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.

Musings From the Last Five Weeks

US Airways - American

$130 here - million I mean.  $100 million there.  Couple hundred here and there.  A chunk of the company for you.  A less than desirable chunk for me.  Hey PBGC, what do you need so we can carry a pension liability on our balance sheet going forward? That’s not a problem since the “old” US Airways terminated its plans!  While we are at it, let’s keep 15,000 more employees than a similar-sized United (each carrier would generate approximately $37 billion in revenue) because, after all, the synergy generation will surely cover it.  It’s the new math - circa 2012.

In its quest to acquire American Airlines, US Airways sounds like a teenager with its first credit card, spending money it doesn’t have.  Paper wealth.  What cracks me up about this “plan” is the new math I mentioned. Critics pan AA’s goal of creating $1 billion in new revenue as bogus because, among other issues, it assumes no competitive response.  Does anyone really think United and Delta are going roll over and let US Airways improve its revenue generation at their expense? Not a chance.

UAL CEO Jeff Smisek said last month a US merger "net, net, that would be good for us." Will there be more competition on certain city pairs?  Yes.  But neither United nor Delta are afraid of competition much less the threat posed by the paper tiger US Airways/American combination.   Smisek and Delta’s Richard Anderson are smart. They know the synergy formula US has seduced some media and AA’s unions with is but a calculation at this point.  Even American’s own pilots admitted in bankruptcy court this week its faux “deal” with US doesn’t include cost assumptions or valuations.

In other words, US is spending money it has no idea whether it will actually have. It is one thing to have a term sheet and quite another to have written contractual language.  My bet is United and Delta see that the first mover advantages created by mergers have already been mined.  For AMR’s creditors – including the labor unions – there are a host of other issues with this proposed takeover.  It is my opinion that US’s new math adds up to the likelihood that they may need to visit out-of-court cost cutting exercises within a very short time to finish the job that they are choosing not to finish during the courting stage – particularly if exogenous shocks again plague the industry.

Showdown in Houston

Most readers of www.swelblog.com know I was asked by United to help study the findings of the Houston Airports System (HAS) report about Southwest flying internationally from Houston Hobby Airport.  HAS and its consultants originally claimed that 23 flights by SWA from Hobby would create in excess of 18,000 jobs and generate more than $1.6 billion in new economic activity for the City of Houston. 

Stratospheric numbers like those don’t pass the sniff test, yet Southwest executives Gary Kelly, Bob Montgomery and Ron Ricks reference the HAS findings as if they were they were gospel.  More on this later.

I believe the HAS study is seriously flawed and is based on what has become known as the “Southwest Effect.”  Problem is, the “Southwest Effect” is a largely a thing of the past.  It got its name from a study completed more than 20 years ago by the U.S. DOT when jet fuel was the equivalent of $30 per barrel.  The fundamental premise is lowering fares will create a disproportionate level of “new” demand in a market. 

Despite the fact Southwest has no experience in flying to international markets, the HAS study assumes traffic will increase 180 percent.  Relevant empirical data shows Southwest’s (135 city pair markets entered since 2006) entry into new markets over the past five years resulted in traffic stimulation of only 10 percent. The latest data shows fares in those markets have actually increased – not decreased.  The HAS study, at a minimum, grossly exaggerates the benefits of a Southwest entry into duplicative markets and is based on a host of unrealistic assumptions. Publicly available cost data shows international flying done by Southwest from HOU would lose more than $76 million per year.  Even Southwest is not flying markets that lose that kind of money despite its self-proclaimed benevolence toward the air travel consumer.

The economic stimulation predicted by the HAS study claims that prices will decrease 55 percent lower than United’s fares.  The truth is, what Southwest calls “stimulation,” is comprised mostly of the cannibalization of IAH traffic which adds nothing to the Houston economy.

The “Southwest Effect” does not drive benefits to local economies as it once did.  Even Gary Kelly agrees.  When pinned down by the Houston City Council on the number of jobs that would be created at Southwest from its limited entry to routes already served, Kelly admitted that total number (nationally) would be 700 and direct Southwest jobs created in Houston would be 50-100. Kelly went on to say that even these 50-100 jobs would be achieved only if Southwest flies the maximum number of flights in its projections several years after entry.  

Even with outrageous multipliers, the number of direct, indirect and induced job creation cannot even begin to approach 10,000 – let alone 18,000.  Not even by relying on the long-obsolete conclusions of a 20 year old study.

The United Pilots

The United pilots are at it again.  While the Delta Air Lines' pilots reached an agreement seven months early, the United pilots are busy building websites whining about outsourced jobs (their term, not mine) and the salaries of United Airlines’ executives. 

Labor leaders in the pilot ranks would have you believe this “outsourcing” (international code sharing and the use of regional flying within the network) is all about management abusing provisions of their collective bargaining agreements to enrich their shareholders. In fact, reducing costs through the relaxation of scope provisions has been labor’s “quid” in return for increases in compensation (or to give less in a concessionary contract) and benefits for 20+ years [the “quo.”]

Among many myths portrayed on the website, United ALPA (Air Line Pilots Association) claims that after the tragedy of September 11, 2001, the management of United Airlines launched a strategic plan to offshore and outsource jobs in an effort to cut costs.  Look no further than the unaffordable contract negotiated between United and its pilots in 2000.  The pilots significantly relaxed scope provisions in return for increased wages, work rules and benefits.  I rest my case.

First of all, the fundamental economics underlying the health of the U.S. airline industry began deteriorating during the second half of 2000.  September 11 ensured that there would be no return to prior industry conditions particularly on the revenue line.  The incursion of the low cost carriers and the use of the internet for airline ticket distribution were every bit as powerful forces as 9/11 in compelling the industry to restructure.  The operating models sought by the network carriers were to find cost savings much like the low-cost carriers – a sector that outsourced a significant portion of its maintenance.  The advent of the regional jet in the mid-1990s was the catalyst driving a reduction in pilot and other costs.  Pilots at all network carriers permitted extensive use of the regional jet well before September 11, 2001.

Perpetuating myths to a public that largely doesn’t care (pilots are much better compensated than the average passenger) is probably a disservice to United’s ALPA members.  Put energy into negotiations like the Delta pilots and you might actually get somewhere.  That requires leadership and telling the entitled pilots at the old United that things are not going to return to the days when the company negotiated contracts it couldn’t afford.  It is just not going to happen.

Concluding Thoughts

Delta Air Lines just continues to do things a little differently.  When it merged with Northwest, Delta made the pilots “buy in” to the concept that consolidation was inevitable and that it was in their best interests to participate.  Delta’s financial performance relative to the industry has been very good quarter after quarter.  Then it buys an oil refinery and negotiates a deal with pilots seven months before the amendable date.  Hell, most negotiations have just completed the uniform section at this point in the proceedings – maybe.

It is clear Delta’s largest unionized group understands industry realities.  That’s a rare thing these days when, too often, reality is sacrificed for political expedience.  Simply look at how much has been made in the media about American’s unions joining hands with US Airways.  That was the easy part.  Which union wouldn’t agree to give up less and suffer fewer job losses?  It sounds great to members and union leaders can knowingly smile and say, at the very least, they’re putting pressure on management.  But reality says they’re weakening their own position, opening themselves up to my favorite term – unintended consequences and simply ignoring the truth that US Airways would have to carry 15,000 more heads than United, while generating the same level of revenue.  That’s not reality; that’s fantasy.

There is little doubt industry consolidation has helped catapult financial results beyond what could have been imagined for the industry based on past performance.  In that reality, my guess is Delta just made it more expensive for US Airways - and United - yesterday by negotiating yet another joint collective bargaining agreement.  US Airways needs those lower labor rates because its network produces below industry unit revenues. So now US is in the position of not only promising American’s pilots increased pay, but having to actually pay its own pilots at Delta +.

But hey, what is a couple of hundred million here and a couple of hundred million there?  After all, the margins for the US airline industry are plentiful.  Right?

US Airways at the Masters: Trying to Win on Thursday?

For those readers who know me well, today marks the beginning of the end of the finest 30 days in sports television.  It starts with the NCAA tournament and culminates with what can often be the best two hours in sports – the back nine at the Master’s Tournament on Sunday. 

Even with the history and the azaleas to occupy my attention, on this tournament Thursday, my mind still wanders to the airline industry and I see similarities in golf, aviation and the games people play.

As is tradition at the Masters, past champions Nicklaus, Palmer and, this year, Gary Player (a.k.a  Delta, United and Southwest) ceremoniously hit the first tee shots to open the playing of 76th tournament at the venerable Augusta National Golf Club. Past champions (multiple winners) at the Masters Tournament enjoy notoriety and historical significance long past their years of playing.

A popular past champion still participating in the Masters Tournament is Ben Crenshaw (American Airlines).  Crenshaw is given little to no chance in this year’s tournament, but the sweet putting stroke possessed by the Texas gentleman keeps Crenshaw a fan (AAdvantage members) favorite. 

Some very good golfers have never attended the Champion’s Dinner. Greg Norman (er US Airways) for example.  Nobody in Masters’ history lost in more heartbreaking fashion than Norman in 1987 when Larry Mize chipped in on the second playoff hole to beat him; or when Norman beat himself in the final round that handed the green jacket to Nick Faldo in 1996.  Norman’s misery is akin to US Airways missing out on consolidation opportunities in 2001(United), 2008 (Delta) and then again in 2010 (United).  US Airways’ strategy to attempt a hostile takeover of Delta while in bankruptcy in 2008 reminds this golf fan of Norman’s collapse in ‘96.

Playing in this year’s field and given a real chance to win are world #1 Luke Donald (Alaska Airlines) and world #2 Rory McIlroy (jetBlue Airways).  The Europeans are also making a strong showing these days, like defending champion Charl Schwartzel and perennial contender Lee Westwood (British Airways and Iberia).

Bunkers, Birdies and Bogeys

Pressure tournaments like the Masters tend to spawn meltdowns even among the very best players. The young McIlroy, in fact, suffered through a sad Sunday in Augusta last year.  Just like airlines have their good years, bad years and critical moments. And just like golfers, the difference between success and spectacular failure in the airline industry depends on how you read the lie. It’s how you think your way around the course, avoiding bunkers like bad decisions, taking advantage of business opportunities (birdies) and minimizing the negatives (bogeys and others) like fuel spikes and bad strategic decisions.

That brings me to US Airways.  

US Airways pursuit of Flight Attendant Hearts and Minds

The Masters is an invitational tournament; you have to be invited by the “committee” [UCC] in order to play.  US Airways is trying to play to the court of public opinion to get an invite to this year’s event.  US Airways had one good round it hoped would help it win an invitation to play in the year’s first major. That was reaching a tentative agreement with its flight attendants.  Unfortunately for US Airways, it couldn’t finish. The flight attendants at the company overwhelmingly rejected that agreement despite the fact it offered significant pay increases.

The flight attendants said in a press release:  "Since the onset of negotiations, Flight Attendants have been steadfast and determined that an agreement must address the needs identified by the membership. Flight Attendants have subsidized the cost of the merger and rising fuel costs for the 'New US Airways.' Management must recognize that our sacrifices have directly contributed to the success of US Airways," said Deborah Volpe, AFA pre-merger America West President and Mark Gentile, AFA pre-merger US Airways acting President.”

It has been nearly seven years since the “Old US Airways” merged with America West and there is still no done deal with either its flight attendants or its internally troubled pilot group. 

And yet before round one has been completed in Augusta, US Airways has allegedly been courting the president of American Airlines flight attendant union, Laura Glading, who is also a member of the Unsecured Creditors Committee (UCC) in order to get that invitation to the year’s first major… a merger with American?

While it’s hard to know exactly who is chasing who in all of the US Airways merging/consolidating with American talk, Glading and the APFA have been anything but shy in their pursuit of an offer from Doug Parker and company. The APFA has boldly stated it thinks there is a better business plan than the one American is offering… mainly because AA’s will freeze pensions and trigger approximately 13,000 layoffs. (Notice no mention of the finer points; that AA’s plan might finally unshackle the company’s ability to compete with other network carriers who rehabilitated under bankruptcy.)

Someone – probably the APFA - has “leaked” stories to specific media about “suitors” talking to the UCC – even though as far as anyone knows the only UCC members actually listening are the unions themselves.

While both the APA and TWU (who are also part of the UCC) have reportedly had serious discussions with AA – and apparently those negotiations might have saved some TWU jobs – Glading has been stomping her feet and pouting about the unfairness of it all.  She’s on record as stating the UCC (or, at least, one particular UCC member) is open to seeing a “better” business plan, thus leading to the flirtation with US Airways.

“Better” to Glading apparently means giving up nothing and gaining everything. But what “better” will she glean from this dalliance with US Airways?  Not to change sports, but Vince Lombardi, the iconic former coach of the world champion Green Bay Packers said:  “the only place you will find success before work is in the dictionary”.  Do Glading and other leaders of American’s unions honestly think US Airways will not seek to make major changes to American’s archaic work rules and collective bargaining agreements? 

In the tentative agreement, the former America West flight attendants were granted a 22 percent increase and the former “Old US Airways” flight attendants were given an 11 percent increase to even out pay rates – finally, after seven years. What then would US Airways have to do in order to put three groups on par with one another? Would APFA members be willing to work more for less? And if so, why wouldn’t they just stay with their own company? Or entertain commercial opportunities that might not involve a seniority integration process?

Maintaining a Cost Advantage Is Critical for US Airways

US Airways suffers from a stage length adjusted unit revenue disadvantage versus its legacy carrier peers – even more than American. But it also enjoys a stage length adjusted unit cost advantage versus these rivals – much more than American. Despite the revenue generating deficiency of US Airways’ network, the Tempe-based airline is producing very good revenue results relative to the industry.

US Airways’ revenue disadvantage is offset by maintaining its cost advantage – and most of that advantage is very low labor costs relative to the industry. As a result, US Airways’ pre-tax margins are impressive given its structural deficiencies. The cost advantage the carrier enjoys cannot be overstated nor can the company hide behind the fact a significant portion of its profit performance can be found in lower labor costs. By contrast, United and Continental are only now beginning to navigate what it might cost to buy labor peace, particularly among the pilot groups. US Airways has not explored what labor peace would cost, probably because maintaining the status quo is more cost effective.  Or did the flight attendants say in their vote that what US Airways could afford was not sufficient to buy labor peace?

US Airways Touting Merger Synergies Before an Invitation is Granted

The most recent version of the US Airways – American merger story leaked to the press suggests the “synergies” of a combination would produce $1 billion in revenue and $500 million in cost savings.  The revenue synergy number stems from the idea other mergers have realized a three margin point improvement in revenue resulting from the combination.  JP Morgan’s Jamie Baker point to the fact American is weak in Albany, Buffalo, Greesnboro, and Richmond to name a few.  What a yawn. In today’s world why are Baker and US Airways not talking about Auckland, Buenos Aires (oh American is positioned there), Guangzhou or Rome?

The strongest example of American’s domestic weakness is that AA is the #4 carrier in the Eastern U.S. in terms of market share and #4 in the highly fragmented Western U.S.  So, the question remains, can AA truly address these structural weaknesses organically or does it need a merger partner?

Problem with adapting previous margin calculation to a US-AA merger is they don’t necessarily apply. Other mergers involved carriers with stronger domestic and – and more important – international networks. US Airways flies to mainly second-tier markets and has little international presence. That might seem like a good thing – each partner filling a need – but there is little synching between the two – but for this observer there is nothing that gets me excited from a network perspective. Domestic calculations are one thing – international are another.  If I were Delta or United, I would be applauding this possible combination because it adds little to what other combinations might add.  And what about the cost savings?  We don’t even know what American will look like once it goes through the full bankruptcy process.  Therefore how can we know what the cost savings will be?

It is just too early to tell because no one knows what AA will be when it gets through the restructuring process.  Stated differently, what if AA wins the ability to have unlimited code sharing in the U.S. domestic market as a result of a changed pilot scope agreement?  Then is US Airways the only choice?  After all, American’s CEO, Tom Horton, has stated publicly he is not averse to a merger, but will only consider such a strategy once the company completes the restructuring process.

US Airways is absolutely not the only option for American.  What about a fully integrated relationship with each Alaska and jetBlue?  These would certainly better address the weaknesses on the west coast and in New York, particularly at JFK – two aspects of American’s not-successful-to-date “cornerstone strategy”. 

The point is, there are options for American beyond US Airways and I might suggest there are better options than the Tempe-based airline – and they do not require a seniority integration process and potentially do not add seats to the capacity fragile U.S. domestic market.  Then again the restructuring needs to be completed in full before we can begin to evaluate options – something that US Airways wants to avoid.  For a company that constantly claims it does not need to merge, it seems to this observer to be incredibly desperate and fearful of not merging with its bigger counterpart.

Concluding Thoughts

As they say at the Masters, and any golf tournament for that matter, you can lose the tournament on Thursday but you cannot win it. It seems to me that US Airways is trying very hard to win the tournament on Thursday.  There is a lot of golf to play in the American Airlines’ bankruptcy case. And until the back nine begins on Sunday, the leaderboard promises to be crowded as American is an important asset to many – most notably employees, British Airways, JAL, the Dallas-Fort Worth Metroplex and Tulsa to name a few. 

If employee members of the Unsecured Creditors Committee are going to believe there is a free lunch (egg salad and pimento cheese sandwiches) with US Airways they are surely mistaken. Simply, if US Airways doesn’t fix many of the structural things wrong with American, then in a few years maybe the “New New US Airways” will have to file for bankruptcy and fix some of the obvious problems their desperate overpromise and sure to under-deliver approach to American’s unions will avoid in order to win the hearts and minds of employees to get a deal done.

Most of the naysayers regarding American’s stated stand-alone business plan have vested interests in the outcome of the game.  Wall Street has made the case that consolidation and strict capacity discipline absolutely need  to be adhered to if the industry is to be stable.  They cite American’s 20 percent stated growth as something to fear.  And it might be.  But what is the 20 percent American has mentioned?  Nobody knows.  What if it is the ability to generate 20 percent more city pairs to sell through code sharing alliances with Alaska and jetBlue that add no new capacity to the system?  Net effect equals zero.  Period. 

Then we have US Airways.  Too big to be small and too small to be big.  Like American, there is a case to be made that their route structure is being marginalized each and every day; therefore a merger is more important to its very success.  For US Airways it’s only shot at a green jacket is to buy one (remember Crenshaw has two and Norman has none) because over a career opportunities to win one have been missed. 

Angst breeds strange bed fellows.  Angst does not win an invite to the Masters Toonament.  And angst does not win an invite to membership.  Yesterday Dustin Johnson had to withdraw from the Masters because of health reasons.  For US Airways this sucks because the Masters does not have an alternate list.  It must earn its way into the 2013 event because angst will not get it into this year’s Masters Tournament.

More to come.

Swelbar: Pondering More of American’s Bankruptcy “News”

So much speculation around what American Airlines might be upon exit from bankruptcy; so many scenario possibilities.  Some media and those with specific interests in the industry are moving pieces around the game board with talk of mergers and acquisitions. I’m willing to play, but with a caveat; no one should take all the recent posturing seriously – at least not yet. And it won’t be tomorrow, or next week, or even next month. More likely the serious gamesmanship will begin approximately 7-8 months from now as creditors evaluate and negotiate American’s proposed plan of reorganization.  Right now, AMR has no choice but to approach the upcoming Section 1110, 1113, 1114 and all other discussions as if it will emerge as a stand-alone entity. 

The world is much more comfortable with the bankruptcy process today than it was even a few years ago.  Lessons have been learned.  Hostile runs on companies in bankruptcy are probably not the answer if a potential suitor really wants to be successful in being a part of the ultimate entity that emerges – unless there is no other option as creditors get close to signing off on some other plan of reorganization.  American will tell stakeholders what IT thinks needs to be done to put the company on a viable path. 

American’s $4 Billion In Cash – It Is Not Quite What It Seems

I just have to get one thing off of my chest:  $4 billion in cash on November 29, 2011 was about to become something much less.  It is one of the reasons why American filed for bankruptcy protection before it was too late.  Can we stop talking about a cash-rich filing?

Reactions ranging from dumbstruck employees to PBGC Director Josh Gotbaum’s comments regarding AMR’s bankruptcy filing with over $4 billion in cash leave me smiling.  The fact is AMR’s $4 billion cash reserve would have depleted quickly had the company continued without bankruptcy – possibly to the point of corporate oblivion.  AMR’s Board of Directors had no choice but to file as the company likely had very little access to affordable credit markets since few of the company’s assets were unencumbered.

Since September 2001, airline companies have significantly increased their liquidity (unrestricted cash plus available credit) as a percent of trailing twelve month revenues from roughly 10 percent to 20+ percent.  In 2011, only American and US Airways held liquidity balances of less than 20 percent.  While American’s cash erosion will be mitigated in bankruptcy, it resembles only adequate operating liquidity not a pool from which to pay large fixed obligations.

With that $4 billion in cash, American faced a pension contribution of $100 million during the fourth quarter of 2011; and $560 million in 2012; maturities of long-term debt including sinking fund requirements were $1.1 billion during the fourth quarter of 2011; and $1.8 billion during 2012.  These obligations should be considered against the backdrop of an airline entity that was burning cash at the operating level and the fact nearly all of its assets were pledged as collateral.  While it is true that some $800 million in assets would have become unencumbered during 2012, the amount is certainly less than necessary to maintain sufficient liquidity and meet fixed obligations assuming American would need to collateralize any credit it would seek.

In fact, if AMR were to pay its obligations with its existing cash balance, it is highly likely that the company would have faced a liquidity squeeze at some point during 2012. And that’s assuming no fuel spikes or world events that might impact airline operations.  I think it can safely be deduced the company did what was prudent to preserve the enterprise. Moreover, employees in denial and a PBGC with its own vested interests should step back and reexamine whether the $4 billion is really $4 billion. 

I don’t think so. The case is clear that a $4 billion liquidity balance is on the low end of optimum for a $22 billion dollar revenue generating airline company whether in bankruptcy or not.

Last Friday’s Bloomberg “News” – A Combined US Airways and American

The cynic in me just loves to read airline news published late in the day on a Friday afternoon.   But that is precisely what we got from Bloomberg last week titled:  US Airways Said To Consider American Airlines Merger To Fill Revenue Gap.  There were no sources to the story, only the classic reference to “people familiar” with the Tempe-based airline’s current activity.  Neither US Airways nor American Airlines would comment.  You know how it goes.  [On the US Airways 4^th quarter earnings call Wednesday the company did confirm the hiring of the advisers to study the matter mentioned in the story]

It has been suggested by some that American needs to pare capacity along the lines of other U.S. airlines in the domestic arena because it hasn’t done enough to date.  US Airways is often used as the example of a company that has demonstrated stringent capacity discipline and now has significantly improved margin results.  Yet the article says American Airlines might have pared too much capacity – to the point where the Fort Worth carrier is no longer attractive to significant portions of the revenue rich corporate travel sector. Someone is right - I guess?

In some circles, both American and US Airways’ networks are referenced as sub-optimal.  My question then:  does sub-optimal plus sub-optimal equal optimal (at least when compared to United/Continental and Northwest/Delta)?  Probably not, but there is the possibility the whole could/would equal more than the sum of the parts and thus generate more revenue. That doesn’t necessarily mean it’s the best-case scenario because there are plenty of questions when considering an American - US Airways combination -- but one can consider such a combination. 

A merged American and US Airways would be the second-largest U.S. airline on paper, but US Airways got out of the mid-continent hub business when it left Pittsburgh. So, how would the Chicago hub fit in? Philadelphia might be the poor man’s JFK (absent sufficient slots at the New York airport), but could Philadelphia prove to be an acceptable surrogate Northeast U.S. gateway to oneworld as it battles STAR and SkyTeam for high yielding east coast traffic?  What happens to the jetBlue relationship forged by American that could certainly be expanded when expected scope relaxations are achieved?  If the carriers combined, is there really a need for both a Phoenix and a Dallas/Fort Worth hub?  I don’t think so.  If not, where would the headquarters be?   

If American’s exit were to include US Airways, would oneworld make US Airways a full partner in each the transatlantic and transpacific joint ventures?  I would think so because, if US Airways’ domestic system is so fertile as to fill a hole in American’s U.S. network as the media stories claim, then it must be every bit as powerful in filling oneworld’s intercontinental revenue deficiencies.  Assuming that, nearly overnight, oneworld would become a more vigorous competitor with SkyTeam and STAR for traffic flows that neither carrier could capture on their own.  There would be a shift of revenue share from STAR to oneworld in addition to new competition.  How might STAR react if there were an overnight shift of 15 points of revenue share to oneworld?  Might STAR – or United - move quickly to make US Airways a full joint venture partner? 

For airline nerds like me, thinking about mergers/acquisitions by only looking at a map is fun. As games are supposed to be.  But reality means there is much more to consider.

Like any other potential bidder, if US Airways were to emerge as a party to American’s exit, the Tempe-based carrier will have to win the hearts and minds of the employees, the PBGC, the rejected Section 1110 lien holders and the unsecured debt holders to name a few along with Boeing and Airbus.  The onus would be on US Airways to demonstrate its plan will ensure higher returns than a stand-alone plan by American or a plan submitted by other interested parties.

Labor will be a key target.  US Airways, or anyone else, will tell labor a combination can offer an option to the cuts AMR is all but certain to require.  While that sounds great, labor will have to weigh any alleged benefits against a certainty it will be forced into a seniority integration process.  And we all know how emotional seniority integration proceedings can be in the airline industry. 

US Airways and its pilots have not negotiated a new collective bargaining agreement because of a failed seniority integration process that started in 2005 and today flounders in litigation – an internal union issue and not the company’s.  Nonetheless, would that mean American Airlines’ pilots could not achieve raises/improvements from the company because the integration of US Airways and America West pilots is not complete?  What about the flight attendants?

The Section 1113 and 1114 process at American all but ensures those employees will take significant cuts in work rules and benefits as those are the areas where AA has the largest competitive exposure.  Even after those cuts, though, some AA employees (like pilots) will still likely make more than many peers at the current US Airways.  So, would the theoretical combined carrier ask AA employees to take less so US Airways employees can get more than they might?  How does that apply to work rules, benefits? There are those who would (and, in fact, are) dismiss these issues saying they can be dealt with later, but that’s short-sighted.

A Combined Delta Air Lines and American

I still cannot get beyond the regulatory hurdles this combination would face, let alone the fact that all of the issues discussed above would also apply.  But here are four things that immediately concern me:

1. There are significant overlapping routes that would need to be addressed by the U.S. regulatory agencies to the point the carve-outs necessary might look and feel like a breakup of American, similar to Delta’s past devouring of parts of Pan Am.
2. Given the current strains between the U.S. and the European Union, combined with the latter’s consternation over the existing alliance construct, I cannot imagine the EU having an appetite for seeing three global alliances reduced to two.
3. The concentration at New York JFK specifically and New York generally.
4. Given the Obama Administration’s expressions of regulatory angst and outright displeasure when #2 AT&T proposed combining with #3 T-Mobile, I find it unlikely that any of the respective agencies would embrace a similar proposition in the airline industry.

As they say in the South, “this dog don’t hunt”.  But let it be clear I respect Anderson, Hirst and the Delta team as they did push a merger with Northwest and the slot swap with US Airways through the regulatory process.  And that is no small feat.

Concluding Thoughts

At this point, three/four names are circulating as having an interest in a restructured American Airlines:  US Airways, Delta Air Lines, TPG Capital and, possibly, IAG.  Whether American emerges from bankruptcy alone or with a partner(s), the case is going to take many twists and turns – some daily.

In pure laboratory conditions where American could restructure without any outside influences, AA would emerge as a much lower cost entity and, therefore, pose competitive threats to other U.S. airlines. 

To mitigate American’s potential cost advantage, other airlines will be sure to muck up the process to ensure that American is not fully successful in achieving its stated result.  Delta is not necessarily just gaming US Airways to cough up more in a bid or vice versa, but as I’m fond of saying, it is the law of unintended – or in this case intended - consequences.  Both are trying to ensure American has to pay more.  The conditions for American will prove anything but pure.

Of course, the game changes if United moves to buy US Airways in order to prevent losing the 15 points of transatlantic revenue share it delivers to the STAR alliance.  I do not believe Delta has a chance unless the Unsecured Creditor Committee (UCC) recommends, and the bankruptcy court agrees, that the parts of American are worth more than the carrier as an ongoing enterprise.  In that scenario, Delta will try to secure as many of American’s assets as it can conceivably digest and still get regulatory approval.  

But there we go again, speculating.  In order of least employee/corporate disruption I rank today’s possibilities as follows:

1. American as a stand-alone
2. American and IAG/oneworld
3. American and TPG Capital
4. American and IAG/oneworld, TPG Capital
5. American and IAG/oneworld, TPG Capital and US Airways
6. American and US Airways
7. American and most anything Delta
8. Liquidation of Assets

The one thing I can positively guarantee, though, is there will be employee/corporate disruption and plenty more speculation to come. Let the games begin.

Swelbar: Just Thinking About A Few Things

Yesterday’s Wall Street Journal

Susan Carey, Gina Chon and Mike Spector report that Delta Air Lines and TPG Capital are separately evaluating potential bids for American Airlines’ parent, AMR.  This story, along with the myriad of others discussing a US Airways bid for the Fort Worth, TX carrier, is just a warm-up for the main event of AMR’s trip through court-assisted restructuring and the ultimate filing of a plan of reorganization acceptable to creditors.

Delta might seem like an odd suitor.  First, we have to accept the fact Richard Anderson’s Delta is not your father’s Delta.  He and his team are aggressive and understand American holds many assets and relationships that are valuable and thus important to Delta (and SkyTeam) like:  Chicago (where Delta has been adding select domestic flying), a relationship with British Airways, a relationship with JAL, a relationship with LATAM, more of New York (this is where regulators will really struggle along with the absolute size of the combination), a deep South America presence, more of Mexico, Miami (where Delta has been adding select domestic and international flying), and a way to defragment Los Angeles. It could also simply be an attempt to keep a restructured competitor from emerging.

Delta is reported to have performed an antitrust analysis that concluded - with certain carve outs - the massive combination could pass regulatory scrutiny.  While I can see such a combination would bolster Delta’s market positions in many areas including the middle and eastern regions of the U.S., across the Pacific and into burgeoning Latin America, there is also a lot of overlap between hubs.  If Detroit and Cincinnati competed before, imagine the hub competition – and redundant flying – with Chicago thrown into the mix.  Nonetheless, just on sheer size alone, I think an American-Delta combination would  prove hard for U.S. regulators to grasp and approve. Delta would also have a difficult task of selling such a merger to an already skeptical European Union.

Fort Worth-based TPG, on the other hand, likes to work with strategic partners according to the Journal.  TPG has strong ties to the current management team at US Airways.  Richard Schifter, TPG partner, served on US Airways Board of Directors.  Schifter is currently a director at Republic Holdings.  Schifter and another TPG partner, David Bonderman, have extensive ties to the airline industry stretching from Continental to Ryanair.  No one should be surprised a private equity concern like TPG Capital might have an interest in a restructured AMR.  For TPG, the strategic partnership possibilities are many and include US Airways, British Airways or any oneworld partner that fears the loss of its only meaningful access to the traffic rich U.S. market.

This Wall Street Journal story highlights something I think is very important; AMR is attractive to strategic buyers as well as a financial buyer like private equity.  Today, the list of names publicly discussed as interested in AMR is three.  That list will grow over the coming months. 

It is also highly likely that this story was leaked by a party to mask something else.  We will see. It is important to remember potential bidders will likely wait a few months until a lot of difficult decisions regarding network and fleet are largely complete. They’ll wait until contentious negotiations with labor are complete – probably including layoffs -  as any new owner will not want to get their fingernails dirty in that process. Potential bidders will also likely wait to see how creditors are treated in a debtor negotiated exit plan.

A question remains however:  will any bid attempt by a strategic or a financial buyer for AMR be friendly or hostile?  US Airways tried an unsuccessful hostile run for Delta. There are a myriad of possibilities here and all that is guaranteed is the debtor has the exclusive right to file a plan of reorganization until the court says otherwise.  That plan may include an offer from a strategic or a financial interest, but at this point, it is all conjecture providing an opportunity to opine.  That said the news reported yesterday officially begins AMR’s journey through bankruptcy.

LAN/TAM

If there is an airline company built with more innovation and creativity than LAN, then someone give me a call and let me know who it is.  Or was it just being in the right place at the right time?  Either way, LAN Airlines has quietly grown into one of the global elite carriers and has earnings and a market capitalization to match.

LAN is an airline I rarely mention, but have a deep admiration for.   Based in Santiago, Chile, LAN’s strategy of taking equity stakes and, in effect, becoming a surrogate flag carrier for a country in an economically struggling region where other airlines have failed, has been brilliant. The strategy has allowed the former Lan Chile to diversify its traffic base away from Chile-only and grow to become the de facto flag-carrier for other countries on the continent. LAN’s ability to take advantage of non-Chilean country bilaterals has produced growth opportunities where a reliance on Chile-only would have only led to diminishing returns.

The carrier began as Línea Aeropostal Santiago-Arica in 1929 before becoming Línea Aérea Nacional de Chile (Lan Chile) in 1932. The Chilean government privatized Línea Aérea Nacional de Chile in 1989, and the carrier absorbed Chile’s second carrier, Ladeco, in 1995. Today, the LAN umbrella covers LAN Chile; LAN Peru; LAN Dominicana; LAN Ecuador; LAN Argentina; LAN Cargo; and LAN Express, among others. Some said LAN refers to Latin American Network. Any way you cut it, LAN is a brand!

LAN was just given authority to complete its merger with Brazilian-based TAM and the combined entity will be LATAM.  To become a true South American airline powerhouse, LAN absolutely needed a significant stake in Brazil, which it now has.

One of the merger problems is each carrier is currently a member of a competing alliance.  LAN is a member of oneworld and TAM is a member of STAR.  If Brazil was essential for LAN, imagine just how important the emerging market is to each of the global alliances.  This story might take on the characteristics of the fight for JAL between SkyTeam and oneworld.  South America is yet another critical geographic area where oneworld is under attack.

American Eagle

Two months ago, most industry watchers were scratching their heads about the investment reasoning for American Eagle as parent AMR intended to spin it off.  High unit costs largely stemming from a very senior workforce, along with a fleet that was built around an archaic scope clause at mainline American Airlines, defined the carrier.  I am confident virtually every carrier comprising the regional industry had little to no fear that Eagle was going to steal any potential business. 

Now with bankruptcy and the freedoms to cut costs, American Eagle may look very different coming out of court-assisted restructuring.  Fleet alignment is sure to occur, and is happening, with any and all 37 and 44-seat aircraft immediately being taken out of service.  Certainly there are numerous out-of-market leases on aircraft controlled by the parent that can be reduced.  In fact, we may see a new market rate established for a 50-seat aircraft that takes into account a $120 per barrel jet fuel environment.  Labor rates and rules are sure to be reduced.  If the ground handling services Eagle offers were the crown jewel pre-bankruptcy, just imagine how much more attractive Eagle’s rates to other carriers will become after the restructuring.

Don’t let the point regarding a new ownership market rate that takes into account the high cost of jet fuel get lost.  While Eagle might be successful, it is likely that Pinnacle will not.  This factor is potentially significant.  If a new rate can be found through the bankruptcy process along with reduced labor rates, suddenly for American, a number of small markets served could be removed from the chopping block and remain a part of the reorganized American network.   

Whatever the size of Eagle when it emerges, it is going to be much leaner than the majority of its competitors.  My guess is SkyWest, Pinnacle, ExpressJet and others are watching this restructuring with bated breath because a new market rate for 50-seat flying, and other flying for that matter, will present itself in the coming months.  And a new competitor for future regional flying will emerge.

American Pilot Scope and Pilot Negotiations at United-Continental

As American and its pilots union attempted to negotiate a new agreement up until the time the company filed for bankruptcy protection, certain aspects of what was being discussed were leaking into the mainstream media.  The game changer being discussed was the new A319 fleet would be flown at rates and rules much lower to reflect the difficult economics of the domestic business and appropriately reflect the market/aircraft size. 

If this is indeed the road American travels down in its Section 1113 negotiations, there are significant and immediate ramifications for the negotiations taking place between United-Continental and its pilots.  As the UA-CO pilots spend more time taking on the company using safety as a hot-button, a new baseline is about to be established as to how pilots work and get paid.  If the UA-CO are hung up on nothing more than 50 seats, then I ask:  what about 115 seats? 

The United-Continental pilots’ strategy to exert a leverage point blew up in their face on November 29, 2011.  Where AA is going is in the right direction as it accomplishes multiple things that will benefit their business:  1) it is better able to match costs with the domestic revenue environment; and 2) it puts an end to the pilot scope discussion.  Regional partners will not be doing any 100 seat flying because, in this seat range, mainline pilots have a better ability to match the cost of flying done by the regionals.

Whether United-Continental pilots either figure it out (or not), the focus then shifts to Delta where scope is already a hot button issue.  In 2013, US Airways pilots are absolutely going to be forced to consider something similar to what the AA pilots are likely to agree to. 

Then you just have to wonder what Gary Kelly is really thinking.  The tables just may be turning.

How the Weeks Ahead Will Shape AMR In The Years To Come

The biggest story in the U.S. airline industry right now is, of course, American Airlines’ parent company seeking Chapter 11 bankruptcy protection. After a flurry of initial filings and some alterations at American Eagle, there hasn’t been a lot of movement from AMR.

The lack of news from it or the bankruptcy court probably has a lot of people - union leaders, media, employees, communities – wondering what is taking so long. That’s the first key to understanding this airline bankruptcy is different and why other airlines such as United, Delta and Southwest as well as the federal government and even regional carriers are keenly watching and waiting.

Unlike all the other airlines that have gone through Chapter 11, American doesn’t have a Debtor In Possession (DIP) lender breathing down its neck. That’s because the AMR board of directors made a strategic decision to file for bankruptcy with more than $4 billion in cash in the bank. That’s more cash than any airline that’s ever entered bankruptcy has had on hand and one of the highest totals in U.S. corporate history.

That gives AMR and American some flexibility to run its business during the initial period of exclusivity, protect its interests and, most importantly, time to ensure that its ultimate plan of reorganization (POR) is the very best it can be. While time is still of the essence to put forth a POR, it gives the debtor (AMR), time to look carefully at its network (mainline and regional partner), its labor contracts, its fleet and then make unhurried and potentially dramatic changes.

When United filed in December 2002, the DIP lenders and creditors demanded interim labor deals within 30 days, some even hammered out on Christmas Day. Delta and the Old US Airways faced similar pressures. As much as is possible in the bankruptcy process, American controls its own fate. It needs to use the time it has to get this right and make sure its labor costs and operations are where they need to be when it emerges. If it doesn’t, I don’t believe American in its current form gets a second chance.

A quick aside: This is usually when AA employees harrumph they gave millions in concessions to management in 2003 and that should balance what other airlines gained in bankruptcy court. I have the greatest respect for what American’s unionized employees tried to do back then, but it was apparent by 2006 those concessions weren’t enough. United, US Airways and Delta’s labor cost competitive advantage continues to pound American. The Airline Data Project (ADP) numbers show American’s employees get paid more, work less and have a range of benefits that are distant memories for peers at other airlines. That’s not an accusation; it’s simply the way the industry restructuring unfolded.

It’s also why all the other airlines, including venerated low-cost carrier Southwest Airlines, are nervously waiting to see what American looks like when it emerges from restructuring.  Following AMR’s Chapter 11 filing, Southwest CEO Gary Kelly posted an open letter to employees saying American, and the other major carries that went bankrupt, did so because of “high costs” and that “Great Customer Service cannot overcome high costs.”

I view Kelly’s letter as an important glimpse into what became American’s inevitable bankruptcy filing and what it means for the rest of the industry.

Kelly said he expected American to become leaner and warned, “If they do emerge from bankruptcy, as I believe they will, they will join the New United, New Delta, and New US Airways as giant, lower-cost airlines. They are, collectively, much more formidable competition than their predecessors. The term “Legacy Carrier” no longer will apply.”

In what had to be a stunning admission to most Southwest employees, Kelly also said, “We currently do not have a sufficient cost advantage to stimulate the market because our fares are much closer to our New Airline competitors.”  In effect, this is what I’ve been saying for years: the “Southwest Effect” is dying, if not dead.

If that’s the feeling in the executive suite at the most consistently profitable airline in aviation history, then I can only imagine how raw nerves must be at Delta, United and US Airways.

American’s filing is the airline industry’s version of “Freaky Friday” with role reversals that have long-term implications. Delta’s pilots are next up in negotiations and, like American did for the last several years, management will essentially be negotiating against itself. Remember, it was just within the last year plus that a significant number of Delta’s pilots began earning more than their colleagues at American… and that was with an infinitely more flexible scope clause that permits the higher pay at the mainline. Delta will be left negotiating improvements to the highest cost pilot contract in the industry knowing American will attempt to emerge from Chapter 11 with significantly improved scope and much lower costs. That’s essentially what American faced from Delta in 2007.

The recent NMB rulings upholding election results afford Delta only a temporary reprieve from unionization efforts. I can all but guarantee Delta will face additional organization campaigns, forcing it to, once again, spend millions to counter labor representation drives with no assurance it won’t be saddled with costly union contracts.

At the new United, the world’s largest airline might be facing world-class headaches. Integrating Continental pilots into the system is already shaping up to be a long, contentious fight, especially as many of Continental crew currently enjoy better pay rates than United peers. Continental flight attendants make considerably more per hour than their United counterparts. Those facts should not only make United’s future negotiations lively, but also mean it will likely have higher costs than a correctly restructured American.

It’s not just big brother that will garner all the scrutiny either. Eagle has already shed leases and announced potential layoffs. When AMR exits restructuring, the once-for-sale Eagle could look completely different and potentially pose real competition to SkyWest, Republic and the apparently spiraling-toward-Chapter-11 itself, Pinnacle Airlines. With American’s fleet purchase plans and a revamped Eagle, momentous change is potentially in the offing for regional airlines as well. I’ll have more on that at a later date.

As I outlined in my last post, American’s payroll is proportionately out of whack compared to its major competitors. A quick glance at the ADP numbers shows every carrier that’s gone into bankruptcy since 2002 has seen a double-digit reduction in workforce within one year of filing. That doesn’t include the nearly 25,000 jobs Delta shed in the four years prior to going into bankruptcy. Those statistics are small comfort to the employees at American who will likely lose jobs, but there is no disguising the pain this type of necessary transformation causes.

Layoffs will get the bulk of the media and general public’s attention, obscuring changes – scope, productivity, benefits – that will have more far-reaching effects. An American that comes out of Chapter 11 with significant changes in those areas potentially sends tsunami-sized ripples through the industry – particularly the flying within the U.S. domestic industry.

Yet the federal government, industry observers and, likely, the media, will spend considerably more time and hand-wringing on another hot button issue: pensions.

Pension Benefit Guaranty Corporation (PBGC) Director Josh Gotbaum has been very vocal about what he thinks AMR should do with its industry-leading pension plans. In short, he doesn’t want them to become PBGC’s problem. Gotbaum is also very quick to point out the additional burden AMR’s pensions could add to the $26 billion deficit the PBGC currently faces.

A couple of things strike me about the pension issue. Gotbaum has questioned American’s commitment to employees, which I find a bit wrongheaded since the airline spent eight years in a good faith effort to keep its pension obligations off the PBGC rolls. 

Gotbaum said American Airlines employees could lose one billion dollars in pension benefits if the airline terminates plans. That’s a bit misleading as all of the carrier’s employee pension plans are not created equally.

Like employees at the other bankrupt airlines, the majority of employees at American will most probably get their pension benefits in full. In 2012, the maximum PBGC payout is going to be more than $55,000 for those who retire at age 65. That’s more currently than the average American ground worker and flight attendant makes. The pensions really at risk will be those of the people who can most afford it – management and pilots. The bottom line is if American terminates its plans, the PBGC will do what it was designed to do: protect the investments of the working class.

AMR’s bankruptcy process will likely dominate the airline industry’s financial and economic headlines in 2012. What happens in the next few weeks and months as the new American (and Eagle) takes shape, though, will be felt by employees, competitors and taxpayers for years to come.

More to come.

If History Is A Lesson – American’s Labor Cuts Will Be Large

There is much anticipation regarding when American will file its petitions for labor relief under Sections 1113 and 1114 of the US Bankruptcy Code.  The clock is ticking in terms of the airline’s ability to get its network and costs in line generally and its labor costs specifically.  This needs to be done without undue rancor and in time to implement a workable plan. 

Further, the bankruptcy road has many unknown twists and turns as experienced by US Airways (not one filing but two), United (a three year stay and multiple approaches for concessions from labor) and Delta (an unsolicited offer to buy the company from US Airways).  American will face surprises along the way as well.

Let’s consider some facts.   Today United/Continental fly 39 percent more ASMs than American, yet its payroll is only 17 percent higher.  Delta flies 27 percent more ASMs than American, yet its payroll is only 7 percent higher.  US Airways is 53 percent smaller than American in terms of ASMs but its payroll is nearly 1/3 the size of American’s.  Any way you consider it, American pays significantly more for labor to fly its schedule than its network carrier peers.

I concluded a recent blog noting that American’s problems are bigger than any check labor could write outside of bankruptcy, but that employees will pay a much higher cost inside bankruptcy.   And that’s a painful situation that might have been avoided if all of the employee groups had the will and found a way to negotiate cost savings the airline requires to survive and prosper.

As APA President Dave Bates told The Wall Street Journal, "Sometimes in life it's easier to have something imposed upon a person than have them agree to it voluntarily." 

UNITED

The same story played out at United in 2002 and, sure enough, the toll on employees was much higher in bankruptcy than what the company originally sought in direct negotiations. Early that year, the company proposed a package of concessions totaling $9 billion over six years – or $1.5 billion per year.  The unions went back and forth for months and ultimately proposed a give of $5.8 billion over 5.5 years as a package they said employees could live with.  But as with the American negotiations, deadlines kept slipping as the unions sought more time to ratify the agreements. 

United, losing millions of dollars a day at a time the carrier was trying desperately to win a loan guarantee from the Air Transportation Stabilization Board (ATSB).  As it was, the ATSB was about the only potential source of capital then available to a company hemorrhaging cash and seemingly unable to control its labor and other costs.

As the clock ticked, the unions finally agreed to the $5.8 billion package, only to have the International Association of Machinists and Aerospace Workers (IAMAW) vote the deal down.  With the ATSB loan imperiled as a result, United filed for court protection 11 days later, on December 9, 2002.

US AIRWAYS

Four months earlier, inside of court protection, US Airways in its first filing asked for $950 million in labor relief per year on a total labor bill of $4 billion.  This was US Airways’ first bite at the labor apple as the company quickly emerged from bankruptcy number one and filed again in 2004 where a subsequent $800 million in concessions were granted.  By the time US Airways emerged from its second bankruptcy and was being merged with America West, the company was half its size in terms of employees and its payroll was 58 percent smaller.

DELTA

On September 14, 2005 Delta Air Lines filed for bankruptcy reorganization.  In the year before Delta’s filing, its payroll was $5.8 billion and it employed nearly 58,000 employees (down from 71,000 in 2000).  Through the bankruptcy stay, Delta shed nearly $2 billion in payroll and reduced the number of employees by an additional 11,000.

WHAT IS THE LESSON FOR AMERICAN?

First, the bankruptcy court proved to be a more effective means to achieving the cost savings than any airline is able to accomplish through traditional collective bargaining.  Remember, United asked for $1.5 billion per year from its labor groups prior to bankruptcy and the unions would agree to about two-thirds of that. Under Section 1113, United asked for, and received, $2.4 billion dollars of an annual labor cost savings over 6 years – for a total of $14 billion in concessions.  And this would only be United’s first of three bites at the labor apple.

The second bite occurred in early 2004 when United filed for relief from paying contractual retiree medical benefits under Section 1114 of the US Bankruptcy Code.  The third bite came in late 2004, with fuel prices beginning their march to $147 per barrel and clear recognition that the company had not cut enough while in bankruptcy, United went back and asked for an additional $725 million per year that would include the employees’ defined benefit pension plans.  These two additional bites at the labor apple cause American to stand out as having benefit packages significantly more rich than the industry and productivity constraints dictated by terms in the existing collective bargaining agreements more onerous.

According to the MIT Airline Data Project, if American’s contract with its pilots union allowed it to match the productivity of Continental’s pilot workforce, American would need 800 fewer pilots to fly its current schedule.  That amounts to $400 million in costs mostly attributable to a labor contract that puts artificially low limits on the amount to hours an American pilot can fly.

If American were to achieve the same flight attendant productivity as Delta, it would require 1,500 fewer flight attendants than it now carries to fly the schedule.

And had American relied even partly as much on outsourcing as does every one of its competitors, American’s maintenance operation, represented by the TWU, would be a fraction of its current size. American today outsources only 24 percent of its maintenance and related work, compared to an average of 40 percent outsourcing among all other carriers.  When United began its restructuring, it outsourced 17% of its maintenance.  By 2007, that had grown to 46 percent.  So it’s not unreasonable to expect something similar when all is said and done in American’s trip through the restructuring process, particularly as its maintenance-heavy Super 80 fleet is retired.

According to AMR, American’s labor cost disadvantage versus the industry now tops $800 million a year.  One of the he main questions outstanding is where the airline cuts, resizes and reconfigures its network to get to a place that it can compete and earn sustained profits.

That plan could, and probably should, contemplate significant outsourcing in the aircraft and traffic servicing department, particularly “under the wing” work in small stations with limited flight activity.

And as the airline rethinks its overall fleet and flight schedule under the watchful eye of its creditors, every position from the flight crews to ground workers to airport agents will be examined to determine how many employees will be necessary to support a resized operation.

How much power do the unions have to “protect” these jobs? If history is any guide, very little. Ultimately, the bankruptcy court will determine the viability of the company’s operating plan based on its ability to balance costs and revenues and return a profit. And if that means fewer jobs, then that’s the reality the court will consider.

This is an admittedly harsh portrait, particularly in light of the $1.8 billion in concessions granted in 2003 by American’s unions – alongside another $2+ billion in non-labor cost reductions that affected employees across the company. 

I have no direct knowledge of what American will ultimately ask of its employees or the other elements of its restructuring plan. But I don’t believe the ask will be light, or easy, and that is more a factor of the economics of the industry and the competitive marketplace than anything American could have done through other means.

American Airlines, Labor Leverage, US Airways and Chicken Little

Labor Leverage and Other Thoughts

Since American’s filing for bankruptcy protection last week, I’ve received many notes asking why I am not writing about American - about a potential combination with US Airways or what I expect the company to win from the unions.  I haven’t written because, frankly, I already talked about the potential consequences of bankruptcy for the airline, unions and the industry in my most recent piece.

On Monday, I intended to write about leverage and how the Allied Pilots Association was seriously misjudging the leverage it thought it had. Tuesday’s filing kind of made that point moot.   As the Sections 1113 and 1114 negotiating process wends its way through a court supervised restructuring, the pilots and all unionized employees will either reach consensual agreements with the company or the company will look to the court to terminate the existing agreements.  Whichever outcome, the new contracts will look nothing like the potential deals the unions could have negotiated at various times over the past five plus years.

I know, I know… “American could have reached a deal if it wanted.” It does take two to tango, but in this round of negotiations, American and its unions were listening to vastly different music. American’s offers provided cost benefits that would be realized over the long-term while still maintaining what can only be described as an industry-best benefits package. That wasn’t going to sit well with analysts and Wall Street types who fervently believed the airline needed immediate gains to remain viable.

The unions, seemingly, wanted everything to magically return to past patterns and routinely called for restoration of the pay and benefits they conceded in 2003 to stave off bankruptcy. A common refrain has been no union members have seen substantial increases in wages since 2001. Peers at other airlines did get raises, but American’s employees were – and are - still better off.  It’s a simple, provable truth and it meant there was no going back to 2003 or 1993. It’s a different industry and a different world.

That’s key to understanding there is no leverage for either side in this round of negotiations. (Are you listening, United pilots?) It’s also why this negotiations cycle has been so difficult. Few agreements have been struck. American will likely get deals well before we see contracts – or even tentative agreements - at United and US Airways.  As the bankruptcy process plays out, the American pilots and flight attendants will no longer have industry leading contracts among the network legacy carriers – Delta will.

And guess who comes up next for negotiation – the Delta pilots.  Like American’s management over the past five years, Delta’s management will have to negotiate improved terms and conditions on the highest cost labor contract in existence. All the while, the United/Continental pilots will spend more time asking who is on first than they will spend at a negotiation table.  Looks to me like all of that “leverage” being created by the United pilots alleging poor safety policies by management is NOT moving the parties quickly toward a deal.

While I expect the Delta pilot negotiations to be complicated and difficult for the company, at least the pilots enjoyed some benefit following the merger with Northwest and the bankruptcy agreements that preceded it.  Delta’s pilots will have the richest compensation package in the industry after American completes its bankruptcy negotiations. That means they won’t have any leverage over the company even as pilots squawk about the liberal scope clause in the current agreement. 

In this process, there is a different kind of “trickle down” theory. Case in point: The TWU employees at American. Talk about no leverage.  The more removed from the flight deck, the more leverage dwindles. American’s below-the-wing employees currently earn a total compensation package of roughly $25 per hour. That work can be outsourced for 40 cents on the dollar.   Add the fact  American outsources the least amount of maintenance work in the industry, and that it has more ground workers than any other airline, well, you get the feeling things are going to change. If you’re a TWU worker, that’s probably no comfort.  

All This Talk About A Merger With US Airways

I am surprised – no, blown away - by just how much attention the US Airways – American merger possibility is getting.  In the first 36 hours after AA filed for protection it seemed the world was suggesting a merger with US Airways was the only viable exit strategy.  I don’t believe it.  American will have the exclusive right to file a Plan of Reorganization (POR) for 180 days – a right that is typically extended multiple times by the presiding judge.

Keep in mind, all three of American’s unions were appointed to the unsecured creditors committee. Any plan of reorganization by a party other than AA will have to convince the committee their plan is better for all stakeholders.  Given the messy labor situation that remains at US – six years after its merger with America West – I sincerely doubt anyone would find a US bid credible… especially American’s unionized workforce.  

That’s why, at least right now, I simply don’t see a merger happening, despite industry analyst Vaughn Cordle’s contention that, “regardless of the ugly nature of merging two suboptimal business models and different unions, American's best option is to merge with US Airways.”  My first question is, why would you even think of merging two suboptimal business models in the first place?  So that you can compete directly against balance sheet and network rich United and Delta?

There is another option I don’t think many analysts have considered.  I could see a competing plan led by British Airways and other oneworld partners that would have the potential to win if the AA case gets to the point where outside parties are free to submit alternative PORs – even at today’s 25% foreign ownership limit.  If you believe AA will become a smaller entity over the coming months, the one sure thing is AA’s network will be optimized to maximize revenue generation with its new joint venture partners.  That’s precisely what STAR is doing through United and SkyTeam with Delta. 

The Sky Is Not Falling

Over at Terry Maxon’s AirlineBiz blog is a letter from TWU President Jim Little decrying American’s filing with $4.1 billion in cash and thus a near term ability to pay its current obligations.  I urge you to read the letter in full and the lack of reasoning throughout.  What did Little expect the company to do when he refused on numerous occasions to step-up and tell his TWU members the cold truth that something is better than nothing?  He has had a number of opportunities over the past five years to negotiate an agreement with American that the company could afford. 

The bottom line is bankruptcy is not a big deal.  This is not the industry’s first rodeo.  American’s problems are bigger than a check labor could write outside of bankruptcy, but sadly, the employees will pay much more inside of bankruptcy.   As APA President Dave Bates told The Wall Street Journal, "Sometimes in life it's easier to have something imposed upon a person than have them agree to it voluntarily."  Sad commentary indeed.

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.

Global Distribution Systems and the Pretense of Consumer Protection?

This past weekend, I found myself immersed in the messy divorce between airlines and the Global Distribution Systems (GDS) that used to be their “partners”.

In this case, I was looking at complaints filed by American Airlines and US Airways against Sabre and related companies, and then Sabre’s and Travelport’s complaints against American Airlines.  Readers know that I believe this is one of the more transformational events in the industry and I finally found the time to read in detail each party’s take on an increasingly tense situation.

In coming weeks, this fight is likely to again come to the fore.  The story is about monopolies and not market power. 

There is no elevator speech on this topic.  Within the industry, it’s all inside baseball. To the outsider, it’s incredibly obscure. But here’s the crux of the matter:  American, US Airways and other airlines are trying to retake their inventory from the GDSs that have for years listed their flights and taken a piece of the ticket price. 

What the airline’s want, in other words, is broader competition through an alternative mechanism to sell airplane seats and other travel related products – not to eliminate the GDSs.  

After all, airlines understand competition. Airlines understand fragmented markets.  Airlines understand pricing dictated by competition and macro economics, and monopolies and duopolies of vendor industries.  There is no global airline company with more than a 7 percent market share.  Even the top 10 airlines in the world together have less than a 40 percent share of global capacity. 

But when it comes to the GDSs, it is a different story.  Sixty percent of airline tickets are sold through travel agents and it is this sector of the industry that is ripe for competition.  According to MIDT data today, three players dominate the field in the U.S.: Sabre with 58% of the market; Travelport with 33%; and Amadeus with 10%. 

Travel agents make money by using the GDSs. The contracts between the vendor and the agent impose such significant switching costs that the financial penalty is too steep for most agents to consider an alternative booking channel.

As US Airways wrote in its complaint, the American Society of Travel Agents confirms the industry’s dependence on the legacy GDSs.  As of the end of 2009, 85.7 percent of travel agencies use only one GDS.  94.9 percent of travel agents using a GDS have not changed their GDS provider in the last two years and a remarkable 86.7 percent of agents are using the same primary GDS that they were seven years ago when the GDS industry was deregulated.    

As a business model, the GDSs are more about suppressing competition than spurring innovation.  Seven years after deregulation, barriers to entry in the GDS space have blocked all new competition. Contrast that with the domestic aviation market where low cost carriers now fly more than 31 percent of ASMs flown.

Market power is a seller's ability to exercise some control over the price it charges. In our economy, few firms see perfectly elastic demand. All products have a differentiation, whether due to consumer tastes, seller reputation, or location, as with airlines that convey upon a seller some degree of pricing power. Thus, a small degree of market power is common and understood not to warrant antitrust intervention.

Market power and monopoly power are related but not the same. The Supreme Court has defined market power as "the ability to raise prices above those that would be charged in a competitive market," and monopoly power as "the power to control prices or exclude competition."  In many markets, but not all, airlines do have market power in that they are able to set revenue in excess of marginal cost.  The last thing they are is monopolists as they have no ability to control prices or exclude competition.

In its complaint against American, Sabre makes a feeble and even laughable attempt to point to American’s monopoly power over certain routes at Dallas/Ft. Worth, Chicago O’Hare and Miami.  Sabre goes so far as to name non-hub cities like Abilene,TX; Augusta, GA; Brownsville, TX; Champaign, IL; and Dubuque, IA as city pair markets where American has monopoly power.  But it is simply wrong to suggest these cities are examples of monopolies, when each is blessed (given their population and underlying demographics) to have entry into the nation’s air transportation grid and each faces some direct or indirect competition. It is just as wrong to suggest that American has no competition on its Augusta GA to Dallas/Ft. Worth route when Delta flies those skies multiple times a day. 

This is a network business and American Airlines holds a 15.2 percent share and US Airways 9.6 percent of capacity in the domestic network market. In fact, the top five airline competitors hold an 80 percent market share in the U.S. domestic market, with the largest carrier, Delta, garnering a 20.1 percent share of ASMs.  This is a far cry from Sabre’s 58 percent share of the U.S. GDS market and that three firms have 100 percent of the U.S. domestic market.

To read the GDS’ complaints, you would think that we’re back in 1978 when schedule and price were the only consumer consideration. Thirty-three years later the GDSs still force the airlines to compete only on two factors; schedule and price. By limiting how airlines compete, the product is the definition of a pure commodity.  

After all, Southwest does not turn its inventory over to the GDSs. How can you have a discussion on price and service without Southwest – which now competes in markets that account for 95% of domestic demand – as part of the dialogue?

GDS advocate Kevin Mitchell, Chairman of the Business Travel Coalition (BTC) has a questionable take on the issue.  In Sabre’s complaint, Mitchell says: “The stakes in this conflict are clear: either an improved airline industry and distribution marketplace centered around the consumer, or one that subordinates consumer interests to the self-serving motivations of individual airlines endeavoring to shift costs and impose their wills on consumers and the other participants in the travel industry.”

He’s right on one point: the stakes are clear.  This is a battle about an improved airline industry – one that is sustainable over the long term; and a distribution marketplace centered on the consumer. But that’s only going to happen when the airlines have control over their own inventory.  Only when airlines have the ability to package their product based on their knowledge of consumer behavior will it become all about the consumer.  To protect and advocate for the GDSs in fact subordinates consumer interests because this legacy distribution vehicle does nothing but thwart competition and stifle innovation. 

Perhaps it is OK with the GDSs and the BTC that shifting (cutting) labor costs in bankruptcy was an appropriate strategy as long as the annuity from the airlines to the GDSs to the travel agents was not affected.  But that assumes an annuity in perpetuity, and fewer and fewer of those exist in today’s airline business. The business of the GDSs can be done cheaper and better by those with technology younger than 1960.  What the GDSs and the BTC claim is an entitlement is anti-competitive at its core.

Mitchell also proclaims to be a consumer advocate.  Remember it was he and Kate Hanni who teamed to advocate for the three hour tarmac delay rule which, with the help of the gullible Secretary of Transportation Ray LaHood, purported to “protect the rights” of some fraction of one percent of all passengers.  Today he supports a monopoly making its money off of 60 percent of air travel consumers.  Now it is Mitchell who rails against what he calls “Hidden Fees” like seat upgrades, baggage fees, and charges for pillows and blankets to name a few of the 16 specific revenue items the Department of Transportation wants the airlines to report.

This, keep in mind, is an industry that earned a scant two cents on every dollar in 2010 and yet the government wants to dig further into the file cabinets of every airline in the country in a misguided attempt to account for the money those fees are bringing in. In case you have been living under a rock, the genesis of ancillary fees has been among the most covered and scrutinized stories since 2008.  In 2010, US airlines generated $3.4 billion in baggage fees and another $2.3 billion in reservation change fees for a total of $5.7 billion.  What about the fact that the industry’s fuel bill in 2010 was $6.5 billion higher than in 2009?  The Air Transport Association forecasts that the industry’s fuel bill in 2011 will be $14 billion more in 2011 than it was in 2010.  Remember, it was the rising cost of fuel in 2008 that served as the catalyst to unbundle the airline product in the first place.

The airline industry already pays more than its share of taxes and fees.  But if it is transparency of “hidden fees” that the regulators (and Mitchell) want, then I as a passenger also want to know how much of my ticket price goes to the GDSs just as I want to know how taxes on my airline ticket are disseminated to various government agencies. 

To me GDS fees and taxes are similar as they both support legacy interests/ideals – some might argue outmoded models -- without any meaningful return to the airlines. That said, there remains an ongoing need for GDSs, particularly with respect to the support they provide to the thousands of travel agencies worldwide and to their international reach.

Today, the GDS industry earns $7 billion in revenue with no product other than the airlines own schedules and prices.  Is that innovation?  Some estimate that the work of the legacy GDSs could be done for 20 cents on the dollar.  That’s a lot of money spent on something that belies innovation.

The GDS role was relevant until about 2002 when market share was the name of the game.  Now the industry is focused on profits.  In fact, this is an industry that would have lost money in 2010 if not for the fees that Mitchell decries.  The GDSs need time to develop the software necessary for it to “up sell” better seats on US Airways.  Imagine how long it will take for the legacy GDS systems to account for 16 fee buckets as defined by the Department of Transportation (a potential new regulatory requirement).

But Mitchell bangs the consumer drum while advocating for an industry serving the airline industry that has monopoly powers over the very companies it calls customers.  

Concluding Thoughts

According to the U.S. Department of Justice (DOJ), “U.S. antitrust laws reflect a national commitment to the use of free markets to allocate resources efficiently and to spur the innovation that is the principal source of economic growth.”  Today’s GDS industry, circa 1960, represents anything but free markets or innovation.  Rather is about protecting a monopoly revenue stream at the expense of allowing the consumer to customize the travel experience depending on their wants and needs.

According to the US Airways complaint, the DOT made four assumptions when the GDS industry was deregulated: 

1) Airline divestiture of their interests in the GDSs made it less likely that a GDS would favor one airline over another;

2) Forthcoming technological changes – including online, direct-to-consumer ticket sales – would operate as a check on the market power of the GDSs;

3) Airlines’ ability to control access to their own content, including webfares and other discounts offered through an airline’s own website or select distribution channels – would reduce the GDSs market power; and

4) Vigorous anti-trust enforcement would help ensure competitive markets.

No matter how well-meaning those assumptions, they haven’t held water largely because of the power of the legacy GDS industry. So perhaps it is high time that the DOJ file suit against the GDS industry.  Why is it OK that Amazon.com is able to offer recommended products to consumers based on past purchase behavior and the airlines cannot?  Why can the consumer pick from a variety of offerings when picking a cable television or cellular phone plan but is so limited in options for air travel purchases?   

Today, all the consumer can do when buying from a travel agent is to make the purchase decision based on service and price.  Limiting indeed.

We desperately need an industry correction that allows a natural evolution in business practices so the free market can work.  A DOJ suit may achieve that.  Free competition will spur the innovation that anti-trust laws are designed to promote.  A DOJ suit may do that.  When competition wins, the consumer wins.  When innovation is allowed, the consumer wins.  Don’t be fooled by the GDS industry and its supporters hiding behind hidden fees; the consumer has no idea how much it already pays to an industry that stifles competition each and every day.   The biggest thing hidden there is the opportunity cost imposed by the GDS industry that would rather direct consumer’s attention elsewhere.

The NMB Finally Issues Its Representation Rule: What’s Next For The US Airline Industry?

Today, the National Mediation Board issued a new rule governing union organizing that is probably the most controversial thing this government panel has ever done.

So, after sifting through 103 pages of legal citations falsely hoping that the rule as proposed in December would have been changed to address at least some of the opposition’s concerns, I now realize the truth: The NMB has become a political body.

Don’t get me wrong – I’m a registered Democrat so this not a rant against all things Obama. But there are places politics shouldn’t figure so heavily and the NMB should be one of them.

The new representation rule comes as Delta and US Airways are suing the government over its proposed solution to the slot swap between the two carriers; and just a week or so since implementation of that visionary tarmac rule.  So yes, I am in a bit of a cynical if not downright snarky mood today.

In the final rule filed in the Federal Register, the National Mediation Board summarized:  “As part of its ongoing efforts to further the statutory goals of the Railway Labor Act, the National Mediation Board (NMB or Board) is amending its Railway Labor Act rules to provide that, in representation disputes, a majority of valid ballots cast will determine the craft or class representative. This change to its election procedures will provide a more reliable measure/indicator of employee sentiment in representation disputes and provide employees with clear choices in representation matters.”

In its proposed rule, the NMB is seeking to change the election process by which unions organize workers in the railway and airline industries. The new rule that will change 75 years of practice, would for the first time determine the outcome of union representation elections in the airline and railroad industries based on a majority of those who vote rather than current practice, where a majority of all eligible voters must support joining a union.

It doesn’t take a magnifying glass to read between the lines. The NMB is doing organized labor a big favor with this rule. So it is laughable to me that the Board describes the change as part of its “ongoing efforts to further the statutory goals of the Railway Labor Act.”  Funny, because the overarching statutory goal of the RLA is to minimize the disruption on interstate commerce stemming from labor-management disputes.  And this rule would likely do just the opposite, with unintended consequences, by increasing the likelihood of union activities that could yet be another destabilizing force in an industry that needs anything but -- a destabilizer that comes just as the industry tries to consolidate in order to stabilize.

The first 81 pages of the document were a little dry.  But starting on page 81 the dissenting opinion of NMB Chairman (and sole Republican member) Elizabeth Dougherty began: “I dissent from the rule published today for the following reasons: (1) the timing and process surrounding this rule change harm the agency and suggest the issue has been prejudged; (2) the Majority has not articulated a rational basis for its action; (3) the Majority’s failure to amend its decertification and run-off procedures in light of its voting rule change reveals a bias in favor of representation and is fundamentally unfair; and (4) the Majority’s inclusion of a write-in option on the yes/no ballot was not contemplated by the Notice of Proposed Rulemaking (NPRM) and violates the notice-and-comment requirements of the Administrative Procedure Act (APA).”

Ouch.  But no matter. The Final Rule will become effective on June 10, 2010, unless opponents use the courts to stop it.

Let the Lawsuit Begin

The industry, speaking from the Air Transport Association platform said:  "It is quite clear to us that the NMB was determined to proceed despite the proposed rule's substantive and procedural flaws, leaving us no choice but to seek judicial review." 

The unions, of course, took a different tack. The AFA-CWA, a big winner here as it seeks for the third time to organize flight attendants at Delta, made clear where it stood on any legal challenge. "We applaud the NMB for taking this historic and courageous step to bring democracy to union elections. By allowing workers to have a voice in these elections, whether it be yes or no [author adds: or by write in], will only bring benefits to all parties. We look to airline management and their third party supporters to respect their employees' voices and the concept that guides our country every day, and not to bog down this significant achievement in legal appeals."

Having now devoted four blog postings to this subject, I may qualify as one of those third party supporters. Not because I’m carrying water for airline management, but because I think this rule stinks just like the tarmac rule and decision by this administration on the slot swap.  The only hope I have with this rule is that the incumbent unions start to be smarter in their negotiation strategies.

Included in a statement by AFA-CWA International President Patricia Friend’s statement lauding the cram down rule is her insistence that job security is a union function.  What is job security in today’s world?  Is it contract language?  Or is it a strong company?  When I think of pilot scope language that is designed and negotiated for the sole purpose of protecting jobs I see 14,000 mainline pilot jobs lost and nearly 800 narrowbody aircraft taken out of service because the economics (largely unproductive labor) could not translate into profitable flying.  But that unproductive labor paid union dues – for awhile.

I have a lot of union experience.  I worked as a local union president.  I have experience as an advisor to labor in distressed negotiations.  I serve in a union-appointed Board of Directors position at Hawaiian Airlines. While I know there is strong flight attendant union leadership at Hawaiian, the same cannot be said around the industry and I note in particular American and United and US Airways.

From what I can see, airline unions are all about yesterday.  Bankruptcy did not fix the labor problems at airlines or the ability of many airlines to manage their costs with still-bloated income statements.  But still the unions want to look back, back when labor costs were even higher and productivity was at an all-time low.  If productivity was given in the restructuring negotiations, union-represented employees would be earning more today.  But I digress.

Let me be clear.  I am not saying that unions are all bad.  Good leadership on the union side and a willing management can make deals.  Look at the most unionized carrier in the US industry – Southwest – which thanks in part to a strong relationship with its unions has managed to pay well and do well in the marketplace by building a great corporate culture and making productivity and customer service a priority.

But unenlightened and parochial thinking pervades the leadership ranks of many other airline unions.  The industry will continue to face change and challenges. Unions that adapt and are able to let go of the past will flourish.  Unions that cannot adapt to the new direction of the global airline industry will struggle to deliver for their members. 

And Why Are We Changing This Rule?

It is pretty simple and transparent.  Neither the AFA-CWA nor the IAMAW believes that they have the votes necessary to win an election in their efforts to organize the combined work forces from the merger of Delta and Northwest.  So labor prompted a friendly administration to change the union representation process to help them pick up these coveted new members – particularly on the Delta side where the flight attendants and maintenance workers have never been union.  Imagine how happy those former Delta employees must/will be?

Or, as the union leaders have clearly calculated, if you fail to win hearts and minds at the ballot box (as they have not once but twice) then change the rules. And despite an outcry and outpouring from the industry about the rule as first proposed by the NMB, the Board made no changes to address the concerns expressed by opponents. Instead the rules were relaxed even more to the advantage of unionization. Decrease the barriers to entry (union representation) and leave the barriers to exit high (no direct union decertification procedure).  So off we go to court.

As I have written before, it is not so much the rule change as the way the "politically neutral" NMB went about it.  With the tarmac rule it is the arbitrary nature of the three hours.  With the slot swap deal it is denying the incumbent carriers the right to sell what they invested in over the years and determine an adequate return on that asset.

I understand that most things governmental are heavily political.  But politics have had too much influence over this industry, and not for the benefit of the airlines or the hundreds of thousands of workers they employ.

More to come.

Mirror, Mirror On the Wall: What About US Airways After All?

One fascinating story resulting from the news that Continental and United intend to merge is what might happen to those on the sidelines, namely US Airways and American. 

Let’s begin with US Airways.  I have written before that US Airways’ route portfolio is inferior relative to other US legacy network carriers. I also have written before that US Airways is hamstrung because of its precarious labor position – a constraint primarily caused by the dysfunction in its pilot corps.

Immediately following Delta’s January 2008 rejection of US Airways’ overture, it was clear to me that US Airways CEO Doug Parker was right in his efforts to be a first mover in the consolidation arena. In making a run at Delta, Parker provided a blueprint for the industry to merge networks, and ensure air service to communities of all sizes, while at the same time reducing fixed costs. But something stood in the way then:  Parker’s pilots. He was hamstrung by pilot leadership blinded by the prospect of an unlikely outcome – a better seniority arbitration decision. [See note below:  Delta attempt came before seniority list decision was issued]  As I wrote then:  “For Parker, bringing labor along would certainly have proven expensive – and maybe just too expensive.”

Today the US Airways pilots await a decision from the 9^th Circuit Court of Appeals stemming from a lawsuit initially won by the former America West pilots after USAPA, the union that represents the US Airways pilots, refused to honor a binding arbitration decision on seniority integration.

Because of that circumstance—and the consistent objection by USAPA to every strategic initiative generated by US Airways management—last month I challenged speculation that United and US Airways could put together a merger where they twice failed before.

To be fair, as discussions proceeded between US Airways and United, it was becoming clearer to this observer that USAPA was beginning to understand and even embrace the idea that consolidation may not be a bad thing for employees.  The math is easy.  A $30 billion corporation is in better shape to provide for raises and long term employment stability than is a $13 billion company susceptible to geopolitical, oil and economic shocks.  But it remains to be seen if this was just USAPA being opportunistic or a sign that the union is changing its stripes.  As I will discuss below, a change in approach by USAPA will be necessary to secure an improvement in pay for the US Airways pilots in the short term and the benefits of consolidation for all US Airways employees in the longer term.   

Let’s Put Some Things into Perspective

In recent days, I’ve read many stories that attempt to etch US Airways’ livery on the next gravestone in the airline cemetery. But the rumors of the airline’s demise have been greatly exaggerated.  In theory, US Airways, American and other carriers should benefit, albeit indirectly, from industry consolidation.  Moreover, most of these stories missed the fact that this consolidation is taking place at the bottom of a recovery cycle, not at the top.  Assuming that the health of the US airline industry is inextricably tied to the health of the US macroeconomy, then a rising tide should float all boats.  Right? 

On May 3, Vaughn Cordle of Airline Forecasts Inc. published a white paper titled:  “United + Continental is Good News for all Stakeholders:  More Mergers are Needed.  Is American and US Airways next?” Cordle writes: “If the industry is not allowed to consolidate in the most rational manner, the result will be a continuation of the slow liquidation and the inevitable failure of US and AA, the two remaining network airlines in need of restructuring.  The most likely outcome would be an AA bankruptcy and outright liquidation of US.”

Cordle makes a case for consolidating US Airways and American citing expected future increases in fuel prices, airport charges, security and labor costs against the backdrop of less than credit worthy industry.  And these come before the industry begins paying to conform to inevitably new environmental regulations.  Don’t misunderstand, I agree that participating in consolidation is the best outcome for US Airways.   But I don’t buy the gravestone argument.  Let’s take a look at the fundamentals.

Everybody remembers America West Airlines.  A legacy-like model—that we all knew ultimately would be combined with another airline—around the turn of the century America West "flirted" several times before tying the knot.  Before its 2005 merger, America West survived and produced competitive margins through focused management, the support of labor unions that recognized the company’s place in the industry, and by offsetting a revenue generating disadvantage by maintaining a cost structure advantage.  Oh yeah, and the airline was based in Tempe, AZ and run by a guy named Doug Parker.  Sound familiar?

Today US Airways does suffer from about a 12 percent stage length adjusted unit revenue disadvantage versus its legacy carrier peers.  But it also enjoys about a 12 percent stage length adjusted unit cost advantage versus these rivals.  Despite the revenue generating deficiency, for the first quarter of 2010 only United among the legacy carriers saw a bigger increase in total unit revenue than the Tempe-based airline.  Like the rest of the industry, US Airways continues to see its corporate revenue and booked yield (passenger revenue per revenue passenger mile) improve.

Maintaining a Cost Advantage Is Critical for US Airways

And this revenue disadvantage is offset by US Airways continuing to maintain a cost advantage.  For the first quarter of 2010, only Delta saw its unit cost (operating expenses per available seat mile) increase less than US Airways when compared with all legacy network carriers. As a result, US Airways’ pre-tax margins show little to no difference when compared to other legacy carriers.  In fact, during the first quarter, US Airways saw a pre-tax margin improvement of 7.2 points, which compared favorably to its peers. The cost advantage the carrier enjoys cannot be overstated nor can the company hide behind the fact that the vast majority of that difference can be found in lower labor costs.  By contrast, United and Continental are only now beginning to navigate what it might cost to buy labor peace, particularly among the pilot groups. 

One imperative for US Airways will be to educate employees about the difference between US Airways when compared to Delta and the new United.  If US Airways’ unions push the company to match rates paid by other carriers with significantly bigger networks, more profitable hubs and less capacity dedicated to the US domestic market, then Cordle just may be right in predicting the potential for liquidation.

But what if the unions recognize US Airways position in the industry and adopt a longer term approach?  What if US Airways can maintain its current cost advantage?  Or enough cost advantage to offset the company’s structural revenue deficiency?  What if the airline get its internal labor house in order so that old US Airways and old America West contracts are one with matching seniority lists and affordable economics?  Is that really any different than America West at the beginning of the last decade?  Is this any different than United going back to Chicago in 2008 after being snubbed by Continental and getting its house in order?  I think not.

In the US Airways route structure, Philadelphia and Charlotte are gems.  I will concede that Phoenix is confounding given the extent of direct competition from Southwest Airlines.  And while US Airways does enjoy a 23 percent unit revenue advantage versus its low-cost competition, it also carries a 29 percent cost disadvantage when adjusted for stage length.  No legacy carrier has more direct exposure to Southwest.  But this is not new and it is not a death knell.  Parker and his colleagues have been successfully managing this challenge for 15 years.  Rather an important part of the education of US Airways employees and unions need to fully understand the importance of keeping costs low.

It’s Hard to Kill an Airline

In my view, an airline today is like a cockroach.  You can beat it, burn it, kick it and starve it, but it doesn’t die easily.  And over the last ten years Doug Parker has defied even a cockroach’s odds on numerous occasions. Remember, we are at the bottom of a recovery cycle – a fragile recovery cycle to be sure.  US Airways cash as a percent of twelve month trailing revenue is comparable to its legacy peers and relative to its size (revenue), comfortable.  Compared to its peers, the company also has fewer debt obligations to be repaid as a percent of revenue over the next two years.

This is not to say that US Airways does not have its issues – some that are easier absorbed by consolidated balance sheets that produce a higher cash cushion.  And there are plenty of sensitivities that can disrupt the company’s vulnerable cost advantage:  1) a 1 percent change in mainline unit cost ex-fuel cost the company an additional $60 million per year; and 2) a $1 change in price of a barrel of crude cost the company $34 million assuming that crack spreads stay at today’s levels resembling historic norms.  On the other side, as little as a 1 percent change in unit passenger revenue bolsters the company’s top line by $93 million.

Also US Airways’ labor unions need to recognize the value of cooperation and moderation in the near term.  Those unions also need to consider that “moderation” could mean significantly improved pay—if they are prepared to eliminate anachronistic scope restrictions and improve productivity.  And they need to see that there is a big pay day if US Airways is involved in industry consolidation, and that their behavior—and the terms of their collective bargaining agreements—will play an important role in determining whether that pay day occurs.

Message to US Airways’ Labor Generally; USAPA and AFA-CWA Specifically

Git’r’done. Enough already.  The pundits who suggest that US Airways is dead do so partly in recognition of the dysfunction of union leadership at your company.  They are not all together wrong.  But most are not aware that there may be recognition by US Airways’ labor leadership that their members may actually benefit by participating in consolidation.  To participate in a strategy designed to promote industry stability requires labor stability as well – and this is an area that needs improvement at US Airways particularly among the two unions representing flight crews, USAPA and AFA-CWA. 

Some suggest in comments to this blog that management is keeping the groups apart to save a few bucks.  If that is what they are doing, then shame on them.  But no one can make me believe that this is the case.  What's in it for Parker to do that?  Also it is in everyone’s best interest to negotiate joint collective bargaining agreements with competitive productivity and scope language that permits a company to navigate the complex competitive landscape and to have a single seniority list for the various class and crafts of employees.   And it is critical to both shareholders and employees that impediments to mergers be eliminated from collective bargaining agreements.

What makes this round so damn difficult is that every carrier is now a little different and it stems from an individual carrier’s portfolio of flying.  For this reason it is increasingly difficult to compare costs at one carrier to another and, as such, pattern bargaining should be a practice of the past.  If airlines engage in union efforts to chase the best contract – even when their networks don’t pay the tab -- then they deserve their place in the airline graveyard.  The price of buying “labor peace” is too high if it means an airline can’t ultimately support or survive its own labor cost structure.

These negotiations, whether at United, Continental, American or US Airways, are about the future of the airline industry as we know it.  As such, the negotiations are about more productivity and flexibility in return for higher wages.  Fixed costs must be removed.  And a union’s demand that a company carry more employees to do the same level of flying as a competitor simply creates a structural disadvantage any rival can exploit.  For a standalone US Airways, the company is in a position to survive given the up cycle ahead.  But come next the down cycle, or geopolitical event, or oil at $100 . . . then all bets are off.  So at US Airways, the negotiations need to be about ensuring the company's relevance while supporting industry consolidation.

Mirror, Mirror On the Wall: In a couple of years give US Airways a call. 

More to come.

Update on 05.6.2010 by swelbar

I have been made aware of a factual error included in this piece.  I have had more than one reader write to remind me that US Airways attempt to merge with Delta occurred before the seniority list decision was handed down by Arbitrator Nicolau.