US Airways And American And The Elephants In The Room

I want to talk about the elephant in the room.

Actually, it’s a whole herd of elephants in pink tutus with “Seniority Integration” and “Unintended Consequences” emblazoned in neon lettering across their posteriors. Yet, most media seem too distracted by sexy headlines and hoped for revenue synergy calculations an alleged US Airways – American Airlines tie-up might bring to even notice the elephants.

Maybe they’re right. The customer doesn’t care what uniform the pilot flying the plane wears or what that pilot’s career prospects look like. They just want that pilot to safely get them to where they’re going.

US Airways is a perfect example that ignoring the elephant can work with few external (i.e. passenger) repercussions: it hasn’t fully integrated pilots or flight attendants since merging with America West in 2005. After nearly seven years of flying separate-and-not-nearly-equal crews on two coasts, maybe US thinks the elephant is just a mouse. Heck, company president Scott Kirby said taking over American Airlines would actually solve US’s problem:

"It's ironic but the solution to that issue at US Airways I think it's probably because we're able to get this deal done. The area that people focus on the most is USAPA, our pilots' union. In this case there is a huge benefit for our pilots in getting the deal done.”

Kirby’s comments would also seem to hold true for flight attendants. He even pointed out merging work groups would be subject to the McCaskill-Bond legislation… created in part, by American’s 2001 takeover of TWA and the short-end of the deal those employees received.

And that’s where the elephants start trumpeting.

I’ll concede again that seniority integration doesn’t mean anything to the average customer. But it means everything to airline employees and, because of the very McCaskill-Bond law Kirby mentioned, even to those employees who don’t belong to a union. They, too, will be subject to the law and the vagaries of seniority integration.

If the Allied Pilots Association really believes seniority integration is, as its spokesperson Tom Hoban labeled it, a “faux concern,” then it’s ignoring its own recent past.  If I am an APA pilot and my union is calling seniority integration a faux concern, well I would be concerned.

If the Association of Professional Flight Attendants thinks it will join hands with US and its senior members will either cash out or staple US’s two groups to the bottom of the seniority list – like the APFA did to the TWA flight attendants – its remaining members will have plenty of time to regret that decision when they’re flying Richmond, VA to Greenville, SC via Charlotte for the third time that day.

REAPING WHAT THEY SOWED

The very group APFA leaders either think they will harmoniously bond with or take precedence over (and I’m betting it’s the latter more than the former) is the Association of Flight Attendants.  The AFA represents two distinct groups at US – the flight attendants from the “old” US Airways and former America West FAs – which have never worked under a joint contract. Kirby’s mention of McCaskill-Bond is especially pertinent in this potential combination of three different flight attendant groups, each with its own pay rates, work rules and benefits.

Why? Well, this is what the AFA says about McCaskill-Bond:

“In 2001, American Airlines purchased TWA. The TWA flight attendants, represented at the time by the lAM, were stapled to the bottom of the American Airline's flight attendant seniority list. The AA flight attendants are represented by the APFA. This was grossly unfair to the former TWA flight attendants. The TWA flight attendants fought back. They were unable to right the wrong that had been done to them. But they were able to, with the help of Congress, ensure that it will not happen again.”

Doesn’t sound like the AFA is ready to take a jump-seat to anyone, especially not a group that was “grossly unfair” to other flight attendants. No matter what promises US’s Doug Parker and Scott Kirby have made to the APFA and president Laura Glading. US flight attendants are going to have a say about what part of the pie they get. It’s also important to remember neither AFA group has approved a new contract with US – in fact, they overwhelmingly rejected the last tentative agreement two months ago.

Currently, the APFA has, in total, the best pay, benefits and work rules in the industry. (A decision on American’s 1113 motion in U.S. bankruptcy court could change that). US Airways are among the lowest compensated. Doug Parker will probably promise his own flight attendants they’ll move up to APFA pay, and with the reported “early out” incentive offered as part of the US-APFA deal (about 80 percent of APFA’s members would qualify under the union’s stated parameters including President Glading), would quickly dominate the seniority lists.

That’s probably not going to be enough for the US flight attendants. They’ll likely – and, perhaps, justly – demand the same early outs, guaranteed seniority and other incentives. McCaskill-Bond calls for arbitration, though US Airways says it is “hoping” for a negotiated settlement. This is the same group hasn’t been able to negotiate contracts with any of its current flight groups in seven years, yet “hopes” for agreements with three different unions all clamoring for top billing?

That doesn’t even take into consideration the lawsuits that will be generated when the remaining APFA members realize they’ve been sold out or either of the AFA groups feel they’ve been shorted.

Speaking of lawsuits, the APA knows a bit about seniority integration court battles. When American took over bankrupt TWA, the APA argued in the Supreme Court of the United States that its members deserved seniority over all Trans World pilots because TWA crews had limited to no future prospects and no reasonable “healthy carrier” would agree to merge if its employees didn’t take precedence. Some call this the “failed carrier doctrine” and it is still applicable with the McCaskill-Bond legislation. The APA won its case in front of the Supreme Court, so it shouldn’t be surprised if USAPA East & West use it against them.

Of course Kirby thinks merging will solve US’s current integration problems. The USAPA pilots are salivating over new planes, APA’s high pay rates and benefits and the chance at more international routes. They’ll happily staple APA to the bottom of the seniority list to get those perks.

Perhaps APA president David Bates really believes the former America West pilots will just give way to the APA’s claims on seniority. He met with USAPA pilots in Charlotte last month and touted the meeting as a beginning of negotiations to resolve the issue.

I don’t believe any “negotiations” are going to resolve this issue quickly or simply… and I see no way APA members come out of this scenario better in the long-term. Union solidarity only goes so far and US pilots have been waiting years for an opportunity like this.

More telling I thought was a quote in The Charlotte Observer from USAPA president Gary Hummell:

"My job, even though we are looking forward to a cooperative effort, is to protect USAPA pilots (and) to ensure our pilots get the best contract they can."

Even if that means it’s at the expense of the APA.  Even if this means making American out to be a failing carrier.

WHITHER TWU?

The Transport Workers Union International and many of the locals haven’t exactly rushed into the arms of US Airways. Unlike APFA, which has thrown itself at US like .... well I won't say it, or APA, with its “studious business” approach, TWU has seemingly shrugged its collective shoulders about the US “deal.”

That’s probably because the US agreement isn’t much different from the one AA recently offered TWU. The Mechanics and Related and Stores work groups rejected American’s proposal, but I doubt they’re holding their breath waiting for US Airways to save them.

The TWU is being realistic. Besides saving some jobs – which the M&R and Stores groups decided wasn’t enough reason to approve the AA offer – there’s not a lot US can do for TWU members. They’ve heard US’s promises of limited job protection and bringing more maintenance in-house, but a quick look at DOT numbers also shows US currently has one of highest percentages of outsourced maintenance in the industry. Hard to believe it would be more cost efficient for US to give that work to TWU.

Plus, the TWU successfully used the failed carrier doctrine against TWA as well. While its 24,000 members at American dwarf the number of ground workers at US, TWU leaders know their own arguments will be used against them in arbitration. The TWU has seen what has happened to ground workers at other failed airlines and, at this point, can only hope to minimize its losses.

TWU also lost a bitter and expensive battle against IAM to represent workers at US and, as any political junkie knows, unseating an incumbent is neither easy nor cheap.

WHAT’S IT ALL MEAN?

I’ve already admitted seniority battles might mean little to nothing to customers and operations. That’s possibly enough for Wall Street types who are bounding after this potential consolidation like dogs chase cars.

There are, though, real concerns for other financial stakeholders.  One complex integration should give them pause - but three battles should/will make them nauseous.

US has touted the synergies merging with American would immediately bring. What happens to those synergies if integrating pilots, flight attendants and ground workers drags on, or as I expect, become overly contentious and litigious?

US Airways’ own track record – now going on seven years - shows it cannot facilitate integrated contracts and is quick to suggest the reason is because of internal union squabbles. “Old” US flight attendants fly with “old” US pilots, segregated from their former-America West peers. If a similar situation develops with a devoured American workforce, those already questionable synergies become even more degraded. In other words, the risk and return calculation might be worth further consideration by AMR’s creditors.

There are also a couple of other elephants standing off in the corner that bear watching. First is US Airways own unions, specifically the AFA and the IAM. None of those three groups (remember, AFA represents two distinct flight attendant units at US) are very happy with Parker and Co. right now. Contract negotiations have dragged on with US holding the line on costs because of its structural revenue underperformance relative to the industry.

Yet the IAM and AFA saw Parker and Kirby promise the moon, stars and assorted planets to American’s union leaders. They have significant leverage, including asking the National Mediation Board for release. With an election quickly approaching, a Democratic White House might be hard put to ignore the treaties of two very influential labor organizations, both of which wield more power than American’s unions. Keep in mind, the current chairperson of the NMB is former AFA president Linda Puchala.

Then there are American’s non-union employees. The CWA is currently trying to organize American’s 10,000 agents and representatives, even though the CWA has publicly admitted the majority of those employees don’t want a union. Well, guess who represents US Airways passenger service representatives? That’s right, the CWA. (It also is partnered with the AFA). In a merger, American’s PSRs would get a union whether they wanted one or not, most likely without a vote and probably find themselves on the bottom of the seniority scale. Their – and the other non-union AA employees not happy about their new seniority “rank” – only recourse might be the courts.

The last elephant is more of a wooly mammoth: extinct, but vestiges still remain. That would be the group of employees the APA, APFA and TWU all made bones off of… the former TWA workers. This could be their last shot to right some wrongs and adding them into the mix exponentially increases the level of difficulty of integration.

"We have a chance for a fresh start here," Roger Graham, a spokesman for the former TWA flight attendants, told Ted Reed of TheStreet.com earlier this month.  At least there is one group of employees who might benefit from this proposed merger.

It’s hard to fathom why no one has really taken notice of the elephants. Maybe because they obscure Wall Street’s desire for a (very) short-term gain despite the longer-term implications. Maybe it’s because American’s unions are simply using US as leverage with no intent to expose their members to the possible risks of actually going through with the merger. Or maybe it’s because ignoring them makes it easier for Parker and Kirby to believe this deal is really as simple as they pretend.

Maybe the court and AMR’s creditors, blinded by pro forma financial reasoning that is, sadly, often divorced from airline industry reality and the notion of competitive response, will embrace the US proposal as the best value for their dollars.

If they do, they should beware that discounts to the pro forma estimate are called for because of the elephants in the room.

APFA, by not making a deal with the company in 1113, should be questioned by its members about its decision to put all of its eggs in the US basket under the failed leadership doctrine.

Finally, the TWA pilots reared their heads last week by filing suit against American Airlines and the Allied Pilots Association. 

Looks to me like -- game on.

Delta's Singular Focus: Executing Its Singular Vision

Labor issues at many US airlines are emerging that underscore this blogger’s call that these upcoming negotiations will be the most important since the airline industry was deregulated in 1978. And we are not really talking about economics yet...

Click to read more ...

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.