US Airways at the Masters: Trying to Win on Thursday?

For those readers who know me well, today marks the beginning of the end of the finest 30 days in sports television.  It starts with the NCAA tournament and culminates with what can often be the best two hours in sports – the back nine at the Master’s Tournament on Sunday. 

Even with the history and the azaleas to occupy my attention, on this tournament Thursday, my mind still wanders to the airline industry and I see similarities in golf, aviation and the games people play.

As is tradition at the Masters, past champions Nicklaus, Palmer and, this year, Gary Player (a.k.a  Delta, United and Southwest) ceremoniously hit the first tee shots to open the playing of 76th tournament at the venerable Augusta National Golf Club. Past champions (multiple winners) at the Masters Tournament enjoy notoriety and historical significance long past their years of playing.

A popular past champion still participating in the Masters Tournament is Ben Crenshaw (American Airlines).  Crenshaw is given little to no chance in this year’s tournament, but the sweet putting stroke possessed by the Texas gentleman keeps Crenshaw a fan (AAdvantage members) favorite. 

Some very good golfers have never attended the Champion’s Dinner. Greg Norman (er US Airways) for example.  Nobody in Masters’ history lost in more heartbreaking fashion than Norman in 1987 when Larry Mize chipped in on the second playoff hole to beat him; or when Norman beat himself in the final round that handed the green jacket to Nick Faldo in 1996.  Norman’s misery is akin to US Airways missing out on consolidation opportunities in 2001(United), 2008 (Delta) and then again in 2010 (United).  US Airways’ strategy to attempt a hostile takeover of Delta while in bankruptcy in 2008 reminds this golf fan of Norman’s collapse in ‘96.

Playing in this year’s field and given a real chance to win are world #1 Luke Donald (Alaska Airlines) and world #2 Rory McIlroy (jetBlue Airways).  The Europeans are also making a strong showing these days, like defending champion Charl Schwartzel and perennial contender Lee Westwood (British Airways and Iberia).

Bunkers, Birdies and Bogeys

Pressure tournaments like the Masters tend to spawn meltdowns even among the very best players. The young McIlroy, in fact, suffered through a sad Sunday in Augusta last year.  Just like airlines have their good years, bad years and critical moments. And just like golfers, the difference between success and spectacular failure in the airline industry depends on how you read the lie. It’s how you think your way around the course, avoiding bunkers like bad decisions, taking advantage of business opportunities (birdies) and minimizing the negatives (bogeys and others) like fuel spikes and bad strategic decisions.

That brings me to US Airways.  

US Airways pursuit of Flight Attendant Hearts and Minds

The Masters is an invitational tournament; you have to be invited by the “committee” [UCC] in order to play.  US Airways is trying to play to the court of public opinion to get an invite to this year’s event.  US Airways had one good round it hoped would help it win an invitation to play in the year’s first major. That was reaching a tentative agreement with its flight attendants.  Unfortunately for US Airways, it couldn’t finish. The flight attendants at the company overwhelmingly rejected that agreement despite the fact it offered significant pay increases.

The flight attendants said in a press release:  "Since the onset of negotiations, Flight Attendants have been steadfast and determined that an agreement must address the needs identified by the membership. Flight Attendants have subsidized the cost of the merger and rising fuel costs for the 'New US Airways.' Management must recognize that our sacrifices have directly contributed to the success of US Airways," said Deborah Volpe, AFA pre-merger America West President and Mark Gentile, AFA pre-merger US Airways acting President.”

It has been nearly seven years since the “Old US Airways” merged with America West and there is still no done deal with either its flight attendants or its internally troubled pilot group. 

And yet before round one has been completed in Augusta, US Airways has allegedly been courting the president of American Airlines flight attendant union, Laura Glading, who is also a member of the Unsecured Creditors Committee (UCC) in order to get that invitation to the year’s first major… a merger with American?

While it’s hard to know exactly who is chasing who in all of the US Airways merging/consolidating with American talk, Glading and the APFA have been anything but shy in their pursuit of an offer from Doug Parker and company. The APFA has boldly stated it thinks there is a better business plan than the one American is offering… mainly because AA’s will freeze pensions and trigger approximately 13,000 layoffs. (Notice no mention of the finer points; that AA’s plan might finally unshackle the company’s ability to compete with other network carriers who rehabilitated under bankruptcy.)

Someone – probably the APFA - has “leaked” stories to specific media about “suitors” talking to the UCC – even though as far as anyone knows the only UCC members actually listening are the unions themselves.

While both the APA and TWU (who are also part of the UCC) have reportedly had serious discussions with AA – and apparently those negotiations might have saved some TWU jobs – Glading has been stomping her feet and pouting about the unfairness of it all.  She’s on record as stating the UCC (or, at least, one particular UCC member) is open to seeing a “better” business plan, thus leading to the flirtation with US Airways.

“Better” to Glading apparently means giving up nothing and gaining everything. But what “better” will she glean from this dalliance with US Airways?  Not to change sports, but Vince Lombardi, the iconic former coach of the world champion Green Bay Packers said:  “the only place you will find success before work is in the dictionary”.  Do Glading and other leaders of American’s unions honestly think US Airways will not seek to make major changes to American’s archaic work rules and collective bargaining agreements? 

In the tentative agreement, the former America West flight attendants were granted a 22 percent increase and the former “Old US Airways” flight attendants were given an 11 percent increase to even out pay rates – finally, after seven years. What then would US Airways have to do in order to put three groups on par with one another? Would APFA members be willing to work more for less? And if so, why wouldn’t they just stay with their own company? Or entertain commercial opportunities that might not involve a seniority integration process?

Maintaining a Cost Advantage Is Critical for US Airways

US Airways suffers from a stage length adjusted unit revenue disadvantage versus its legacy carrier peers – even more than American. But it also enjoys a stage length adjusted unit cost advantage versus these rivals – much more than American. Despite the revenue generating deficiency of US Airways’ network, the Tempe-based airline is producing very good revenue results relative to the industry.

US Airways’ revenue disadvantage is offset by maintaining its cost advantage – and most of that advantage is very low labor costs relative to the industry. As a result, US Airways’ pre-tax margins are impressive given its structural deficiencies. The cost advantage the carrier enjoys cannot be overstated nor can the company hide behind the fact a significant portion of its profit performance can be found in lower labor costs. By contrast, United and Continental are only now beginning to navigate what it might cost to buy labor peace, particularly among the pilot groups. US Airways has not explored what labor peace would cost, probably because maintaining the status quo is more cost effective.  Or did the flight attendants say in their vote that what US Airways could afford was not sufficient to buy labor peace?

US Airways Touting Merger Synergies Before an Invitation is Granted

The most recent version of the US Airways – American merger story leaked to the press suggests the “synergies” of a combination would produce $1 billion in revenue and $500 million in cost savings.  The revenue synergy number stems from the idea other mergers have realized a three margin point improvement in revenue resulting from the combination.  JP Morgan’s Jamie Baker point to the fact American is weak in Albany, Buffalo, Greesnboro, and Richmond to name a few.  What a yawn. In today’s world why are Baker and US Airways not talking about Auckland, Buenos Aires (oh American is positioned there), Guangzhou or Rome?

The strongest example of American’s domestic weakness is that AA is the #4 carrier in the Eastern U.S. in terms of market share and #4 in the highly fragmented Western U.S.  So, the question remains, can AA truly address these structural weaknesses organically or does it need a merger partner?

Problem with adapting previous margin calculation to a US-AA merger is they don’t necessarily apply. Other mergers involved carriers with stronger domestic and – and more important – international networks. US Airways flies to mainly second-tier markets and has little international presence. That might seem like a good thing – each partner filling a need – but there is little synching between the two – but for this observer there is nothing that gets me excited from a network perspective. Domestic calculations are one thing – international are another.  If I were Delta or United, I would be applauding this possible combination because it adds little to what other combinations might add.  And what about the cost savings?  We don’t even know what American will look like once it goes through the full bankruptcy process.  Therefore how can we know what the cost savings will be?

It is just too early to tell because no one knows what AA will be when it gets through the restructuring process.  Stated differently, what if AA wins the ability to have unlimited code sharing in the U.S. domestic market as a result of a changed pilot scope agreement?  Then is US Airways the only choice?  After all, American’s CEO, Tom Horton, has stated publicly he is not averse to a merger, but will only consider such a strategy once the company completes the restructuring process.

US Airways is absolutely not the only option for American.  What about a fully integrated relationship with each Alaska and jetBlue?  These would certainly better address the weaknesses on the west coast and in New York, particularly at JFK – two aspects of American’s not-successful-to-date “cornerstone strategy”. 

The point is, there are options for American beyond US Airways and I might suggest there are better options than the Tempe-based airline – and they do not require a seniority integration process and potentially do not add seats to the capacity fragile U.S. domestic market.  Then again the restructuring needs to be completed in full before we can begin to evaluate options – something that US Airways wants to avoid.  For a company that constantly claims it does not need to merge, it seems to this observer to be incredibly desperate and fearful of not merging with its bigger counterpart.

Concluding Thoughts

As they say at the Masters, and any golf tournament for that matter, you can lose the tournament on Thursday but you cannot win it. It seems to me that US Airways is trying very hard to win the tournament on Thursday.  There is a lot of golf to play in the American Airlines’ bankruptcy case. And until the back nine begins on Sunday, the leaderboard promises to be crowded as American is an important asset to many – most notably employees, British Airways, JAL, the Dallas-Fort Worth Metroplex and Tulsa to name a few. 

If employee members of the Unsecured Creditors Committee are going to believe there is a free lunch (egg salad and pimento cheese sandwiches) with US Airways they are surely mistaken. Simply, if US Airways doesn’t fix many of the structural things wrong with American, then in a few years maybe the “New New US Airways” will have to file for bankruptcy and fix some of the obvious problems their desperate overpromise and sure to under-deliver approach to American’s unions will avoid in order to win the hearts and minds of employees to get a deal done.

Most of the naysayers regarding American’s stated stand-alone business plan have vested interests in the outcome of the game.  Wall Street has made the case that consolidation and strict capacity discipline absolutely need  to be adhered to if the industry is to be stable.  They cite American’s 20 percent stated growth as something to fear.  And it might be.  But what is the 20 percent American has mentioned?  Nobody knows.  What if it is the ability to generate 20 percent more city pairs to sell through code sharing alliances with Alaska and jetBlue that add no new capacity to the system?  Net effect equals zero.  Period. 

Then we have US Airways.  Too big to be small and too small to be big.  Like American, there is a case to be made that their route structure is being marginalized each and every day; therefore a merger is more important to its very success.  For US Airways it’s only shot at a green jacket is to buy one (remember Crenshaw has two and Norman has none) because over a career opportunities to win one have been missed. 

Angst breeds strange bed fellows.  Angst does not win an invite to the Masters Toonament.  And angst does not win an invite to membership.  Yesterday Dustin Johnson had to withdraw from the Masters because of health reasons.  For US Airways this sucks because the Masters does not have an alternate list.  It must earn its way into the 2013 event because angst will not get it into this year’s Masters Tournament.

More to come.

Swelbar: Pondering More of American’s Bankruptcy “News”

So much speculation around what American Airlines might be upon exit from bankruptcy; so many scenario possibilities.  Some media and those with specific interests in the industry are moving pieces around the game board with talk of mergers and acquisitions. I’m willing to play, but with a caveat; no one should take all the recent posturing seriously – at least not yet. And it won’t be tomorrow, or next week, or even next month. More likely the serious gamesmanship will begin approximately 7-8 months from now as creditors evaluate and negotiate American’s proposed plan of reorganization.  Right now, AMR has no choice but to approach the upcoming Section 1110, 1113, 1114 and all other discussions as if it will emerge as a stand-alone entity. 

The world is much more comfortable with the bankruptcy process today than it was even a few years ago.  Lessons have been learned.  Hostile runs on companies in bankruptcy are probably not the answer if a potential suitor really wants to be successful in being a part of the ultimate entity that emerges – unless there is no other option as creditors get close to signing off on some other plan of reorganization.  American will tell stakeholders what IT thinks needs to be done to put the company on a viable path. 

American’s $4 Billion In Cash – It Is Not Quite What It Seems

I just have to get one thing off of my chest:  $4 billion in cash on November 29, 2011 was about to become something much less.  It is one of the reasons why American filed for bankruptcy protection before it was too late.  Can we stop talking about a cash-rich filing?

Reactions ranging from dumbstruck employees to PBGC Director Josh Gotbaum’s comments regarding AMR’s bankruptcy filing with over $4 billion in cash leave me smiling.  The fact is AMR’s $4 billion cash reserve would have depleted quickly had the company continued without bankruptcy – possibly to the point of corporate oblivion.  AMR’s Board of Directors had no choice but to file as the company likely had very little access to affordable credit markets since few of the company’s assets were unencumbered.

Since September 2001, airline companies have significantly increased their liquidity (unrestricted cash plus available credit) as a percent of trailing twelve month revenues from roughly 10 percent to 20+ percent.  In 2011, only American and US Airways held liquidity balances of less than 20 percent.  While American’s cash erosion will be mitigated in bankruptcy, it resembles only adequate operating liquidity not a pool from which to pay large fixed obligations.

With that $4 billion in cash, American faced a pension contribution of $100 million during the fourth quarter of 2011; and $560 million in 2012; maturities of long-term debt including sinking fund requirements were $1.1 billion during the fourth quarter of 2011; and $1.8 billion during 2012.  These obligations should be considered against the backdrop of an airline entity that was burning cash at the operating level and the fact nearly all of its assets were pledged as collateral.  While it is true that some $800 million in assets would have become unencumbered during 2012, the amount is certainly less than necessary to maintain sufficient liquidity and meet fixed obligations assuming American would need to collateralize any credit it would seek.

In fact, if AMR were to pay its obligations with its existing cash balance, it is highly likely that the company would have faced a liquidity squeeze at some point during 2012. And that’s assuming no fuel spikes or world events that might impact airline operations.  I think it can safely be deduced the company did what was prudent to preserve the enterprise. Moreover, employees in denial and a PBGC with its own vested interests should step back and reexamine whether the $4 billion is really $4 billion. 

I don’t think so. The case is clear that a $4 billion liquidity balance is on the low end of optimum for a $22 billion dollar revenue generating airline company whether in bankruptcy or not.

Last Friday’s Bloomberg “News” – A Combined US Airways and American

The cynic in me just loves to read airline news published late in the day on a Friday afternoon.   But that is precisely what we got from Bloomberg last week titled:  US Airways Said To Consider American Airlines Merger To Fill Revenue Gap.  There were no sources to the story, only the classic reference to “people familiar” with the Tempe-based airline’s current activity.  Neither US Airways nor American Airlines would comment.  You know how it goes.  [On the US Airways 4^th quarter earnings call Wednesday the company did confirm the hiring of the advisers to study the matter mentioned in the story]

It has been suggested by some that American needs to pare capacity along the lines of other U.S. airlines in the domestic arena because it hasn’t done enough to date.  US Airways is often used as the example of a company that has demonstrated stringent capacity discipline and now has significantly improved margin results.  Yet the article says American Airlines might have pared too much capacity – to the point where the Fort Worth carrier is no longer attractive to significant portions of the revenue rich corporate travel sector. Someone is right - I guess?

In some circles, both American and US Airways’ networks are referenced as sub-optimal.  My question then:  does sub-optimal plus sub-optimal equal optimal (at least when compared to United/Continental and Northwest/Delta)?  Probably not, but there is the possibility the whole could/would equal more than the sum of the parts and thus generate more revenue. That doesn’t necessarily mean it’s the best-case scenario because there are plenty of questions when considering an American - US Airways combination -- but one can consider such a combination. 

A merged American and US Airways would be the second-largest U.S. airline on paper, but US Airways got out of the mid-continent hub business when it left Pittsburgh. So, how would the Chicago hub fit in? Philadelphia might be the poor man’s JFK (absent sufficient slots at the New York airport), but could Philadelphia prove to be an acceptable surrogate Northeast U.S. gateway to oneworld as it battles STAR and SkyTeam for high yielding east coast traffic?  What happens to the jetBlue relationship forged by American that could certainly be expanded when expected scope relaxations are achieved?  If the carriers combined, is there really a need for both a Phoenix and a Dallas/Fort Worth hub?  I don’t think so.  If not, where would the headquarters be?   

If American’s exit were to include US Airways, would oneworld make US Airways a full partner in each the transatlantic and transpacific joint ventures?  I would think so because, if US Airways’ domestic system is so fertile as to fill a hole in American’s U.S. network as the media stories claim, then it must be every bit as powerful in filling oneworld’s intercontinental revenue deficiencies.  Assuming that, nearly overnight, oneworld would become a more vigorous competitor with SkyTeam and STAR for traffic flows that neither carrier could capture on their own.  There would be a shift of revenue share from STAR to oneworld in addition to new competition.  How might STAR react if there were an overnight shift of 15 points of revenue share to oneworld?  Might STAR – or United - move quickly to make US Airways a full joint venture partner? 

For airline nerds like me, thinking about mergers/acquisitions by only looking at a map is fun. As games are supposed to be.  But reality means there is much more to consider.

Like any other potential bidder, if US Airways were to emerge as a party to American’s exit, the Tempe-based carrier will have to win the hearts and minds of the employees, the PBGC, the rejected Section 1110 lien holders and the unsecured debt holders to name a few along with Boeing and Airbus.  The onus would be on US Airways to demonstrate its plan will ensure higher returns than a stand-alone plan by American or a plan submitted by other interested parties.

Labor will be a key target.  US Airways, or anyone else, will tell labor a combination can offer an option to the cuts AMR is all but certain to require.  While that sounds great, labor will have to weigh any alleged benefits against a certainty it will be forced into a seniority integration process.  And we all know how emotional seniority integration proceedings can be in the airline industry. 

US Airways and its pilots have not negotiated a new collective bargaining agreement because of a failed seniority integration process that started in 2005 and today flounders in litigation – an internal union issue and not the company’s.  Nonetheless, would that mean American Airlines’ pilots could not achieve raises/improvements from the company because the integration of US Airways and America West pilots is not complete?  What about the flight attendants?

The Section 1113 and 1114 process at American all but ensures those employees will take significant cuts in work rules and benefits as those are the areas where AA has the largest competitive exposure.  Even after those cuts, though, some AA employees (like pilots) will still likely make more than many peers at the current US Airways.  So, would the theoretical combined carrier ask AA employees to take less so US Airways employees can get more than they might?  How does that apply to work rules, benefits? There are those who would (and, in fact, are) dismiss these issues saying they can be dealt with later, but that’s short-sighted.

A Combined Delta Air Lines and American

I still cannot get beyond the regulatory hurdles this combination would face, let alone the fact that all of the issues discussed above would also apply.  But here are four things that immediately concern me:

1. There are significant overlapping routes that would need to be addressed by the U.S. regulatory agencies to the point the carve-outs necessary might look and feel like a breakup of American, similar to Delta’s past devouring of parts of Pan Am.
2. Given the current strains between the U.S. and the European Union, combined with the latter’s consternation over the existing alliance construct, I cannot imagine the EU having an appetite for seeing three global alliances reduced to two.
3. The concentration at New York JFK specifically and New York generally.
4. Given the Obama Administration’s expressions of regulatory angst and outright displeasure when #2 AT&T proposed combining with #3 T-Mobile, I find it unlikely that any of the respective agencies would embrace a similar proposition in the airline industry.

As they say in the South, “this dog don’t hunt”.  But let it be clear I respect Anderson, Hirst and the Delta team as they did push a merger with Northwest and the slot swap with US Airways through the regulatory process.  And that is no small feat.

Concluding Thoughts

At this point, three/four names are circulating as having an interest in a restructured American Airlines:  US Airways, Delta Air Lines, TPG Capital and, possibly, IAG.  Whether American emerges from bankruptcy alone or with a partner(s), the case is going to take many twists and turns – some daily.

In pure laboratory conditions where American could restructure without any outside influences, AA would emerge as a much lower cost entity and, therefore, pose competitive threats to other U.S. airlines. 

To mitigate American’s potential cost advantage, other airlines will be sure to muck up the process to ensure that American is not fully successful in achieving its stated result.  Delta is not necessarily just gaming US Airways to cough up more in a bid or vice versa, but as I’m fond of saying, it is the law of unintended – or in this case intended - consequences.  Both are trying to ensure American has to pay more.  The conditions for American will prove anything but pure.

Of course, the game changes if United moves to buy US Airways in order to prevent losing the 15 points of transatlantic revenue share it delivers to the STAR alliance.  I do not believe Delta has a chance unless the Unsecured Creditor Committee (UCC) recommends, and the bankruptcy court agrees, that the parts of American are worth more than the carrier as an ongoing enterprise.  In that scenario, Delta will try to secure as many of American’s assets as it can conceivably digest and still get regulatory approval.  

But there we go again, speculating.  In order of least employee/corporate disruption I rank today’s possibilities as follows:

1. American as a stand-alone
2. American and IAG/oneworld
3. American and TPG Capital
4. American and IAG/oneworld, TPG Capital
5. American and IAG/oneworld, TPG Capital and US Airways
6. American and US Airways
7. American and most anything Delta
8. Liquidation of Assets

The one thing I can positively guarantee, though, is there will be employee/corporate disruption and plenty more speculation to come. Let the games begin.

How the Weeks Ahead Will Shape AMR In The Years To Come

The biggest story in the U.S. airline industry right now is, of course, American Airlines’ parent company seeking Chapter 11 bankruptcy protection. After a flurry of initial filings and some alterations at American Eagle, there hasn’t been a lot of movement from AMR.

The lack of news from it or the bankruptcy court probably has a lot of people - union leaders, media, employees, communities – wondering what is taking so long. That’s the first key to understanding this airline bankruptcy is different and why other airlines such as United, Delta and Southwest as well as the federal government and even regional carriers are keenly watching and waiting.

Unlike all the other airlines that have gone through Chapter 11, American doesn’t have a Debtor In Possession (DIP) lender breathing down its neck. That’s because the AMR board of directors made a strategic decision to file for bankruptcy with more than $4 billion in cash in the bank. That’s more cash than any airline that’s ever entered bankruptcy has had on hand and one of the highest totals in U.S. corporate history.

That gives AMR and American some flexibility to run its business during the initial period of exclusivity, protect its interests and, most importantly, time to ensure that its ultimate plan of reorganization (POR) is the very best it can be. While time is still of the essence to put forth a POR, it gives the debtor (AMR), time to look carefully at its network (mainline and regional partner), its labor contracts, its fleet and then make unhurried and potentially dramatic changes.

When United filed in December 2002, the DIP lenders and creditors demanded interim labor deals within 30 days, some even hammered out on Christmas Day. Delta and the Old US Airways faced similar pressures. As much as is possible in the bankruptcy process, American controls its own fate. It needs to use the time it has to get this right and make sure its labor costs and operations are where they need to be when it emerges. If it doesn’t, I don’t believe American in its current form gets a second chance.

A quick aside: This is usually when AA employees harrumph they gave millions in concessions to management in 2003 and that should balance what other airlines gained in bankruptcy court. I have the greatest respect for what American’s unionized employees tried to do back then, but it was apparent by 2006 those concessions weren’t enough. United, US Airways and Delta’s labor cost competitive advantage continues to pound American. The Airline Data Project (ADP) numbers show American’s employees get paid more, work less and have a range of benefits that are distant memories for peers at other airlines. That’s not an accusation; it’s simply the way the industry restructuring unfolded.

It’s also why all the other airlines, including venerated low-cost carrier Southwest Airlines, are nervously waiting to see what American looks like when it emerges from restructuring.  Following AMR’s Chapter 11 filing, Southwest CEO Gary Kelly posted an open letter to employees saying American, and the other major carries that went bankrupt, did so because of “high costs” and that “Great Customer Service cannot overcome high costs.”

I view Kelly’s letter as an important glimpse into what became American’s inevitable bankruptcy filing and what it means for the rest of the industry.

Kelly said he expected American to become leaner and warned, “If they do emerge from bankruptcy, as I believe they will, they will join the New United, New Delta, and New US Airways as giant, lower-cost airlines. They are, collectively, much more formidable competition than their predecessors. The term “Legacy Carrier” no longer will apply.”

In what had to be a stunning admission to most Southwest employees, Kelly also said, “We currently do not have a sufficient cost advantage to stimulate the market because our fares are much closer to our New Airline competitors.”  In effect, this is what I’ve been saying for years: the “Southwest Effect” is dying, if not dead.

If that’s the feeling in the executive suite at the most consistently profitable airline in aviation history, then I can only imagine how raw nerves must be at Delta, United and US Airways.

American’s filing is the airline industry’s version of “Freaky Friday” with role reversals that have long-term implications. Delta’s pilots are next up in negotiations and, like American did for the last several years, management will essentially be negotiating against itself. Remember, it was just within the last year plus that a significant number of Delta’s pilots began earning more than their colleagues at American… and that was with an infinitely more flexible scope clause that permits the higher pay at the mainline. Delta will be left negotiating improvements to the highest cost pilot contract in the industry knowing American will attempt to emerge from Chapter 11 with significantly improved scope and much lower costs. That’s essentially what American faced from Delta in 2007.

The recent NMB rulings upholding election results afford Delta only a temporary reprieve from unionization efforts. I can all but guarantee Delta will face additional organization campaigns, forcing it to, once again, spend millions to counter labor representation drives with no assurance it won’t be saddled with costly union contracts.

At the new United, the world’s largest airline might be facing world-class headaches. Integrating Continental pilots into the system is already shaping up to be a long, contentious fight, especially as many of Continental crew currently enjoy better pay rates than United peers. Continental flight attendants make considerably more per hour than their United counterparts. Those facts should not only make United’s future negotiations lively, but also mean it will likely have higher costs than a correctly restructured American.

It’s not just big brother that will garner all the scrutiny either. Eagle has already shed leases and announced potential layoffs. When AMR exits restructuring, the once-for-sale Eagle could look completely different and potentially pose real competition to SkyWest, Republic and the apparently spiraling-toward-Chapter-11 itself, Pinnacle Airlines. With American’s fleet purchase plans and a revamped Eagle, momentous change is potentially in the offing for regional airlines as well. I’ll have more on that at a later date.

As I outlined in my last post, American’s payroll is proportionately out of whack compared to its major competitors. A quick glance at the ADP numbers shows every carrier that’s gone into bankruptcy since 2002 has seen a double-digit reduction in workforce within one year of filing. That doesn’t include the nearly 25,000 jobs Delta shed in the four years prior to going into bankruptcy. Those statistics are small comfort to the employees at American who will likely lose jobs, but there is no disguising the pain this type of necessary transformation causes.

Layoffs will get the bulk of the media and general public’s attention, obscuring changes – scope, productivity, benefits – that will have more far-reaching effects. An American that comes out of Chapter 11 with significant changes in those areas potentially sends tsunami-sized ripples through the industry – particularly the flying within the U.S. domestic industry.

Yet the federal government, industry observers and, likely, the media, will spend considerably more time and hand-wringing on another hot button issue: pensions.

Pension Benefit Guaranty Corporation (PBGC) Director Josh Gotbaum has been very vocal about what he thinks AMR should do with its industry-leading pension plans. In short, he doesn’t want them to become PBGC’s problem. Gotbaum is also very quick to point out the additional burden AMR’s pensions could add to the $26 billion deficit the PBGC currently faces.

A couple of things strike me about the pension issue. Gotbaum has questioned American’s commitment to employees, which I find a bit wrongheaded since the airline spent eight years in a good faith effort to keep its pension obligations off the PBGC rolls. 

Gotbaum said American Airlines employees could lose one billion dollars in pension benefits if the airline terminates plans. That’s a bit misleading as all of the carrier’s employee pension plans are not created equally.

Like employees at the other bankrupt airlines, the majority of employees at American will most probably get their pension benefits in full. In 2012, the maximum PBGC payout is going to be more than $55,000 for those who retire at age 65. That’s more currently than the average American ground worker and flight attendant makes. The pensions really at risk will be those of the people who can most afford it – management and pilots. The bottom line is if American terminates its plans, the PBGC will do what it was designed to do: protect the investments of the working class.

AMR’s bankruptcy process will likely dominate the airline industry’s financial and economic headlines in 2012. What happens in the next few weeks and months as the new American (and Eagle) takes shape, though, will be felt by employees, competitors and taxpayers for years to come.

More to come.

American Airlines, Labor Leverage, US Airways and Chicken Little

Labor Leverage and Other Thoughts

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

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

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

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

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

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

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

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

All This Talk About A Merger With US Airways

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

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

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

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

The Sky Is Not Falling

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

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