Aboard UA #2: Reading Captain Wallach’s Latest Half Truths

I have a long institutional history at United, primarily working on behalf of the Association of Flight Attendants. In this role, I worked with the flight attendants through every concessionary period, the ESOP attempts, and Phase One of bankruptcy -- a long association that ended when I spoke my mind in a media interview on the vulnerability of defined benefit pension plans and, in doing so, angered some in the union leadership with my candor. .

All by way of saying that there is very little in United’s recent history, at least between 1985 and 2003, that I did not witness up front and personal.

The Recent Spat

The latest static at UAL involves a war of words surrounding United, Continental, Air Canada and Lufthansa in their application for anti-trust immunity to operate an international alliance. This debate is creating much more noise in Chicago than it is in either Washington or Brussels and that’s for one reason: the noise comes from a desperate union leader who waited ten months to voice concern about any potential impact on United workers.

This is the very same union leader who sits on United’s Board of Directors. His administration was subject to a federal court injunction to end what Judge Joan H. Lefkow ruled was a job action in clear violation of federal law. This, in fact, is a union leader who fancies himself as the second coming of ALPA boss Rick Dubinsky – the legendary golden goose hunter that worked more than 15 years to create many of the problems that still plague United. But, Mr. Wallach, you are no Rick Dubinisky.

Sometime after Wallach’s anti-trust immunity concerns were made known via the press, United COO John Tague, sent a letter to employees explaining United’s successful alliances with ten airlines over the course of the past ten years – none of which had led to problems or complaints with the carrier’s unions. A day later, Wallach responded with an open letter to Tague and copied all United employees – a tirade he then shared with the media as demonstrated by this submission to Forbes.com.

Wallach’s Letter

Wallach opens citing what he calls blatant mischaracterizations and outright falsehoods contained in Tague’s letter. But after reading Wallach’s letter, I am of the mind that it is he who is guilty of blatant mischaracterizations and outright falsehoods.

In building his case, Wallach attempts to blame United’s role in the STAR Alliance for the airline’s trouble today . . . a dubious case he makes by comparing the size of United in 1997 when it first joined STAR to the carrier’s size today. That argument conveniently fails to note that 1997 marked the middle of the greatest up cycle in US airline history, and then neglects to account for all the industry trouble that has transpired since. But that’s what the industry has come to expect from unions that spend more time and capital attacking companies through half truths and blatant misinterpretations rather than working to address the economic and competitive realities at the root of the industry’s struggles.

A more honest analysis would take into account the full breadth of events that have had a profound impact on the airline industry since 1997, including but not limited to SARS

1. SARS
2. The growth of the US low cost carriers
3. The rapid deflation of the IPO bubble
4. The puncture of the stock market bubble
5. The advent of internet distribution and pricing (transparency that contributes to lower ticket prices
6. The Summer of 2000 (where actions by UA pilots to “work to rule” impacted service)
7. Ratification of a new pilot contract with rates far higher than the rest of the industry
8. September 11, 2001
9. US Airways bankruptcy filing that led to significant reductions in labor rates
10. United bankruptcy filing
11. Oil prices begin increase to historic levels; crack spreads depart from historic norms
12. Delta and Northwest bankruptcy filings
13. Oil reaches $147 per barrel, driving run up of other commodity prices
14. New rash of airline industry oil hedges in anticipation of further price spikes,
15. Followed by plummeting prices that put many hedge contracts underwater
16. Credit crisis takes hold
17. Consumer confidence falls
18. Economy enters recession in late 2007
19. Recession deepens to become worst on record since 1930’s with global reach into Asia and Europe
20. Pandemic flu outbreak with hardest initial impact in Mexico.
21. United pilots in negotiations over new contract for first time since bankruptcy agreement.

The real lesson is in the extent to which the entire industry has changed over the past 12 years with a permanent impact on the legacy carriers. Wallach weakens his own case by suggesting that alliances have hurt US airline employment without identifying the many factors in the equation.

In fact, I would argue that without the alliance partners United works with today, the airline would be even smaller.

Has the management at United made some mistakes along the way? Of course. The current UAL leadership has no compunction about forgetting the past other than to recognize that the carrier’s past was largely a dysfunctional disaster. But that recognition led to many of the changes to United’s structure and operations in place today. As CEO Glenn Tilton often makes the case, the industry has to earn its cost of capital – something the global industry has rarely achieved over its long history.

Corporate Campaigns and Organized Pilot Labor

The airline unions – particularly those now in contract negotiations, have not shied away from full-barrel attacks on the carriers as one method of soliciting support during labor talks. Ginning up opposition to airline alliances seems to have become the latest tactic in this long-running campaign. But it should not be lost on any industry watcher that the loudest rhetoric comes from the union halls of the pilots at United and American. Ironically, the least noise is coming from the most successful US legacy carriers – Continental and Delta. I’ll leave it to the readers to weigh in as to whether there’s a connection.

But outside the rhetoric there’s a pretty clear case for the benefits of these alliances, particularly for an industry that needs desperately to hold on to its customer base. Maintaining and expanding the current alliance structure is one sure way to do so.

Concluding Thoughts

It is important to filter the daily missives fired from the labor bunker with the understanding that many in the industry are understandably frustrated by the changes and challenges in the airline industry. At some level, the best labor leaders recognize that the industry will not return to the unsustainable bargaining patterns and demands of yesteryear. Captain Wallach should take a very careful look at his union’s history at United and role in contributing to the precarious position the airline now finds itself in.  In other words, make yourself relevant in shaping United's tomorrow.

That history lesson should begin with the pilot-led majority purchase of the company in 1994, a process that began following a strike in 1985. With that purchase, the unions had unprecedented power in the governance structure and influence so strong it included hiring and firing power. But as the ESOP sunset, there was no transformation – no new culture or structure that prepared the airline to weather the trials to come. Instead, the transformation has come as the result of seismic economic factors that are redrawing the global airline industry map. And that map includes alliances – a necessary partnership in an industry in which US airlines aren’t permitted to act like other global businesses and merge.

There is not one legacy carrier in the US today that could stand alone and compete on a global scale. To stand in the way of market evolution is to stand on a dangerous path.

The United – Aer Lingus Venture: The Chicago Tribune Perpetuating the Past

Since starting this blog and taking advantage of opportunities to be “media trained” over the years, I was told that I would never read the news the same again. How true.

I am a little late in weighing in on a March 16 story by Julie Johnnson in the Chicago Tribune: Clipping Union’s Wings; United – Aer Lingus Plan to Outsource Pilots on Overseas Flights, which I believe errs in just about every aspect in understanding what is really going on in the airline industry.

In the article, Johnnson suggests that the arrangement between United and Aer Lingus will spark an uproar as pilot contract negotiations begin next month. But what the author fails to mention is that the Airline Pilots Association (ALPA) knew of this deal long ago. And while I am not in the business of selling newspapers as the Chicago Tribune is, I do believe that negotiations that already stoke emotional fires do not benefit from stories that throw fuel on those fires.

I’ll start with the article’s assertion that the United-Aer Lingus deal would allow the airlines to “outsource” pilots and, in the process, clip the union’s wings. But this argument ignores the fact that the UA – AE venture is permitted by the UAL pilots’ collective bargaining agreement.

Indeed, there is no evidence to suggest that the collaboration between the airlines is equivalent to outsourcing or in any way a violation of the pilot agreement. Worse, the story goes further by suggesting that these flights would be flown by under qualified pilots.

The article also raises questions – unfairly in my view -- about safety, noting that it is unclear who would regulate an airline not based in the home country of a parent carrier. U.S. limits on foreign ownership would not apply because the partnership would be based overseas. The author’s raising of the safety issue is specious as established carriers like United and Aer Lingus would not put their reputations at stake by knowingly engaging in unsafe practices.

But the story does underscore a common slant of some newspapers that key challenges can all be distilled into labor issues. It is, perhaps, no coincidence that the story implies that the company is working against the best interests of it pilots, while failing to mention that United has begun paying bonuses to its employees for operational performance.

So let me say what the newspaper article didn’t. The real story is network economics.

In this alliance, United is considering Washington Dulles to Madrid for the initial route. Keep in mind that Madrid is a hub for Iberia, which is part of the oneworld alliance. And so the plot thickens, as industry observers know that several oneworld carriers (American, British Airways, Iberia, Royal Jordanian and Finnair) have applied for anti-trust immunity to fly between the US and Europe. United, meanwhile, is part of the STAR alliance. The majority of its transatlantic flying is gateway-to-gateway flying between North American carrier gateways and gateways of European partners.

The advantages of gateway-to-gateway flying are many. Foremost is the ability to sell not just traffic in the local market; but also traffic behind the US gateway to the European hub. And not just traffic from the US local market to points beyond the European gateway; but also bridge traffic traveling from points behind the US gateway to points beyond the European gateway.

The STAR alliance is not now well positioned geographically to serve Madrid and Lisbon and even some points in the UK and France because its primary gateways are located much deeper into the European market. So for United to make Washington – Madrid work by itself requires the carrier to rely only on local Washington – Madrid traffic and feed traffic to Madrid from cities connected to the Washington gateway. The route therefore has a limited pool of traffic and revenue as compared to Washington – Frankfurt or Washington – Munich. Moreover, the Washington – Madrid route is much different from Washington – London where the local market itself can support multiple daily flights.

Iberia currently serves Washington Dulles - Madrid. My guess is that United, and STAR, have identified this as a strategically important flight to its network. But as a stand-alone UA route -- with its inherent cost structure (labor or otherwise) – I would be surprised if United could turn a profit. All of which demonstrates how important it is for United and STAR to establish a presence in a strategically important city pair at a cost structure that will improve the economics of the route.

The United Pilot Collective Bargaining Agreement

Under the terms negotiated between United and its pilot union, Section 1 of the collective bargaining agreement explicitly states that, prior to entering into code sharing agreements with foreign carriers, UA will confer with ALPA.

The agreement further obligates United to negotiate with the prospective partner any labor protections that it deems appropriate to the circumstances consistent with its business judgment, including a commitment to negotiate as much reciprocal code share as possible taking into account limitations that are beyond the company's control.

In my read, there is nothing in the scope section of the UAL-ALPA contract that prohibits revenue sharing, cost sharing or branding, as long as the code share tests are met. The agreement also stipulates that the company cannot remove a scheduled non-stop flight from a joint international non-stop market unless it can demonstrate that the flight fails to pass what is known as “base rate of return” test – in other words a route must achieve pre-ordained financial results. Moreover, the pilots’ contract permits United or one of its affiliates to acquire as much as 50 percent of the equity of a STAR alliance carrier, contingent upon certain details.

Concluding Thoughts

Finally, the story concludes with predictable comments from the unions representing pilots at both United and American – the two carriers expected to face the toughest contract negotiations and where the unions are most openly antagonistic toward management. These negotiations capture some of the most difficult issues facing domestic airlines, where in many cases labor leaders have failed to acknowledge or address some of the core structural economic factors changing the industry. But the story, and its take on this development, would be greatly strengthened by providing more context regarding the global airline environment and the pressures on US airlines to build a truly global network and route structure.

The question, quite simply, is whether the US airline industry can compete with lower-cost and better capitalized carriers from around the world, particularly in this challenging global economy?

The reality is that United is doing nothing more than what it is permitted under its agreement with its pilots. Yes, there may be union leaders and airline employees who simply resent that the era of US dominance in global aviation is on the wane, but to ignore this reality does nothing to position any airline for a new global marketplace.

Perhaps the Tribune erred mostly by painting the challenges and opportunities facing United in the time-worn management-labor construct, rather than with the complexity the situation demands. The industry will change and change dramatically. And companies that fail to find new ways to create value through branding and revenue sharing and cost sharing could fail to exist.