the table you sit, these negotiations are blessed and cursed in many ways.

In each case, fragility rules the day, whether by the condition of airline balance sheets, relationships, expectations, competition, over promising, under delivering. What is clear at the outset is that U.S. airlines need to seriously reexamine their communications to employees and shareholders if they are going to successfully negotiate this treacherous path.

I rank upcoming negotiations at the Texas-based airlines from easiest (nothing will be easy) to most difficult (requiring a new prescription in the rose colored glasses) in this order:

1) Continental, in that the company and its pilots negotiated a protocol agreement that will help preserve effective communications and a productive process.

2) American, in that, by virtually any metric, its pilots are already at the top of industry in terms of total compensation but have the ability to create currency through improved productivity that might be used to subsidize other parts of a new agreement; and

3) Southwest, in that the company and its pilots already lead the industry in productivity click here and as a result do not have much “give” on that front;; have the highest average wages click here; and face slower growth. Man, I would not want to be in Gary Kelly’s shoes on this one.

A case can be made that this upcoming round of negotiations with airline unions may be the watershed event since deregulation. It could go far in determining tomorrow’s airline winners, losers – and mere survivors. Remember Eastern and Pan Am. Every 15 years or so something happens that changes the game.

So why are all eyes on Texas?

Continental and the Air Line Pilots Association’s negotiating protocol paves the way for them to begin bargaining early in an attempt to complete negotiations by the scheduled amendable date of December 31, 2008. American’s contract with the Allied Pilots Association is amendable in April of 2008. And Southwest and its pilots are currently working under an extended agreement that is currently amendable

In my view, Continental has one of the best – if not the best -- management teams of all the network legacy carriers. They were first in signaling the end of the small regional jet euphoria – or, as the former Chairman of the Federal Reserve Bank, would call it “exuberance.” Continental has leveraged its Newark hub to grow transatlantic flying (a model others are trying to emulate but with population bases one-sixth the size of the New York CMSA – but I digress); and they have continued an open communication with all of their employee groups that evolved after the airline emerged from bankruptcy hell in the mid 90s and has clearly led to a good internal operating environment.

In Continental’s case, neither the management side nor the labor side negotiate agreements that prohibit the goose from laying “golden” eggs for all stakeholders. They, too, negotiated concessionary agreements outside of filing for court assistance but they did not have to go near as deep given the competitive pay rates and productive work rules in the collective bargaining agreement.

Between the two Texas network legacy carriers (NLCs as we refer to them at MIT), American faces the toughest negotiations. Its cockpit crew members currently have the highest total compensation per pilot in the sector. More importantly, when total compensation is calculated (wages, pension and benefits and personnel expenses as dictated in the contract) AA has the highest pilot cost per block hour of any carrier in the industry click here.

Given this unenviable cost disadvantage, is it any wonder why American did not immediately agree to the whopping 30.5% pay increase and other sundry contract enhancements demanded by the APA’s prior administration – and now we wait on a new proposal that is speculated to be even more? In fact, that number is uncomfortably close to the number sought by then-Chairman of the United Pilot MEC, Rick Dubinsky during the dreaded summer of 2000, which all but killed the UAL “golden goose” and forced the carrier into bankruptcy. It was said to me at the time that the tentative agreement made nearly two-thirds of United's international flying unprofitable. Now, as a result of the extended trip through bankruptcy, UAL's pilots are among the lowest paid versus the highest paid in the industry.

American’s pilots today enjoy a cost per block hour advantage against no major competitor in the industry click here whereas Continental enjoys a cost per block hour advantage against four of its six NLC competitors.

But it is American’s cross-town competitor, that faces the toughest labor situation of all, at least to this observer. Yes, I mean Southwest -- the envy of the industry in terms of pilot/employee productivity. And therein lies the rub. The magic in collective bargaining – and historically for Southwest - is to find a way to trade productivity for higher wages. When you have a pilot group that flies an average of 65 hard hours per month against a mandated industry maximum of 1000 hours per year, there is not much room to move. This, on top of the fact that Southwest pilots are already the highest compensated in terms of average salary per pilot along with an arguably rich benefit package – begs the question: where do they go from here? As growth slows, it will be increasingly difficult to move the “productivity needle” through operational changes click here. And don’t look now, but Southwest pilots fly the least number of available seat miles per dollar of total compensation than even the network legacy carriers – output per labor dollar has declined more than 25% since 1995 click here.

So as we watch the airline labor negotiating world begin the contract kabuki dance, all eyes should be on Texas. Like it or not, the concept of pattern bargaining still is alive and well in the industry and it is just as much of who’s on first (industry leading) as it is who is going to go first – and set the pattern?

Swelblog.com Taxiing Into Position

Welcome to Swelblog.com . For some of you, the name Swelbar is recognized. For others it will be new. Following nearly 30 years of airline industry experience, mostly in the consulting world, I hope to use this space to focus on the most talked-about issues in the airline business: the people running the airlines, the labor unions, customer service, competition and finances in one of the most interesting industries in the world.

Of course we may deviate some to talk about golf, college basketball or wine and other vitally important things, assuming there are any.

I did not start this blog to win friends or influence anyone. I’m a data guy, and I’ve been studying the industry long enough to come up with some strong opinions . . . many of which aren’t popular in either boardrooms or union halls. My approach is analytical because, in my view, the numbers don’t lie.

I want to start with scope, which has powerful implications for airline fleet use, labor and the bottom line. I spent a lot of time studying labor contract “scope clauses” in a prior incarnation, looking specifically at the issue of scope clause constraints on market development in 1999. Some agreed with the analysis, others did not. Some were dignified in their responses to the analysis, others were not. I expect much of the same here and it is my hope that the site can in time lead to a cogent, coherent and congenial discussion on the many issues and opinions that are sure to rear their head.

I rejoined the scope debate in a recent issue of Aviation Daily. In August, a well known and respected regional airline industry analyst raised issues with pilot scope clauses as an impediment still plaguing certain carriers. That piece was followed by a response from a current leader of a pilot labor organization and then followed by a response from the current President of the Regional Airline Association. After reading it all, I could not quiet my fingers.

In my posting you will find many issues that I have addressed publicly over the years, not only scope, but also the regional-mainline carrier relationship in general. I have taken the liberty below of sharing the opening and closing paragraphs of each submissions that lead to my response which I have published in full. Much more to come……..

Swelbar

Scope Disparities Growing on 8/2/07

By Doug Abbey, Partner in Washington-based aviation market research and consulting firm The Velocity Group

First Paragraph:

As Continental commences formal negotiations with its pilots on a new multi-year contract, it is ironic to note that the carrier now has the most restrictive scope clause language in the industry. By having successfully avoided bankruptcy, Continental (along with American) has been rewarded commensurately; both carriers now find themselves widely out of competitive touch with their post-reorganization peers.

Closing Paragraph:

We therefore encourage Continental and American to consider a new direction not encumbered by old ways of thinking or doing business. Scope is an anachronism — both in and out of bankruptcy — that does far more harm than good.

Opinions expressed are not those of Aviation Daily or McGraw-Hill. Bylined submissions should be sent via e-mail to aw_departures@aviationnow.com.

Scope: Beneficial To Pilots And Airline Managers on 8/17/07

First Paragraph:

In the “Departures” section of the Aug. 2 edition of The DAILY, airline industry consultant Doug Abbey expresses the view that the scope clauses contained in some pilot contracts do more harm than good for major carriers’ key constituencies. A brief examination of the facts illustrates that he could not be more mistaken.

Closing Paragraph:

It’s a tired refrain for consultants like Mr. Abbey to blame labor contracts for corporate shortcomings. I submit that it’s management’s responsibility — the executives who lavish themselves with hundreds of millions in bonuses — to fix the factory through vision and leadership.

Capt. Lloyd Hill is president of the Allied Pilots Association, collective bargaining agent for the 12,000 pilots of American Airlines.

Stop The RJ-Bashing on 8/23/07

First Paragraph:

Blaming this summer’s air traffic hassles on regional jets brings to mind Yogi Berra’s reason why he didn’t want to eat at a popular restaurant: “No one goes there anymore — it’s too crowded.”

Closing Paragraphs:

But don’t blame RJs. Or the airlines — which lose big with flight delays. Or the FAA’s controllers, since not even Tiger Woods could hit 350-yard drives playing with persimmon head clubs. Instead, can’t we just all get along, stop playing “blame ball” and work together to fix the system — even if it’s one delay at a time?

Then maybe we can make one of Yogi Berra’s lesser known quotes come true: “It’s not too far, it just seems like it is.”

Roger Cohen is president of the Regional Airline Association.

It’s More About Labor And Economics, And Less About Scope

I have one word for the discussion that began in Departures on Aug. 2 and continued throughout the month regarding the issue of scope clauses — hypocritical.

While scope clause limits in mainline pilot contracts were a significant issue in the late 1990s, they can hardly be considered a similar impediment at any carrier today. You can’t claim that scope defines work for mainline pilots any more than you can say that small narrowbody jets have a place only in the regional airline industry.

While I do not agree with Capt. Hill’s economic analysis of the use of 35- to 90-seat jets, I believe he has identified a key issue facing airline labor unions in the next round of negotiations. The arbitrage in labor rates between the mainline and regional sectors of the industry fueled the growth of the regional industry over the past 10 years. Now, as rates have converged across nearly all sectors of the industry, one can make the case that the economics of the relationships between mainline carriers and their regional affiliates may not be the best operating model for tomorrow.

Mr. Abbey cites American and Continental as the airlines with the most restrictive pilot scope clauses. In fact, each carrier has been judicious in its use of its regional fleets and has outperformed the industry during a tumultuous time. Continental made the first declaration that its 50-seat growth would come to an end sooner than expected, and American has been the most vocal of the mainline carriers about the need to keep constraints on domestic capacity.

There are many issues that should be of equal or greater importance to the regional industry than scope clauses — particularly building an airport and airway infrastructure that meets America’s 21st century needs, as suggested by Mr. Cohen. The debate surrounding the reauthorization bill seems to be lacking an important push from labor, as both mainline and regional pilots have a lot at stake in this debate. The current situation does not bode well for growth in either sector, and growth is a critical ingredient for stakeholder success.

We are at a crossroads as the next round of mainline pilot negotiations begins: 1) Will mainline pilots continue to relax their scope and watch as significantly more small narrowbody flying is done by another sector of the industry that could potentially rekindle the discussion of labor arbitrage? or 2) Will mainline pilots seriously reflect and understand that the facilitation of growth at the mainline is their best course of action in terms of job protection — and maybe even job creation?

One necessary outcome in this next round of negotiations is a recognition that structural impediments to success exist within each sector of the industry. Cost maintenance/reduction remains paramount in this less-than-robust revenue environment. We cannot forget that vigilant cost controls must remain the focus if we are ever to find an enduring operating model that creates capital for all stakeholders, rather than recycling capital among them.

Today, network legacy carriers operate nearly 700 fewer aircraft with fewer than 150 seats than in 2000. Just because Embraer- and Bombardier- manufactured equipment resides with the regional sector of the industry today does not mean that the sector is entitled to all aircraft made by these two companies.

So, in addition to getting on with the business of fixing the infrastructure, let’s get busy and negotiate an economic framework that can get the mainline sector of the industry growing again. Unless mainline pilots find a new way to think about domestic flying in this next round of negotiations, aircraft manufactured by Embraer and Bombardier will remain the entitlement of the regional carriers.

This topic, and the fact that it has again reared its head, serves only to remind us that the industry’s restructuring is far from complete.

William Swelbar is a Research Engineer at MIT’s InternationalCenter for Air Transportation.
Labels: Air Line Pilots Association, airline labor, Allied Pilots Association, American Airlines, Aviation Daily, Continental Airlines, pilot scope clauses, Regional Airline Association, William Swelbar draft by Swelbar 8:32:00 AM Delete

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