US Airways And American And The Elephants In The Room

I want to talk about the elephant in the room.

Actually, it’s a whole herd of elephants in pink tutus with “Seniority Integration” and “Unintended Consequences” emblazoned in neon lettering across their posteriors. Yet, most media seem too distracted by sexy headlines and hoped for revenue synergy calculations an alleged US Airways – American Airlines tie-up might bring to even notice the elephants.

Maybe they’re right. The customer doesn’t care what uniform the pilot flying the plane wears or what that pilot’s career prospects look like. They just want that pilot to safely get them to where they’re going.

US Airways is a perfect example that ignoring the elephant can work with few external (i.e. passenger) repercussions: it hasn’t fully integrated pilots or flight attendants since merging with America West in 2005. After nearly seven years of flying separate-and-not-nearly-equal crews on two coasts, maybe US thinks the elephant is just a mouse. Heck, company president Scott Kirby said taking over American Airlines would actually solve US’s problem:

"It's ironic but the solution to that issue at US Airways I think it's probably because we're able to get this deal done. The area that people focus on the most is USAPA, our pilots' union. In this case there is a huge benefit for our pilots in getting the deal done.”

Kirby’s comments would also seem to hold true for flight attendants. He even pointed out merging work groups would be subject to the McCaskill-Bond legislation… created in part, by American’s 2001 takeover of TWA and the short-end of the deal those employees received.

And that’s where the elephants start trumpeting.

I’ll concede again that seniority integration doesn’t mean anything to the average customer. But it means everything to airline employees and, because of the very McCaskill-Bond law Kirby mentioned, even to those employees who don’t belong to a union. They, too, will be subject to the law and the vagaries of seniority integration.

If the Allied Pilots Association really believes seniority integration is, as its spokesperson Tom Hoban labeled it, a “faux concern,” then it’s ignoring its own recent past.  If I am an APA pilot and my union is calling seniority integration a faux concern, well I would be concerned.

If the Association of Professional Flight Attendants thinks it will join hands with US and its senior members will either cash out or staple US’s two groups to the bottom of the seniority list – like the APFA did to the TWA flight attendants – its remaining members will have plenty of time to regret that decision when they’re flying Richmond, VA to Greenville, SC via Charlotte for the third time that day.

REAPING WHAT THEY SOWED

The very group APFA leaders either think they will harmoniously bond with or take precedence over (and I’m betting it’s the latter more than the former) is the Association of Flight Attendants.  The AFA represents two distinct groups at US – the flight attendants from the “old” US Airways and former America West FAs – which have never worked under a joint contract. Kirby’s mention of McCaskill-Bond is especially pertinent in this potential combination of three different flight attendant groups, each with its own pay rates, work rules and benefits.

Why? Well, this is what the AFA says about McCaskill-Bond:

“In 2001, American Airlines purchased TWA. The TWA flight attendants, represented at the time by the lAM, were stapled to the bottom of the American Airline's flight attendant seniority list. The AA flight attendants are represented by the APFA. This was grossly unfair to the former TWA flight attendants. The TWA flight attendants fought back. They were unable to right the wrong that had been done to them. But they were able to, with the help of Congress, ensure that it will not happen again.”

Doesn’t sound like the AFA is ready to take a jump-seat to anyone, especially not a group that was “grossly unfair” to other flight attendants. No matter what promises US’s Doug Parker and Scott Kirby have made to the APFA and president Laura Glading. US flight attendants are going to have a say about what part of the pie they get. It’s also important to remember neither AFA group has approved a new contract with US – in fact, they overwhelmingly rejected the last tentative agreement two months ago.

Currently, the APFA has, in total, the best pay, benefits and work rules in the industry. (A decision on American’s 1113 motion in U.S. bankruptcy court could change that). US Airways are among the lowest compensated. Doug Parker will probably promise his own flight attendants they’ll move up to APFA pay, and with the reported “early out” incentive offered as part of the US-APFA deal (about 80 percent of APFA’s members would qualify under the union’s stated parameters including President Glading), would quickly dominate the seniority lists.

That’s probably not going to be enough for the US flight attendants. They’ll likely – and, perhaps, justly – demand the same early outs, guaranteed seniority and other incentives. McCaskill-Bond calls for arbitration, though US Airways says it is “hoping” for a negotiated settlement. This is the same group hasn’t been able to negotiate contracts with any of its current flight groups in seven years, yet “hopes” for agreements with three different unions all clamoring for top billing?

That doesn’t even take into consideration the lawsuits that will be generated when the remaining APFA members realize they’ve been sold out or either of the AFA groups feel they’ve been shorted.

Speaking of lawsuits, the APA knows a bit about seniority integration court battles. When American took over bankrupt TWA, the APA argued in the Supreme Court of the United States that its members deserved seniority over all Trans World pilots because TWA crews had limited to no future prospects and no reasonable “healthy carrier” would agree to merge if its employees didn’t take precedence. Some call this the “failed carrier doctrine” and it is still applicable with the McCaskill-Bond legislation. The APA won its case in front of the Supreme Court, so it shouldn’t be surprised if USAPA East & West use it against them.

Of course Kirby thinks merging will solve US’s current integration problems. The USAPA pilots are salivating over new planes, APA’s high pay rates and benefits and the chance at more international routes. They’ll happily staple APA to the bottom of the seniority list to get those perks.

Perhaps APA president David Bates really believes the former America West pilots will just give way to the APA’s claims on seniority. He met with USAPA pilots in Charlotte last month and touted the meeting as a beginning of negotiations to resolve the issue.

I don’t believe any “negotiations” are going to resolve this issue quickly or simply… and I see no way APA members come out of this scenario better in the long-term. Union solidarity only goes so far and US pilots have been waiting years for an opportunity like this.

More telling I thought was a quote in The Charlotte Observer from USAPA president Gary Hummell:

"My job, even though we are looking forward to a cooperative effort, is to protect USAPA pilots (and) to ensure our pilots get the best contract they can."

Even if that means it’s at the expense of the APA.  Even if this means making American out to be a failing carrier.

WHITHER TWU?

The Transport Workers Union International and many of the locals haven’t exactly rushed into the arms of US Airways. Unlike APFA, which has thrown itself at US like .... well I won't say it, or APA, with its “studious business” approach, TWU has seemingly shrugged its collective shoulders about the US “deal.”

That’s probably because the US agreement isn’t much different from the one AA recently offered TWU. The Mechanics and Related and Stores work groups rejected American’s proposal, but I doubt they’re holding their breath waiting for US Airways to save them.

The TWU is being realistic. Besides saving some jobs – which the M&R and Stores groups decided wasn’t enough reason to approve the AA offer – there’s not a lot US can do for TWU members. They’ve heard US’s promises of limited job protection and bringing more maintenance in-house, but a quick look at DOT numbers also shows US currently has one of highest percentages of outsourced maintenance in the industry. Hard to believe it would be more cost efficient for US to give that work to TWU.

Plus, the TWU successfully used the failed carrier doctrine against TWA as well. While its 24,000 members at American dwarf the number of ground workers at US, TWU leaders know their own arguments will be used against them in arbitration. The TWU has seen what has happened to ground workers at other failed airlines and, at this point, can only hope to minimize its losses.

TWU also lost a bitter and expensive battle against IAM to represent workers at US and, as any political junkie knows, unseating an incumbent is neither easy nor cheap.

WHAT’S IT ALL MEAN?

I’ve already admitted seniority battles might mean little to nothing to customers and operations. That’s possibly enough for Wall Street types who are bounding after this potential consolidation like dogs chase cars.

There are, though, real concerns for other financial stakeholders.  One complex integration should give them pause - but three battles should/will make them nauseous.

US has touted the synergies merging with American would immediately bring. What happens to those synergies if integrating pilots, flight attendants and ground workers drags on, or as I expect, become overly contentious and litigious?

US Airways’ own track record – now going on seven years - shows it cannot facilitate integrated contracts and is quick to suggest the reason is because of internal union squabbles. “Old” US flight attendants fly with “old” US pilots, segregated from their former-America West peers. If a similar situation develops with a devoured American workforce, those already questionable synergies become even more degraded. In other words, the risk and return calculation might be worth further consideration by AMR’s creditors.

There are also a couple of other elephants standing off in the corner that bear watching. First is US Airways own unions, specifically the AFA and the IAM. None of those three groups (remember, AFA represents two distinct flight attendant units at US) are very happy with Parker and Co. right now. Contract negotiations have dragged on with US holding the line on costs because of its structural revenue underperformance relative to the industry.

Yet the IAM and AFA saw Parker and Kirby promise the moon, stars and assorted planets to American’s union leaders. They have significant leverage, including asking the National Mediation Board for release. With an election quickly approaching, a Democratic White House might be hard put to ignore the treaties of two very influential labor organizations, both of which wield more power than American’s unions. Keep in mind, the current chairperson of the NMB is former AFA president Linda Puchala.

Then there are American’s non-union employees. The CWA is currently trying to organize American’s 10,000 agents and representatives, even though the CWA has publicly admitted the majority of those employees don’t want a union. Well, guess who represents US Airways passenger service representatives? That’s right, the CWA. (It also is partnered with the AFA). In a merger, American’s PSRs would get a union whether they wanted one or not, most likely without a vote and probably find themselves on the bottom of the seniority scale. Their – and the other non-union AA employees not happy about their new seniority “rank” – only recourse might be the courts.

The last elephant is more of a wooly mammoth: extinct, but vestiges still remain. That would be the group of employees the APA, APFA and TWU all made bones off of… the former TWA workers. This could be their last shot to right some wrongs and adding them into the mix exponentially increases the level of difficulty of integration.

"We have a chance for a fresh start here," Roger Graham, a spokesman for the former TWA flight attendants, told Ted Reed of TheStreet.com earlier this month.  At least there is one group of employees who might benefit from this proposed merger.

It’s hard to fathom why no one has really taken notice of the elephants. Maybe because they obscure Wall Street’s desire for a (very) short-term gain despite the longer-term implications. Maybe it’s because American’s unions are simply using US as leverage with no intent to expose their members to the possible risks of actually going through with the merger. Or maybe it’s because ignoring them makes it easier for Parker and Kirby to believe this deal is really as simple as they pretend.

Maybe the court and AMR’s creditors, blinded by pro forma financial reasoning that is, sadly, often divorced from airline industry reality and the notion of competitive response, will embrace the US proposal as the best value for their dollars.

If they do, they should beware that discounts to the pro forma estimate are called for because of the elephants in the room.

APFA, by not making a deal with the company in 1113, should be questioned by its members about its decision to put all of its eggs in the US basket under the failed leadership doctrine.

Finally, the TWA pilots reared their heads last week by filing suit against American Airlines and the Allied Pilots Association. 

Looks to me like -- game on.

Reflecting on Today’s Congressional Testimony in the DL-NW Deal

I did my best to listen to as much of each hearing as I could today. I certainly found the Senate hearing much more interesting than the House hearing. The only players to testify in each hearing were Delta CEO Richard Anderson and Northwest CEO Doug Steenland. For the most part, similar testimony was offered in each the House and Senate hearings.

I did think both CEOs were much better and much sharper in the Senate give and take. But I sure did feel the pain for Anderson as he tried in many ways to describe how networks work and how networks can create new product as the nodes are leveraged post-deal. Both were particularly good in the afternoon discussing the fuel issue and Steenland finally reminded everyone of the fact that the weak dollar versus virtually any world currency is just another issue weakening the competitive posture of US airlines today.

But the other two panelists in the Senate session?………And for me the most interesting testimony was from Kevin Mitchell of the Business Travel Coalition.

12 Mitchellisms

I just cannot help myself and will spend a little time picking out some of my highlights from the testimony of each Kevin Mitchell of the Business Travel Coalition and Dr. Darren Bush of the University of Houston Law Center -- and I am just not sure what he was saying. No, I will spend virtually all of my time with Mr. Mitchell’s testimony as he has been around this industry a long time, and well…….should know better on many points.

In his first full paragraph of his overview, Mitchell rightfully discusses the importance for the Department of Justice to evaluate competition from both a city pair and network perspectives. Then the 5 minutes of scare tactics begin. Mitchell #1: “Moreover, Congress needs to understand the total consumer costs resulting from massive service disruptions and the degradation of the reliability of the system. The direct, indirect and opportunity costs for mid-size communities that lose efficient connectivity to important business centers around the country and globe need to be quantified”.

The reliability of the system? Don’t you think that the government has a significant stake and has failed the consumer, and small and mid-size communities, by failing to upgrade the very air traffic control system within which the carriers operate? It seems to me that even without these high fuel costs that the industry may not be in such “dire straits” if it did not need to add time to the schedule each quarter because of the system’s inefficiency. “money for nothin’”.

If the economics are not there, just because an airport has a runway, a terminal and security does not mean that the airport market is entitled to air service. Maybe another question could be: how have global forces impacted that community and possibly moved much of the economic base away because they were simply not competitive? A fair question to ask before laying it all at the feet of the industry. More simply, if those customers are willing to pay the cost for the service, then they will continue to receive the service.

Mitchell #2: “The managements of Delta and Northwest drove their companies into painful bankruptcies”. Based on what we know about Gerry Grinstein, my guess is bankruptcy was the last arena he preferred to visit. As for Northwest, they along with their labor, worked arduously to avoid a trip to a court-assisted restructuring and stood with labor on the pension issue along that troubled road. Management did not drive anyone in. Market forces did. And each carrier had very different competitive reasons for filing.

Mitchell #3: “With respect to Delta / Northwest, how can one accept that there are billions of dollars in revenue synergy when there are no plans to restructure either network? Unless Delta can convince expert outsiders of something on the order of $5 billion dollars in readily achievable synergies, there is no possibility that this merger could benefit consumers or the public interest”. No plans to restructure either network? Why did they want a complete pilot deal done first? So they could immediately begin to move aircraft around the network to best match aircraft to market sizes I thought. $5 billion in achievable synergies? Well you must have been much more a fan of the US Airways hostile as it did involve capacity cuts that would have been much greater than anything considered here even with the announcements made on each of the carrier’s earnings calls.

Mitchell #4: “The Delta / Northwest proposal emphasizes all of the features of past mergers that have consistently failed and doesn’t exploit any of the synergies of the rare mergers that did produce positive returns, e.g., TWA / Ozark and Northwest / Republic”. You did forget Delta-Western. What I find most interesting about your statement is that each of these mergers, except Delta-Western removed a competing carrier sharing the same hub. Talk about anti-competitive!? My flip comment on the mergers in the mid 80's was if they approve these, then anything goes.

Mitchell #5: “Megamergers create a risk of an operational meltdown that could cripple the nation’s aviation system". Fuel prices and the lack of merger-related synergies would create huge pressures to cut corners on implementation spending, creating pressures that would exacerbate conflicts with (and among) employee groups”. You are right, economic forces, competitive forces, antiquated air traffic control systems and uncontrollable crude and refining costs have no effect at all – so blame it on M&A activity [please read with tongue in cheek].

And further each carrier today, operating as a stand alone, will avoid the fates of Aloha, ATA, Skybus and Frontier? For someone that has made fares a career, do not forget that it is an accepted principle that volatile prices are most unsettling on commodity industries – and the US airline industry has become a commodity industry. Any one of your members should do a net present value calculation on travel expenditures and compare it to other input costs that they have paid.

Mitchell #6: “Merged mega airlines will leverage their route structures to dictate terms and conditions (pay more for less) to corporate buyers, even for those airline pairings without significant route overlap”. Mr. Mitchell, consumers are going to pay more. And if they don’t, labor is part of your constituency and they would not get anymore either. On the more for less issue. Short-term maybe. But this industry knows it has been lacking in making both aircraft and non-aircraft capital expenditures in the business and the most recent earnings announcements suggest they will get further cut back. For virtually every carrier, another trip to bankruptcy is not an option – and Southwest, jetBlue and AirTran are not the option for the constituency you represent.

Mitchell #7: “Coordinated Effects. Going from 6 to 5 airlines would make fare increases easier to stick, especially if Northwest were absorbed into another large carrier because this carrier has often played the role of the “spoiler.” And of course, the problem with fare increases is even more enormous if the industry goes from 6 to 3 super major carriers. United Airlines recently brought back the infamous Saturday Night Stay requirement that will virtually fence-off lower-priced fares for business travelers increasing ticket prices by hundreds of dollars”. Market forces are the catalyst. All sectors of the industry are affected by the current environment. No more free lunch. But again I impress on you to do that net present value analysis I suggested earlier.

Mitchell #8: “Congress should be concerned with the market power of super-mega airlines and their incentive and means to frustrate new airline entry at hub airports”. With the low cost carriers approaching 30% of US domestic market share, your scare tactic that suggests low barriers to entry are simply not true. The US market should not fear individual carrier failures or consolidation. Indeed, this market has demonstrated time and time again that where competition is vulnerable, a new entrant will exploit that vulnerability. Where there are market opportunities, there will be a carrier to leverage that opportunity. Where there is insufficient capacity, capacity will be sure to find the insufficiency.

Mitchell #9: “Congress should also view with great concern the increased joint purchasing power of the global alliances (buying groups) with respect to their ability to exercise monopsony power and drive supplier prices below competitive levels”. To suggest the current laws and regulations even permit this type of action by US airlines is yet another scare tactic. Yes the world will evolve. And alliances are nothing but a band-aid to access the world.

Mitchell #10: “The primarily objective and dirty little secret of these megamergers is the permanent end to meaningful competition between the U.S. and Continental Europe—two airline competitor groupings would control 90-95% of a profitable, growing market of over 30 million people, where there would be zero possibility of new competition”. This is among the more laughable suggestions. Whereas the European-based carriers are healthy today, have you noted the downgrades on British Airways; the story surrounding the continent’s sixth largest carrier, Alitalia; continued moves toward further consolidation that make the Europeans stronger? Further have you noted that Europe’s next competitor originates in the Middle East? To suggest that the game’s conclusion is now decided is another unfortunate scare tactic.

Mitchell #11: “All of the potential external funding for Northwest / Delta and United / Continental would come from the European airlines that would be the leaders of this two-airline duopoly, Air France and Lufthansa”. Interesting comment. Most interesting, as they are not participating in the deal that has been presented. I am not saying that Air France will not, but interesting. And Lufthansa invested $300 million in jetBlue but you did not mention that.

Mitchell #12: No comments on your conclusion.

Thank goodness, Cliff Winston of the Brooking Institution testified today so that market forces could get entered into the record. Not sure what the unions were trying to accomplish as you cannot have a seat at the table until you set the table. My guess is you will have a seat once you have made it clear that that a collective bargaining agent outweighs other options.

Much more to say. Much more to come.