The Summer of 2008 ……..

Rather than proving who is right, can’t we just recognize that much is wrong?

Will it be the sequel to the Summer of 2000? An early opening to “goose season”? Or a leading indicator of what is to come as we enter the post – 9/11 labor negotiations season? Or all of the above? With only a short amount of time to check the news as I continued my tour of the domestic US last week, I am talking about the news that United Airlines filed suit over a perceived abuse of sick leave by its Air Line Pilots Association unit, or some of them.

Between the USAPA; APA and the United pilots, we have the beginnings of something good – in a perverted kind of way. Yes we will have the sympathizers; the empathizers; the hypothesizers; the criticizers; and of course the legitimizers. But the something good is the continuation of extinguishing 50 years of bad labor practices. It is a painful and necessary process begun in 2002. I was addressing a group last Tuesday, and as the talk continued there seemed to be one theme that emerged from those carriers that have better labor relations. [Answer] They were not in existence prior to 1978, or were in a fledgling state, when the industry was deregulated.

Yes you can argue that Continental was a pre-1978 carrier. But by the time the Old Continental finished its second or third trip through the bankruptcy process, the whiteboard of outdated contractual language was virtually clean and it looked very little like its legacy self. And take advantage of the ability to rewrite the construct they did. Management made the effort to be inclusive of its battered work force. Employees were grateful to be acknowledged by a management team that promised to include them and to reinvent the airline; execute on their plan to do so; all the while implementing a better employee relations environment.

Fast forward to the Summer of 2008. Continental now finds itself at the top, or near the top, of total compensation in each class and craft of employee when compared to its network legacy carrier brethren. But they are also a highly productive work force when compared to their network legacy carrier brethren which permits the higher compensation. Somehow the importance of this relationship gets lost on union leadership. It is this relationship that provides Southwest the leeway to improve the earnings of its work force - and I am not suggesting that the hub and spoke carriers with senior work forces can realize the levels of productivity generated at Southwest.

The pilots at American Airlines somehow believe that they gave up amounts similar to the amounts conceded by their counterparts at United and US Airways. Not close. Not even in the zip code. And now they want it all back. The irony is: if the United pilots are actually calling in sick and standing in the way of the most efficient operation that can be run during the peak summer season, then this does smell some of the Summer of 2000 when Dubinsky brought the airline to its knees and the airline gave them an unprecedented contract.

The one subtle difference between the two periods is that the Summer of 2000 was about negotiating a collective bargaining agreement that followed a failed ESOP arrangement. The sad part was that the collective bargaining process was about negotiating a fixed-cost agreement that would somehow compensate for the failure of a risk-based stock ownership regime. It cannot be done but there has to be a hybrid that is good for all stakeholders.

The Summer of 2008 is about preserving a few more jobs against the backdrop of an industry in need of capacity cuts.

The Summer of 2000 collective bargaining agreement lasted all of 15 months before United filed for bankruptcy. First it was wage reductions. Then it was productivity. Then it was the pensions. Pension terminations are where I have sympathy. Relatively unproductive work forces in this environment do not get much sympathy as deregulation was as much about removing the inefficiencies as it was about making air travel affordable to the masses. Would I like to see some wages restored to help ease the rise in the price of fuel and food? Yes, but……….. risk needs to be shared. For both sides, using the collective bargaining process to further complicate contract language that is outdated only serves to make for confrontation over a sense of entitlement.

Are we ever going to ask the hard questions:

1. Are 30+ sections of a collective bargaining agreement really necessary?;

2. Why is it good practice to continually modify and expand on paragraphs that were originally written long, long ago when route networks were vastly different and air traffic control was much less burdened?;

3. Is the seniority system really the best way, or is it time to consider changing the seniority system going forward for those that ultimately hire on and will be the backbone of the US airline industry tomorrow?;

4. As we approach 150,000 lost jobs, isn’t it time to begin planning for the industry of tomorrow? This can be done while preserving much of what the legacy employee has today and creating a compensation system that best reflects the industry’s reality of macroeconomic ebbs and flows;

5. Are we ever going to try and fix it or are we just going to continue to lay blame? And that holds true for both sides. But when I see APA so resistant to a change in their sick leave policy, and in turn file a lawsuit, well, the type of necessary change seems so far away.

So as we read stories about how United and its pilots negotiated a standstill pact at the end of last week, more and more stories will appear about the deplorable labor-management relation in the airline industry. It takes two sides to negotiate. It takes two sides to recognize that writing new language that will somehow “right” the old language is just bad practice. It is 2008, not 1938.

We write about change; we read about change; we recognize that industry conditions change; but somehow the more things change, the more they stay the same. And the more they stay the same, the further we are from finding a successful industry construct.

10 Airline Issues That Have My Attention

Note: at 634pm I made some minor edits to the orginal post. Immediately after posting, a personal issue arose that required immediate attention. I apologize.

But before we go there I will share my favorite headline of the week gone by: Congress, get off your gas, and drill!

1. Crandall

It is interesting to me that Gordon Bethune has gone quiet for the most part and has now been replaced by Crandall. The entire industry recognizes what Crandall recognizes and that there is little obvious cost cutting that remains other than capacity cuts and that the revenue line must become the focus for the industry. The interesting note to all of Crandall's suggestions for some form of reregulation is how US airline labor generally, and American Airlines' labor specifically, are hanging on his words of late. Is it Crandall the leader or the suggestion of reregulating the industry? Crandall the leader would not be handing out big increases in compensation in this fuel environment; yet Crandall the re-regulator is the silver bullet that would enable the industry to charge enough for an airline ticket to offer a return of the concessions and still employ all 400,000+ people that remain in the industry?

2. IATA Annual General Meeting

Mark Pilling of Airline Business writes Airline bosses call for strict capacity discipline following IATA’s Annual General Meeting last week in Istanbul. This piece is good reporting on the differing levels of cuts being considered around the globe. With the US undertaking the most aggressive actions: Europe is now beginning the process of how to react; the Asia-Pacific carriers are exiting some routes but redeploying capacity to other more promising routes; and the Middle East is continuing on their aggressive growth path. Is the industry serious about capacity discipline this time and will we really put capacity down as a reaction to outside forces and inherent inefficiencies? Or is this just a time out?

3. Labor PR and of Course Fuel Does Not Matter

I did not think I would see ALPA take a page out of APA’s tired play book, but they have. On Sunday night, the following appeared: labor Relations Darken at Hawaiian Airlines. But my favorite story in this topic area was written last week as Continental pilots picket for higher pay, benefits. I have no issue regarding a union’s right to picket. But I do have an issue with yet another irresponsible statement from a labor leader. In the Continental story, Captain John Prater, President of ALPA is quoted as saying: “Don't try to use the price of gas," said Prater. "The industry is unstable, and the only way to add labor stability is through a solid contract." What does that mean? Of course the price of gas will have absolutely nothing to do with the outcomes of negotiated agreements John [emphasis added]. With so many things happening in the interesting Hawaii market, I only wish I could write on some of them.

4. European Carriers

Over the last few months, stories have been appearing that suggest the underlying fundamentals in the European market are weakening. Austrian Airlines has suggested the carrier will seek a strategic partner. We all know of the woes at Alitalia. Among the Big 3 in Europe, British Airways has been warning of turbulence ahead for the carrier in the face of high oil prices and the carrier’s exposure to the weakening US market. And now there are even rumblings from Lufthansa and Air France/KLM. For each of those two carriers the revenue synergies have been captured through their acquisitions. Now there will be a renewed focus on costs. Finally, the US is not alone.

5. Asian Carriers

For me, things were starting to get interesting in this critical world region immediately following Singapore’s earnings announcement in February that was less than stellar. Then Cathay Pacific suggested it would begin to curb capacity growth. Then Qantas. Each of these carriers has a place on the list of global elite airlines and are not immune from the environment either. AFP reports that Oil costs will push some Asian airlines under: analysts. Thinking about it, this region’s airlines carry passengers long distances and we know that the price of fuel and long-haul flying are not in concert today in all markets. In the article it is suggested that the region’s airlines are not close to doing enough and that SARS-like capacity actions should be considered in some cases. With or without high oil prices though, this region is certain to lose airlines along the way given its early stages of development.

6. Boeing and Airbus – A Couple of Things

Julie Johnnson of the Chicago Tribune writes that Foreign carriers' woes could hurt jetmakers. I have heard that some deliveries will be deferred. Certainly today’s issues will only prolong the needed replacement programs for the US industry, except for Southwest, Continental, AirTran and others. The manufacturers and lessors cite the fact that aircraft can be quickly placed into another carrier’s portfolio if positions or newer generation aircraft come available. But we still have not felt the full effects of the economy’s headwinds in my judgment.

At the same time the manufacturers are doing the industry no favors by perpetually delaying the delivery of the new generation aircraft that promise significant efficiencies and fuel savings. I found it most interesting in Continental’s announcement last week that it would park its older aircraft but continue to take delivery of new aircraft. This will be a story to watch.

7. Liquidity and US Airline Equities

Bill Greene, Morgan Stanley’s airline analyst, published another very good piece of research today where he continued to write on his tipping point theme. He writes: Too soon to begin buying US airlines, in our view. "As we’ve written in the past, we believe that amid the current macro backdrop, airlines will not become attractive investments until the industry reaches a Tipping Point - when extremely bearish fundamentals trigger broad, acute financial distress and restructuring that leads to significant capacity reductions (beyond current announcements); thus, serving as a very bullish catalyst for shares in surviving airlines. After updating our estimates for $130/bbl oil, it appears that a Tipping Point catalyst is more a question of when rather than if."

In Greene’s liquidity analysis of his tipping point theory, some very interesting findings are expressed. I have written often of liquidity concerns and that this period’s focus will remain firmly on the balance sheet and the cash flow statement. Yes we are in a cash burn scenario yet again. As Greene analyzes the airlines he covers, he points to the steeply downward sloping liquidity positions for each of the carriers assuming $3.81 jet fuel and taking into account all fixed obligations between now and the end of 2009.

Through 2009, he ranks the US airlines he covers from worst to best in terms of liquidity: US Airways, and a need to raise $1.5 billion to maintain a liquidity balance equal to 10 percent of last 12 month revenues; American, and a need to raise $2.6 billion to maintain a liquidity balance equal to 10 percent of last 12 month revenues; Northwest, and a need to raise $856 million to maintain a liquidity balance equal to 10 percent of last 12 month revenues; Continental, and a need to raise $260 million to maintain a liquidity balance equal to 10 percent of last 12 month revenues; United, and a need to raise $290 million to maintain a liquidity balance equal to 10 percent of last 12 month revenues; Delta with no need to raise cash; and jetBlue, with no need to raise cash.

8. Continental's Announcement of Capacity Cuts

Last week, Continental described in detail its planned capacity reductions. Can we learn anything from their list as we look toward the detailed cut announcements to be unfurled by United, American, Delta, US Airways and others as we approach fall? Markets with leisure attributes that demonstrate little to no hope of being able to charge for the full cost of fuel, let alone all other expenses associated with carrying a passenger from A to B will either be eliminated or cut back significantly. Long-haul regional jet flying will be scrutinized, and reduced, as Continental cut a number of these city pairs. City pair routings of a highly seasonal nature might be totally eliminated during the shoulder season. And while much has been made of the shift to international flying, Continental certainly demonstrated that underperforming international markets will be cut as well. Finally, the elimination of service to certain cities that offer little hope of ever being profitable were dropped from their network map. Distinct patterns will develop as other carriers make their announcements.

9. The Mixed LCC Bag

Samer A Majali from Royal Jordanian was named the new Chairman of IATA. In an interview where he discussed issues confronting the global airline industry, he stated that fuel prices to hit budget airlines the hardest. In the US we have witnessed this very issue. We have seen ATA liquidate; Skybus liquidate; Frontier file for Chapter 11 reorganization and still searching for capital; and just recently Sprit announced that it will begin to cut capacity and headcount. This is not a very good time to be a "bottom fisher". AirTran and jetBlue have each sold aircraft and/or delivery positions to bolster liquidity. A question to ask: what will Southwest do when it has to run an airline instead of a trading desk? Will Southwest become the savior for big leisure-oriented markets like Las Vegas and Orlando and will these will be the markets that “fuel their growth”? Southwest is the one that scares me on the capacity discipline issue.

10. Those Frothy Commodity Markets

Today, the Air Transport Association called on Congress for U.S. curbs on oil speculators. I just get nervous when this industry calls on Congress for anything as it seems to be an invitation for layering on more favors that tend to make this industry even more inefficient than it is. But I do understand the need to investigate anything and everything that could help in the jet fuel area.

Finally and based on my previous post, the world’s best golfer was crowned yesterday. Only issue is - he had already been identified.

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.