Stuffing the Turkey

The drum beat is growing louder now that we may soon see the outcome of all those merger talks between American Airlines and US Airways.  As Ray Neidl of the Maxim Group wrote in a November 20 research note this morning:  “We believe a merger would definitely benefit the industry since it would promote further consolidation and enhanced pricing power for the carriers in general. However, we also believe that an AMR/US Airways merger, if it were to happen, would not be an easy endeavor to manage (as was Delta/Northwest merger, even with AMR union support). We believe that the benefits in market mass would not be as great as either the Delta/Northwest or UAL/Continental merger are proving to be.”

US Airways and others tout the benefits of synergy – relying mostly on the experience of recent mergers that may not apply in this case. Proponents are less likely, however, to spotlight dis-synergies. The fundamental question: What are the net synergies?

This question is particularly relevant in the case of a potential merger that creates an unstable labor situation.  I tried to address this before in the most-read blog in swelblog history:  US Airways and American and the Elephants in the Room.

The labor issues we’ve seen recently at several airlines offer a big window into the risks of brand and service degradation. But let’s focus just on pilots.  What’s most important to a pilot’s career, flying opportunities and pay? Seniority. What is for pilots at most risk in a merger?  Seniority.

We already know what can happen when pilots are unhappy . . . they uniquely have the means to affect the operation by something as minor as a slow taxi to the gate.  Look no further than American’s on-time performance in September and October. .

Difficulty in merging seniority lists is likely the rule, not the exception. Even MaCaskill-Bond, legislation designed to make the process fair for each side, does nothing to ensure a smooth integration. 

So imagine for a moment the seniority integration monster a merger between American and US Airways could create because there are not two but FOUR pilot groups involved: American’s pilots represented by the APA, US Airways pilots and former America West pilots both represented USAPA but working under separate contracts, and former TWA pilots who have never been very happy about their treatment when American acquired TWA’s assets in 2001.

By the time you involve management in that equation, it could be a 5-way or 6-way conversation..  We have seen enough cases of difficult outcomes with three parties at the table, let alone more.

Enter arbitration.

At US Airways, an arbitrated seniority award under ALPA merger policy resulted in the decertification of the union by a majority of US Airways pilots because some more junior America West pilots were placed ahead of them on the combined list. This happened in part because America West pilots had more certain career expectations than the original US Airways’ pilots whose carrier was in bankruptcy for a second time with little hope of surviving as a stand-alone carrier.

If an AA-US merger were to occur before American exits bankruptcy, the two pilot groups at US might successfully argue that AA is a failed carrier and that, as pilots for a successful carrier they deserve super-seniority consideration.  This scenario, known in the industry as the Failed Carrier Doctrine, has long played a role in combining seniority lists in mergers involving a profitable carrier and a bankrupt carrier

Former TWA pilots at AA won a recent court case arguing that ALPA did not meet its “duty of fair representation” in the AA-TWA integration. The APA was originally part of this litigation but was dismissed because the court found that APA did not yet represent the TWA pilots at the time the lists were merged.  Now, the TWA pilots working at AA may demand that wrong be undone as part of their support for a merger with US Airways.

Now consider this: If an integration list is created using a pilot’s date of hire (the most common method of determining seniority) then it is likely that many US Airways East pilots would be placed at the top of the new list. And you can be sure that would not be received well by the AA pilots or the former TWA pilots who could argue that the AA list should be adjusted to reflect their hire date at TWA.

Fences (an industry term for isolating respective operations from another) can fix some of the seniority concerns but also add complexity and unknown costs to the merged operation. At the end of the day, what usually makes pilots happy is a big check from the company.

Bottom line: A merger between American and US Airways would likely be the most difficult seniority integration in history. Some or all pilots will feel disenfranchised as a result because integration results in winners and losers - perceived or real.  Could the pilot unions work together to negotiate integration?  Maybe, but given the history of these pilot groups not without a lot of blood on ground.

Therefore the most likely path to integration is one in which every pilot at AA and US would put their future in the hands of an arbitrator with no guarantee of a positive outcome. There is plenty of precedent for the arbitrator to consider, but very little that indicates an outcome that would be acceptable to a majority of the combined pilot group.

Moreover, it could take years to work out the implementation of a new seniority list. During that time Delta and United would do everything possible to gain a competitive advantage. These carriers already have a first mover advantage over American and US Airways.  So put me in the C-Suite in Atlanta and Chicago and I’m cheering this proposed merger on with a megaphone because there is nothing but opportunity for Delta and United, not only from improved domestic market fundamentals but also from any fallout that occurs should the new American fail to produce.

No valuation of the merger is complete without consideration of this factor during what will be a critical transition period that could make or break the value equation.   And no shareholder should buy the optimistic prospectus from Doug Parker without taking into account this very real risk.

AA’s Labor Negotiation Scenarios Get Even More Interesting

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

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

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

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

Brilliant, Why?

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

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

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

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

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

This really is fun to watch.

One Year Ago Today…….No Swelblog.com

One year ago today, I barely knew what a blog was let alone think for a minute that I would own one. I remain amazed at the time it takes to “feed the blog”. The time spent reading, researching and thinking has been time well spent. This new medium is a good one. The diversity of opinion on matters in this industry is what makes it both great and frustrating during this period of change.

In my first post, Swelblog.com Taxiing Into Position, I stated: “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”. Well, I know in many cases I did not win friends. And that is fine with me. Did I influence anyone? I don’t know. Do I have some strong opinions based on nearly 30 years of being in and around this industry in a variety of roles? Yes I do.

We have talked about a lot of controversial stuff over the past year: pilot scope clauses; foreign ownership; merger and acquisition activity in the US and abroad; the pull down of hubs; entitlement by labor and other stakeholders in the industry; terms of art in labor negotiations like “put it on ice” and “clear the underbrush”; rejecting comments attacking other commenter’s; sharing with readers my beginnings in this industry; Doug Parker, Glenn Tilton, Richard Anderson, Gerard Arpey, Willie Walsh, Richard Branson, Doug Steenland and other CEOs that are shaping the structure of the industry going forward; Capt. John Prater, Capt. Lloyd Hill, ALPA, USAPA, AFA-CWA, TWU and other unions; labor-management relations in general and the fact the world must be laughing at us here in the US; globalization; air traffic congestion; asset divestitures; nothing to fear from the loss of a carrier; how cool it would be to be the UPS whiteboard guy; Lufthansa and its aggressive, and brilliant, real estate plays; seniority; Lee Moak as I will not put him next to Prater and Hill; the auto industry and airlines; the banking industry and airlines; Jim “Hell NO”berstar; the Business Travel Coalition and its leader, Kevin Mitchell; creative destruction; Bob Crandall and his lost after life; Gordon Bethune; catalysts for change; executive compensation; United – Delta; Delta – Northwest; United – Continental; United – US Airways; Allegheny-Mohawk Labor Protective Provisions; the airline customer; Maryland Terrapins; March Madness; The Masters; US Open golf; US competitiveness in a global industry; wondering and wandering; Force Majeure; “Hush Money”; “A Flying Pig”; Crude oil, the crack spread and jet fuel; words that start with “c”; price elasticity; “Rent Sharing”; yawning; Back to the Future; liquidity and all things cash; unbundling; top 10 lists; STAR, oneworld and SkyTeam; Starbucks; small community air service; naysayers; speculation, consternation and detoxification; union corporate campaigns; labor arbitrage; outsourcing; capacity cuts; interdependencies; virgins; and the memorializing of dates.

WHEW. To name a few.

Not only does today mark the end of year 1 of swelblog.com, it also means that the 2008 golf season for me is coming to a close. And it has been a great year in terms of venues played: Caves Valley in Baltimore; Butler National and Medinah #3 in Chicago; Erin Hills, Whistling Straits and Blackwolf Run in Wisconsin; The Bridges and Torrey Pines in San Diego; and Wailae in Honolulu. A good year indeed. Now if I can only get that chance to play Augusta National before I die, the top 100 list will be largely played. Oh, and I do have some work to do on Long Island. For the next four days I will join dear friends (Jack Ginsburg, Pete Robison, Ro Dhanda, Bill Musto and Greg Lane) and my partner, Dr. Craig Faulks, in our annual member-guest tournament.

Readership has exploded for a blog that does not promote itself. Most cool for me is the growth in the non-US readership. I thank the students at MIT for the multiple challenges posed in answering your questions as your unaffected enquiries often prompt an idea for a blog.

First rate reporters like Susan Carey, Liz Fedor, Terry Maxon, Justin Baer, David Field, Dave Koenig, Barbara DeLollis, Ben Mutzabaugh and others offer great insight to the industry. I never know where to put other bloggers/reporters/columnists like Holly Hegeman but thanks to you as well. Whereas this blog is my own, it is made better and sharper because of people like these that challenge the industry each and every day.

Wall Street analysts like William Greene at Morgan Stanley; Kevin Crissey at UBS; Jamie Baker at JP Morgan; Gary Chase at Lehman/?; and Ray Neidl at Calyon all offer us great insight and analytically supported opinions. The chief economists at ATA and IATA, John Heimlich and Bryan Pierce, have made the trade associations most valuable resources for looking at the industry from a variety of perspectives and supplying us with material that helps to put things into a global context.

I thank the readers who agree with me and disagree with me. To know me, really know me, is to know that I do not suffer fools well. I turned 50 this year and my guess is that will not be changing much. This blog is about change and it will remain about change. Because this industry sure as hell needs to change. I hope the next 12 months results in writing more about Dubai than Dallas. But damn, Dallas is one fun place to watch, and write about, as it has it all. The good with Southwest – at least for the moment – and the bad with American.

As I close, I want to revisit a quote that I published in January as it seems most appropriate:

"Bubble to Bubble to Bubble"

At the World Economic Forum in Davos, Switzerland, yesterday [January 24, 2008], Stephen Roach, the head of the Asian operations of Morgan Stanley, slagged Mr. Bernanke for being "goaded into action just by what the markets are doing." Mr. Roach described the Fed's actions as "excessive monetary accommodation that just takes us from bubble to bubble to bubble." It is "a very reckless way of running American monetary policy," he said. "I'm quite astonished that they did what they did."

It really is hard to know what is right. For many, my views are wrong, or at least not what you want to hear. Despite many incorrect facts printed about me on this blog and on other blogs by Howard Putnam, APA folks and others, it is nice to know you are reading.

This transition from consulting to thinking has been, and will continue to be, great. I recommend it.

Jill, Sam and Romy - YOU ROCK!

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.

Consolidation, Mediation and an Explanation

CONSOLIDATION

On Thursday, January 10, the Wall Street Journal breaks the news that Delta Air Lines will ask its Board of Directors for permission to explore a merger with either Northwest Airlines or United Airlines click here. The article is entitled: Delta’s Merger Buzz May Stir the Industry. And stir, and buzz, it did. After a month of sustained stock price declines, the airline sector rallied by more than 15% following the story finding its way onto the newswires.

While news regarding the Board’s deliberations is quiet at this writing click here, the news of a deal involving Delta should come of little surprise to airline industry watchers and readers of swelblog.com. Further, at this point, we do not even know how, or if the story will play out. But……

In a November AP story covering a New York investor conference, Delta’s President and Chief Financial Officer, Ed Bastian, called consolidation a “front burner” issue for the carrier. As the company discusses consolidation, its message to all stakeholders has been consistent – a deal that is good for shareholders, employees and communities will be explored.

It has been reported that Delta would like to answer the consolidation question before it makes any decisions regarding asset or subsidiary spin offs. Delta's public statements on this subject have held true and the carrier announced that it will delay a decision to spin off its Comair unit click here. Delta has not denied these reports.

In either merger scenario suggested by the Journal, Comair and Cincinnati will be a source of discussion. Beginning the process of paring 50 seat capacity and secondary hubs are certainly synergies in my analysis supporting any good, and viable, merger proposal. If it is a Delta/Northwest combination, what about Pinnacle and Memphis?

There Is Something Different In Atlanta

And it is labor. It is pilot labor. It is pilot labor leadership. His name is Lee Moak click here.

History has taught us that simply negotiating a term sheet does not a successful merger make. The two speed bumps to a successful culmination of negotiated terms are: the regulators; and labor.

For serious industry watchers, Captain Moak has been on the scene for some time. His presence was felt during Delta’s bankruptcy reorganization. But his real persona emerged following Pardus Capital’s announced intention to facilitate a combination of Delta and United in mid November 2007 click here. Moak then wrote in a letter to his pilots: "Pardus' demand for a merger between Delta and United is a poisonous vision built upon an artificial timeline and focused primarily on a financial transaction…"

Moak has publicly opined that he sees structural change ahead in the industry. And to the extent that it impacts his carrier and therefore his pilots, he will play a role. Just a day before the Wall Street Journal wrote its story, Moak wrote a letter to his pilots suggesting that consolidation was at the door click here. In my opinion, Pardus’ big mistake was that it proposed a deal that could easily be perceived by labor as a “cram down”. And suffice it to say that after bankruptcy/restructuring, labor’s appetite for a "cram down anything" is nil.

It is refreshing to see a real leader emerge in the labor space. Right now the labor space is generally devoid of good leadership -- with a few exceptions to be sure. Whether this story plays out or not, what is different is that you have a union leader who has made it clear that he will represent his constituents and a CEO who will do the same. More importantly, Moak is not saying no for the sake of saying no. Rather he must see an opportunity to better position his pilots in a changing world. How refreshing.

Parallel paths that may ultimately converge to create something better than today’s fragmented and fragile platform?

Concluding Thoughts

What is sure is that US Airways’ CEO Doug Parker’s idea to be a first mover in the consolidation arena was a good one. What is also sure is that Parker provided a blueprint for the industry to merge networks, ensure access to the air transportation system for communities of all sizes while at the same time reducing fixed costs. Now Parker is hamstrung by pilot leadership blinded by the prospect of an unlikely outcome – a better arbitration decision. For Parker, bringing labor along would certainly have proven expensive – and maybe just too expensive.

At Northwest, CEO Doug Steenland is mirroring statements made by Delta’s CEO Richard Anderson that the right transaction – one that benefits employees, shareholders and communities will be considered click here. Steenland and his pilots had to work through a very difficult, and adversarial, operational situation shortly following its emergence from bankruptcy. An outcome was reached that seemed to quiet the rhetoric emanating from the Twin Cities. A platform to build on?

As for United, a new pilot leadership is settling into office. They are presented with a potential opportunity to find a meeting of the minds with a management team that has been most vocal, and visionary, on industry change. Is there a sufficient blueprint out there for the two sides to work as a single mind so as to ensure that United will not just sit on the sidelines and watch others implement Tilton’s strategic vision? Maybe the holiday operational breakdown can be used as a platform -- like at Northwest?

Network and labor blueprints are emerging. Maybe the historic speed bumps to successful structural change are being reduced as a result?

MEDIATION

The Allied Pilots Association announced this past week that they will apply for mediation, with or without American management joining them in the formal request, to the National Mediation Board after the close of business on January 14, 2008. I guess we are now getting a window into a strategy designed for a quick resolution?? My guess is it will still ensure a very long and protracted negotiation that ultimately lands in front of a Presidential Emergency Board.

Is the APA making a bet early in the Presidential and Congressional election cycle that somehow a PEB will fall short of Congressional action? Sounds risky to me. From my viewpoint and based on APA's current table position, there is no "splitting the baby".

In a widely read blog post here click here I borrowed a term often used among the professional negotiators at the Board: put it on ice. The term of art describes a situation where the gulf between two sides is too wide and as a result progress is difficult to measure. In that circumstance, a case is put on ice. Mediation is suspended and the parties are sent home to reevaluate their respective positions.

In this case, I do not see newly elected APA officers moving off of an uneconomic, unpalatable and untenable position anymore than I see American management remotely willing to entertain many, if any, of the economic proposals put forth by the union.

Another widely used term of art by a negotiator is underbrush. Underbrush refers primarily to negotiations on non-economic issues that should largely be concluded before the NMB is engaged. Well, suffice it to say there is plenty of underbrush.

Yes -- the Board will probably take the case but not before encouraging the parties to engage in more direct negotiations. Once the Board accepts the case, the parties will/can meet with and without a mediator.

As Terry Maxon of the Dallas Morning News asked on his blog (and I paraphrase): who will the lucky mediator be to get assigned this case?

So -- while the airline world surrounding “today’s” largest US carrier is certain to be engaging in commercial transactions that strengthen their respective companies, American and the APA will be spending time discussing: a secondary revenue source like cargo and its relevance to commercial passenger pilot rates of pay; executive compensation; inflationary adjustments to 1992 rates of pay; Super Bowl Sunday -- and probably not at the water cooler; and hourly rates of pay that when used in isolation make a nice story but fail to address the productivity side of the equation just to name a few of the issues. Oh, and computer allowances so that everyone can log on and read how American lost its leadership position.

Pretty sad story. No, a really sad story.

EXPLANATION

Chitragupta, in a comment to my most recent post, suggests I return to my heritage and find some sympathy toward the executive compensation issue. As I wrote in click here my beginnings in this industry as a flight attendant, union leader, ESOP Steering Committee member and numerous consulting assignments have their roots in distressed negotiations. Variable compensation for employees, executive pay packages and labor advisor fee negotiations have been a part of my professional world for as long as I have participated.

Whether the amounts paid to Stephen Wolf on multiple occasions (Republic, United and US Airways) were excessive or not, labor was aware. Amounts paid to ALPA advisors in the 1990s for a failed deal and ultimately a successful deal exceeded $30 million. Whether excessive or not, labor was aware and made the decision to write those checks. Amounts paid to the ALPA and IAM chosen CEO to lead United in the post ESOP era, Gerry Greenwald, were significant at the time and labor was aware. The ALPA and IAM labor directors were present and engaged in the hiring of Glenn Tilton at United. At the time it was certainly not easy to find a qualified CEO for that troubled airline and under Tilton's leadership it has emerged from a bloody period with eyes on being part of a new airline industry structure.

So as I am asked to return to my heritage, I am constantly reminded of other points in history where executives and labor advisors were paid significant amounts of money and, in most instances, labor was at the center of the conversation. This is not different at AA today or any other carrier where executive compensation has been, and will be, paid. In every negotiation I am aware of, labor had access to all information in the distressed discussions that have transpired during the 2002 – 2007 period. Underscoring this fact is that each the IAM, AFA and ALPA were members of the Unsecured Creditors Committee at United – the very committee that approved the plan of reorganization.

I recognize the issue is an emotional one. I was concerned about the timing of the most recent payouts, but my history/heritage - or whatever it may be - is dotted with points in time where significant money was paid to certain individuals. My lack of "sympathy" regarding the issue is that labor knew about most of the payment schemes. Further, in each case, labor was armed with a battery of advisors.

The terms of the current executive compensation plans are documented in the public domain and should be considered a part of history. The future can be shaped, history cannot. It is over. It is time to move on. This issue is not confined to the airline industry. The last 8 years have been an ugly period in American business. There have been many casualties. My assumption is that the next time around, labor will be more aware and thus will be smarter on the issue. So will management.

I grow weary of emotional rhetoric. I have referred to the exec comp issue as a “one trick pony”. My words on the issue are in the public domain. I am more concerned about the competitive positioning of the US industry and its place in the global sphere, not what a CEO makes in Ft. Worth, Atlanta, Chicago or Minneapolis. If the same amount of energy was spent putting forth new ideas to replace the outdated and outmoded ways of doing business in the labor negotiations arena, I might have a different view.

Labor is not a victim. What I am hearing is that management cannot lead, cannot innovate, cannot implement. Labor has a seat. Where there is a seat, there is an opportunity. Just like the Democrats steal a page out of the Republican playbook from time to time, and vice versa, why doesn’t labor take a page out of management’s playbook and negotiate at risk compensation that has the possibility of providing income when the business cycle and the negotiating cycle do not line up. And this happens in most cases.

There has to be a better way. Ask Lee Moak. To others, stop bitchin’ and start doin’. And if that means burn the furniture, then burn the furniture as employees at other carriers in the industry will benefit from your arson. Otherwise, plenty of opportunity exists to make the world better and more secure for your members.