A Flight Attendant Representation Inflection Point?

There is no questioning the importance of a flight attendant to commercial carriers, whether as the onboard safety professional or as an extension of an airline’s marketing department.  As they themselves are quick to point out, of all airline employees it is flight attendants who spend the most time with customers, a role they say should have more value in their compensation. 

This blog has often been critical of pilots and the leadership at the major pilot unions for being unrealistic in their contract demands, particularly in an industry struggling economically. Today I look at the flight service unions and wonder if there is a fundamental change in direction afoot.

One has to look no further than the combined work forces at Delta, where the non-union Delta flight attendants and their unionized counterparts at Northwest recently voted against union representation.  Delta, where only the pilots are unionized, has flexibility and productivity built into its operation so that the airline can quickly adjust to market conditions rather than be hamstrung by contractual restraints. In return, Delta has long offered relatively high industry pay and a culture employees value.  That’s one reason that when Delta announced plans last year to hire 1,000 new flight attendants, more than 100,000 hopefuls applied. By all outward signs, Delta flight attendants are largely satisfied with their jobs, and tens of thousands of applicants would evidently love to join them. So perhaps it is no surprise that flight attendants at the “new Delta” rejected old-style union representation.

My question is whether contract negotiations elsewhere in the U.S. airline industry will challenge the status quo as defined by old-line labor agreements negotiated by the Association of Flight Attendants – CWA (AFA) and the Association of Professional Flight Attendants (APFA) to promote the level of productivity and flexibility today’s airline industry demands.

At American, for example, the mantra coming from management in its negotiations with flight attendants has been increased productivity in return for increased pay.  That formula works at Southwest and Continental and Delta – where high productivity has lead to higher pay.  The conundrum for the APFA at American is that their current contract pays flight attendants at or near the top of the industry but puts productivity near the bottom as compared to other carriers.

To be clear, “productivity” in this context does not measure how hard an employee works but, rather, is dictated by the work rules outlined in a collective bargaining agreement. Too often, these work rules limit the number of hours an employee can work as one way of forcing a company to hire more employees.

 In many old-line agreements, aircraft technology (flying longer and faster) is the driver behind the work rules.  This technology – more advanced aircraft that could fly more passengers faster and farther --created a false perception that employee productivity was increasing. Today there is little to no technology effect on flight crew productivity. And it’s high time that contract agreements reflect that reality.

From my perspective, the APFA is neither willing to acknowledge nor accept that fact. Rather than agree to increased productivity – even to a point that is at par with flight attendants at other carriers --  the union is insisting on pay increases without offering anything in return. Absent that, the union has threatened the sides have reached “impasse” and the union should be allowed to call a strike.

At this point, there’s no predicting the end game. Last week, the union reported that the National Mediation Board will not now act on its request for a “release” to strike and has scheduled no additional meetings, a story reported by Terry Maxon of the Dallas Morning News in a thoughtful recap of the difficult negotiations at American. The union, not surprisingly, blamed the company: “APFA Negotiators did everything they possibly could to achieve a deal,” the union said in a hotline message to members, “But the company is still unwilling to recognize the value Flight Attendants bring to this company."

Maxon then updated his blog post to include this statement from the company:  "We [American] are disappointed not to have additional dates. After more than seven months since our last negotiating session, the company team looked forward to meeting with APFA in early January in Nashville. During the week, we presented APFA with several proposals to move the process forward on items we know would affect all our flight attendants. Unfortunately, APFA did not respond to the company's most recent proposals or offer any proposals of their own. We believe this lack of movement contributed to the NMB's decision not to schedule additional dates.”

Clamoring for a strike in this environment is old school, chest thumping, red meat stuff that will probably ensure only that member flight attendants will wait longer than necessary to get a new contract. And it’s my guess that the NMB realized this in calling a time out, recognizing that the union’s failure to negotiate is not the same as negotiating in good faith and failing to come to an agreement.  That’s the definition of real impasse. What the APFA is doing is posturing rather than putting in the hard work of good faith negotiations as envisioned by the Dunlop Commission in its recommendations to improve airline labor-management relations.

Like it or Not, It’s Still About the Economics

Unless I have missed something, American was the only network legacy carrier to lose money in 2010 and is forecast to be break even at best in 2011.  And one trend that no one is missing is the price of oil that has settled for the moment around $90 per barrel.  Add to that the trend line in the crack spread, which has jumped from $10-15 per barrel in the last six months of 2010 to about $25 per barrel now.  So for airlines, the true cost of “in the wing” oil can top $100 per barrel depending on where they buy their fuel.

In most cases, the airlines are doing what they can on the costs they can control. They are keeping capacity increases in check. They have successfully implemented fees to bring in much-needed revenue.  And perhaps the profits we saw in 2010 are the return on this discipline and new pricing strategies. But one year of profits does not define a trend. And in the long term, it is not enough to compensate for labor’s outsized asks at the negotiating table or the expectation labor leaders create when they tell union members that they should “get back” the concessions negotiated during the industry’s restructuring period. 

Back to Flight Attendants

Which brings us back to flight attendants and the labor struggles at play throughout the industry. Consider the case at US Airways where five years after the merger with America West, the AFA represented flight attendants from each airline are still working under the agreements negotiated prior to the merger.

And that case merely sets the stage for what’s to come at United–Continental Holdings, where the old line AFA has petitioned the NMB to declare the merged company a single carrier in order call an election that would bring the Continental flight attendants, now represented by the International Association of Machinists and Aerospace Workers (IAMAW), under the AFA wing.  That would be a different direction for Continental’s inflight service, whose contract with the IAMAW emphasizes productivity and flexibility that has served the airline and its employees well in recent years.  So as with the decision at Delta, that election will go a long way in determining the direction of labor in the airline industry.

This industry has only begun a long overdue and ultimately necessary transformation that could bring sustained profitability, but only if that transformation is allowed to go forward. That will require the constructive participation of organized labor which, like the airlines themselves, must transform the way it conducts business.

United has that opportunity in negotiating a joint collective bargaining agreement for employees of the merged carriers. There, it is up to leadership to demonstrate the stark difference between one contract that produces high productivity and high compensation, and the other that produces low productivity and lower compensation, and work to convince flight attendants what is in their long-term best interest

And I believe that, ultimately, the AirTran flight attendants represented by AFA will come to embrace the highly productive, highly compensated terms of the Southwest flight attendant agreement negotiated by the TWU

American, for its part, does not have battling unions contend with – only a battle between expectations and reality.  The unions have so far been unwilling to reconsider contract language and provisions not even relevant to today’s industry. There are no more magic bullets like the jet airplane coming along to artificially inflate employee productivity.  The only way to get there is to rethink dated notions of productivity and job protections.  And that’s a real opportunity, for labor and for management.

Self-Help or Self Sacrifice or Self Fulfilling Prophecy? What Will This Accomplish?

This week, Terry Maxon of the Dallas Morning News  wrote about the “surprised” reaction at American Airlines when a correspondent on NBC’s Today Show reported a “potential strike” at the airline following the holidays.

The show was a bit vague on its sources, but my best is that Laura Glading, President of the Association of Professional Flight Attendants, is working her media list to drum up a little coverage for the union’s latest negotiations gambit.

I consider myself a pretty good historian on most things airlines over the past 30 years.  And I remember the APFA’s divisive and destructive Thanksgiving strike in 1993 that attempted to bring the airline to its knees over the critical holiday travel period.  Last year, the union “celebrated” the 15^th anniversary of the strike with a campaign they called “Remember November.”

For this year’s anniversary, the union is doing its best to remind the company of the pain it could again impose in a campaign that all but threatens another strike . . . this one called “Got Guts?” 

To be fair, the APFA has made clear that they do not plan to disrupt American’s operations over the holidays.  However, the union did say it was prepared to strike next year if no contract agreement is reached by January, with Glading saying she will consider asking the National Mediation Board for a “release” from negotiations – the first step toward seeking the right to “self help” under the Railway Labor Act.

First, let’s review the rules.  The NMB will grant a release only if it believes negotiations are at an impasse, and the bar for that is set pretty high.   A release would then open a 30-day “cooling off” period.  Only after that point and if the parties fail to reach agreement can either side engage in self help --  which for a union means work stoppages or strikes and for management allows a company to impose its “last offer” at the table or lock out striking workers.

So let’s be perfectly clear.  The union can’t strike now, no matter what the alarmists may say on Today. There is no guarantee that the NMB would grant a release. And even then, the RLA has several protections built in – the cooling off period and the prospect of a Presidential Emergency Board – to prevent the kind of work stoppages that could ground an airline and impact interstate commerce.

So why is the flight attendant union playing it out this way? Why on one hand are they talking strikes (which in some cases proves reason enough for passengers to “book away” from a particular airline) and on the other hand trying to reassure passengers that their holiday travel plans are safe?

Because that’s what unions in the industry too often have done. . . talk out of both sides of their mouth – paying lip service to their commitment to passengers while at the same time making demands and engaging in work actions that threaten the airlines’ ability to do business.

The Boeing Lesson

Let’s consider the real impact of strikes.

Last September I wrote here:  “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?”  

In its negotiations, Boeing was looking to balance its economic offer to the union with added flexibility in its contracts the company needed to address the ups and downs in the business cycle.   The IAMAW was not willing to comply. So Boeing ultimately settled with the union, but not before further damage was done to an already fragile relationship. 

The real story, however, played out a few months later, when Boeing announced its decision to build a second production line to build the 787– not in Washington, its corporate home for decades, but in the right-to-work state of South Carolina.

Washington State officials reportedly worked hard to try to convince Boeing to stay, but at the end the state’s governor said the company’s decision to build the line in South Carolina came down to one thing: its difficult relationship with the Machinists union and a failure to reach a no-strike deal. 

And the pain may not be over for Washington’s IAMAW workers. At some point Boeing will need to begin manufacturing replacements for today’s 737 and 777 lines.  Where will those planes be built? 

What is particularly telling in this case is that the IAMAW was publicly dismissive of the fact that the union’s actions had anything to do with the company’s decision to add capacity in South Carolina. 

This is typical of labor of late.  But at some point unions in this space – whether airline or aerospace -- need to recognize the fundamental flaw in their collective bargaining agreements that too often work to choke productivity rather than promote it.

Looking ahead, I believe that the current round of airline negotiations must continue the transition/transformation underway in the US airline industry and address the sticking points in its contractual relationships with its labor force.  These include pay (which is unlikely to return to 2001 levels)  and productivity (which unions resist for fear of losing dues-paying union jobs).

The crux of the problem for labor as I see it is a failure to appreciate the delicate balance between pay and productivity. Without recognition that balancing the formula is critical, the industry, and individual carriers, will continue to find a more efficient means of doing the work.

Sadly, productivity is driven at its core by seniority and all the protections I’ve discussed in the past that unions provide so that long term members feast while newer members are left to feed on the scraps. 

Despite many of the gut-wrenching changes and cost cuts during the last negotiations cycle, the industry did nothing to restructure seniority – the “third rail” on union politics.  In my view, organized labor’s blind commitment to preserving seniority lies at the heart of a race to the bottom.  Yes, the revenue environment contributes more than its fair share to airline’s financial woes, but at some point labor has to accept responsibility for the role of these Depression-era ideologies.  The reality is that, last time around, airline wages were cut more than necessary because of union insistence on preserving seniority and limiting productivity.

Back to the Cabin

So it is in this environment that the APFA waves its strike threat like a red flag in the bullring.  The APFA website even features a report the union commissioned highlighting the failures of airline deregulation and the economic pressures on the industry. On a recent trip to Washington, Glading joined AFA-CWA President Pat Friend in urging the Obama Administration to “stabilize an industry that's not working” and reverse the “damage done” to the traveling public.

Call me nuts, but I’m guessing that Glading’s talk of a strike runs counter to her desire to “stabilize” the industry.  Perhaps other carriers would benefit from the union’s effort to ground the country’s second largest carrier in terms of revenue. But American – and all of its employees – wouldn’t see many benefits.

Or am I to believe that glorifying 1993 and rallying her members to strike in one of the most difficult times in airline history would alleviate the “damage done” to travelers?

I’ve said it before and I’ll say it again – the U.S. industry needs to do a better job of managing labor costs in boom and bust cycles in which fat contracts are approved in boom years only to require painful and at times draconian cuts when the cycle turns down.

Tellingly, and perhaps predictably, the unions are hoping a labor-friendly administration in Washington will help them gain new power in the industry – evidenced also by their efforts to change election rules at the NMB to make it easier to organize workers (even if the AFA-CWA, which is trying to organize at Delta, is hiding behind the AFL-CIO’s Transportation Trades Department to do it.)

What’s happened in Detroit over the last year is a pretty good indicator of what happens when an industry fails to get its costs in line with the market.  A smaller airline industry can’t absorb the same costs – including labor costs – that it did ten years ago.  Already we’ve been at this restructuring thing for more than five years and it’s pretty clear that the market has spoken.

So I’m really confused by what the APFA thinks it will get in return for a strategy that will only hurt the company that employs its members.

I don’t know what a strike buys anyone in this fragile business environment except, perhaps, an unpleasant ending.  Where I do agree with Ms. Glading is the importance of recognizing history.  I, for one, remember Pan Am, Eastern and TWA.  At the time, most believed those proud companies could weather any storm.  And I’d guess there may be another airline on that list before this cycle is complete.

If the past eight years have been rough and tumble, imagine what the next few years could be like as airlines reach pressure points in contract negotiations.   In that case, I can only imagine what would be left to celebrate on the 20^th anniversary of APFA’s Thanksgiving Strike. 

Capital, Labor and Seniority in the News

We awake this morning to reports that Chrysler will file for Chapter 11 bankruptcy . Despite efforts by the Obama administration to force Chrysler stakeholders to find an out-of-court solution, certain debt holders would not agree to the haircut they would have to take in forgiving debt to the auto giant. What they seem to be saying is that, under the terms of the proposed solution, labor would receive a disproportionate share of equity in the restructured company.

Where seniority for airline workers is earned through longevity, capital structure seniority is a bit different. In a bankruptcy, there are different classes of capital. Debt secured by company assets is the most senior on the list of creditors who will be paid. Unsecured debt capital is next in the pecking order, followed by preferred stock and, lastly, common equity.

Nowhere is “sweat equity” reported on a company’s balance sheet. However, worker concessions have been recognized as capital in a restructuring scenario and have been currency accorded a stake in a reorganized enterprise. Moreover, it is the sweat equity at Chrysler held by current and retired workers that might appear to some as being unduly enriched through the deal that gave them a 55 percent ownership stake in a restructured Chrysler.

A very different scenario played out in the airline industry. There, in bankruptcy cases that resulted in either a termination or freezing of pension plans and/or alterations to retiree benefit plans, creditors made it clear that they would not pay the bills from the past by forgoing profits in the future. For airline companies to emerge from Chapter 11, they needed public capital to fund their exit from bankruptcy. For car companies, the government is the source of exit capital.

This morning’s New York Times, quotes a statement from GM’s bondholders that applies to Chrysler’s issue as well: “We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another.”

As the article notes: “The U.A.W. members at both automakers stand to lose some of their pay and benefits, but the cuts are not as deep as those faced by airline and steel workers when their companies went bankrupt. Under proposed deals devised by the Treasury Department, U.A.W. pensions and retiree health care benefits would largely be protected”.

Airline Seniority In The News

On Tuesday, Terry Maxon of the Dallas Morning News wrote about the former TWA flight attendants and their dissatisfaction over their treatment from the flight attendant union when American purchased the assets of the troubled and iconic carrier in 2001. Also Tuesday, the four-year seniority battle between the merged group of pilots at US Airways got underway in US District Court in Phoenix, Arizona. Read Dawn Gilbertson’s reporting in the Arizona Republic and on the paper’s US Airways blog.

Whether it is in the airline industry or in the automobile industry, there clearly is something wrong with the seniority system. My question: should seniority really be sacred? The current seniority system does not work for shrinking industries like airlines and autos.

I am in stark agreement with the actions taken by the Association of Professional Flight Attendants, the union that represents AA flight service crews, which in protecting the seniority rights of its members decided that former TWA flight attendants would be put at the end of the seniority list when they joined AA ranks. The fact is this wasn’t a merger of equals. At the time of the purchase, TWA had sold most strategic assets and had reached its tipping point. There was nothing left to borrow and no hope except American’s offer to buy its assets.

I am in stark agreement with the America West pilots in their disagreement with the former US Airways [East] pilots who had little hope of a career absent the reorganization plan that involved a merger with America West.

Given that the economy will continue to call into question the future viability of any number of US airlines, this seniority issue is far from over. Plain and simple, it is about economics and the viability of individual carriers. US Airways [East] was not going to survive in its 2004 form for long. TWA would likely have died of natural causes as the effects of 9/11 ravaged the industry.

Concluding Thoughts

Given that the airline industry will likely get smaller before and if it gets bigger, it is high time that organized labor puts down its swords and constructs a national seniority list. Employees should have the right to move within the industry should their carrier cease to exist. Seniority should not be a shield for some to hide behind. Rather it should promote stability for those experienced workers that choose to offer their services for hire in an open market

The economic crisis and its impact on corporate America highlight the need for thoughtful analysis of labor issues. Seniority is only the first of the “third-rail” topics we shouldn’t be afraid to discuss. Another is the “legacy costs” like pension and retiree benefits and whether they should be the sole responsibility of the employer in today’s world. Best that I can tell, this growing financial burden on employers may serve only to stand in the way of active employees working to maximize their earnings.

Time will tell what ultimately will emerge from Chrysler’s bankruptcy; GM’s prospects for the future and whether the deal at Ford positions that company to compete for the long term. The same day might be coming for airlines which would be wise to learn lessons from the industries that come before them.

I make that final statement after reading through Obama’s statements. The US government is constructing a safety net for Chrysler and its workers. Some will fall through and others will be saved. Airline labor should be thinking about the same.

AA’s Labor Negotiation Scenarios Get Even More Interesting

I am thinking that we should consider changing the name of the NMB, National Mediation Board, to the AAMB or the American Airlines Mediation Board. Or the FWMB, the Fort Worth Mediation Board, because the docket at the Mediation Board is about to be anything but National.

Trebor Banstetter, at the Fort Worth Star-Telegram’s Sky Talk blog, reports that American Airline’s flight attendants represented by the Association of Professional Flight Attendants (APFA) have jointly filed with the company to the NMB to take over the talks. This one did catch me by surprise but as I think about it, this is a brilliant strategy.

If the application by American and APFA has indeed been made, it raises some very interesting scenarios. Terry Maxon asked on his AIRLINE BIZ blog the other day: Will TWU be first American Airlines union to impasse? Maxon’s question was spot on given that the company and the TWU, sans the mechanic group, had arguably narrowed their differences in a super negotiation session that concluded one week ago. I do appreciate that the starting point will be something other than the final issues remaining on the table, but the TWU and the company each made clear to one another what is important to each side in their negotiations.

We potentially have the majority of American’s employee groups in mediation. The one group not in mediation, the mechanics, is the one labor group at AA that have a sound platform from which to negotiate "gain-share" improvements given the outside work being conducted. This is not to say that there are not some difficult issues ahead in these negotiations given that AA is planning to park their older – maintenance heavy – MD80 fleet on an accelerated pace beginning in 2009. But the fact is this group has enabled AA to find new revenue sources.

Brilliant, Why?

Often, the NMB is forced to make a decision as to which negotiation on its docket has reached impasse first. Typically a decision is between airlines and not labor groups at the same airline. American now has an entire company in mediation. A release of any one group would certainly result in sympathy strikes from other groups with unresolved contracts.

How quickly would new President Obama agree to ground the nation’s second-largest airline? With nearly $2 trillion in economic stimulus to be injected into the economy during the early days of his administration, I am not sold that “labor’s savior” will be trigger quick to ground a company of American’s size in an industry that is inextricably tied to the health of the economy.

Another benefit is that the NMB will be able to truly gauge progress within each negotiation. This is particularly important when determining the “impasse pecking order”. With regard to the TWU and APFA groups, at least some movement has taken place in the non-economic areas. The APA cannot say the same as it has put itself into such a politically-tenuous position that it cannot move off of an opening proposal. A proposal that could not be afforded on the day it was presented – let alone now.

Mediation in this industry can be a good mechanism to work through issues but only after issues begin to narrow. That is how the process is designed to assist. Not to clear the underbrush from 30+ sections of a collective bargaining agreement.

I still think Maxon is right that the TWU group in mediation is number 1 on the “impasse pecking order” list. For the APA, you just moved to a distant third on that list – unless of course you get to participate in a sympathy strike. Or maybe, the APA will actually read the tea leaves and remove their opener and conduct a negotiation with the real world in mind and not the terms and conditions offered at Air Nirvana.

This really is fun to watch.

PRASM, TRASM and now FRASM? Oh My

We routinely discuss PRASM, or Passenger Revenue per Available Seat Mile. We also refer to TRASM, or Total Revenue per Available Seat Mile. I am now thinking that we will begin to talk about FRASM, or Fee Revenue per Available Seat Mile. PRASM, FRASM and TRASM – Oh My.

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Aviation News Just Breeds Itself in the Dallas Metroplex

Air Romo breaks his finger on the first play of overtime and is grounded for four weeks. American Airlines reports a profit for the third quarter of 2008; but only after accounting for the sale of American Beacon Advisors. Southwest Airlines posts its first quarterly loss in 17 years; but only after accounting for losses on certain hedge contracts. Had it not been for accounting issues, the news might have been much the same as American would have posted a loss and Southwest would have posted yet another profitable quarter.

But earnings are not “the” story for 2008’s third quarter given the volatility of jet fuel that occurred during a period when the passengers carried largely bought their tickets months ago. The story from the earnings announcements is more about the landscape on a going forward basis. Like many data points we assess and refer to, the Southwest loss deserves an asterisk.

The most interesting news thus far has been American Airlines announcing an order for 100 787-900 aircraft as part of its third quarter discussion. 42 of the aircraft are firm orders and are scheduled for delivery beginning in 2012. As the news came across the wire, I was preparing to give a lecture on networks. It was quite the buzz in the room as many of the students are like you and me and have jet fuel running through their veins.

There are many aspects of this announcement that I find encouraging. First, and simply, a US carrier announced a significant order for new technology as India's airlines consider cancelling orders. Second, and unlike many of the world’s carriers with orders for new aircraft, a US carrier is not ordering at the top of the cycle only to take delivery as the cycle turns down as will prove true with many carriers in Europe and Asia. Third, American did what it should do and make the delivery schedule contingent on a negotiated deal with the Allied Pilots Association.

Terry Maxon of the Dallas Morning News blogs on the APA’s reaction to American’s announcement that it is spending billions on new aircraft that will permit it to connect multiple dots on tomorrow’s global map. Of course the pilots are pleased that the company is investing in new equipment. Of course their reaction comes with the caveat that reinvestment in aircraft is only part of the necessary reinvestment in the airline. As the APA reminds us daily, restoring pay rates to some historical level in their current contract is also a necessary action.

I don’t know about you, but I am tired of the refrain of pay restoration. I am tired of the suggestion that these negotiations began in 2006. They did not. The negotiations began when the new rockers in the Metroplex, “Captain Lloyd and the No Planet Airmen”, took office and made a comprehensive proposal to management that was ultimately priced out at $3 billion dollars.

I have written here often of the need to change existing collective bargaining agreements as language just does not work. Well the APA rightfully points to a glaring reason why we need to rethink the entire labor construct. Pay rates have historically been based on the weight of the aircraft among other inputs. Well the weight of the 787 will be less as it made of composite materials. So now that does not work for the APA and there will have to be another approach.

I have been traveling and speaking again this week, so I missed Trebor Banstetter’s article on Tuesday in the Ft. Worth Star Telegram discussing the status of American's negotiations with its pilots. The APA seems to suggest that the NMB is partially to blame. Remember, as I have written here before: you have to clear the underbrush before a meaningful negotiation can take place on the economics otherwise - just put it on ice. The APA strategy to call for mediation still numbs this observer. I hope that they did not pay anyone for that advice.

But the real piece of information that I find most interesting as I catch up on my reading is a Banstetter blog post suggesting that there is a move on to rein in the national officers at APA. Lloyd and his band have become one song wonders and the membership needs more.

American has positioned itself to take a new narrowbody aircraft every 10 days beginning next year and to begin a growth and replacement strategy with the 787 beginning in 2012 all in managing the company for the long term. Hopefully the APA might begin to take notice from visionary pilot groups at Delta and Northwest that tomorrow really is different.

As always, this one is fun to watch. I wanted to post a piece I have been working on about autos and airlines again, but news here is so hard to resist.

Dear Richard: You Are Not a Virgin Anymore

One of the more amusing bumper stickers I have ever seen/read occurred at an intersection of Woodland Avenue and Jean Duluth Road in Duluth, Minnesota. I was a senior in high school and had been driving for a year and a half or so. The bumper sticker read: Virgins: Thanks for Nothin’.

Last week, Terry Maxon of the Dallas Morning News Airline Biz blog wrote a piece discussing the data analysis that Virgin Atlantic is using to frame the antitrust immunity application recently filed by American, British Airways and Iberia. We will touch on a few of those issues later and in future posts. But first, I have held a late August 2008 interview with Branson done by Karl West of the UK's Daily Mail that I would like to speak to.

West writes that “he [Branson] believes an alliance of the two giant airlines, plus BA merger partner Iberia, would allow them to dictate the market, charging higher prices between Europe and America." This makes no sense to me whatsoever because if it is high prices you are worried about, then who better than your own Virgin Atlantic, to offer lower prices and show the air travel consumer that you are the answer to their high air fare plight.

Your business model takes you to only the largest metropolitan areas, so your pricing actions will benefit the lion’s share of US – London Heathrow (LHR) demand. Because of your “network’s presence” in these large markets, you have, and will continue to have, a strong voice in attracting these customers because your product offering is very good and even different.

Whether it is the US domestic market or the transatlantic market, mature/maturing airline markets have demonstrated time and time again that where competition is vulnerable, a new entrant will exploit that vulnerability. Where there are market opportunities, there will be a carrier to leverage that opportunity. Where there is insufficient capacity, capacity will be sure to find the insufficiency. Simply, if the US - LHR market shows signs of “price gouging” by BA/AA, then surely Virgin Atlantic is among the best positioned to discipline the behavior.

West’s interview was the first one done with Branson following the BA/AA announcement that they would try for an immunized alliance for the third time. Branson believes the 'monster monopoly' will be bad for passengers, bad for competition, and will result in higher ticket prices. “It patently does not make sense,” he fumes. “Monopolies are good for companies, but they are never good for the consumer.” Branson adds: “BA has improved as an airline as a result of Virgin Atlantic keeping them honest.”

First of all where is the monopoly?

To answer that, I turned to Wikipedia for a definition. In Economics, a monopoly exists when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. Monopoly through integration: A monopoly may be created through vertical integration or horizontal integration. The situation in which a company takes over another in the same business, thus eliminating a competitor (competition) describes a horizontal monopoly (and that is what you are talking about I believe).

Surely no one believes that a monopoly would exist, or even be created, by granting Anti-Trust Immunity (ATI) to BA/AA/IB between the US and LHR. Branson’s arguments are LHR-centric and totally ignore the fact that the airline industry is a network business today and not the cozy structure protected by Bermuda II when Virgin Atlantic first flew in 1984. Yes, LHR is coveted, and is served, by nearly every major carrier of substance from around the world. Those US carriers that were not permitted to serve LHR are now allowed to serve the market and provide Bermuda II incumbents with significant new competition.

But fundamentally, today’s airline industry is about networks and not city pairs. It is a simple fact that oneworld cannot sit and watch STAR and SkyTeam grow anymore. Air France/KLM and Lufthansa/Swiss have grown into the world’s largest revenue producing airlines. Delta and Northwest will alter the ranking once their merger is approved but that will probably only last as long as it takes Lufthansa to get its hands on SAS and/or Austrian. Branson mentions his thirst for British Midland (BMI) and its extensive LHR slot holdings, but what about Lufthansa’s option on those LHR slots? Surely Richard you are not implying that with meaningful STAR alliance presence at LHR a oneworld monopoly would exist?

Branson talks in the interview about how AA and BA are using the current difficult economic and operating environment to accomplish what they have not been able to accomplish in two prior attempts. Quite honestly Richard, the entire world is being forced to transform their business models to adapt to the new realities.

US carriers are using this time to make difficult decisions on capacity cuts in order to diversify their route structures away from an over-weighted position in the US domestic market. Maybe you should be questioning whether Virgin Atlantic should be considering something other than LHR. Oh you have with Virgin Blue, Virgin Nigeria (and you might sell your stake in that Virgin) and Virgin America.

Or maybe you should be putting more energy into changing the ownership laws in order that Virgin Atlantic can realize all possible synergies from your family of Virgins. Abstinence from industry realities might be safe in the short-term but potentially lonely over the long term. You talk about the AA/BA/IB’s ability to strong arm travel agents and corporate customers. You are a branding genius and now you are saying that you cannot differentiate your product from AA/BA?

At what point do we take you serious?

Your data arguments are weak as well. It is about the local US – London/LHR market and that does need to be studied just as it is done on other deals. At least AA and BA have performed the best analysis to date using the best data source available to make that assessment. The competition authorities will make the same informed analysis and draw the distinction between local and connecting traffic as well.

So go paint your airplanes and while doing so recognize that Willie Walsh is right. He said broken record and I will not take a shot at another of your brands. What I will say is that your arguments are not virgins anymore and maybe you should be writing letters to Oberstar rather than McCain and Obama. If you write to McCain and Obama, the subject should be about changing the ownership laws that stand in the way of allowing the industry to become the global industry that rewards world class competitors like Virgin Atlantic. Because the large and small can cohabitate and as you say, make competitors even better competitors.

Oh and while you are thinking about some new arguments, take a look above London. On a clear day, at 40,000 feet, you will see liveries like Emirates, Ethiad, Qatar and others that do not necessarily believe that a network industry requires London to be the center of the airline universe.

Unless you recognize that 1997's arguments need to change the third time around, thanks for nothin’.

“I hear the train a "C"omin'”

As earnings season kicks off for the third quarter, Delta announces great results click here and its CEO talks about consolidation click here This, is what the major newswires and bloggers picked up -- not that Delta’s earnings exceeded the Street’s expectations. The exception to these stories is Terry Maxon of the Dallas Morning News writing in his blog about the cleansing of bankruptcy which puts a different, but fair, perspective on the company’s performance click here.

One – no the best question of the day -- came from a significant trader in the airline debt world was: Will the news of Delta being part of consolidation considerations be bad for Delta CEO Richard Anderson? My immediate response was no, Anderson’s public comments have never shut the door on anything other than to make Delta the best it can be in his view and his board’s view.

So now that earnings season is underway, I just wonder how many times the “C” word will be used? We know that UAL has painted a target on its back but will others discuss the “C” word in their comments to the analysts? This, on top of an expected Delta announcement with alliance partners Air France and KLM click here, and today’s announcement click here, makes clear that the management team in Atlanta is not sitting still as it undertakes its transatlantic strategy.

Lots has been written about “unlocking value” by spinning off subsidiaries that are perceived by the market as to not being reflected in the current equity prices of US carriers. $86 oil points to a potentially mean and long cold winter for this industry. Therefore, expect the discussion of the “C” word to be included in this quarter's earnings’ overview. Moreover-- and this is true for each management and labor --remember tomorrow for this industry is about “capital creation” and not “capital recycling” or as some of my smart friends might say “capital destruction”. Or die.

The unfortunate visionary that is being left out of today’s (10/16/07) talk of consolidation is the CEO of US Airways, Doug Parker – but the earnings announcement is days away. He gave us a blueprint of how consolidation is good for the industry and individual companies in his bid for Delta. He openly talked – as to this writer’s take – on the benefits of reducing fixed costs while still maintaining access to the US air transportation system for air travel consumers in markets large and small. [I sure hope the US government reads and thinks about this statement]

What is unfortunate for Mr. Parker click here is the parochial interest of labor in the “C” word discussion. Certainly there is more to come on the US Airways situation in this blog -- but to stand in the way of market development for labor is a major mistake. It is global, it is real, it is now. So if labor thinks they are sitting in Folsom Prison and hoping that they’d moved it on a little farther down the line—stand ready.

“It's rolling round the bend"