Northwest – Delta Back On?

Susan Carey and Paulo Prada report: Northwest Reworks Plan For Merger With Delta - WSJ.com.

Clearly, more to come.

Not Time For “Hush Money”

The Status Quo Is the Issue; Not Firing CEOs

Today I received a comment from Carmen on my latest blog post. Carmen is a frequent reader here, student of the industry and a person that is not afraid to say and write what he believes. Even if it means that he is not the first person other pilots seek out in the crew room when he checks in for his trip. He suggests that invoking force majeure might incite a revolution – and I paraphrase.

Carmen is not a current member of his union and his philosophical differences with his union have been written here and on multiple blog sites that cover the industry. Carmen, like others, point to the lack of a people element in the US airline business today is what stands in the way of a successful and sustainable industry when contrasted to the industry we know that perpetually teeters on the edge.

I Said I Would Not Acknowledge

Regarding Carmen’s comments, I responded in a pretty matter of fact tone. After responding, I started thinking back to Bob Reed's piece in Business week last week entitled: It's Time for United's CEO to Go; UAL should keep United Airlines in Chicago—but send Glenn Tilton, its deal-hungry CEO, packing. OK, for those that know me, you know that I have an affinity for Tilton. Do I agree with everything that has been done at United under his watch? No, I do not. Where I absolutely agree with Mr. Tilton is that the status quo does not work for any stakeholder group. Period.

So Mr. Reed, my question to you: are you singling out Tilton or are you joining hands with certain industry stakeholders that are looking for any leverage to maintain the status quo and perpetuate the self-imposed gridlock toward change which afflicts the US industry? It seems to me that any question you asked in your article could have been asked of Richard Anderson at Delta, Doug Steenland at Northwest, Doug Parker at US Airways and yes, even Larry Kellner at Continental. And I am going to include Gerard Arpey of American and I will discuss that later.

And Mr. Reed, I am sure glad you mentioned Continental and its transformation. From my read, about the only thing in your article that comes close to even describing the competitive reality that faces this industry each and every day is the fact that Continental survived the “controversial and oft-despised” Frank Lorenzo era. And I quote further: “the airline survived his tenure (along with two bankruptcies) and eventually morphed into one of the country's most successful large carriers. Now Continental is enjoying solid financial returns, improved customer satisfaction, and stronger employee relations. What's more, its CEO doesn't want to merge and is even ordering new planes”.

Pretty bold statement on the intentions of Continental’s current CEO who has done anything but rule out merger efforts should other carriers in the industry decide to join hands. Then again, it is hard to talk about joining hands when you are encumbered by a golden share that also serves as golden handcuffs. And even bolder to insinuate that other airline CEOs would not want to achieve the same thing that took Continental 10 years to begin fully realizing. And for that matter, that type of success is what CEOs want to be paid for. But the type of transformation that continues at Continental is more akin to a marathon than a sprint.

Where This Whole Post Started

Like today, the industry then was engaged in a shakeout and survival of the fittest when Continental began its transformation. For any Continental, PEOPLExpress, Frontier, New York Air, Texas International (see comment section) and Eastern (did I leave any carrier out?) employee of the time there are plenty of horror stories. But 20+ years later, we continue to witness the legacy carrier that first underwent necessary quadruple bypass surgery to transform itself to a US industry leader.

The only thing different today is that the transformation is more difficult. In the 1980s it was important to build a network, with a cost structure, that gave a carrier some form of presence/dominance within a particular US geographic region. Today it is about building an entity that maintains is preeminence in the US domestic market while spreading its reach to all world regions with a cost structure that allows it to compete where external forces are increasingly complex. Mr. Reed, airline labor, airline consumer activists and Rep. Oberstar would all have us believe that today’s airline world should remain focused on Altoona rather than Auckland; Duluth rather than Dubai.

Carmen in his comment to me mentions pandering and appeasement against a backdrop of a leadership void. Where I am stuck, is that I think there is finally leadership within the industry and there is a vision as to where this industry needs to morph to. When there is leadership and vision, there will be reasons to say no. And today’s CEOs are saying no to a return to the way things have been. They are saying very clearly and in their own way, no to the various issues that led each of their respective entities into bankruptcy or restructuring.

Definitely Not the Time for Hush Money

I asked Carmen in my response: “but isn't what labor wants is an historical return to pandering and appeasement? Throwing good money at the age old problems only makes people happy in the short term. Then the industry has to return and ask for concessions because they can no longer afford the hush money that was negotiated. I am all for saying no and trying to find a way to break this age old pattern. And I think finally this industry has a group of CEOs that can and will say no rather than push off the tough decisions that have been deferred over the past 3-4 negotiating cycles. Popularity contest -- NO. Necessary action – YES”.

It seems that the Northwest employees were more than willing to vote Steenland out in the event of a Northwest – Delta deal. And apparently he was willing to drop his “ego” and step aside in the event of a transaction that he and his board deemed in the best interests of all stakeholders.

My bet is Mr. Tilton and others would/will do the same in return for a deal that satisfies a vision. United has been out front in the consolidation view to be sure. But, United has been out in front suggesting they would put down capacity in the event of high oil prices also. And that simply sounds like managing the business to me. Mr. Reed pleads with United’s Board to “give Tilton his due, provide him fair compensation for time served—and begin the hunt for an executive who can build on his accomplishments and take an independent airline to greater heights”.

But Tilton’s work at United is not yet done and therefore the United Board should no more pay Tilton his hush money to walk today anymore than the prior United administration should have paid the United pilots the hush money to end the dreaded “Summer of 2000” that ultimately landed the carrier in bankruptcy. And certainly Mr. Arpey should not be paying his pilots, flight attendants or any other employees the amounts of hush money they are seeking over an executive compensation plan designed by American's Board. A compensation plan that could have been altered by the Board, not by Mr. Arpey and his management team.

Breaking the boom-bust cycle is much more important than perpetuating the status quo. Maybe we should invoke the force majeure clause on the self-imposed gridlock toward change which afflicts our industry …

To call for one CEO's head when an entire group of industry CEOs recognize that the status quo just does not work is well.......unfortunate.

More to come.

Invoking the Force Majeure Clause: Oil Taking Its Toll

...and Thinking About Northwest - Delta

As I prepared to write this week, I had outlined a piece around the NCAA basketball tournament generally and Selection Sunday specifically. I was going to talk about how the Delta-Northwest deal, destined for a #1 seed a month ago had become a “bubble” deal over the past month because of a less than stellar end to the conference schedule and “one and done” in the conference tournament. And then I was prepared to place them in the last 4 teams out group.

But rather than just isolate Delta-Northwest, I think it is time for the industry to think about consolidation in yet another way. Typically we think about consolidation as two entities combining through merger activity. But there is financial consolidation as well. It is similar to what we experienced during the 2002-2006 period where an industry contracts on its own volition. It is probably time to begin another round of contraction as the price of oil makes it very difficult for the industry to maintain its current service offerings.

Introduction to Force Majeur for Those on Capitol Hill
and a Refresher for US Airline Labor

From where I sit, the NCAA tournament will make great theater as always but will pale in news as to what I see coming for the US airline industry. In my last blog post, I purposefully left the piece hanging on an issue for labor and the politicians to seriously consider: “Politicians and labor should think real hard about the fallout that could stem from the current economic environment [read to include high oil prices] versus what the perceived fallout could be in a consolidation scenario”.

As the market opened this morning, oil traded near $112 per barrel. Whereas the price has pulled back from those highs, it is becoming clearer that oil is going higher as the highs get higher and the lows get higher. Heeding warnings from the industry that capacity will be closely examined at these prices, I began to write this piece.

Then as I was writing, I did my usual check of the headlines as the day wore on. In one check of the day’s news, I read, as everyone should when you are not reading here to steal a Maxon line, a blog post by David Field of Airline Business on his blog named appropriately Left Field. Mr. Field cites quotes directly from Delta’s Anderson, Northwest’s Steenland and Continental’s Kellner each questioning the size of their respective networks in the face of $105 per barrel oil.

Defining Force Majeure

Typically we do not like to talk about force majeure issues in the industry, but I am thinking it is time. Wikpedia defines force majeure as:

Force majeure (French for "greater force") is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as war, strike, riot, crime, act of nature (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract. However, force majeure is not intended to excuse negligence or other malfeasance of a party, as where non-performance is caused by the usual and natural consequences of external forces (e.g., predicted rain stops an outdoor event), or where the intervening circumstances are specifically contemplated.

Time-critical and other sensitive contracts may be drafted to limit the shield of this clause where a party does not take reasonable steps (or specific precautions) to prevent or limit the effects of the outside interference, either when they become likely or when they actually occur. A force majeure may work to excuse all or part of the obligations of one or both parties. For example, a strike might prevent timely delivery of goods, but not timely payment for the portion delivered. Similarly, a widespread power outage would not be a force majeure excuse if the contract requires the provision of backup power or other contingency plans for continuity.

A force majeure may also be the overpowering force itself, which prevents the fulfillment of a contract. In that instance, it is actually the Impossibility defense.

The understanding of force majeure in French law is similar to that of international law and vis major as defined above. For a defendant to invoke force majeure in French law, the event proposed as force majeure must pass three tests:

Externality

The defendant must have nothing to do with the event's happening.

Unpredictability

If the event could be foreseen, the defendant is obligated to have prepared for it. Being unprepared for a foreseeable event leaves the defendant culpable. This standard is very strictly applied.

Irresistibility

The consequences of the event must have been unpreventable.

A Non-Lawyer Discussion of Force Majeure

Force majeure (French for "greater force") is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as war, strike, riot, crime, act of nature (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract.

Name any airline that spent time in bankruptcy and was required to file a plan of reorganization that correctly estimated the price of oil in that plan. United assumed $55 per barrel and that was $50+ per barrel ago. Northwest just recently emerged and it assumed oil $40+ per barrel ago.

Based on the assumed price per barrel of oil, contracts were entered into with the regional affiliates of the major carriers. The price of oil has long been described an uncontrollable expense for the airline industry. Is this an act of nature, I do not know. What I do know, is that this rise in the price of oil is beyond the control of the industry. Moreover, this recent price push makes oil more expensive than it was on an inflation adjusted basis in the early 1980’s and we know that the period will always be defined as an oil crisis.

However, force majeure is not intended to excuse negligence or other malfeasance of a party, as where non-performance is caused by the usual and natural consequences of external forces (e.g., predicted rain stops an outdoor event), or where the intervening circumstances are specifically contemplated.

There is no negligence here by the industry or malfeasance by anyone. This is the market at work. The causes for the oil price increases are many but cannot be isolated to any one catalyst. And none of this is as predictable as rain on a hot summer night.

Time-critical and other sensitive contracts may be drafted to limit the shield of this clause where a party does not take reasonable steps (or specific precautions) to prevent or limit the effects of the outside interference, either when they become likely or when they actually occur.

To say that the industry has not taken reasonable steps to prevent or limit the effects of the outside interference would ignore the painful attempts to address cost structures that were simply not sustainable. As Jamie Baker pointed out last week in his research note, since 2002, the price of oil will have increased some $25 billion for the US industry while savings from labor over the same period amounts to $7 billion.

Through the restructuring period and practices that continue today, the industry cut costs to combat a declining revenue environment and to address the rising cost of oil. The industry has used hedges; pared domestic capacity as a way to reduce exposure to an unhealthy domestic market; increased international capacity as a way to increase revenue; cut back on amenities; cut distribution costs to a minimal level; reduced ownership costs; cut employee wages; improved employee productivity; improved asset utilization; terminated pensions; outsourced flying; outsourced maintenance; outsourced administrative activities; and experimented with hub structures to name a few of the hundred of cost cutting activities that have been employed.

Most, if not all, reasonable steps have been taken to prevent or limit the continued losses for the US industry – except for that outside interference called oil.

Included in the definition: A force majeure may also be the overpowering force itself, which prevents the fulfillment of a contract. In that instance, it is actually the Impossibility defense. As for the externality, the industry has nothing to do with the event’s happening. As for unpredictability, this industry has done everything it can do to counteract its influences. As for irresistibility, the consequences of the oil price rise were not preventable.

Delta and Northwest

About one month ago, I remember Bob Fornaro, CEO of AirTran Airways, referring to proposals made to his pilots in an oil-denominated way. Like Fornaro, Messrs. Anderson and Steenland I only hope that you tell your pilots and all other employees that the terms of the agreement you made in order to have a single collective bargaining agreement in place are now off of the table. You made an agreement where some of your pilots would receive 30% pay increases at $85-90 oil, surely those agreements should not be made at $105 oil. Invoke force majeur.

$20 per barrel ago, you said that your networks would be largely kept intact. Now today you seem to be hinting that the size of your networks may need to be reconsidered. Let’s just face the fact that there are too many regional carriers and too many hubs and as a result too much money being spent on serving communities that cannot economically support the frequency of access to the air transportation system today. Cutbacks like those Doug Parker of US Airways suggested were probably unavoidable at some point and at $105 oil, well……invoke force majeur.

In each case, these suggested actions seem prudent and can easily be explained by an unpredictable externality whose consequences could not have been predicted by you. Invoke force majeur.

Consolidation is still right. But as everyone has said it has to be the right deal for all stakeholders and given the externalities facing the industry, much harder choices will now have to be made.

More to come.

The Era of Transition, and Hopefully Transformation, Is Top of Mind for British Airways as Well

Industry cycles often adopt a theme – and often too late. The late 1990’s through, at least, the first three quarters of 2000 was arguably a bubble period where revenue generation was too good to be true – even in hindsight. Yet the US industry added billions dollars of costs believing that the revenue trajectory was sustainable. For US carriers, the period from late 2001-2007 was a restructuring period. A period necessary to begin making wholesale changes based on the unrealistic cost structures that developed during the inflating of the bubble.

Now today, we find an industry that has indeed taken billions of dollars of cost out of any number of carrier’s respective operations. But it was clearly not enough to produce an industry structure that can profitably support all of the current players. All you have to do is read 2008’s best-selling daily horror novel named the Wall Street Journal to realize that we are on very shaky ground. And about the only thing we know for sure is that the revenue health of the US and global airline industries is inextricably tied to the health of the US and global macro economies.

Views from Willie Walsh

Back in October, I wrote the shortest swelblog.com post to date. And the themes from that post are the one’s I use most when speaking. In Transforming the Transatlantic Market Into a Transcon Market, I reference a Reuters article that interviewed British Airways’ Chairman Willie Walsh. In that post I characterize the story in the following sentences: “Clearly British Airways is (re)evaluating the best use of its capital as the current architecture of the transatlantic market is being (re)examined. This story comes on the heels of reports that BA is considering a major expansion of new services into the US market”.

In the Reuters article, Walsh uses the term transformational. Transforming the global airline industry is precisely what is being done in Singapore, Dubai, Abu Dhabi, Frankfurt, Paris, Amsterdam, Hong Kong and Sydney. It is precisely what Glenn Tilton of United, Doug Parker of US Airways, and now Richard Anderson of Delta and Doug Steenland of Northwest have been/are saying as well.

There are Many Parallels Between BA’s Views and US Industry Views…..

……and I will touch on a few.

Individual airline growth around the world is taking place in multiple ways. Among the elite Asian carriers, the robust growth is largely organic. The same is true in Latin America. Except for LAN who is expanding through both organic growth as well as providing a brand on which flags of countries with struggling airlines can rely on for access to the global air transportation system. In the Middle East region, it is all about organic growth. This region is blessed with geography, capital and a vision that I appreciate more today than I did just a month ago.

In Europe though, growth for the legacy carriers has largely come through acquisition strategies. Sure Ryanair and Easyjet are growing organically but they are not the answer to Europe’s global access anymore than Southwest, jetBlue and AirTran are in the United States. It is just naïve to believe that the low cost sector is that answer.

On March 7, 2008 the Financial Times wrote a very good story entitled: BA looks to play the consolidation game. It is from this story that I will attempt to draw out some of the many parallels that exist between BA and the thoughts on industry structure espoused by the leaders of the US legacy carriers.

For British Airways, global travel is everything. For the US legacy carriers, global travel is quickly becoming everything as the US domestic market’s fragmented structure promises little to nothing in terms of profitable new business. But when BA looks at the size its principal regional competition (Air France/KLM and Lufthansa/Swiss) has grown to through acquisition, it, like its US counterparts, need to be concerned. They are big in virtually any metric imaginable.

While much is being written about what the new open skies agreement means for the industry in 2008, arguably the most important event for BA begins in December of 2008 when Lufthansa has a call option to begin buying BMI British Midland. With BMI comes a large London Heathrow slot portfolio that is sure to bring lots of interest from carriers around the globe. As BA moves to the brand new T5, and with the move the ability to move many more passengers, the slot issue is not lost on Walsh.

Like the US carriers, BA has shown very little growth since 2001. It has been engaged in its very own restructuring process. BA generates strong cash flow like the US legacy carriers but also relatively low returns on capital which also resembles the US legacy carriers. The FT article states that BA is readying for a growth period that is likely to be some combination of organic and acquisition related. In a theme that is quite reminiscent of what US legacy CEOs have been saying, Walsh is quoted in the article as saying "Some of the shackles have been removed," he told investors and equity analysts on Thursday, "we have not quite fixed the core business, but we are well on the way".

Ah, that core business thing again. To invest? Or not to invest? - and let the enterprise attrit into oblivion. That IS the question.

The FT piece expands on BA’s interest in BMI and goes on to say that an interest remains in Iberia. But outside of these two carriers, there is little interest in anything else European. Walsh states, "We are mindful of the opportunities consolidation can offer," he said. And his gaze is not only fixed on Europe”.

But Before We Go There – Yet Another Parallel

In a paragraph which caused me to pause and read multiple times, Walsh commented on the acquisitions made by each Air France and Lufthansa: "we look with admiration" at how both deals had generated substantial revenue synergies, a possibility BA had largely discounted, as it concentrated much more on the potential for cutting costs”.

This sounds a lot like what Delta and Northwest have been discussing. Network and revenue synergies first. I, along with many observers, have also struggled with the strategy outlined in a number of press reports which suggest that Northwest and Delta will maintain their current network structures. But after a period of domestic cuts and a restructuring of networks with a sharp focus on an international strategy, we will just have to wait and see whether the same synergies can be realized here in the US as are being realized in Paris and Frankfurt.

On US Consolidation and Views on the Regulatory Landscape

The article and Mr. Walsh offer views on US consolidation that are also in concert with statements made by US legacy carrier CEOs. "US consolidation would be a good step forward," said Mr Walsh, "it would benefit the US and the global industries".

There has to be a strong US industry for there to be progress in the next stage of transatlantic liberalisation and a dismantling of US restrictions on the foreign ownership and control of US airlines.

BA had a "good relationship" with its US partner American Airlines, but the development of any deeper deal was "inhibited" by the two groups' lack of antitrust immunity from the US and European competition authorities.

"There is evidence that the regulatory landscape is changing," said Mr Walsh, but it was not yet clear that it had changed sufficiently to make a fresh application for a deal with American, he said. "We will continue to look and examine."

Bringing Back a Few of My Favorite Glenn Tilton Statements

For those of you that have read this blog since the beginning, you will have seen these quotes used before. For the purposes of this blog post, the parallels between a US airline CEO and Mr. Walsh are certainly evident.

Glenn Tilton, UAL’s Chairman and CEO said in a speech to the Nikkei Global Management Forum in Tokyo: “If there is one imperative for every business in the global economy today, it is simply this: evolve, adapt, reinvent . . . or risk irrelevance in the global marketplace”. He went on to say: “As everyone here today knows well: the reality of our world is that globalization is relentless. Think of any industry represented in this room; choose any business listed on the Tokyo Stock Exchange; and one can be sure: it looks nothing like it did ten years ago; and looks nothing like it will ten years from now”.

In his Tokyo speech, Tilton asks the following question: “As globalization gives rise to new economic powers within the developing world, the real question for all of us operating in mature economies today is this: will the legacy systems that contributed to the success in developed nations in the 20th Century be an asset or an impediment to growth in the 21st Century”?

He goes on: “The airline industry is a perfect platform from which to focus this discussion, because it is subject to virtually every imaginable challenge -- every human challenge, industrial challenge, financial, regulatory, and security challenge -- throughout the global economy. And then, of course, we also contend with the weather”.

So BA, like the US legacy carriers have evolved largely by being pushed by economic and competitive forces to engage in a necessary restructuring. The restructuring was necessary to adapt to both a changed and hypercompetitive domestic market and to better prepare for a world that has been largely liberalized. But, the reinvention of former legacy airlines into entities that can thrive in tomorrow’s economic world is not complete. And that is clear for each BA and United and Northwest and Delta and others to be sure.

More to come.

First Labor Hurdle Cleared in Delta – Northwest Deal?

The Devil Will Be In The Details

As Delta Air Line’s Board of Directors prepares to meet tomorrow in New York, Nathan Hurst of the Detroit News reports that the pilots of each Delta and Northwest have tentatively agreed to a framework of a deal. As in all things difficult, the devil is in the details. But the story suggests that an agreement on seniority integration has been reached subject to membership ratification.

There is no mention of a construct of a single collective bargaining agreement but the article does suggest that the pilots will receive an equity stake and a voting board seat in the combined entity. In the event the tentative agreement is not ratified by the membership, a binding arbitration mechanism has been put in place.

Susan Carey and Paulo Prada report in today's Wall Street Journal that a number of other “deal issues” still need to be finalized including the size of the Air France/KLM stake, compensation for non-pilot employees, a premium for Northwest shareholders among other items.

In the Journal story, Carey and Prada write “Some industry executives have worried privately how zero capacity reductions and higher labor rates would hurt the rest of the industry”? I am an analyst that wonders the very same thing but as mentioned above, the devil is in the details.

But it sure looks like tomorrow’s Board meeting is important and maybe we can start to look at the details instead of wondering what they might be. Or, maybe we will hear as soon as today or tomorrow according to the Atlanta Journal-Constitution.

Continuing to Ponder a Northwest – Delta Combination

Over the past weeks, I have written about what I see as catalysts behind the current consolidation talk/activity that is enveloping the industry. In addition to the catalysts I have talked, as have many others, that the two biggest hurdles to a deal are labor and the regulators. Further I have addressed an influential member of Congress that supported open skies and increased competition in the name of consumer benefits but fails to recognize that a healthy US industry lies at the core of delivering those very consumer benefits.

The Labor Hurdle

Unlike the naysayers who continually point to labor issues as likely to derail any potential deals, I actually see labor as a catalyst to the current activity. Why you may say? Because simply, any enlightened leader understands that the next round of Section 6 negotiations cannot, and will not, make their respective members whole following the restructuring round of negotiations.

The industry is no position to return to labor the $11 billion in concessions made over the period particularly when faced with a fuel headwind of $14 billion over the same period. What labor can do in a consolidation scenario is to position themselves in multiple ways to address their most pressing near term concerns while doing their best to ensure that their members will survive the ongoing Darwinian Struggle.

The three most significant issues facing labor in any consolidation scenario are: 1) determining labor representation; 2) seniority integration; and 3) negotiating a single collective bargaining agreement. I recently wrote a post on the first two items which discussed the nuances of potential Delta merger scenarios. The next day, Susan Carey and Paulo Prada of the Wall Street Journal filed a story in which they write “Executives at Delta Air Lines Inc. and Northwest Airlines Corp. are trying to build a common labor contract for the 11,000 pilots at both airlines before they complete a merger deal, according to people familiar with the matter”.

Further they write, “Delta and Northwest want to quickly achieve the synergies that would flow from a merger and avoid a messy, protracted labor wrangle that could arise if they wait to get pilots' agreements after a merger were announced or consummated.”

What is encouraging with all of this news is that the current industry is working hard to address many of the issues that the talking heads of the industry like to use to create doubt. If a single collective bargaining agreement construct is agreed to, Delta and Northwest have placed a high hurdle for any deals that might follow. I guess Delta and Northwest are redefining what conventional wisdom has come to accept as a labor hurdle.

The Regulatory Hurdle

If the current “odds on favorite” deal plays out, nearly 14 months to the day after Delta began its work to fend off a hostile bid from US Airways, Delta will be put in the position of defending why a consolidation scenario makes sense for the carrier, and the US industry, versus pulling out the guns to explain why a deal makes no sense. Ironic, yes. Surprising, no. Aside from Atlanta and a good market position in New York, the Delta network is anything but an envy of the industry. As for Northwest’s network with it hubs in Detroit and Minneapolis/St. Paul, the best description of their domestic network remains – it is cold, it is dark and it is ours. Just not high traffic volumes to Fargo and my Duluth home.

In the link to the powerpoint presentation entitled “Proposed US Airways/Delta Merger Would Be Highly Anticompetitive” above, it is easy to see how Delta played on the small community air service fear. It is also true that a combination with Northwest will result in a very different competition analysis given the more end-to-end attributes of the two networks. My guess is the combination will be looking for similar synergies that US Airways recognized -- read fixed cost savings while not undermining the pro forma revenue line of the merger scenario.

It is true that the Atlanta and Charlotte hubs have significant overlap. It is true that Salt Lake City overlaps with Phoenix and Las Vegas. It is true that Cincinnati overlapped with Pittsburgh (particularly before the downsizing). I am not going to acknowledge the suggested cited competitive overlap between New York JFK and Philadelphia as problematic.

There have been some reports suggesting minimal reductions can be expected at any of the hubs utilized by either Northwest or Delta. Look at page 6 of the powerpoint presentation. If Charlotte and Atlanta served 90 similar points, just imagine what percentage of cities served at tiny Memphis are served by Delta’s Atlanta megahub? The same statement would apply between Cincinnati and Northwest’s megahub at Detroit. And this is before we throw Midwest into the network mix.

Yes the restructuring that just recently concluded removed some of the redundancies between the Delta and Northwest networks. When US Airways made that hostile play for Delta, traditional anti-trust analysis would have shown this combination (DL/NW) to drive a higher concentration of market power than most other possible combinations. And a Continental – United combination would create a relatively low measure of market power across their respective networks.

But Is This What Is Really Important?

I am actually troubled by my own post. I have just spent 1000 words talking about what happens inside the 48 contiguous states and not what is transpiring around the globe. I am not talking about competition for China traffic between US carriers with authority today and what Korean Airlines carries over its global hub at Seoul. I am not talking about the global elite carriers that have prospered while our carriers have languished in a fragmented and hypercompetitive home market. I am not talking about the prospects of Singapore serving London Heathrow and New York with a far superior product.

No, I just did what many will try to do and limit the analysis to competition at home and not around the globe. And isn’t it the economic forces of globalization that are really at the heart of change? The naysayers will continue to fight those forces. In the end the forces always win. And in the end it really is about what structural changes need to be made to ensure that the US is in best position to regain a world leadership position. Let’s really think this through before dismissing it out of hand like Congressman Oberstar.

More to come.

F + E = LPP^DL: Fairness and Equity; Seniority Integration; Union Representation; and Lee Moak Again

In a Delta Air Lines Deal, Labor Protective Provisions Were Board Approved Before the Law Was Passed

Well, leave it to Susan Carey, along with Dennis K. Berman and Paulo Prada, of the Wall Street Journal to again write, and break the most recent period of silence surrounding a potential deal between Delta Air Lines and Northwest Airlines. In the same story, she reports that the preliminary talks that have taken place between United Airlines and Continental Airlines “have grown more serious”.

Whereas news on the deal side has been quiet, I have also noted the deafening silence from Lee Moak, the Chairman of the Delta chapter of the Air Line Pilots Association. My guess is Captain Moak is doing what all labor leaders should be doing and that is preparing for what is arguably going to be the most important period for organized labor since the passing of the Airline Deregulation Act.

A Recent Law Was Passed…..but the tenets had already been adopted by the Delta Board of Directors

SEC. 117. LABOR INTEGRATION. (a) LABOR INTEGRATION- With respect to any covered transaction involving two or more covered air carriers that results in the combination of crafts or classes that are subject to the Railway Labor Act (45 U.S.C. 151 et seq.), sections 3 and 13 of the labor protective provisions imposed by the Civil Aeronautics Board in the Allegheny-Mohawk merger (as published at 59 C.A.B. 45) shall apply to the integration of covered employees of the covered air carriers; except that--
(1) if the same collective bargaining agent represents the combining crafts or classes at each of the covered air carriers, that collective bargaining agent's internal policies regarding integration, if any, will not be affected by and will supersede the requirements of this section; and
(2) the requirements of any collective bargaining agreement that may be applicable to the terms of integration involving covered employees of a covered air carrier shall not be affected by the requirements of this section as to the employees covered by that agreement, so long as those provisions allow for the protections afforded by sections 3 and 13 of the Allegheny-Mohawk provisions.
(b) DEFINITIONS- In this section, the following definitions apply:
(1) AIR CARRIER- The term `air carrier' means an air carrier that holds a certificate issued under chapter 411 of title 49, United States Code.
(2) COVERED AIR CARRIER- The term `covered air carrier' means an air carrier that is involved in a covered transaction.
(3) COVERED EMPLOYEE- The term `covered employee' means an employee who--
(A) is not a temporary employee; and
(B) is a member of a craft or class that is subject to the Railway Labor Act (45 U.S.C. 151 et seq.).
(4) COVERED TRANSACTION- The term `covered transaction' means--
(A) a transaction for the combination of multiple air carriers into a single air carrier; and which
(B) involves the transfer of ownership or control of--
(i) 50 percent or more of the equity securities (as defined in section 101 of title 11, United States Code) of an air carrier; or
(ii) 50 percent or more (by value) of the assets of the air carrier.
(c) APPLICATION- This section shall not apply to any covered transaction involving a covered air carrier that took place before the date of enactment of this Act.
(d) EFFECTIVENESS OF PROVISION- This section shall become effective on the date of enactment of this Act and shall continue in effect in fiscal years after fiscal year 2008.

As we move forward there will be lots of stories about labor issues, air service to communities of all sizes, domestic issues, international issues, consumer issues and of course the horror stories of past deals gone bad to name a few. I sincerely believe that “smart labor” recognizes that the current speculation of possible combinations is not just talk but may be their best hope to position themselves for the future. Naïve thinking that Section 6 bargaining will return to its historical nature – well it is just naïve.

As we have written here many times and in many different ways, the current industry construct does not work for many, if any, major industry stakeholder(s). Any concept of change is difficult to accept on both the emotional and rational levels for sure. Short- term displacements and pain for some -- yes. Being forced to step back and accept that tomorrow will be significantly different -- absolutely.

But the burning question for me is: is the implementation risk of a merger deal (seniority integration, single collective bargaining agreement etc.) any greater than a leader having to manage the expectations of any employee group that actually believes they can make themselves whole in the next round of Section 6 negotiations? I do not think so with the industry facing an oil environment that was imagined by only a few, a weakening economy, increased global competition, general lack of an investment thesis, presence everywhere and pricing power no where -- no matter who you are.

My guess is Captain Moak has taken the basic tenets (fairness and equity) of the Allegheny-Mohawk merger protection provisions to heart and is studying the same merger scenarios that his management is. The primary difference in his due diligence is that he is focused on seniority lists and not EBITDAR. In his diligence process, I am sure he is figuring how to best analyze and “game out” the combination that treats each his own pilots as well as all pilots of a combined entity fairly and equitably. That is what leaders do and in this case it is leaders from both management and labor.

The integration process has evolved over the years since the Allegheny-Mohawk Labor Protective Provisions were originally enacted. There have been more failures at adopting fairness and equity than not to be sure. But it is incumbant for labor and management leadership this time to ensure that career expectations are met for all employees. Simply this concept means that the relative seniority of a combined list is not significantly different for a respective employee in a combined entity than it is for that employee today.

On the labor side, rigorous analysis of seniority lists can be done ahead of an announcement. My only hope is that Moak is being joined by his counterparts in Chicago, Minneapolis/St. Paul, Houston and other airline corporate homes. From what I read, Moak understands that a short implementation period is a friend of the deal and a long implementation period is well – just look at US Airways. Moreover, if pilots and other employees are seriously interested in a piece of equity ownership of the new entity, labor should absolutely want a short implementation period too.

Yes, There Are Employees Other Than Pilots

What makes any Delta combination interesting is the fact that other than the pilots and dispatchers, the company is non-union. Delta is a company that has trumpeted the idea of fair and equitable throughout its existence whether in union avoidance strategies directly or in the day to day management of its various class and crafts of employees. Whether conscious union avoidance or not, along the way you have to walk the walk and not just talk the talk. And in Atlanta there has obviously been more walkin’ the talk than talkin’ the walk.

Just How Might Delta’s Current Non Union Workforce Play Out

Any deal led by Delta, or involving Delta, opens up a potential union representation box. Stated otherwise, if a combination of any class and craft of employees involves two different unions, then more than likely there will be an election; and if there is a combination of any class and craft of employees where one is union and the other non-union, and the unionized group comprises 35% or more of the total employees, then there would likely be an election.

In the Delta combinations being discussed, in each case the pilots are organized and members of the same union so no representation elections are expected.

But the flight attendants are a different story. The Northwest and United flight attendants are represented by the Association of Flight Attendants, AFA-CWA. And given that a combined entity would be comprised of 35% or more union represented employees, a representation election would likely occur. In that election the flight attendants could either vote for AFA-CWA, another flight attendant union or for no representation in either merger scenario.

AFA-CWA has an organizing campaign underway at Delta. The decision point for the combined work force would be simply: am I better off working under a collective bargaining agreement or under the wage and working conditions employed by Delta with its current flight attendant work force.

As for the mechanics, this one also has some interesting nuances to it as well. Delta’s in house maintenance work force is unorganized and the company has begun to increase its insourcing of maintenance work. Each United and Northwest have been outsourcing an increasing amount of their maintenance work albeit for different reasons. Northwest’s mechanics were in effect disenfranchised by AMFA’s poorly conceived decision to strike Northwest and therefore, based on my read of the LPPs, the mechanics of a combined Delta – Northwest entity would not trigger a representation election. In a United - Delta combination, an election would be triggered but who the incumbent union would be is not known at United because currently the Teamsters are challenging AMFA. Got that?

As for the ground and related employees, the scenarios for either a Delta and Northwest or a Delta and United combination are the same. An election would more than likely be triggered given that the International Association of Machinists and Aerospace Workers (IAM) represent the various class and crafts of employees in this broad group at each Northwest and United. The definition of class and craft here will be a story to watch and they include ramp, customer service and reservations.

And more than likely, a representation election would be triggered by combining the dispatch groups. Although small in number, they are governed by the same rules as well.

Bigger Concerns than Unionization

In addition to the capable leadership of Moak, Delta management is led by Michael Campbell, their EVP of Human Resources, Labor Relations and Communications. Campbell was Gordon Bethune’s head of labor at Continental. The issues of representation and combining collective bargaining agreements are complicated for sure - but in capable and professional hands.

Should the investment community be concerned of union representation at Delta? No. The investment community should be more concerned with seeing that labor integration is done as quickly as possible, whether it involves unions or not, as this provides the shortest pathway to realizing merger synergies. For Delta, fairness and equity has been adopted at the Board level. Now it is law and this is important for many to consider when the naysayers repeatedly and continually tell us all to remember the menu of historic disasters.

At the end of the day, what was important for Delta yesterday will carry the same weight for Delta tomorrow. Given the current lack of unionization at the carrier, some might say that something was done right. Delta has historically understood that higher wages in return for commensurately higher productivity has served its employees and the company well. This concept is a most important model for the industry to sustain and will promise to be a most important theme in any upcoming negotiation. Further, it will be important for any combination to maintain - and sustain - the highest productivity possible as the industry needs to continue to shed fixed costs and not add to them.

Isn’t that really the issue behind today’s consolidation push anyway? I think Delta and others have learned from past mistakes.

Pondering A Northwest – Delta Combination

A Thought for Today

How does the Northwest/TPG bid for Midwest factor into the various consolidation scenario considerations being explored?

On January 7, 2008, Liz Fedor, airline reporter for the Minneapolis Star Tribune, wrote a story suggesting that the Department of Justice would complete its review of the proposed transaction by January 31, 2008. In the article, Northwest suggests that the transaction is being reviewed by the DOJ much like a merger would be reviewed.

If approved, a Delta – Northwest combination just might receive more intense scrutiny than originally thought. Geographic concentration? I am not going to get too excited given the confluence of hub competition within this region. Or is this yet another reason why a decision regarding Comair – read Cincinnati – is being postponed?

Maybe an AirTran acquisition of Midwest might resurface? In today’s TheStreet.com, Ted Reed reports that PAR Capital has made a passive investment in AirTran. An AirTran/Midwest combination could be the low cost competition lacking in Minneapolis and Milwaukee? Just a thought and yet another example of the myriad of complex network issues that are sure to be scrutinized and considered as this consolidation round gets kicked off.

Converging Catalysts Making a Case for Consolidation?

Don’t look now…….

…..but there is something that feels different to me. In the vial, mix:

1. a lot of anxiety with commensurate posturing
2. non-traditional capital sources with skeptical labor
3. parochial tendencies against global economic forces
4. a weak dollar relative to foreign currencies
5. a weakening US economy and record high oil prices that appear to be the new standard

What do you get? Consolidation chatter that has the feel that it is real. Not talk; not speculation . . ..the real deal.

The US Home Market

The last meaningful airline consolidation period that involved multiple players began in the mid-1980s. Piedmont bought Empire; American bought AirCal; Northwest bought Republic; TWA bought Ozark; United bought Pan Am’s Pacific Division; Delta bought Western; USAir bought PSA; USAir and PSA bought Piedmont; United bought Pan Am’s London Heathrow authority; and American bought TWA’s London Heathrow authority. And that’s only the larger transactions of the period.

It is these transactions that formed the commercial backbone of the industry today. Nearly 20 years have passed since the industry recognized that economies of scope, scale and density would prove important to survival in a deregulated network industry. And it brought a significant regional concentration of services. Two Minneapolis hub carriers merged; two St. Louis hub carriers merged; and two predominantly East Coast carriers merged. Arguably, only Delta and Western represented an “end to end” merger of carriers.

In the years since, there have been periods of mainline capacity cuts, mainline capacity growth and regional carrier growth – explosive at times and largely facilitated by technological change and a disparity in labor rates. And by the late 1990s, we also had the explosion in new capacity by low-cost carriers, and not just Southwest. The growth by the LCC sector was largely driven by the gap in the cost structures between the upstarts and the legacy carriers.

That Was Then, This Is Now

We have talked on Swelblog.com about how the barriers to exit are greater for this industry than are the barriers to entry. We learned the latest lesson on this topic during the bankruptcy era when more-than-sufficient capital was available to fund each of the respective plans of reorganization.

I would be surprised if one serious analyst did not question the virtues of the reorganization plans. Costs were cut and network changes were made, to be sure. But now, compounding the price of fuel is a weakening economy. Airline share prices plummeted throughout the month of December. Thus far in 2008, virtually every market is off to one of the worst starts of any year on record. The markets know something. The only time I want to see the highs getting lower, and the lows getting lower, is in my golf score.

At some point, the current credit crisis, increasing food prices and the impact of rising fuel on the consumer pocketbook will begin to put real pressure on consumer disposable income. And this will impact airline travel. Consumers will simply be less inclined to travel, even if the ticket price is right. From everything I read, it is clear that planned capacity for 2008 has not factored in any meaningful loss of consumer disposable income, nor should it as the macro economic indicators continue to provide us with mixed signals at every turn.

The Catalysts for Consolidation

1. The price of fuel: Consolidate this time will mean consolidate, or risk getting smaller. Consolidate means eliminating any and all duplication of service and costs associated with providing that service. And no, it does not have to harm the consumer as I believe that the leadership of the US airline industry may actually be more concerned about further erosion of consumer confidence in the industry than the health of the economy and oil threats.

2. The US domestic economy: A weakening economy will only shine a harsher light on service to communities that can’t be operated at a profit. The US airline industry made a good bet on 50 seat capacity during the latter half of the 1990s. That bet helped the industry to remain connected during the dark days of 2001 – 2004. But if that capacity was not economic at $50 oil, then it certainly is not economic at $90 oil. I do not think the industry has any overt intentions to disenfranchise entire communities from access to the US air transportation system. Rather, the industry will rightly ask if the same revenue can be generated with six frequencies instead of nine or three frequencies instead of five.

3. Hyper domestic competition: If anyone on Capitol Hill ignores the simple fact that US airline industry growth has slowed at home because few profitable opportunities remain, then we will just keep having the circular conversation – mostly driven by parochial concerns – that rejects consolidation out of an irrational fear that it will limit competition.

4. Increased international competition: If not a catalyst today, incursions into our market from foreign carriers promise to become a pressure point in the near term. The immediate impact of the US-EU deal is not much more than a change of the three letter airport code from LGW to LHR. But LHR, like JFK, is important airline real estate. Given this fact, what will bmi do? It has significant slot holdings that are sure to be bid on by any number of carriers like BA, Virgin, Lufthansa (with rights to exercise), Singapore, Emirates or any one of the Indian carriers. Any one of these carriers can force a changed transAtlantic environment overnight if LHR slots land in their portfolio. And we will sit and watch just how BA will compete with its Open Skies subsidiary from non-LHR points on the continent. Game on.

5. Foreign Capital: Just as plenty of money was available from many sources to fund bankruptcy exits in the US, foreign capital will prove to be plentiful as the US considers merger partners and deal structures. I am not convinced that all alliance structures are set in concrete. This being said, the alliances are sure to be most interested parties in how the network structures might evolve. In fact, some of the competition among the alliances to secure their place at a preferred table may be the catalyst to satisfy the many currently unsatisfied shareholders in US airlines today.

6. Labor: In a recent post here (no, not the one where the Terrapins beat the Tar Heels), I wrote about the emerging leadership of Lee Moak, ALPA MEC Chairman at Delta. Since that posting, the leadership of the pilots at United and Northwest have also spoken. Why the rising volume in the union leadership ranks? Because I am increasingly convinced that the industry is moving beyond recognition that structural change is about to occur -- and with that recognition comes preparation. Unions representing pilots and the flight attendants signal that preparations are underway to address respective issues in any consolidation scenario. They are seeming to believe, as do I, that with a seat at the table comes opportunity.

7. Management: In their public statements, the leadership at each of the airlines is increasingly more resolute in their comments regarding consolidation. United’s Tilton and US Airways’ Parker have been joined in recent weeks by Delta’s Anderson and Northwest’s Steenland speaking out in support of consolidation. Keep watching – it appears that Continental’s Kellner and Southwest’s Kelly may not be far behind.

With jetBlue partnering with Lufthansa; Frontier under increasing competitive pressure in Denver; and AirTran certain to be challenged by a growing and more vibrant Delta footprint, this discussion is not confined to a single sector of the industry.

A Few Concluding Thoughts

There is just something different this time. If after taking billions of dollars of cost out of the industry’s operations, all we get is a two-year profit cycle, then there will have to be something different this time. Yes, we might get three years of profitability, but that’s not where the smart money is now. Already profit estimates for 2008 are being reduced by 40 percent versus what the industry earned in 2007.

The fact is, the industry already has used most of the rabbits in its hat. In 1985 the industry was in its infancy and the focus was on the domestic market as network size could not be built organically in the face of deregulated pricing. The same is true in 2008, but now we’re talking about network size in the global marketplace. Like in 1985, the networks that are necessary to survive cannot be built organically, not when airlines lack critical pricing power that stems from a fragmented and hypercompetitive home market.

Some very good things came out of that merger period in the 1980s. Some very good things will come out of this merger period as well. Yes, there will be dislocations and the loss of an icon or two. But we should embrace the change. It may be the last shot for many airlines. And it is a risk worth taking because the current model will only produce the same deaths by a thousand paper cuts.

Consolidation, Mediation and an Explanation

CONSOLIDATION

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

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

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

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

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

There Is Something Different In Atlanta

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

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

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

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

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

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

Concluding Thoughts

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

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

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

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

MEDIATION

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

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

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

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

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

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

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

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

Pretty sad story. No, a really sad story.

EXPLANATION

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

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

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

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

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

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

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

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