American: Limited Options, Pain Likely

Many readers have let me know that they are not as encouraged about the financial prospects of American Airlines with its massive aircraft order as I was in this piece. After all, the folks at AMR have problems beyond an ancient fleet, including an anemic revenue performance relative to the industry, high labor costs and all the other economic misery inflicted on many airlines in the past ten years.

I believe that AA’s aging fleet contributes some to the competitive disadvantage it suffers, and bright, shiny, fuel-efficient new planes will help impress customers and cut fuel and maintenance costs.  But what comes next?

Anxious analysts point to the fact that the price of oil impacts everyone, yet AA’s performance lags quarter after quarter. And there’s seemingly no significant movement yet in the airline’s labor negotiations, despite years at the bargaining table. With contract costs higher than anyone else in the industry, the company wants more productivity and smarter work rules in exchange for enhancements. All the while the unions have dug in either thinking or pretending that their righteous indignation will somehow turn the global economy and thus the industry around and recoup for labor all of losses in recent years.

American is one of the few carriers out there that didn’t turn to bankruptcy to shed some of these costs. In bankruptcy you cannot restructure the price of oil, but you can shed the leases of the least desirable aircraft, work with creditors to reduce debt and make changes to the labor agreements. But bankruptcy is probably not a realistic option now.

This is not 2002 with the shadow of 9/11 cast over the proceedings. This is not 2005 when the price of oil began its march upward and served as a catalyst for the bankruptcy filings of Northwest and Delta on the same day. 

No it is 2011, 10 years past the date that the country would like to forget.  Now, many airlines are flush with cash and don’t have the liquidity scares that were present when others filed. Many U.S. airlines are making money or at the very least are cash positive, despite jet fuel prices at the equivalent of a barrel of oil at $130. 

American, however, is on the wrong end of the industry today and some smart people question whether it will survive to see it’s much talked about long-term plans take wing.

So, let’s assume that Avondale Partners’ airline analyst Bob McAdoo was right in his May 16, 2011 analysis that American simply needs to shed capacity.  McAdoo cited US Airways as an example, where new management culled 20 percent of jet capacity.  But what he did not figure in is the likely relief American would need from its pilots union to make that kind of correction possible. More on that later.

American still relies on its regional partners to fly 37 and 44 seat jets because they are part of the pilot contract’s “scope” equation that determines the number of larger regional jets American can fly.  A 20 percent reduction in flying, much of it on long haul wide body routes flown by senior crews, would likely result in a furlough of up to another 1,500 pilots.  But American can’t do that either because of the same contract provisions that say American cannot drop below 7,200 pilots on the active roster.  And that doesn’t even take into consideration what the other union groups may have in their contracts that prevent the company from making the kind of changes that may be necessary to save the airline.

So what choice does American Airlines have?  Cutting that much capacity will be extremely painful for employees, and could put at least an additional 11,000 other American Airlines workers on the furlough list and in the unemployment line.  Cutting that much capacity would also redraw American’s network and route structure as we know it, giving its competitors greater strength in some cities and markets where American’s presence would dwindle or disappear.

McAdoo’s analysis calls for American to pull down certain Chicago to London flying; cut flights to Buenos Aires from multiple AA gateways; eliminate service to India;  reduce by half the flights from Chicago to China; and trim transcon service between JFK, Los Angeles and San Francisco.

McAdoo also challenges American’s “Cornerstone Strategy.”  In addition to flying a money-losing route between London Heathrow and Los Angeles, American is building its LAX presence using those inefficient, small regional jet aircraft. The same is true at Chicago and New York JFK.  In McAdoo’s view, Chicago is too dependent on connecting traffic at fares that are not compensatory.  Further he claims that in many instances, Chicago and Dallas/Ft Worth compete for many of same passengers connecting to points east and west and internationally and therefore are redundant service. 

Maybe it is time to de-emphasize LAX because the mix of traffic makes profitability difficult.  Maybe it is time to pull out of O’Hare because de-leveraging a hub is tricky particularly with an aggressive United hubbing in the same market.  Honestly, the only real big bang [removing fixed costs] American may have left is to massacre a hub like Chicago the way US Airways did to Pittsburgh and Delta did to Dallas/Ft. Worth.  The bigger the hub takedown, the bigger the fixed cost savings.

As for New York, American is now third in the market behind Continental at Newark and Delta at JFK and offers less connecting service than does Delta at JFK.  American’s relationship with jetBlue was supposed to address some of these competitive disadvantages but, as McAdoo points out, one can look a long time before finding many jetBlue to American connections in the various distribution systems. 

In the local New York market, AMR’s revenue per seat mile is underperforming when compared to peers at JFK and Newark.  Maybe it is time for American to pull out of JFK except for some select Trans-Atlantic flying, select transcon flying, and turn the rest of the region’s feed over the jetBlue.  But oneworld is depending on American to make New York the best market it can be for the alliance so this would be harder to do.  In fact with more 70-seat aircraft American could actually become more competitive there.  That would, again, depend on the pilot union’s willingness to do the right thing.

There is no doubt that a 20 percent cut in capacity would cause significant pain at American, even if it might be absolutely necessary to address the airline’s structural problems. But what if the cuts go even deeper?  What will be the impact on necessary American Eagle capacity that American has contracted for in the new Air Services Agreement?  If there is no Eagle feed, then there is no need for many mainline aircraft now dependent on the flow from points of all sizes behind and beyond the hub.  The virtuous circle spirals downward. 

At that point, American’s Cornerstone Strategy will be more about Dallas/Ft Worth, Miami and a little New York JFK and Los Angeles.  And the labor savings will come simply by cutting headcount.

To be clear, McAdoo says very clearly that labor costs are not the main driver of American’s weak results.  “Stopping the long haul bleeding has more direct leverage than trying to offset the losses by squeezing labor,” he said.  But in this scenario, labor is a large component of the fixed costs shed.

And on a strict profitability analysis, McAdoo may be right.  But contractual restrictions like pilot scope clauses – and American’s pilot scope clause is the most restrictive of network carriers – hamstring the company from making necessary tactical and strategic decisions. It is pretty clear that that American would not be flying as many mainline 136-seat aircraft today if it were able to utilize 70 seat aircraft like its competitors.  If that were the case, we may not be having this discussion.  And American Eagle would certainly not be flying 37 and 44 seat configurations in today’s fuel environment if not for the mainline pilot scope clause.

These small aircraft, “scope busters” to their critics, are used for many reasons and in this case they are used to average down the seat size of the regional fleet so that larger aircraft can be flown.  By the way, the competition flies 70-seat aircraft at will, primarily with the borders of the contiguous United States.  They can compete on frequency because they have right sized aircraft.  American does not.  Remember CALite?

Those who suggest that there is no labor problem at American should look no farther than the pilot agreement.  Among other common-sense adjustments, either American needs relief from that scope agreement in order that it can compete on equal footing with its domestic peers and provide the U.S. network feed to its oneworld partners that they demand, or the Allied Pilots Association needs to negotiate a regional-like contract for domestic flying as the A319s are delivered.  I wrote about these two options in March 2010 when I asked:  Mainline Pilot Scope: Will Regional Carriers Be Permitted to Fly 90+ Seat Aircraft?

It is unlikely that management at other airlines are going to make any deals that drive up their own labor costs only to have to go back and ask for relief later.

So there is not likely going to be the kind of labor cost convergence American hopes for in this round of negotiations; therefore, American may still have a labor cost disadvantage relative to the industry, particularly on productivity and benefits and scope.  This coupled with continuing economic challenges and pressure from investors and analysts will necessarily limit the extent to which American can sweeten its contract proposals to buy labor peace.  Purchasing labor peace only exacerbates the Ft. Worth carrier’s problems.

By all appearances, even the National Mediation Board recognizes that American does not have the money to satisfy the inflated demands of the unions that seem unwilling to discuss anything that smacks of a concession.

The upshot is that the unions at American may want to think hard about a draw-a-line-in-the-sand strategy that has done nothing but contribute to the airline’s under-performance. The contracts have to be part of an overall plan to get American out of the financial doldrums if the company is going to be able to execute the kind of financial and operational maneuvering that is absolutely necessary to win back the hearts and minds of the investment community – let alone customers and alliance partners.

A failure to make strategic, forward-looking agreements at the negotiations table now could have ramifications well beyond the individual contracts.  And there’s not a lot of time to waste in the process.  With limited options, the structural changes will prove painful.  

It Shouldn’t Be About Scope This Time – Rather Benefiting More Than One Stakeholder Is Key

It is Friday, August 26, 2011 and I am aboard United flight #701 bound for Albuquerque to participate in the 16^th Annual Boyd Group International Aviation Forecast Summit.  Many third rail issues get addressed at this widely attended conference and this year promises to be no exception.  The conference will address what Boyd refers to as futurist issues that will ultimately result in structural change to the architecture of the industry.  And I have been asked to help Mike open the conference along with Captain Michael Baiada.  I cannot wait.

What is significant about United flight #701? Seven years ago, a significant part of my career was assisting communities to attract airlines to begin new service. I was working with a talented air service development team at the Metropolitan Washington Airports Authority and my former firm, Eclat, and at the time there was very little domestic service to relevant markets that Washington Dulles did not have, whether regionally, mid-con or trans-con. 

But there were unserved markets like San Antonio and Albuquerque that were made interesting with regional aircraft service.  We approached United about a regional service from Dulles to the Land of Enchantment starting with a regional jet.  United agreed that the market could support a 50-seat aircraft on that route.  Over time, that route could support a 70-seat plane. Tonight I sit aboard a United mainline A-319 flown by a United mainline crew. 

If not for the ability to initiate a route that had fledgling demand with a right-sized aircraft, there would not be a mainline flight today that would get passengers from Washington Dulles to New Mexico in three hours and nineteen minutes. And this is but one example of many similar stories.

Today's pilot unions might look at this through a different lens.  How can we talk about any positive development stemming from the relationship between a mainline carrier and a regional partner?  In the view of many, any flight flown under the flagship name should be flown by mainline pilots. That's why unions negotiate scope clauses. That's job protection.

Or is it?

Ahh -- the law of unintended consequences rears its head in union halls.  Scope language is negotiated – in the mind of the pilot unions - to protect jobs.  But it does not.  Just note the loss of more than 800 mainline narrowbody shells and nearly 15,000 mainline flight crew members over the past decade and ask how successful the pilot unions have been at protecting jobs. 

More cuts will come if management negotiates the wrong scope language this time – language that limits their ability to remain agile when responding to competitive threats.  Domestic mainline network attrition will occur by 300-400 additional paper cuts per airline if done otherwise.  Nothing can artificially alter market forces.  Airlines have found ways around regulations governing international air transport and they have found ways around the biggest regulator of all – unions and scope language.

All I hear from negotiations at United/Continental, American and a renegade wannabe union challenging ALPA at Delta is that this round is about Scope, Scope and more Scope.  And I smile and wonder where the magic will come this time as lower cost competition remains keen to take full advantage of its labor and other cost advantages to find future growth opportunities.

Jeff Smisek, President and CEO of United Continental Holdings, recently lambasted the federal government - the other regulator - in a presentation at the Global Business Travel Association Convention in Denver.  Where might the U.S. look for a model of more effective air policy? Dubai, Smisek said, according to an article by Fred Gebhart in Travel Market Report.

“Emirates is a good example of an airline with a government that has good aviation policy,” Smisek said.
“Dubai recognizes the importance of air. It has an intelligent policy with a government that cares about the success of the air sector. It doesn’t throw up roadblocks, doesn’t over-tax it, and doesn’t beat it down at every opportunity. The U.S. government does all those things every day.”

 As usual, Smisek is spot on.

He talked of wanting to make United an airline that customers want to fly and investors want to invest in.  But while he spoke, Gebhart reports, nearly three dozen pilots and staffers picketed Smisek outside the conference, claiming that the company was "outsourcing jobs while creating unsafe working and flying conditions for employees and passengers.”

Nothing, and I mean nothing, disgusts me more than the actions of the US Airways and United/Continental pilots playing the safety card to create leverage in negotiating a collective bargaining agreement.  Is it really useful to try to frighten passengers? The vast majority of employees recognize that the best job security is a successful company and successful companies need customers to provide the revenue and shareholders to provide the capital.

Keep in mind that the pilots doing the picketing agreed to the language that allows the outsourcing of certain flying.  If not for the regional partners as a lower cost alternative, United, Continental, Delta and US Airways mainline operations would be but a shadow of the shadow they are today.

The United/Continental and US Airways pilot groups should get out of the court room and the arbitration tribunal business and get back to the bargaining table and negotiate an agreement that takes into account their companies' unique strengths and weaknesses.

Scope is not their problem.  Global competition is the challenge, and no scope language is going to protect them from that.  Any attempt to hamstring the airlines from making decisions that are in the best interests of all employees/stakeholders will only weaken the companies down the line. When it comes to United/Continental and US Airways ability to survive, Smisek and Parker are not the enemy; Emirates and Southwest/AirTran and Air Asia are.

Qantas Compared to the US Network Carriers

Speaking of being hamstrung by labor - the Qantas story playing out has strong parallels to the US network carriers that used the bankruptcy process to remake their operations during the 2002 – 2007 period.  The only real difference is that Qantas is quickly losing its competitive advantages to the emerging international “low cost” network carriers whereas the US network carriers lost their competitive advantage to the emerging domestic low cost carriers.

Last week Qantas outlined for the world the initial phase of an intended restructuring in its international operations designed to get its operating costs down – beginning with a new, high end, narrowbody intra-Asia operation with 11 Airbus aircraft.  Needless to say, Qantas CEO Alan Joyce’s decision to embark on such a strategy only poured more fuel on the fire burning between the kangaroo and its unionized pilots. 

Joyce is one tough leader.  Last week, Qantas announced that its profits doubled.  You know if you are making money why would you need to possibly embark on a radical, non-Australia based operation?  Because the international operation is under fire from Emirates and Air Asia and Virgin Australia and . . . Qantas announced that the mainline domestic and international – not subsidiary JetStar - made AUD 228 million, an improvement of 240 percent over the prior year period.  So what’s the problem?  The international operation lost AUD 200 million, meaning a very small domestic operation made a staggering AUD 428 million.  Therein lays the problem.  A money losing international operation, given the large fixed investment made, could quickly land a smallish carrier like Qantas in the memory bank.

Not only does Qantas suffer a structural geographic disadvantage of being at the end of a network system easily making its markets captive by the competition, it also suffers from a labor cost disadvantage, particularly in its international operations.  With successful competitors springing up in all sectors of Asian commercial aviation, the Qantas brand is potentially isolated and damned for extinction unless the network procreates outside of Australia.

This is why Joyce is making his move and doing so before it is too late.  And that is what the unions do not understand.  Scope is only as valuable as a met condition makes it.  Scope is negotiated before the future landscape is fully known and understood.  Airlines overpay for scope because the opportunity costs to shareholders are disregarded.  And this must come to an end because it only hurts the bottom line and job protection in the future.

Smisek, Anderson, Parker and Arpey (and maybe even Kelly as his airline gets more complicated) should take a long hard look at the history of scope.  Has it produced the desired consequences for employees, shareholders and the company?  Has it produced the kind of goodwill a company might expect from negotiating job protection measures in collective bargaining agreements?  Has it stopped unions from using the "safety card" to attack their own airlines by making customers leery of flying?

I challenge each of the US CEOs to resist caving into union demands for scope language in negotiations with the unions. There is no job security for any employee if the company is made weaker because management tried to buy labor peace with short-sided, limiting "job protection" clauses designed to make one employee group feel better.  In today's airline industry, the root of job security is the ability to fly profitably and with the flexibility to fly the right aircraft with the right costs on the right routes for the network.

More to come later this week.

Mainline Pilot Scope: Will Regional Carriers Be Permitted to Fly 90+ Seat Aircraft?

Today I had the pleasure of participating on a panel at the 35^th Annual FAA Aviation Forecast Conference, my second consecutive year taking part in one of the breakout sessions.  I shared a dais with the President of the Regional Airline Association, Roger Cohen, and long-time industry consultant, historian and photographer George Hamlin on a panel titled: New Decade......Dawn or Dusk for Regional Carriers?  I had the hotseat – responsible for discussing the reliably controversial subject of mainline pilot scope clauses.

It is my view that there can’t be an honest discussion on the shape or structure of the US domestic airline industry without talking about scope – the contractual clauses pilot unions negotiate to protect certain flying for their members.  I believe that this round of contract negotiations at major carriers will be the most important since deregulation, and scope will play a pivotal role as the airlines take a hard look at economics. And mainline pilot scope agreements are all about economics. 

Today’s industry architecture in which regional carriers fly large numbers of aircraft with 76 seats and less was drawn on the equivalent of vellum paper using compasses, triangles, French curves, triangular scales and protractors.  The working structure did not come about easily. First, earlier era scope clauses were relaxed during the late 1990s and early 2000s to permit carriers to deploy 50-seat regional jets between hubs and markets that could no longer support the economics of a mainline jet.  Delta and Continental had a significant head start on the rest of the industry in using these smaller aircraft because they had few limitations imposed through their pilot agreements.

Other mainline carriers: American, Northwest, United and US Airways, were late to the game.  Scope-relaxed competitors were using the 50-seater to claim traffic that was traditionally the domain of the scope-constrained carriers still limited to feed markets within the turboprop drawn 400 mile radius around a hub.  Now these little jets could overfly hubs, aggressively changing the competitive structure in the US domestic market.

So those carriers that needed the permission of pilots to compete on a level playing field recognized the need to relax restrictive scope clauses that limited what type of aircraft regional pilots could fly.  And that made the scope clause important trading currency for pilot unions that agreed to relax scope protections only in return for improvements in other parts of the agreement.  For example, when United pilots negotiated a new agreement in the Fall of 2000, the union leveraged scope relief to demand a weighted average 23 percent wage increase and two subsequent 4.7 percent increases, as well as a number of other contract enhancements that ultimately contributed to landing the carrier in bankruptcy.

I am convinced that, if not for bankruptcy, we would not be seeing mainline carrier’s regional partners flying aircraft 70 seats and greater in the numbers we are seeing today.  So if today’s architecture was drawn with outdated tools, then tomorrow’s architecture will likely require Computer Aided Design (CAD) software.  That, as old-school architects might say, is equivalent to replacing the pencil with a keyboard -- limiting in that the digital world requires exact inputs rather than the less precise nature of sketching. And that has real implications for pilots and the carriers that employ them. 

Tipping Point

From my perspective this next round of pilot negotiations could be the tipping point for scope:  the critical juncture in an evolving situation that leads to a new and irreversible development.  What if mainline pilots again treat the relaxation of scope as trading currency to make improvements in the collective bargaining agreement? Wouldn’t they ultimately be ceding mainline narrowbody flying in the US domestic market?  I think so. 

This approach would be a mistake for management, too, because scope relief has historically been assigned too much value in bargaining.  There is value in the shift of flying from the mainline to regional partners to be sure.  But the differences in labor rates between the mainline and the regional are nowhere near what they were before the last round of industry restructuring.  Domestic revenues continue to suffer, particularly compared to the revenue environment when values were last ascribed to scope relief.  And with little growth expected in US domestic flying, airlines must question where they’ll find the arbitrage.

I make this projection for domestic flying based in part on a comparison to historic growth rates. Today, the travel spend as a percent of GDP produces $35+ billion dollars less in revenue than did the high water-market in 2001.  Labor rate differentials between mainline and regional carriers are significantly smaller than they were in 2001.  Regulatory oversight of the regional industry will add expense that is not yet known or understood.  Negative media coverage could undermine passenger acceptance and willingness to fly regional carriers.  Most mainline airlines are ordering narrowbody equipment to replace aircraft in their fleets, not expand their fleets. And there are still thousands of mainline pilots on furlough.

Does Scope Produce the Intended Outcome?

In the most simplistic terms, scope is the definition of work for the class and craft of employees governed by the provisions of a collective bargaining agreement.  Its purpose is to provide job security for those employees.  But it is safe to say that most scope clauses produced unintended consequences.  Between 2000 – 2008, legacy carriers reduced the number of narrowbody aircraft they fly by 800, and more than 14,000 pilot jobs have disappeared.

So, one could argue that scope is just another example of protectionism that failed. As economist Henry George, a sharp critic of protectionist policies, once said: “Protectionism teaches us is to do to ourselves in times of peace what enemies seek to do to us in times of war.” 

Scope negotiations have been divisive not only between labor and managements but just as much between the unions representing mainline pilots and those representing regional pilots. Ultimately airlines must determine whether the 90-125 seat flying of tomorrow should go to the mainline or be flown by their regional partners. To arrive at the right economic solution, it is time for organized pilot labor and management to stop putting a Band-aid on problems.

The Boyd Group International recently released an interesting fleet forecast that looks in part at new aircraft orders. So far, the only area of real growth is in the 75-125 seat category.  Orders in other seat ranges are forecast simply as replacements from now until 2015.

Ironically, 2015 is when many regional contracts expire, primarily those for 50-seat flying.  These expirations could eliminate nearly 500 existing airplanes currently under contract between now and 2016; with the lion’s share coming off contract in 2015.  This is a conundrum for the regional industry for sure.  There will be a thirst for new flying.

It Is All About the Economics

Perhaps a better way than scope for pilot unions to think about job protection is to find the economics that will employ the most pilots at the mainline.  That challenge must acknowledge the fact that today’s industry is not the industry of yesteryear.  If the regional industry has been used as currency to cross-subsidize pilots at the mainline; and assuming that the trading currency is not what is was as we engage in this round of bargaining, then something has to give. 

There are two solutions as I see it:  1) relax scope in order to win bigger increases in wages, benefits and working conditions for pilots that remain at the mainline; or 2) embrace the absolute fact that contractual rates, work rules and benefits need to be lower for US domestic mainline flying.  That type of carve out can be negotiated.  Domestic market flying differentials can be the new trading currency used to adapt any pilot contract to the market realities of today.  There is no way to “perfume the pig” here; the mainline did something similar in 1984 in order to average down labor costs to facilitate growth.  When it was decided that the concept was not internally healthy, mainline pilot labor made the regional industry the new vehicle for cross-subsidization of mainline pilot terms of employment.

One trend is clear:  the industry’s pricing structure cannot now support labor rates that keep pace with inflation.  An unpopular message -- yes.  But there needs to be a structure in place that recognizes the different conditions in the US domestic market versus international markets.  This structure must recognize that not all flying is created equal, just as the airlines are coming to appreciate that a one size fits all operation is not financially sustainable.  There is a tremendous opportunity to put in place something better – if only the players at the table can let go of the past and come to terms with a new era in the airline industry.

Where Do I Come Out?

I recently saw a piece by Lori Ranson on the Airline Business blog titled:  “A New Line In the Sand” that cites comments by long-time Raymond James analyst Jim Parker on the future of scope: “As employee groups seek to regain some concessions made early last decade as a host of carriers spent time in Chapter 11, there could be some leeway in the size of jets flown by mainline regional partners,” according to the analysis.  James sees the potential to renegotiate current scope clauses, moving the dial from 70-seats to 90-seats.

I am not one to be on the other side of Parker often, but on this one I am.  I do not believe that the mainline pilot unions can afford to make another mistake.  Their arrogance toward regional jet flying led to their current predicament.  The economics of US domestic flying is simply much more difficult now for the legacy carriers.  If labor can’t let go of their memories of what the industry was 20 years ago to focus instead on where it’s going over the next 20 years, then they will have no one to blame but themselves if they fail to help position airlines – and the pilots they represent  – for success.  John Kennedy once said:  “Change is the law of life. And those who look only to the past or present are certain to miss the future.”

It won’t be easy for pilot union leaders to find a solution for a problem that they helped to create.  Just as the US Airways East scope clause defines small, medium and large regional aircraft, it is time to define small, medium and large narrowbody equipment necessary to profitably serve the domestic market. 

Once again, a call for pilot union leadership.  My view is that management is indifferent as to which pilot group does the flying.  I am thinking we are at that critical juncture in an evolving situation that leads to a new and irreversible development – mainline legacy carrier pilots performing narrowbody flying in the US domestic market 20 years from now – or NOT.

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.    

STEEEEEE….rike 1

It is September and pennant races are in full stride. The “wild cards” are up for grabs too as Major League Baseball works its way toward the playoffs.

In what is starting to be a rather ho-hum event in the aerospace/defense world: the International Association of Machinists and Aerospace Workers (IAMAW) have decided to strike the Boeing Company for the second time in three years. Is this a “yawn moment” or a precursor of things to come as the airline industry begins in earnest the renegotiation of concessionary contracts?

I am thinking this a precursor of things to come. Not quite sure if it is a yawn just yet. Whereas the aerospace/defense industry is quite different than the airline industry, there are similarities. The similarities begin with the simple fact that the manufacturers are a most important stakeholder in the virtuous circle of airline industry success; or failure as they represent an important cost element to the industry. For certain airline class and crafts of employees, a Boeing contract represents a trend.

Boeing is outsourcing. The airline industry is outsourcing. The world is outsourcing.

As J. Lynn Lunsford reports in this morning’s Wall Street Journal: “Resentment over outsourcing has been festering since the mid-1990s, when Boeing began a sweeping campaign to modernize its factories. The company has relied increasingly on contractors across the world to build larger and larger sections of its airplanes. By adopting many of the methods pioneered by the automobile industry, Boeing has been able to reduce the time it takes to build some of its jets by 50%.”

Resentment over Outsourcing - Airlines Too

Beginning in the mid 1990s, US airline industry labor has been festering over outsourcing too. First it was pilots and scope clause restrictions (1995 – 2001) that govern who could fly the first regional jets (50 seats and under for the most part). Those airlines with the fewest limitations placed large numbers of the small jets into service and garnered a “first-mover” advantage to be sure. There should be no mistake as to why US Airways was among the first to file for bankruptcy protection as the carrier had the most restrictive scope clause language and their network was attacked by those with freedom to overfly it. Finally, by 2001, relaxation of the scope limitations, allowing this size jet to fly, had largely been won in return for unaffordable fixed price contracts. Some mainline pilot agreements permitted the flying of 70-seat jets; others did not.

During the restructuring round of negotiations, scope clause limitations on the flying of 70-seat jets by regional partners were significantly relaxed. During that same period, the industry turned to outsourcing more of its heavy maintenance work as carriers looked to find ways to trim costs ala Southwest Airlines that has historically outsourced its heavy maintenance. Well here we go again. I see a pattern. And I do not like what I see because it just simply ignores fundamental issues.

Whereas the Boeing business/economic climate has been quite good and has produced significant profits of late, let’s not forget that the order book is full. Some say until 2017 and some say 2020. Whatever it is, profits can be forecast as the revenue stream can be calculated with some measure of certainty. Adjustments will need to be made to account for pre-strike delivery problems. And there may be some adjustments to be made for strike-related delays. But if the supply chain has been the issue, doesn’t a strike possibly allow certain suppliers to “catch up”? No matter, with the revenue stream reasonably certain it becomes a cost issue just like it did for the airline industry beginning in 2001.

Labor Arbitrage

This is what is at play for each Boeing and the US airline industry, isn’t it? As I turned to the financial dictionary online for a definition of labor arbitrage, this is what I found. Outsourcing: A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.

Notes:
Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant.

Damn, that outsourcing word again.

Where is the Crux of the Problem? Or Begin to Really Think About It

This is what few want to explore it seems. This round of negotiations simply needs to be a continuation of the transition/transformation period for the US airline industry and the contractual relationships with its labor force. I am not going to perfume the pig here. This is about a different set of wages and rules for the new workers that will comprise tomorrow’s industry that will be increasingly impacted by the ebbs and flows of global trade. The airline and aerospace industries can do better than the automobile and steel industries who acted much too late to protect the many good-paying jobs that remain.

And yes, there does need to be something in it for those that make up the industry today as well. The crux of the problem for labor as I see it is a lack of appreciation of the delicate balance between pay and productivity. Boeing is looking to balance an economic offer with flexibility if the business cycle requires it. Without recognition that balancing the formula is critical, the industry, and individual carriers, will continue what has become known as the "September Swoon" and miss the playoffs altogether. The “spiral down” - read job loss - will continue, strike or no strike. Markets will continue to be successful in finding the most efficient provider - they always are.

The simple question: why are job losses among the legacy US carriers approaching 200,000?

Or maybe the real crux of the problem is the seniority system. Ever wonder if tomorrow’s workers will really want such a system because it stands in the way an individual’s right to participate in the free market?

So I do think we will see strike 2. And probably a high, hard one that produces a swing and a miss that will cost someone the opportunity to continue on in the chase for the title of World Champion.

We are going to be bringing up many issues over the next couple of months.

More to come.

Maybe the Allied Pilots Association Is Really Onto Something

As I have written often and recently, the competitive position of the US legacy carriers in the global arena is a major concern to me. My thoughts on this topic are largely contained in a talk I gave at the ACI-NA International Aviation Issues Seminar in late November click here.

With the combined market capitalizations of the Big 3 EU legacy carriers (Air France/KLM, Lufthansa and British Airways) exceeding the market capitalizations of the Big 6 US legacy carriers (American, Continental, Delta, Northwest, United and US Airways) combined by nearly 33%, something clearly needs to change. And if Air France/KLM is successful in integrating troubled Alitalia into its fold, then the margin will become even more embarrassing for airlines carrying the US flag.

What a Cool Job

If there is a job I want in the airline space today, it would be the UPS whiteboard guy click here. Why? Because the UPS model, and the way they talk about it in their whiteboard campaign, demonstrates the futility of US carriers trying to operate successfully under collective bargaining provisions that are at least 35 years old. The UPS guy is not encumbered by existing lines or parameters as he connects UPS’s dots on the map. More importantly, the company actually connects the product to what customers want and demand –a novel concept! If there is a time to throw the past away (erase) and look to the future (redraw), it is now.

So maybe, just maybe, the Allied Pilots Association is on to something in its latest proposal to American Airlines. While I would never suggest that the APA “one liner” scope provision click here makes sense for the AA network as we know it today, anything that simplifies the ability of US airlines to implement commercial, tactical and strategic decisions to react to a changing domestic and global landscape makes very good sense to me. More importantly, anything that gets the mainline growing again is the best solution to some of the labor-related hostilities in the industry today.

Whiteboard Analysis – Regional and Codeshare Flying

What I like about the simplicity of the APA proposal is that it provides a starting point to begin serious negotiations – something the American Airlines negotiations are sorely lacking.

Given that scope defines who can do what flying necessary to operate the network, AA would get to go to the “whiteboard” and lay out for the APA the cost for feeder flying relative to the revenue generated by that flying, as well as the traffic and revenue contributions to its mainline domestic and international routes. As part of AA’s whiteboard exercise, they also get to demonstrate the value of revenue and traffic contribution the international codesharing partners now contribute.

If APA puts forward a scope proposal that reserves all flying for its member pilots and that makes economic sense, then there would be no need to scale back the current size of the network – all other things being equal. On the other hand, if APA is not willing to agree to terms – pay rates and work rules – that, when the interdependencies of all contractual issues are understood and at least match what AA pays today for this business, then the company would need to make some decisions about how much to shrink the current network.

Whiteboard Analysis – Mainline Flying

Let’s take it further.

The cost of the APA flying will ultimately determine the size of the network for regional and codeshare flying. The next calculation is the cost of operating the existing, or remaining, mainline network. If the network can sustain the 50+ percent increase in rates and all other items included in the union’s current proposal, then the APA will have realized its goal of restoring lost earning power to their members and establishing the pattern for the rest of the industry to follow.

Based on the cost of operating the mainline network under the APA proposal, there are two paths to explore on the decision tree: 1) if the remaining network cannot incorporate the cost of the entire APA proposal, then determine what portions can be operated profitably and the remaining network would need to be dismantled; or 2) determine how much increase in pilot cost the network could absorb and then ask the APA to adjust its proposal downward.

Whiteboard Analysis – What Is the Right Formula for US Legacy and LCCs?

This conversation is underway not only in union halls, but also on Wall Street and in corporate boardrooms. It is a topic on the Dallas Morning News’ airline blog click here. While Mr. Maxon sees the APA proposal is a bombshell, I see it as a starting point for negotiation that appears to be stuck. Historically, scope language is among the last issues negotiated in pilot contracts. Let’s switch it up this time and figure out exactly what unions want their respective companies to be - global leaders or niche players?

We talk a lot here about CEOs that are genuinely concerned about value creation versus value destruction – Glenn Tilton at UAL, Doug Parker at US Airways and Richard Anderson at Delta. But another CEO has been hard at work totally rethinking his business as well: Gary Kelly at Southwest. This past week, Kelly spoke directly to the “perils” facing the industry click here. Kelly and his pilots are also engaged in a discussion of scope language as their business is about to get more complicated with proposals for international flying and code shares as a way to boost revenue production.

With little to no clear investment thesis in the core business of airlines, UAL this week declared a special dividend to its shareholders click here, much to the chagrin of its employees and a very passionate Holly Hegeman who writes about the action in her blog, Planebuzz click here. If nothing else, Tilton and UAL are consistent in their focus on the shareholder – often the most ignored of stakeholders in the airline industry. While I can see the employee view, at-risk compensation is a way around this angst.

So unless the business of the business starts to have a clearer line of sight to the customer – meaning delivering a product that the customer is willing to pay more for – then the payment of special dividends, the selling of wholly owned subsidiaries, consolidation and/or a slow liquidation of US flag airlines will continue. You know, money talks and #$*&! walks.

Concluding Thoughts

I really think the APA is on to something with its scope proposal. Let’s talk about scope first among the tough questions that will determine the future shape of the US airlines. Once that question is answered we can move on to a meaningful discussion about how to better compensate a workforce because the current seniority-based, hourly rate system simply is not effective in the modern market.

Structured properly, this round of negotiations may just lead to finding the right network architecture to make the US carriers global leaders again. Or not. But doing business circa 1970 is not going to get it done. So let’s remove the clutter and the underbrush and start with a clean whiteboard. Maybe even do what the European carriers do and create business units that carry cost structures to match the sub markets they serve because they recognize that a one size fits all just does not work. And this approach could indeed be done with pilots on the APA list – just ask Northwest and US Airways.

Let’s stop saying it just cannot happen. It can.

Swelblog.com Taxiing Into Position

Welcome to Swelblog.com . For some of you, the name Swelbar is recognized. For others it will be new. Following nearly 30 years of airline industry experience, mostly in the consulting world, I hope to use this space to focus on the most talked-about issues in the airline business: the people running the airlines, the labor unions, customer service, competition and finances in one of the most interesting industries in the world.

Of course we may deviate some to talk about golf, college basketball or wine and other vitally important things, assuming there are any.

I did not start this blog to win friends or influence anyone. I’m a data guy, and I’ve been studying the industry long enough to come up with some strong opinions . . . many of which aren’t popular in either boardrooms or union halls. My approach is analytical because, in my view, the numbers don’t lie.

I want to start with scope, which has powerful implications for airline fleet use, labor and the bottom line. I spent a lot of time studying labor contract “scope clauses” in a prior incarnation, looking specifically at the issue of scope clause constraints on market development in 1999. Some agreed with the analysis, others did not. Some were dignified in their responses to the analysis, others were not. I expect much of the same here and it is my hope that the site can in time lead to a cogent, coherent and congenial discussion on the many issues and opinions that are sure to rear their head.

I rejoined the scope debate in a recent issue of Aviation Daily. In August, a well known and respected regional airline industry analyst raised issues with pilot scope clauses as an impediment still plaguing certain carriers. That piece was followed by a response from a current leader of a pilot labor organization and then followed by a response from the current President of the Regional Airline Association. After reading it all, I could not quiet my fingers.

In my posting you will find many issues that I have addressed publicly over the years, not only scope, but also the regional-mainline carrier relationship in general. I have taken the liberty below of sharing the opening and closing paragraphs of each submissions that lead to my response which I have published in full. Much more to come……..

Swelbar

Scope Disparities Growing on 8/2/07

By Doug Abbey, Partner in Washington-based aviation market research and consulting firm The Velocity Group

First Paragraph:

As Continental commences formal negotiations with its pilots on a new multi-year contract, it is ironic to note that the carrier now has the most restrictive scope clause language in the industry. By having successfully avoided bankruptcy, Continental (along with American) has been rewarded commensurately; both carriers now find themselves widely out of competitive touch with their post-reorganization peers.

Closing Paragraph:

We therefore encourage Continental and American to consider a new direction not encumbered by old ways of thinking or doing business. Scope is an anachronism — both in and out of bankruptcy — that does far more harm than good.

Opinions expressed are not those of Aviation Daily or McGraw-Hill. Bylined submissions should be sent via e-mail to aw_departures@aviationnow.com.

Scope: Beneficial To Pilots And Airline Managers on 8/17/07

First Paragraph:

In the “Departures” section of the Aug. 2 edition of The DAILY, airline industry consultant Doug Abbey expresses the view that the scope clauses contained in some pilot contracts do more harm than good for major carriers’ key constituencies. A brief examination of the facts illustrates that he could not be more mistaken.

Closing Paragraph:

It’s a tired refrain for consultants like Mr. Abbey to blame labor contracts for corporate shortcomings. I submit that it’s management’s responsibility — the executives who lavish themselves with hundreds of millions in bonuses — to fix the factory through vision and leadership.

Capt. Lloyd Hill is president of the Allied Pilots Association, collective bargaining agent for the 12,000 pilots of American Airlines.

Stop The RJ-Bashing on 8/23/07

First Paragraph:

Blaming this summer’s air traffic hassles on regional jets brings to mind Yogi Berra’s reason why he didn’t want to eat at a popular restaurant: “No one goes there anymore — it’s too crowded.”

Closing Paragraphs:

But don’t blame RJs. Or the airlines — which lose big with flight delays. Or the FAA’s controllers, since not even Tiger Woods could hit 350-yard drives playing with persimmon head clubs. Instead, can’t we just all get along, stop playing “blame ball” and work together to fix the system — even if it’s one delay at a time?

Then maybe we can make one of Yogi Berra’s lesser known quotes come true: “It’s not too far, it just seems like it is.”

Roger Cohen is president of the Regional Airline Association.

It’s More About Labor And Economics, And Less About Scope

I have one word for the discussion that began in Departures on Aug. 2 and continued throughout the month regarding the issue of scope clauses — hypocritical.

While scope clause limits in mainline pilot contracts were a significant issue in the late 1990s, they can hardly be considered a similar impediment at any carrier today. You can’t claim that scope defines work for mainline pilots any more than you can say that small narrowbody jets have a place only in the regional airline industry.

While I do not agree with Capt. Hill’s economic analysis of the use of 35- to 90-seat jets, I believe he has identified a key issue facing airline labor unions in the next round of negotiations. The arbitrage in labor rates between the mainline and regional sectors of the industry fueled the growth of the regional industry over the past 10 years. Now, as rates have converged across nearly all sectors of the industry, one can make the case that the economics of the relationships between mainline carriers and their regional affiliates may not be the best operating model for tomorrow.

Mr. Abbey cites American and Continental as the airlines with the most restrictive pilot scope clauses. In fact, each carrier has been judicious in its use of its regional fleets and has outperformed the industry during a tumultuous time. Continental made the first declaration that its 50-seat growth would come to an end sooner than expected, and American has been the most vocal of the mainline carriers about the need to keep constraints on domestic capacity.

There are many issues that should be of equal or greater importance to the regional industry than scope clauses — particularly building an airport and airway infrastructure that meets America’s 21st century needs, as suggested by Mr. Cohen. The debate surrounding the reauthorization bill seems to be lacking an important push from labor, as both mainline and regional pilots have a lot at stake in this debate. The current situation does not bode well for growth in either sector, and growth is a critical ingredient for stakeholder success.

We are at a crossroads as the next round of mainline pilot negotiations begins: 1) Will mainline pilots continue to relax their scope and watch as significantly more small narrowbody flying is done by another sector of the industry that could potentially rekindle the discussion of labor arbitrage? or 2) Will mainline pilots seriously reflect and understand that the facilitation of growth at the mainline is their best course of action in terms of job protection — and maybe even job creation?

One necessary outcome in this next round of negotiations is a recognition that structural impediments to success exist within each sector of the industry. Cost maintenance/reduction remains paramount in this less-than-robust revenue environment. We cannot forget that vigilant cost controls must remain the focus if we are ever to find an enduring operating model that creates capital for all stakeholders, rather than recycling capital among them.

Today, network legacy carriers operate nearly 700 fewer aircraft with fewer than 150 seats than in 2000. Just because Embraer- and Bombardier- manufactured equipment resides with the regional sector of the industry today does not mean that the sector is entitled to all aircraft made by these two companies.

So, in addition to getting on with the business of fixing the infrastructure, let’s get busy and negotiate an economic framework that can get the mainline sector of the industry growing again. Unless mainline pilots find a new way to think about domestic flying in this next round of negotiations, aircraft manufactured by Embraer and Bombardier will remain the entitlement of the regional carriers.

This topic, and the fact that it has again reared its head, serves only to remind us that the industry’s restructuring is far from complete.

William Swelbar is a Research Engineer at MIT’s InternationalCenter for Air Transportation.
Labels: Air Line Pilots Association, airline labor, Allied Pilots Association, American Airlines, Aviation Daily, Continental Airlines, pilot scope clauses, Regional Airline Association, William Swelbar draft by Swelbar 8:32:00 AM Delete

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