Capital, Labor and Seniority in the News

We awake this morning to reports that Chrysler will file for Chapter 11 bankruptcy . Despite efforts by the Obama administration to force Chrysler stakeholders to find an out-of-court solution, certain debt holders would not agree to the haircut they would have to take in forgiving debt to the auto giant. What they seem to be saying is that, under the terms of the proposed solution, labor would receive a disproportionate share of equity in the restructured company.

Where seniority for airline workers is earned through longevity, capital structure seniority is a bit different. In a bankruptcy, there are different classes of capital. Debt secured by company assets is the most senior on the list of creditors who will be paid. Unsecured debt capital is next in the pecking order, followed by preferred stock and, lastly, common equity.

Nowhere is “sweat equity” reported on a company’s balance sheet. However, worker concessions have been recognized as capital in a restructuring scenario and have been currency accorded a stake in a reorganized enterprise. Moreover, it is the sweat equity at Chrysler held by current and retired workers that might appear to some as being unduly enriched through the deal that gave them a 55 percent ownership stake in a restructured Chrysler.

A very different scenario played out in the airline industry. There, in bankruptcy cases that resulted in either a termination or freezing of pension plans and/or alterations to retiree benefit plans, creditors made it clear that they would not pay the bills from the past by forgoing profits in the future. For airline companies to emerge from Chapter 11, they needed public capital to fund their exit from bankruptcy. For car companies, the government is the source of exit capital.

This morning’s New York Times, quotes a statement from GM’s bondholders that applies to Chrysler’s issue as well: “We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another.”

As the article notes: “The U.A.W. members at both automakers stand to lose some of their pay and benefits, but the cuts are not as deep as those faced by airline and steel workers when their companies went bankrupt. Under proposed deals devised by the Treasury Department, U.A.W. pensions and retiree health care benefits would largely be protected”.

Airline Seniority In The News

On Tuesday, Terry Maxon of the Dallas Morning News wrote about the former TWA flight attendants and their dissatisfaction over their treatment from the flight attendant union when American purchased the assets of the troubled and iconic carrier in 2001. Also Tuesday, the four-year seniority battle between the merged group of pilots at US Airways got underway in US District Court in Phoenix, Arizona. Read Dawn Gilbertson’s reporting in the Arizona Republic and on the paper’s US Airways blog.

Whether it is in the airline industry or in the automobile industry, there clearly is something wrong with the seniority system. My question: should seniority really be sacred? The current seniority system does not work for shrinking industries like airlines and autos.

I am in stark agreement with the actions taken by the Association of Professional Flight Attendants, the union that represents AA flight service crews, which in protecting the seniority rights of its members decided that former TWA flight attendants would be put at the end of the seniority list when they joined AA ranks. The fact is this wasn’t a merger of equals. At the time of the purchase, TWA had sold most strategic assets and had reached its tipping point. There was nothing left to borrow and no hope except American’s offer to buy its assets.

I am in stark agreement with the America West pilots in their disagreement with the former US Airways [East] pilots who had little hope of a career absent the reorganization plan that involved a merger with America West.

Given that the economy will continue to call into question the future viability of any number of US airlines, this seniority issue is far from over. Plain and simple, it is about economics and the viability of individual carriers. US Airways [East] was not going to survive in its 2004 form for long. TWA would likely have died of natural causes as the effects of 9/11 ravaged the industry.

Concluding Thoughts

Given that the airline industry will likely get smaller before and if it gets bigger, it is high time that organized labor puts down its swords and constructs a national seniority list. Employees should have the right to move within the industry should their carrier cease to exist. Seniority should not be a shield for some to hide behind. Rather it should promote stability for those experienced workers that choose to offer their services for hire in an open market

The economic crisis and its impact on corporate America highlight the need for thoughtful analysis of labor issues. Seniority is only the first of the “third-rail” topics we shouldn’t be afraid to discuss. Another is the “legacy costs” like pension and retiree benefits and whether they should be the sole responsibility of the employer in today’s world. Best that I can tell, this growing financial burden on employers may serve only to stand in the way of active employees working to maximize their earnings.

Time will tell what ultimately will emerge from Chrysler’s bankruptcy; GM’s prospects for the future and whether the deal at Ford positions that company to compete for the long term. The same day might be coming for airlines which would be wise to learn lessons from the industries that come before them.

I make that final statement after reading through Obama’s statements. The US government is constructing a safety net for Chrysler and its workers. Some will fall through and others will be saved. Airline labor should be thinking about the same.

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

Some Thoughts for Gerard Arpey

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

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

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

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

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

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

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

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

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

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

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

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

Swelblog.com: The First 31 Days

Whereas it has only been one month since I ventured into this unknown world of blogdom, suffice it to say that this labor of love has been among the most gratifying endeavors I have ever experienced. As I said in my very first post entitled Swelblog.com Taxiing Into Position: click here “I did not start this blog to win friends or influence anyone. I’m a data guy, and I’ve been studying the industry long enough to come up with some strong opinions . . . many of which aren’t popular in either boardrooms or union halls. My approach is analytical because, in my view, the numbers don’t lie.”

I have been moved by the comments made in other blogs and the press about this site and the use of some of the comments expressed here. To Holly Hegeman Planebuzz, Terry Maxon Airline Biz, Trebor Banstetter Sky Talk, and Loren Steffy Houston Chronicle I am grateful. To these, and all other, enlightened influential watchers of the industry and the many other readers who have commented to me via other mediums, I very much appreciate your welcome.

While I may not need to reiterate this point, I am going to as I want to make sure the readership fully understands that this blog and the MIT Airline Data Project are separate. I use the MIT site’s data to analyze issues because I know how the various metrics have been calculated, vetted and presented.

It was the second post, “All Eyes on Texas” that certainly seemed to launch this blog. Some agreed with my ordering of the difficulty of the pilot negotiations and others questioned my ordering. That is the sort of healthy debate that I hope happens here as the blog matures. As a result of my immediate previous post where I addressed a sensitive issue regarding the cost of the APA pilot opener, there were a number of comments made. I have always wanted this site to show both the “positive” and the “negative” comments regarding what I have written and, until Monday, I have made each of the comments available for public review.

But as the days following that piece unfolded, Monday morning I posted a comment that I should not have posted and ultimately deleted it. While it had some valid points, this blog was starting to become a venue supporting the views of one employee at AA challenging another. Then after I authorized the post to be published, a follow on comment was made which I deemed was exacerbating the situation versus having a meaningful exchange of views. I rejected this post. It is one thing to attack me -- and trust me you are in a long line of those that have had the opportunity long before I started this blog.

I welcome, no, I want comments on the issues discussed here -- but check the emotion at the door. From this point on, this site will not be used for personal attacks on another person commenting – period. There are many other venues for that. This is my blog and my rules. And they are changing as I learn.

There was a comment from flyby519 posted to Swelblog that I did not acknowledge and should have as it was precisely the type of thoughtful comment that I want to address in this blog click here. We will pick up here over the next couple of days.

Happy Halloween

“I hear the train a "C"omin'”

As earnings season kicks off for the third quarter, Delta announces great results click here and its CEO talks about consolidation click here This, is what the major newswires and bloggers picked up -- not that Delta’s earnings exceeded the Street’s expectations. The exception to these stories is Terry Maxon of the Dallas Morning News writing in his blog about the cleansing of bankruptcy which puts a different, but fair, perspective on the company’s performance click here.

One – no the best question of the day -- came from a significant trader in the airline debt world was: Will the news of Delta being part of consolidation considerations be bad for Delta CEO Richard Anderson? My immediate response was no, Anderson’s public comments have never shut the door on anything other than to make Delta the best it can be in his view and his board’s view.

So now that earnings season is underway, I just wonder how many times the “C” word will be used? We know that UAL has painted a target on its back but will others discuss the “C” word in their comments to the analysts? This, on top of an expected Delta announcement with alliance partners Air France and KLM click here, and today’s announcement click here, makes clear that the management team in Atlanta is not sitting still as it undertakes its transatlantic strategy.

Lots has been written about “unlocking value” by spinning off subsidiaries that are perceived by the market as to not being reflected in the current equity prices of US carriers. $86 oil points to a potentially mean and long cold winter for this industry. Therefore, expect the discussion of the “C” word to be included in this quarter's earnings’ overview. Moreover-- and this is true for each management and labor --remember tomorrow for this industry is about “capital creation” and not “capital recycling” or as some of my smart friends might say “capital destruction”. Or die.

The unfortunate visionary that is being left out of today’s (10/16/07) talk of consolidation is the CEO of US Airways, Doug Parker – but the earnings announcement is days away. He gave us a blueprint of how consolidation is good for the industry and individual companies in his bid for Delta. He openly talked – as to this writer’s take – on the benefits of reducing fixed costs while still maintaining access to the US air transportation system for air travel consumers in markets large and small. [I sure hope the US government reads and thinks about this statement]

What is unfortunate for Mr. Parker click here is the parochial interest of labor in the “C” word discussion. Certainly there is more to come on the US Airways situation in this blog -- but to stand in the way of market development for labor is a major mistake. It is global, it is real, it is now. So if labor thinks they are sitting in Folsom Prison and hoping that they’d moved it on a little farther down the line—stand ready.

“It's rolling round the bend"