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.