The National Mediation Board: From Honest Brokers to K Street Politicians

Something is just not right about the speed with which the National Mediation Board issued a Notice of Proposed Rule Making (NPRM) to amend the Railway Labor Act

I’m guessing that the reasons had more to do with politics than good policy. Something is just not right.       

In its proposed rule, the NMB is seeking to change the election process by which unions organize workers in the railway and airline industries. The new rule, which would change 75 years of practice, would for the first time determine the outcome of union elections based on a majority of those who vote rather than current practice, where a majority of all eligible voters must support joining a union.

What is laughable about this change, at least to this observer, is that the Board describes the NPRM as part of its “ongoing efforts to further the statutory goals of the Railway Labor Act.”  Funny, because the overarching statutory goals of the RLA is to minimize the disruption on interstate commerce stemming from labor-management disputes.  And this rule would likely do just the opposite: increase the likelihood of union activities that could wreak havoc on our nation’s commerce.

Never do I remember the use of the formal NPRM process to make such a significant change to labor law.

But before we go too far, it is important to note the dissenting opinion of the Chairman of the Board.  The NPRM was issued by NMB members Harry Hoglander and Linda Puchala – the two Democratic appointees on the three-member Board. The Chairman, GOP appointee Elizabeth Dougherty, in a formal dissent challenged the action of her fellow Board members

 “Regardless of composition of the Board or the inhabitant of the White House, this independent agency has never been in the business of making controversial, one-sided rule changes at the behest of only labor or management,” Dougherty wrote.  And it is this very mindset of Hoglander and Puchala in the drafting of the NPRM that smacks of politics, disregard for prior practice and arrogance in refusing to address subjects of similar importance in the labor arena, including the ability of employees to decertify a union and a union’s right to demand the personal contact information of employees they hope to organize known as an Excelsior list.

Let’s Talk Stability

On September 28, 2009 I blogged in a piece titled:  Airline Industry Eyes on the National Mediation Board,  that looked at this very issue..  The rule change was sought by labor – the Transportation Trades Department of the AFL-CIO as part of its efforts to make it easier to organize airline workers. But the proposed rule is loaded with the potential for unintended consequences, particularly for incumbent unions that might be the target of “raids” by competing unions encouraged by the possibility of picking up new members in an industry already heavily unionized. 

Stability is one issue Chairman Dougherty addresses in her dissent, albeit for different reasons:

 “The Board has repeatedly articulated important policy reasons for our current majority voting rule – including our duty to maintain stability in the air and rail industries,” she writes. “This duty stems directly from our statutory mandate to ’avoid interruption to commerce or the operation of any rail or air carrier.’ The Majority attempts to ignore this important statutory mandate by claiming that only our mediation function is relevant to keeping stability in the air and rail industries. This argument has no merit. The statute does not limit our mandate to only mediation, and it is disingenuous to suggest that our representation function does not play an important role in carrying out our duty to maintain stability in these industries. Moreover, the Board has repeatedly in the past raised this policy issue in conjunction with our representation function.”

But it is just that stability that would suffer in the case of more frequent labor disputes and work actions designed to cripple a carrier’s service.

Some will say that disruption of interstate commerce was one thing in the 1930’s when the RLA was last amended and yet another thing in 2009 to justify making changes to 75 years of practice.  Not so fast.  In the 1930’s, interstate commerce consisted more of construction materials transported by train.  Today’s economy is about “just-in-time” delivery of every commodity imaginable and that includes the crucial role of airlines in getting business travelers to and from their destinations.  Time sensitive materials and travel are critical to today’s economy and fundamental to the service modern airlines provide.  So avoiding disruption is as applicable -- if not more important -- today as it was then.

Why Should You or I Care?

I have been asked by many really smart people why I oppose this change. After all, it would only put in place the very election practice of majority voting that is at the core of our democracy.  From that perspective, I could easily wrap myself in the flag and say the change sought by the unions makes absolute sense. 

But let’s give it a closer look. Our election practices were established by the U.S. Constitution. The 12^th and 17^th Amendments changed the rules for electing Presidents and Senators, but only after careful deliberation.  And just as the Constitution establishes the framework for the establishment of the Federal government and its relationship with states and citizens, the RLA establishes the framework for the resolution of labor-management practices in the railroad and airline industries. 

I am not a lawyer. But I do know that there is much learned discussion around the issue of original intent as it pertains to the Constitution.  Changes can be made and have been made to that ruling document.  Similarly, changes can be made to the RLA.  But that should happen only after careful deliberation. Moreover, it should not occure on the whim of two NMB members.  I hesitate to even suggest that these changes are being imposed by the Obama Administration on a struggling industry as a way to pay back labor for its support during the campaign, but it is beginning to smell that way.

Should the Industry Really Care?

The fact is, this proposed rule change is aimed at a single airline, Delta, which is less-unionized than any other legacy carrier.  And as the nation’s largest airline following its acquisition of Northwest, Delta is clearly a tempting union target.

So should anyone other than Delta really care? There is probably plenty of water cooler discussion taking place in Dallas, Chicago, Houston and Phoenix to name a few airline headquarters. One can only imagine that, in their view and on one hand, it is high time that Delta has to deal with the same labor challenges that have burdened other airlines for decades.

Delta is unique in the industry in its ability to offer above industry W2 compensation in return for work rule and commercial flexibility.  That’s been possible because Delta isn’t constrained by union contracts that limit productivity, add rigid work rules and protections and add other fixed operating costs.  Under unionization this past practice and fact becomes a question mark.

But I believe that the industry should be concerned about this Board action, both in impact and in precedent. Assuming the rule is implemented as I believe it will be, then all airlines with unrepresented work groups should prepare for union organizing activity unlike anything this industry has seen in two decades.  AirTran, jetBlue, Republic/Frontier and SkyWest should stand ready.

Let me be clear.  I am not saying that unions are all bad.  Good leadership on the union side and a willing management can make deals.  Look at the deals done in 2009.  Look at the most unionized carrier in the US industry – Southwest – which thanks in part to a strong relationship with its unions has managed to pay well and do well in the marketplace by building a great corporate culture and making productivity and customer service a priority

On the other hand, unenlightened and parochial thinking pervade the leadership ranks of many airline unions.  The industry will continue to face change and challenges. Unions that adapt and are able to let go of the past will flourish.  Unions that cannot adapt to the new direction of the global airline industry will struggle to deliver for their members.

Will unions grow stronger and gain members under the new rule? Probably. Does the NMB appear politically-motivated? Absolutely. That’s a real problem.

Today, several airlines are negotiating collective bargaining agreements under the auspice of the NMB. Whereas in the past the parties would have been sent back to the bargaining table to work out their differences, we might in the near future see a reckless use of the release process by a politically motivated Board.

[Note:  I am currently a local AFA appointed board member at Hawaiian Holdings, Inc. where the ALPA represented pilots have requested a release from mediation.  Writing on this topic is purely my own view on happenings at the National Mediation Board and in no way is intended to represent the views of Hawaiian Holdings, Inc., Hawaiian Airlines, Inc., or represent the views of local HAL AFA President, Ms. Sharon Soper.  The opinion stated is solely that of William Swelbar.]

What Does it Mean for Airline Unions?

I always watch with interest what James Hoffa and the Teamsters Union say about the airline and railroad industries.  In a November 3, 2009 Wall Street Journal article by Mike Esterl and Melanie Trottman on this very subject, Hoffa is quoted in support of the proposed change: “This reform lets workers choose a union the same way they choose the President of the United States,” he said. Whichever side gets the most votes, wins.”

But I’m guessing that Hoffa’s real goal is something else entirely. Because Hoffa and his Teamsters Union split from the AFL-CIO, they are free to raid another union by petitioning the NMB to organize workers represented by a different union.  The leaders of AFA, the IAM and ALPA ought to start looking over their shoulders now, because another union might be standing in the shadows. And that union might just be aiming for dissatisfied members that – whether out of anger toward the incumbent union or the struggling economy – might just be open to considering switching allegiances in hopes of getting a better deal. After all, under the RLA it takes only 35 percent of the workers in a “class or craft” to sign a card showing interest in a union.  And then, under the proposed rule, only a simple majority of the minority would be necessary to vote the incumbent union out. 

Imagine how tempting the prospect of signing up new dues-paying members from any number of small railroads around the country, whether for the IBT, the SEIU, or any other aggressive union that shows little interest in abiding by the etiquette of the House of Labor?  In industries in which two-thirds of workers already are represented by unions, a raid targeting disgruntled employees (an unfortunately large group in the airline industry) would present the best opportunity for a union to gain “market share.”

One can only assume that the strategists at the TTD and the AFA-CWA have thought all of this through. They must be counting on passage; otherwise, why would the AFA-CWA and the IAMAW have moved to withdraw their applications for single carrier determination at the merged Delta that is necessary to initiate a representation election?  And the fact that they’ve come this far leads me to believe that they have some pretty powerful friends in Washington, D.C.

Something is just not right

.     

US Pilot Unions’ Dirty Little Secrets

I keep waiting for real leadership to emerge from labor unions in the US airline industry, particularly from pilot unions.  During past down cycles, pilot unions could be found taking the lead in creating a nuanced solution that addressed a company’s competitive needs and the concerns of pilots they represent.  The template crafted by pilot union leaders in the past often formed the framework for companies seeking help from the non-pilot workforce.

Today, more often than not, I see the work of pilot unions doing more to pose a barrier to an airline’s success than to promote it.  To be fair, the unions at Delta, Alaska and Southwest get credit for smart leadership. But the same can’t be said at other airlines, and here’s one reason why.

The legacy carriers all operate as part of networks that have formed over time, through mergers; asset buys; regulatory frameworks; and, importantly, union influence.  By this I refer in part to the dirty little secret in pilot union contracts: “scope” clauses that too often hamstring an airline’s operations in the name of job protection for pilots.

The question we in the industry should be asking is whether those scope clauses are really serving that purpose or, rather, whether some union leaders are using them in a way that is both misguided and harmful to the pilots they represent.

Evolve, Adapt, Reinvent – Or Risk Irrelevance

The ability of mainline carriers to employ regional jets is not new to the industry.  Neither is the ability of mainline carriers to engage in international code sharing arrangements with foreign airlines.   Both activities are governed by scope clauses in each carrier’s collective bargaining agreements with pilot unions. And before we go any further, let’s remember that the language in these collective bargaining agreements is just that – collectively bargained between the management and the unions. 

Much of what I have written at swelblog.com over the past two years has probably earned my picture a place on the dartboard at most pilot union offices. And this column is not intended to resurrect my image with certain pilot leaders in any way.  It’s just that union presidents are really the CEOs of their organizations and they deserve the same scrutiny as do airline CEOs.

And yes, I’ll name names. One is Captain Lloyd Hill who is president of the Allied Pilots Association – which represents only the pilots of American Airlines.  Another is John Prater, president of the Air Line Pilots Association, which represents pilots across the industry. After watching Captain Hill’s misguided attempts to garner leverage for AA pilots during contract negotiations and Captain Prater’s recent embarrassing diatribes before the House Aviation Subcommittee’s hearings on aviation safety, even I feel sympathy for the pilots they attempt to represent.

Captain Lloyd Hill

In the early days of the blog, I wrote a lot about American Airlines and its strained relations with the APA’s Hill administration.  The union was antagonistic toward the company from the very start and began negotiations with an outrageous opening proposal that demanded, among other things, a pay increase of more than 50 percent. I suggested then that it would be a long time before a deal will be reached with these players at the table. 

Two full years later, there is not only no deal, but not even the scent of a deal in the air.  And from my read of the contract cases now before the National Mediation Board, I could make a case that it will be at least two more years before American and the APA reach agreement or a NMB-declared impasse is declared.  But I will leave it to the APA membership and the Las Vegas odds makers to analyze what needs to change in order to improve the odds of a new working agreement.

Never before in my experience have I seen a more misdirected, miscalculated and mismanaged mess of a negotiation by a union.  And because we can all read Hill’s playbook and it’s clear he’s not moving the ball down the field, he keeps going back to his current whipping boy -- the “immunized alliance” the company is trying to achieve through a joint business agreement with British Airways and Iberia.  After calling the same play on second and third down, I am thinking that this fourth down attempt will result in a loss as well. 

Last week the APA issued yet another press release urging the DOT to dismiss American’s application. But this time, the APA was joined in its hollow and transparent opposition by ALPA.   In this case, ALPA was less strident, choosing not to oppose alliances generally but instead to urge DOT to ensure that jobs at US airlines are not eroded as a result of international partnerships.

“As a result of two significant developments during the past several days, we urge the DOT to decline American Airlines’ application for worldwide antitrust immunity,” Hill said in the APA release. “The first of those developments was the EC’s announcement earlier this month that American Airlines’ plans may violate rules governing restrictive business practices. Given those stated concerns, we question the advisability of granting approval to a deal that may fail to pass muster with the DOT’s European counterparts.

“Closer to home, American Airlines management has refused to provide industry-standard job protections for our pilots, despite APA’s concerted efforts,” Hill added. “We can only conclude that our worst fears would be realized in the event American Airlines is permitted to proceed with what amounts to a virtual merger with British Airways and Iberia.

No Captain Hill, your worst fears should not be this alliance.  You see, your contract permits this arrangement and if this type of commercial activity were to be prohibited, your actions in fighting the alliance will all but ensure fewer US jobs – they may be primarily narrowbody jobs but US jobs nonetheless.  Maybe you should begin negotiating with the company with realistic and market-sensitive proposals rather than filing petty grievance after grievance that has resulted in a further weakening of your negotiating position.  Maybe you should stop putting up billboards openly criticizing your employer on product reliability and safety issues because trying to hurt the company that employs your members is no good path to trying to improve their contract.  

Maybe the goal of “restoring the profession” should be to recognize a changed environment and figure out how best the members you represent can prosper under the new economic reality.  

Maybe your dirty little secret is that you do not know how to tell your members that your strategy to “restore the profession” has failed.  But the real sad part is the real losers are the professional aviators who deserve better from their union leaders.

Captain John Prater

Over at ALPA, the world’s largest pilot union, we have John Prater at the helm. Prater won the election to head ALPA by beating out his predecessor, the very skilled and seasoned Duane Woerth, on a platform that overpromised and is sure to under-deliver. Over the years some of the very best union leaders in the airline business have come from ALPA:  J.J. O’Donnell; Hank Duffy; Randy Babbitt and Woerth to name a few, and that doesn’t include a line of great leaders during the union’s formative years.

Now we have ALPA testifying before Congress in ways that are not becoming of past ALPA leaders.  Prater testified at the September 23 hearing on the crash of Colgan Air 3407 about a number of safety initiatives ALPA is promoting across the regional spectrum. But he also spoke about the relationship between mainline carriers and their regional partners in a way I find troubling.

Prater attributed what he called the “low-experience pilot problem” to the mainline airlines’ business model. 

“Mainline airlines are frequently faced with pressures on their marketing plans that result in the use of the regional feed code-share partners, whether they be economic, passenger demand or essential air service,” he said. “These code-share or fee-for-departure (FFD) contracts with smaller or regional airlines provide this service and feed the mainline carriers through their hub cities.”

Before mainline airlines had regional partners, Prater said, all flying was done by the pilots of an airline on a single pilot-seniority list, where pilots were trained to and met the same higher-than-minimum regulatory standards."

“A safety benefit is derived from all flying being done from a single pilot-seniority list because it requires that first officers fly with many captains and learn from their experience and wisdom before becoming captains themselves,” Prater said.

Now, he argued, major airlines use multiple, regional “vendor” carriers to drive down their costs, a practice he said “harms safety”  because first officers on regional airlines can become captains within a year and “fail to gain the experience and judgment needed to safely act in that capacity.”

Prater goes on:  “When a regional airline operates a route for a mainline carrier and offers subpar wages and benefits, only low-experience pilots, who cannot qualify for a job with a better paying airline, are typically willing to accept such employment. It is not uncommon that training at such carriers is conducted only to FAA-required minimums. However, these low-experience pilots obviously need more training than more experienced airline pilots to gain equivalent knowledge of the operating environment, aircraft, and procedures before flying the line.”

Later, in questioning by members of the committee, Prater insinuated that airlines involved in the crash, as well as other carriers that ALPA is in contract negotiations with, are continuing work practices that may compromise safety.

"The managements at Pinnacle and Colgan have not changed their ways. The management at Trans States Airlines haven't changed their ways. Do I need to go further? I have a big book," Prater told the subcommittee. He then suggested that carriers were actually punishing Captains that report maintenance issues with their aircraft, concluding: "Some managements are still insisting that they are going to beat their pilots into submission."

What Prater fails to share is ALPA’s dirty little secret: that the wage rates, working conditions, training provisions and other particulars he criticizes were negotiated by his union. ALPA represents the majority of regional pilots flying in the US today.  So maybe ALPA needs to step up and take some responsibility for its contribution to building this sector of the industry.  Only by agreeing to lower rates of pay and more flying time at the regional carriers can ALPA justify and sustain the generous pay, benefits and work rules that benefit pilots at the mainline airlines. 

Look at any significant relaxation of the scope clause at the mainline carrier that allows the airline to increase its use of jets 70 seats or less. In just about every case the mainline pilots received a significant pay boost in return for that “concession.”

The fact is that ALPA has played a major role in creating the labor Ponzi scheme that survives at the legacy airlines. How does ALPA find a way to pay another group of new pilots less in order to buy “better” contracts for the regional pilots it now represents? It can’t. And you can bet that ALPA would not ask its mainline pilots to take a pay cut to help increase the wages for pilots flying at their regional counterparts.  A conundrum indeed.

Concluding Thoughts

Labor leaders in the pilot ranks would have you believe that this (international code sharing and the use of regional flying) is all about management abusing provisions of their collective bargaining agreements to enrich their shareholders.  In fact, the creation of B-Scale constructs and the relaxation of scope provisions has been labor’s “quid” in return for increases in compensation and benefits for 20+ years [the “quo].”  Even when the industry economics suggested the quo was too much.  As I have said here before, labor likes to “eat their young.”  This is an issue that is fundamental to the difficulty of today’s negotiating environment.

Hill and Prater are resorting to 1920’s tactics rather than trying to lead pilots in a new world of airline economics. Labor’s “Old New Deal” cannot be supported by today’s competitive environment.  What is needed is a “New New Deal”. It will not look anything like the “Old New Deal” to be sure.  Just as airline executives have been forced to adapt to new economics shaping the industry, labor, too, must adapt because it has no more young to consume to keep senior pilots fat and happy.

It is hard to be at the top - whether looking for necessary capital or creatively searching to support the expectations of pilots.    

Two Years Ago Today: No Swelblog.com

I cannot believe two years has passed.  Thank you to all that read this blog.  The numbers speak for themselves as I know there are many, many more of you today than there were one year ago by a multiple.  With that said, I do not want to celebrate the blog’s second birthday by getting in the way of the traffic and discussion taking place on my most recent post:  Airline Industry Eyes on the National Mediation Board.

Off to give a lecture.  If you are attending Mike Boyd's Annual Aviation Forecast Summit in Lexington, KY next week, I hope that we will get a chance to meet.  I know I am looking forward to an event that prides itself on free thought.  Thanks again for the support.

Airline Industry Eyes on the National Mediation Board

The Railway Labor Act (RLA), which governs labor relations in the rail and airline industries, has been around longer than the airlines flying today.  First passed in 1926 and amended in 1934, it is designed in part to ensure that labor disputes in these key industries can be managed in a way so that they don’t interfere with the nation’s critical commerce.

Decades later, we can all point to the RLA and find certain aspects of the law that should be changed.  And that’s a worthwhile discussion. As long as it’s based in the understanding that the purpose of the RLA was to promote stability and not to disrupt interstate commerce with labor strife.  In its own quirky way, it accomplished these two inherent objectives. 

Now some in organized labor want to inject instability on top of an already unstable industry architecture.  Labor leaders insist they want a more predictable, efficient system. The question is whether the reform being sought will bring unintended consequences?

Organized Labor, President Obama and the National Mediation Board

Recently, the AFL-CIO’s Transportation Trades Department (TTD) asked the National Mediation Board to change 75 years of practice regarding representation elections. The practice in place today requires that a union win with a majority of employees within a “class” or “craft” in order to be certified as those workers’ collective bargaining representative.  The TTD, running interference for the Association of Flight Attendants (AFA-CWA) and the International Association of Machinists and Aerospace Workers (IAMAW), is seeking to make a major alteration to the practice that would put the union in place if it gets “yes” votes from a majority of those voting, not a majority of all employees in the class or craft.

This issue promises to provide some insight into the power of organized airline labor in the Obama Administration. Clearly, labor played a key role in electing the President.  But to date, labor has not reaped the successes many expected in the early months of the new administration.  Will the administration pressure the National Mediation Board to make this change?

After 75 Years, Why Now?

It is pretty simple and transparent.  Neither the AFA-CWA nor the IAMAW believes that they have the votes necessary to win an election in their efforts to organize the combined work forces from the merger of Delta and Northwest.  So labor hopes that a friendly administration will change the process to help them pick up these coveted new members – particularly on the Delta side where the flight attendants and maintenance workers have never been union.

Or, as the union leaders have clearly calculated, if you fail to win hearts and minds at the ballot box (as they have not once but twice) then change the rules. 

The AFA-CWA failed twice in its efforts to organize Delta flight attendants. In their last campaign, only 40 percent of eligible flight attendants even voted. And under NMB procedures, those who don’t vote are counted as a “no” vote regarding union representation. 

After months of delay in seeking to have Delta and Northwest declared a single carrier – an administrative procedure necessary to hold an election for union representation – the AFA-CWA petitioned the NMB for the single carrier determination in July.  The IAMAW followed in August, but is not seeking to organize the entire group of eligible employees in various class and crafts of Delta and Northwest employees.  Unfortunately, an election cannot proceed until the TTD’s request of the NMB has been decided upon.  Therefore, more hurry up and wait for affected employee groups. 

The TTD asked the NMB to change election procedures on September 2, 2009.  Since that time, various groups opposed the change in formal comments to the Board. Opponents include the Air Transport Association, the Regional Airline Association, and the Airline Industrial Relations Conference.

The TTD’s position is that the NMB’s policy is “clearly inconsistent with the longstanding, widely accepted understanding of a democratic election process in the public arena.”

I could wrap myself in that flag -- I guess. And as I read through the various filings, I understand the legal arguments being made. But I am not a lawyer.  So I am going to think about this in another way.

Majority Rule

The “majority rule” issue that is at the center of the TTD’s request seems to have a philosophical bent toward stability:  If a majority of workers in a class or craft want a union to be its collective bargaining representative, the union then has a mandate to bargain with the employer.  With less than a majority support, how effective can a union be in representing the work group?  If the ultimate weapon of the union is the ability to engage in “self help” (the RLA term for strikes, work stoppages, hiring replacement workers and other actions either side can take if the negotiating parties are “released” from mediation), then how effective can the union be in forcing the employer to improve pay and working conditions if more than half of the workers choose to work during a declared job action?

With nearly 150,000 airline industry jobs lost since 2002, it is easy to understand why labor is concerned about the decline in its ranks. Delta has long been a tempting target for unions. Only the pilots and two smaller groups of workers are now unionized.  Delta is a non-union airline by industry measures.  So unionizing the world’s largest airline could be a big step for unions trying to replenish their membership roles following the industry’s restructuring period.  Simply, labor wants to change the majority rule because union activists are those that vote. 

In AFA’s last election attempt at Delta, one assumes that 60 percent of eligible flight attendants didn’t vote because they knew that not to vote was a “no” vote. A clear majority said that they were not interested in changing the labor dynamic at the airline.  But the majority of the 40 percent who did vote supported the union. 

Now enter Northwest and its 7,000 flight attendants. Prior to the merger, they already were members of the AFA-CWA.  Add those votes to the mix and AFA-CWA should easily get a majority of the combined work force.

Fragmented Labor Meet a Fragmented Airline Industry

Today’s AFL-CIO is not the same force that it was during its "New Deal" heyday.  Then, the labor movement was consolidated and spoke with one voice.  Today it does not.  Two large and powerful unions, the Teamsters and the Service Employees International Union (SEIU), recently broke from the AFL-CIO to form a rival coalition.  That defection has created a fragmented labor industry in which the old rules no longer apply. Already, unions in rival coalitions have tried to “raid” members from other unions – something the old rules prohibited. Herein lies the rub.

Arguably, one of the fundamental issues that airline labor has struggled to recognize and reconcile in a constructive way is the fragmented airline market.  Yes, fragmentation leads to hyper competition, but it also creates an unstable industry structure.  This unstable structure has forced airlines to seek wage cuts and productivity gains from labor in order to prevent competing airlines from entering markets and stealing the incumbent carrier’s traffic and revenue - and to live to fight another day.

In my view, changing long-established rules that are intended to promote stability has the potential to exacerbate an already unstable situation. Consider the scenario played out by AMFA following restructuring at United.  Because AMFA is not an AFL-CIO union, it could raid - or threaten to raid - at will mechanic groups at those airlines where unions had gone along with deep concessionary agreements under bankruptcy or other financial pressure. In fact, it won a few elections along the way only to lose later when they failed to deliver on their promise of securing “snapbacks” and wage and benefit increases the industry simply couldn’t afford.

I have seen many airlines struggle in negotiations with AMFA-targeted groups.  In many cases, the company and the incumbent union could probably have reached agreement earlier but for the union’s fear that by agreeing to some perceived negative change to the agreement, they would invite a raid from AMFA hoping to steal their dues-paying members.  This created a destructive and mercenary element to contract negotiations that too often delayed deals and hurt airlines and their employees.

Another question worth asking, but unresolved, is if a majority rule provision were replaced whether a minority of the class and craft could then move to force an election to decertify the union?  (The RLA would seem to be silent on this subject) Imagine the destabilizing effect of that situation.  Just about any tentative agreement I can think of would have elements or aspects that may not be palatable to some vocal minority.  So if an agreement ultimately passes by a razor thin margin, the vocal minority begins a campaign to replace the union that made the deal, looking to a new union that will promise that it can accomplish what the incumbent could not.  And so it goes.......

I may be going out on a limb here, but I’d guess this is a scenario that the Teamsters have already thought through in trying to change the RLA.  The minority rule should allow for raids that could bring new members into the Teamster ranks.

Concluding Thoughts

There’s a real risk to the change the union seeks, particularly during a collective bargaining cycle like this one in which the expectations of employees are so far from most airlines’ ability to afford. There is enough instability in this industry without creating a situation that would bring even more.

Labor has asked the NMB to move toward quicker resolutions of cases on the docket.  But the debate over the RLA must also consider the perspective and concerns of incumbent unions who will be hard pressed to make a deal that offers airlines something of what they need – namely, greater productivity – without facing a raid from a hungry competitor.  A hungry competitor that will promise anything without the corresponding responsibilities of working with management and putting together agreements that serve the long-term best interests of the companies and their employees.. 

It is the burden of management to make very difficult decisions based on the competitive environment in which they operate.  In this labor environment, union leaders could very well face the same challenges and be forced to make decisions that are not in the best interests of dues paying members but in the best interest of the institution. And that would be just one unintended consequence of a change in the rules of the game in order to “possibly” achieve a short-term gain.

The alteration sought by the TTD would prove to be a bad NMB policy change I fear -- particularly when one of the most important goals of the new NMB is to resolve cases in a timelier manner. 

Nibbling on a Little Crow While Watching Eagles Fly

Yep, I was one of those observers not long ago suggesting that the current revenue environment would challenge certain carriers’ liquidity.  While not specific on those carriers I believed to be marginal, the supposition was always US Airways, United and American.  In that order.  Of the three, it was understood that American had more options as it had not yet played the cash for miles card. 

Well, that story played out yesterday when AMR announced that it had secured $2.9 billion in new financing, in part by selling a billion dollars worth of frequent flier miles to Citigroup. Meanwhile United is hinting that more liquidity raising efforts are ahead and Delta is in the market for $500 million.  American’s announcement makes it clear that the credit window remains open for carriers that have quality unencumbered assets to pledge and a reputation for paying their bills. But, I remain unconvinced that the window will stay open for all carriers operating today. 

The same day, American announced network and fleet changes I see as important steps the carrier is taking as a decision nears on its immunized alliance with British Airways. Those changes also can be read as important to the ability of American to forge a closer relationship with JAL. 

The Changing Face of the Domestic Market

While St. Louis has been a hub in name only for American in recent years, yesterday’s announcement that it would stop serving 20 cities out of Lambert and reduce departures to 36 per day pretty much provides the final eulogy for the former TWA.  Now if Delta would only do what it should and pull Cincinnati down to a similar size, much of the necessary work on dismantling unnecessary and redundant secondary, mid-continent hubs will be done. 

Unlike Delta, American has historically owned a strong position in New York; therefore, its announced changes to that critical dot on the airline map were minimal.  And assuming that American’s immunized alliance is granted, New York promises to be one supremely competitive market between STAR, SkyTeam and oneworld carriers in each the domestic and international markets.

Speaking of Alliances

American has absolutely no choice but to counter Delta’s rumored bid for JAL.  The opportunity to make London and Tokyo bookends to a focused domestic network provides the airline the opportunity to finally take advantage of Asia and sell Europe, Africa and the Middle East like their aligned peers. 

It’s no secret that US legacy carriers have their problems. But trust me when I say that the US carriers are productive, nimble and agile when compared to JAL.  At this point, it appears that American would be working in cooperation with, British Airways and Qantas to court the Japanese airline.

JAL needs major surgery.  But assuming that JAL survives the procedure, its recovery requires a presence in all major world regions.  That is why I like the fact that each of the critical players in the oneworld alliance are involved.  As Japan is almost certain to become an open skies country in the coming months, a healthier and allied JAL is critical.

For those concerned about competition in Tokyo, let’s not forget the presence of STAR in the form of ANA.  For those crying about poor little Delta, let’s not forget that Delta remains the largest single carrier in the world in terms of revenue.  For those that may cry foul over competition in the North Pacific, let’s not forget about Delta’s SkyTeam relationship with Korean.  And a case can be made that Seoul has become a more powerful hub than Tokyo largely because of JAL’s weakness and Korea’s aggressiveness. 

Lots of Happenings at American

This latest news is interesting in part because American has been forced to make many changes the hard way as its competitors cut costs through bankruptcy.   American has managed through crisis after crisis all the while toting around a cost and an alliance disadvantage versus most of its legacy peers.  Moving to renew its fleet in the midst of a nasty economic cycle is bold. 

But more impressive to me is the steady, targeted focus on the balance sheet that made yesterday’s liquidity raise possible. It’s not all pretty there. Management continues to struggle to come to agreement with unions on new contracts that won’t exacerbate the company’s competitive disadvantages, and that’s all the harder when union leaders continue to make demands that could not and cannot be met given the competitive environment.

Making this even harder is explaining that the improved liquidity position is only because of borrowing, not that the company has suddenly found the recipe for outsized profits.   

Labor:  This Is a $2.9 Billion DIP Loan……Without the Consequences for You

It is safe to say that no other US carrier could accomplish this type of a capital raise at this time.  Any near-term concerns that analysts or observers might have about American’s ability to meet its obligations should be quelled.  Clearly American management believes in the company’s future or it would not be investing in it.  After all, the quest of any company is to produce a return on that capital.

American just leveraged the future.  And if I am a union leader there I would want to tie my industry-best lot among the US legacy airline world to the carrier that just put its money where its mouth is.  To continue resisting changes critical to the company’s future profitability only leads to the propagation of the status quo. 

Yes, I’d make some demands. When the economy and the industry do recover, I would insist that some of my members’ earnings are tied to company performance.  That is real leverage – not the illusory leverage unions try to create by promoting the false belief that past concessions and 1990’s wages relative to inflation should be restored in an industry vastly changed.

There is ultimately going to be a recovery.  Like American’s decision to order aircraft anticipating the recovery, if I am labor at American I would want to get my negotiations done sooner rather than later.  Just think how little incentive there will be for companies to conclude negotiations during an economic upturn given the losses suffered over the past 8 years.  As I have written before, I am astounded at how much time labor spends negotiating downside protections versus provisions that enable the members they represent to participate financially on the upside – a scenario that promises much more than any negotiated increase in wage rates.

More on this. 

“Go Ahead, Bite the Big Apple; Don’t Mind the Maggots”

Yesterday, as I was awaiting a report from the Institute of Supply Management on August manufacturing activity, I was working on a piece I titled:  “Government Buys Junk; Consumer in Funk; Airline Recovery No Slam Dunk.”  But after reading Ann Keaton’s piece in the Wall Street Journal on how jetBlue and Lufthansa are looking for a code share deal, I started thinking about all the pieces in play in the New York market and, as it happens, of the 1977 Rolling Stones tune “Shattered.”

Was it US Airways’ that said “my brain’s been battered, splattered all over Manhattan?”  Or AirTran talking about “rats on the west side, bed bugs uptown?”  Was that Continental murmuring something about “all this chitter-chatter, chitter-chatter, chitter-chatter ‘bout shmatta, shmatta, shmatta -- I can’t give it away on 7th Avenue?”  [But I can in Newark]  I do think I heard Delta saying, “to live in this town you must be tough, tough, tough, tough, tough!”  And I am sure I will hear from American “don’t you know the crime rate is going up, up, up, up, up” if it is not granted an immunized alliance with its transatlantic partners.

A Long and Overdue Reshaping of the Competitive Environment Gets Underway

It began on August 11, when AirTran Airways announced a deal with Continental to vacate Newark and give its slots and one gate there to Continental in return for slots at New York’s Laguardia and Washington Reagan.  A day later, Delta and US Airways announced a monster deal in which US Airways will give up 125 pairs of Express slots at Laguardia in exchange for 42 pairs of slots at Washington Reagan and rights to fly to Tokyo and Sao Paulo.  Both swaps involve no cash and have no impact on the Northeast Shuttle operations run by each US Airways and Delta.

The Delta – US Airways swap all but ensures that Delta will surpass American as the largest carrier at Laguardia.  By any measure of market concentration, LGA will continue to have ample competition.  For Delta and US Airways, the deal gives each carrier the tools to build out markets they believe are market strongholds.  Some say that a split operation (Laguardia and JFK) for Delta is a mistake.  But I disagree.  Winning passenger loyalty from offering expanded domestic services at LGA should translate into making Delta a clearer choice for passengers to choose the carrier when traveling to international destinations from its operation at JFK.

Absent this kind of deal, there is not much that can be done to increase domestic flying at any of New York’s three major airports.  Applying US Department of Justice standards to determine market concentration, Laguardia, JFK and Newark would be considered concentrated or moderately concentrated per the Herfindahl-Hirschman Index.  And JFK has limited space to for an airline to run a large domestic operation because of the extensive international operations that occupy the critical late afternoon/early evening hours.

Given all of the constraints of the New York aviation infrastructure, the airlines involved in the slot swaps have taken a proactive approach to advance their competitive strategies.  By recognizing their individual strengths and weaknesses, the airlines involved will be better positioned when a recovery gets underway.  If the government says you cannot merge, then engage in binge and purge. 

Today’s environment does not afford any carrier the luxury of presence everywhere and pricing power nowhere.

Congress and the Regulators

Because these transactions require regulatory approval, I fear that critics will claim that the deals would give the carriers excessive pricing power in those markets. 

But look at the data. According to the Airline Transport Association, system passenger revenue is down 21 percent, or $12.5 billion when comparing the first seven months of 2009 to 2008.  Add in the $3.1 billion the industry has brought in from those damn fees that everyone likes to write about, and that means revenue is down $9.4 billion. 

Where is the pricing power?  Where is the gouging?  And when will the politicians and regulators take airlines at their word when they say they need change?

“People dressed in plastic bags.  Directing Traffic.”

Neither Ponzi nor Pyramid, but an End Game Nonetheless?

Liquidations and/or Use of the Failing Carrier Doctrine?

On the day when Bernie Madoff gets sentenced to 150 years for orchestrating the financial fleecing scheme that put its namesake, Charles Ponzi, to shame, I am pondering the balance sheets of airlines. And it comes down to this: some carriers have little room to maneuver. Investors (read: credit) are not lining up to provide new capital without demanding ransom in terms of collateral or sky-high coupon rates well above those paid in other industries.

Ponzi and pyramid schemes work by gathering proceeds from one group of investors to pay off earlier investors. It is no small irony, then, that much the same has been happening in the airline industry for years. The financial scams fall apart when they run out of money to pay new investors. In airlines, the end result is pretty much the same. Airlines continue to seek new capital even as previous investors fail to earn a respectable return on their investment. It’s not illegal, but neither is it sustainable. Indeed, it is fast becoming apparent that capital is quickly tiring of this industry and its inability to sustain profits, return its cost of capital and thus reinvest in itself at market rates.

In an industry that has succeeded mainly in destroying decades of capital, the end game for some airlines may be near. To inject new funds into its operation, United Airlines’ required collateral was reportedly three times the $175 million in cash it raised. More troubling yet -- the coupon rate on the new debt was 12.75 percent. Even with exorbitant collateral demands and above-market interest rates, new investors were willing to pay only 90 cents on the dollar for the security, which equates to an effective return to the investor closer to 17 percent.

At the same time, American announced it will sell $520.1 million in debt . American’s collateral requirements will be hefty, but slightly less than twice the amount it plans to raise. According to the Associated Press, American’s debt is investment grade based in part on the assets pledged as collateral. Therefore, American will pay significantly less for its capital than will United, even if the investor interest level is on par. But with corporations of this size, and of this importance to the US economy, “investment grade” ought to be the baseline, not the high bar. That’s not the case today. Earlier in the year, Southwest -- the industry’s only capital-worthy airline -- was forced to pay in excess of 10 percent on its loans. Wow. In other circumstances, that might be considered usury.

Data Points

Market perceptions, and cold, hard cash, demonstrate a new industry pecking order is emerging. Allegiant, AirTran, Alaska and SkyWest – airlines many Americans have never flown -- each today have a market capitalization greater than that of either United or US Airways.

In Spring 2009, Fitch’s Airline Credit Navigator outlined current liquidity and expected debt maturities for airlines over the next three years. It found “most of the biggest U.S. airlines ended the first quarter in "unfavorable liquidity positions.”

For three of the top seven carriers (US Airways, American and United), this liquidity ratio fell below 15 percent of trailing twelve month revenues - a benchmark commonly used to target an optimal amount of cash to be held on the balance sheet.

According to Fitch’s data, American, Continental, Delta, United, US Airways, Southwest and jetBlue held nearly $17 billion in liquidity at the end of the first quarter of 2009 (and with a market capitalization of $13.7 billion for the same group of carriers, the market says that a dollar today is not a dollar tomorrow). Southwest and Delta constitute two-thirds of the group’s market capitalization.

Assets are only one part of the disturbing picture the Fitch data paints. The other half is liabilities. Together, the carriers have debt obligations of nearly $12 billion due by the end of 2010. And these obligations come at a time where negative free cash flows are anticipated for the foreseeable future.

Take as one example Delta, which claimed title as the world’s largest airline following its merger with Northwest. While in the first quarter of this year Delta did not fall below Fitch’s relatively arbitrary liquidity rating. Fitch nonetheless downgraded the debt ratings of Delta and Northwest on June 25 to reflect “intense revenue pressure” and expected negative cash flows. As a result of its combined balance sheet with Northwest, Delta has a stronger absolute cash balance relative to the industry, but still faces nearly $5 billion of fixed debt obligations through 2011.

The shift of capacity by the U.S .legacy carriers to international markets has suffered from poor timing. For United, its exposure to once lucrative trans-Pacific markets is even more painful as the geographic region is closest to intensive care. By comparison, American and US Airways are fortunate to have little relative exposure in the Pacific. But the winner is likely the new Delta which, with lots of eggs in all international baskets. This diversification will certainly produce better results than either Northwest or Delta would have achieved individually.

Renewed Consolidation Focus Based on an Old Tool?

In prior eras, the airline industry has relied on the “failing carrier doctrine” to combine companies on the verge of collapse or unable to meet debt obligations. That doctrine might be dusted off and used again during the next 12 months. Precedent shows mergers and acquisitions are viewed more favorably – with fewer concerns about competition – when the economy is in a swoon and airlines are at greater risk of going under.

US Airways chief Doug Parker is not alone in making a case for consolidation. United’s Glenn Tilton is also in the chorus. Both carriers are on Fitch’s list of those in the “liquidity danger zone.” United and US Airways still have some room to maneuver, but recent attempts to raise capital have proven, in the airline industry particularly, money is getting increasingly expensive.

We may be entering a new era in which the “failing carrier doctrine” no longer applies. Instead, we are now facing the “failing industry doctrine.”

On Second Thought

One of the big issues related to mergers not discussed enough is the preservation of the tax loss carry forwards that each airline has accrued (accrued losses can be used to offset profits in future years). So in the short to medium term, the industry may resist the urge to merge because a change of control could or would have significant tax ramifications. If this is the case, why not apply the failing carrier doctrine to anti-trust immunity?

First, there is no doubt we will see additional capacity cuts, with the next round showing up in the schedules for fall of 2009. This industry is not shrinking because it wants to, but rather because it has to. By the time airlines cut further at the end of the summer travel season, the industry’s two decades of economics-be-damned growth may be nothing but a memory of bad decisions gone by. Then the U.S. airline industry can finally get down to the business of being a business. Or be resigned to failure.

As I have written time and again, in this economy, capital will determine the survivors. Access to capital is the lifeline airlines need now. Those who control that capital are sending a message to legacy carriers, and that is they will pay dearly for funding until they can demonstrate a sufficient return for investors.

Republic Airways Holdings, Inc.

Recognizing the importance of that lifeline might shape the airline industry of the future. Republic Airways CEO Bryan Bedford seems to already be moving that way. As a result of his purchase of Midwest, Bedford now has investment firm TPG on his board - - basically, capital now in is the role of decision maker.

Whether other carriers can accept that kind of change might very well decide the future of the industry and whether some airlines even survive. Right now, that future for many airlines and the hundreds of thousands of people they employ is anything but bright.

Keep in mind, the next industry shakeout is not reserved for the big players alone. Look for entities other than the five legacy carriers (American, Continental, Delta, United and US Airways) to have input into any new architectural renderings of network structure. And input will not only come from Alaska and from the so-called low cost carriers, (Southwest, jetBlue and AirTran) but also some regional carriers like SkyWest.

And I keep coming back to Republic.

1st Quarter Earnings Calls: Unbungling; Unbundling But Not Unshackled

Three legacy carrier earnings calls down, two to go. Southwest and Allegiant have reported. So has SkyWest. But the clear takeaways are difficult to discern. Everyone wants to know if the industry has reached a bottom. But there are no clear answers while we are still in the middle of an economic tsunami. For all those who have said the domestic market is stabilizing (me among them) the only hard evidence on our side right now is that the environment is not getting worse.

Every carrier is supremely focused on unbungling their operations. Yes, unbungling. Because we all know that operations at many carriers have been a mess, with many factors to blame. And, as painful as the process has been, many carriers are making progress getting their operations and costs in order. US Airways led an amazing turnaround focused on its once-troubled Philadelphia hub. Many very good reforms are underway at United. And all things operational are improving at American, albeit at a slower pace than at some of their legacy peers.

Moreover, virtually every carrier – except for Southwest – remains committed to continuing the unbundling process and to maximizing secondary revenue sources. Today, Delta went so far as to announce a fee for the second checked bag on international flights -- becoming the first in the industry to do so. The industry is unequivocal that the fees will stay and that where opportunities are present to do more, they will. Further, a heartening storyline has emerged regarding distribution, where carriers increasingly see opportunities to move away from paying intermediaries to sell their tickets and to turn that model on its head so that airlines get a fee from the middle man for the right to sell their product.

The United Call

I do not have the transcript of this call in front of me, but this was a most interesting listen. My favorite part was when Morgan Stanley’s Bill Greene posed a very fundamental question that went something like this: With planned capital expenditures less than depreciation, how are we supposed to think about United, or the industry, on a going forward basis from an investment point of view?

Or, as Helane Becker of Jessup and Lamont put it: Should UAL have public equity at all, or instead raise only debt capital from the public markets? Then there was Ted Reed of TheStreet.com, who was blunt in asking whether, just maybe, United had “shrunk too much.”

Good questions. Unfortunately, they are ones that the current environment makes very difficult to answer with conviction.

In my last post, I questioned the airline industry’s access to capital given fragile economic fundamentals in an industry that, over its long history, has failed to produce so much as a dime in retained earnings. In my view, the industry is at a tipping point in which smart investors should question the structural integrity of some carriers and networks during what amounts to a market stress test . . . one that just might reveal which airlines have few moves left to shed uneconomic capacity.

This is the “new and irreversible development” I referred to, a trajectory that might change only through serious effort to remove the many regulatory shackles around this industry. Some necessary changes might not be politically popular -- increased foreign ownership of US airlines comes to mind – but the industry’s options are narrowing when you consider that revenue trends do not hold out much immediate promise.

Looking ahead, with credit tight, where will capital – affordable capital – be found unless it is from another participant in the same industry? If companies are struggling to realize any return on invested capital today, then what happens as interest rates continue to increase in lockstep with capital scarcity? As standalone companies, there is just not enough room for individual carriers to maneuver around an income statement that holds little promise of further significant reductions in the short-term. Based on Greene’s point, even United seems reluctant to reinvest much of its own, and limited, capital into a business that does not hold promise of a reasonable return.

This is not just about United. This is an industry issue. And not just a US industry issue . . . it is fast becoming a global industry issue.

In North America, Air Canada has long been the poster child of an airline that needs an influx of foreign capital necessary to keep the company relevant in the global market place. Air Canada faces some unique challenges: namely that nearly two-thirds of Canada’s air travel demand is found in just eight markets.

Meanwhile, the Delta/Northwest merger is fast proving that the combined entity is far less vulnerable than either of the two carriers would have been had they not merged. Just think about the vulnerability of each Delta’s and Northwest’s respective hubs to the economies in the interior of the US footprint.

With US Airways the exception among the legacy carriers as to international market exposure, we as a nation should at very least acknowledge the reality that globally-oriented airlines need to be just that. I’m not talking about domestic airlines with global extensions -- we tried that, in a way, with TWA, Eastern and Pan Am . But absent any real alliances that left each of them dependent only on US-origin traffic, those carriers suffered a common fate -- shut down in sagging economies as capital became tight.

Concluding Thoughts

Following an industry life cycle of value destruction, US legacy carriers now face a dilemma: whether to invest in their core businesses or not?

As the US airline industry is now six full years into a major restructuring, the tendency to legislative and regulatory gridlock did not get restructured. An inflexible labor construct did not get restructured. Policies promoting the fragmentation of the US domestic market did not get restructured – until the airlines themselves took on this task through capacity reductions in redundant markets out of necessity. The infrastructure, whether it be ATC or the airport system, did not get restructured. And the historic mindset that capital will be forever recycled among manufacturers, vendors, labor and government imposed actions did not get restructured.

In truth, 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.

At a minimum, government should take a very serious look at where this industry sits. The US airline industry is not asking for government handouts. Rather it is my view that this industry seeks nothing more than the same rights to operate as virtually every other successful US industry selling to the global marketplace is permitted.

Few shackles unless consumer harm can be proven. Going backward will result in significantly more dislocation for virtually every stakeholder remaining in the industry today as it begins with an industry even smaller than today’s.  It would be a shame to waste six years of some very good work.

Empathy for Ron Gettelfinger

What, Swelbar showing empathy for a labor leader? Yes. In fact, my feelings are not dissimilar to the emotion I felt for airline labor leaders a few years back, when the solvency of so many carriers was in question and some of the biggest went on to file bankruptcy. Trust me, no one wanted to be a labor leader in the airline industry following 9/11. Today, I’d bet that there is no human being that wants to sit in for Ron Gettelfinger, the damned-if-you do, damned-if-you-don’t President of the United Auto Workers (UAW).

On Tuesday, Fox.com posted a piece entitled: With GM's Wagoner Ousted, Should Union Head Have Met the Same Fate? In my view, absolutely not. In the early days of Swelblog.com I wrote a piece entitled Self Help in which I praised the negotiating strategy of the UAW. This was on October 11, 2007, long before the spike in oil prices, the freeze in credit markets and the downturn in the economy that has left consumers with little to no confidence in the future and contributed to a decline in consumer spending.

The contracts Gettelfinger negotiated at GM 18 months ago attempted to address many of the competitive disadvantages the US auto industry faced. Those negotiations resulted in, among other items: 1) freezing base pay for 4 years; 2) shifting a significant share of the burden of retiree health care from GM to the union; 3) creating a two-tier compensation structure in return for job protections for the current workforce.

Think about these terms. Unpopular? Anti-worker? Unsuccessful? Yes to all. But the new contract made significant ground in bringing about some of the necessary changes to a collective bargaining agreement born of decades of negotiation between the UAW and the Big Three carmakers and costs that had spiraled out of control. These were well-intended fixes to contractual language written when times were different – but the fixes allowed some historical language to remain. This was well-intended language that would only produce real benefit if the industry grew.

It is like pilot scope clauses: there is only value in the language when it happens. Some might argue this point – don’t scope clauses restrict airlines from even considering new routes/planes/partners when it would potentially violate scope – even when company growth presents itself? Only growth is not in the cards for U.S. auto industry, - or the US airline industry - at least not unless, and until, there is real change.

Just like the automakers, the legacy airlines continue to negotiate from outdated language. Most of these contracts were written when technological changes facilitated productivity improvements that could offset pay increases, and when targeted capacity growth would build airline markets where there was no evidence that the market could support new air service. At the time, collective bargaining agreements did more to ensure that labor would take advantage of technology change rather than to adjust work rules and expectations to account for the advantages new technology brought.

Unfortunately for the airline industry, there is no techological change on the horizon that will increase the speed of the aircraft in a meaningful way.

I have written many times here that the auto industry cannot make the necessary changes without a court-assisted restructuring. The same was true for the airline industry. The problem is that, even in bankruptcy, the airline industry still left decades-old and largely irrelevant language in their collective bargaining agreements. Bankruptcy was effective in dealing with the low-hanging fruit, but did not do enough to position the airlines for long-term success.  Simply, the flexibility to match the work force to the demand environment was not negotiated.

So here we sit with significant negotiations to be done at United, American, US Airways, Continental and AirTran. No labor leader at any of these carriers has stepped up the way Gettelfinger did 18 months ago when he was willing to challenge decade’s worth of old-labor ideas and ideals in return for better positioning GM in tomorrow’s world.

Lee Moak, the head of the pilots’ union at Delta, came closer than any other union leader in acknowledging that change was inevitable as the Delta-Northwest merger moved forward. Moak did what any first-mover in a merger world would do and negotiated the best deal for his members. The problem is that Moak did too good of a job given the state of international markets. I only hope he can hang on to what he negotiated.

We have new contracts getting done across the industry. Interesting and different mindsets at Alaska and Hawaiian have produced some very different agreements. Southwest ground workers have ratified a deal. Southwest has announced a tentative agreement with its flight attendants.

And Southwest this week revealed details of an agreement with its pilots that in my view will prove to be a mistake – with the company caving to the union and giving pilots too much specificity in scope. Southwest did show amazing restraint in agreeing to wage increases, but I had expected it to come without “handcuffs” on code sharing. With this contract, we can see quite clearly how Southwest is aging and facing many of the very same labor struggles that have long dogged the legacy carriers.

I feel for those employees that have “given back,” whether through concessionary contracts or at the demand of a bankruptcy court. But that doesn’t change the fact that the give back was from a level that was unsustainable and would have occurred, eventually, come hell or high water.

This current negotiating period is important to both management and labor. Hopefully, the airline industry will produce leaders like Gettelfinger that recognize that tomorrow has different challenges than yesterday, and that labor leaders have a crucial role in negotiating contracts that protect the workers who helped build the industry, while at the same time ensuring that US aviation can be competitive in the future.

Some call this approach “eating their young”. I call it smart. Because there is nothing that Gettelfinger and the UAW can do today to fix what was done 20 years ago. But labor leaders in the airline industry should do everything in their power to avoid the situation automobile labor now faces. Labor leaders who succeed in the long term will be those who set realistic expectations for their members, resist the urge to overpromise and, like Gettelfinger, recognize that change is inevitable and that labor can and should be a key player in making it work.

More to come.

Stuffing Romy's Thanksgiving “Turkey”

Over the past month, news emanating from Wall Street has muted some of the stories taking place in the airline industry. So on this Thanksgiving morning, I thought I would stuff the bird with some stories that leave me scratching my head...

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Delta - Northwest Deal Is Real

This link will lead you to information available at this time: http://www.newglobalairline.com

Still Pondering a Northwest – Delta Combination

Swelblog.com: The First 183 Days

Time flies. Never did I think I would write anything with a title, “A Flying Pig”. Never did I think that this year’s four number 1 seeds would make it through the Regionals only to meet at the 2008 Final Four in San Antonio. Never did I think that it was possible for one man to dominate the game of golf as we get to witness Tiger Woods’ rewrite of the record books before he is 35. Never did I think that writing could be this much fun as it comes quite hard for me.

I did think that some of what I would write would not be popular with all. I did think, and do think, when I began to write this blog that we were about to embark on one of the most important and necessary journeys along the path of change since the industry was deregulated.

Still Pondering a Northwest – Delta Combination

Pardus Capital, the activist hedge fund, arguably started the consolidation ball rolling with its expressed interest in seeing a Delta and United combination. Today, $2 bln hedge fund Pardus suspends withdrawals just as we begin to think about a Northwest – Delta combination yet again. Capital preservation.

Where to start when pondering a Northwest – Delta combination sans an agreement on pilot seniority? And speculation of a reworked pilot deal? And announced capacity cuts in the face of oil price realities and macro economic weakness? And with CEOs that have spent considerable amounts of personal and political capital since this deal first became news in January 2008? Capital preservation.

I simply do not know where to start on this one. It made sense before and it makes sense today. My thoughts concerning this deal have me stuck on the negotiating positions of all involved. A lot has been said by the CEOs and the MECs that is going to be – and I am assuming that there will be another attempt to revive the deal – most interesting this go around. Some compromise will be necessary.

Labor versus Capital

Just as the Pardus play was summarily dismissed by Captain Moak, Pardus’ interest along with the interest of all capital are watching this deal. The patience of many was tested as Delta and Northwest tried to forge a deal along the path of least resistance and give labor the say that they demanded following the Pardus play last fall. Well labor had their shot to act in the shaping of the deal and there were many cheerleaders, including me.

But not everyone was a fan of the deal cut, including me. I am all for employees having a piece of the deal as it gives them skin in the game and begins to mitigate some of the us versus them mentality that is all too prevalent in the management and labor worlds today. I am not for negotiating significant fixed increases in rates of pay that will stand in the way of capital appreciation. Particularly in today’s economic world where revenue generation is sure to be challenged.

I am encouraged by the decisions of respective players in the industry to begin the process of cutting capacity. This was another area of the first deal that was troubling. But again, economic forces prevail.

The catalysts driving consolidation have been identified and all remain. But another catalyst, capital, is about to emerge and retake the top spot. And on a day when Pardus Capital is in a capital preservation posture.

Just another irony in this deal. And on a day where we liquidate the first US airline in this cycle. And on a day when Champion Air announces it will cease flight operations on May 31, 2008. And.......