Is The Union Leadership at American Really Representing the Membership’s Best Interests?

Delta is cutting international capacity by 3-4 percent in the face of economic weakness.  In an effort to improve profitability, United has announced capacity cuts for 2013.  Federal Express just announced a 3-year plan to cut $1.7 billion in costs mainly in its Express unit as revenue suffers from high oil prices and the fact that customers have found cheaper alternatives.  The cost cuts will largely be accomplished through headcount reductions which work to eliminate fixed costs.

If FedEx is seriously evaluating headcount at a perpetually profitable business unit, then so should those who believe that American and US Airways together would not need to trim costs any more than has been done at each airline in restructuring.

This is why it is so puzzling to me that Laura Glading, president of the Association of Professional Flight Attendants at American, continues to beat the drum for a merger between American and US Airways.

My guess is that Glading negotiated some concessions for flight attendants in talks with American because she is convinced, or has been promised, that a deal with US Airways will come with some sort of snapbacks or other icing that benefit her members and, perhaps, her position in what would be a larger, more powerful union.

That theory, however, ignores the economic reality of consolidation in today’s domestic market which has proven time and again that airlines with the highest costs have a distinct competitve disadvantage. So Glading continues to view her world through rose-colored glasses, preaching the purported labor benefits of a merger that can’t hope to succeed without the strict cost discipline neither she nor Parker are willing to acknowledge.

Recently, Glading asked flight attendants at both airlines to petition AMR’s Board of Directors to pursue a merger. The petition reads:

Dear AMR Board of Directors,

American Airlines is no longer the brand it used to be. Instead, this once great airline is now at the mercy of a dwindling network and an inferior product. 

Fortunately, not all hope is lost. There is a way to right this ship. If American Airlines could merge with US Airways before this bankruptcy has run its course and the AA brand completely destroyed, we can all work together to get American Airlines back on top.

The US Airways merger plan is the best option to correct the problems AA faces. I encourage you to pursue the only path available that will lead American Airlines out of bankruptcy stronger than the day it entered: a merger with US Airways.

American Airlines + US Airways: Our Future Depends On It

One has to wonder exactly what Glading was promised to press so hard for a plan with such limited economic foundation.  If US Airways brings so much to the table, then why did the Delta employees band together to block Parker’s ardent overtures?  Why did United leave US Airways at the altar at the eleventh hour when a better partner emerged?  Yet at American, the unions’ leadership seems to believe that a marriage with US Airways is some sort of panacea that represents no pain/all gain for employees. 

Do investors see the proposed merger as American’s path to better labor relations?  Not if they’re looking at what’s going down at US Airways, where the union representing flight attendants called for a strike vote after flight attendants failed to ratify the second tentative agreement in six months. Clearly the expectations of the US flight attendants exceed the company’s ability to pay. And this comes after years of acrimonious relations between the airline and its two rival pilot groups which, 77 months after the fact, still prevent a smoothly merged operation between US Airways and first spouse American West.  If Parker’s team needs to promise more and more just to get ratified agreements with his own employees, imagine how expensive those labor deals become when you need a fast path toward a joint collective bargaining agreement and a single seniority list? 

What might the creditors at American think of the high price tag on labor peace likely necessary to get joint contracts between the two carriers?  And what toll will that price take on the combined company going forward?  Parker and Glading talk synergies, but both conveniently overlook the expensive path they’d need to travel to get there if, as I suspect is true, labor groups are being told they’ll be made whole – or better – as the reward for their support of a merger.

Flight attendants should think twice before they buy the line that synergies alone obviate the need for real-world cost reductions, particularly with one partner still operating in bankruptcy. A merger for the sake of a merger inside of bankruptcy is not going to make the creditors want less.

Union leaders must accept responsibility for helping to position the company to succeed before they can promise payoffs to employees, particularly in this competitive market. It is not up to management alone to promote fiscal discipline and constructive labor relations when success demands genuine efforts on both sides.

Ignoring the fact that creditors will want to maximize their claim in bankruptcy is a sure-fire way to ensure that the best interests of employees are not represented because there is nothing that can be negotiated that will improve the well-being of members.  Ignoring the reality of deteriorating revenue trends and the fact that other carriers are cutting capacity is to knowingly accept an overpromise on the synergies.

Facebook: Will American Friend US Airways?

Much has changed since I last posted. Summer came and went.  I played some golf and worked some projects. My mom had major surgery.  And the usual drama in the U.S airline industry continued, including breathless speculation about the potential marriage of US Airways and American. 

I was thinking about this watching the dizzying rise and fall of Facebook’s fortunes as part of its Initial Public Offering (IPO).  Based on the price performance of the stock, the IPO has been anything but a success.  Circa 2000, it was thought to be a sure bet for anyone lucky enough to garner those initial shares offered.  Instead shareholders sued Facebook CEO Mark Zuckerberg and a number of banks, alleging that crucial information was concealed ahead of the offering.  At the heart of the lawsuit, according to Reuters news service, was the fact that Facebook and its banks failed to reveal "a severe and pronounced reduction" in forecasts for the company’s revenue growth, as users increasingly access the site through mobile devices. Investors, it happens, were so enamored of the Facebook “story” that too few asked tough questions about the company’s revenues.

I wonder if something similar isn’t happening with the US Airways-American story.  Where are the tough questions?  Or are reporters so taken by the Doug Parker storyline they’ve failed to look behind the pretty wrapping paper.

Mind you, I have not “friended” anyone at the unions representing US Airways or American employees. Not that they would accept the request. But if I were a line employee at American I would be demanding that my elected union officials, at a minimum, be asking the tough questions.

For me, the first question is how many employees are really needed at a combined US Airways and American. In its attempt at a shotgun marriage with American’s union leadership, US Airways suggested that it could hang onto more jobs than American would in restructuring.  That math deserves a second look.  For example, on a pro forma basis a combined American – US Airways network would be 3-4% larger than United – Continental yet it would have nearly 18% more employees.  Granted the number of employees will be reduced under either carrier’s plans, but someone is not telling the whole truth nor is it just found in the outsourcing of jobs. 

Where are the tough questions about airport overlap? Remember that when US Airways was singing the virtues of its proposed merger with Delta it talked about cutting capacity (frequency) in a large number of markets.  Many of those markets would have been smaller communities like Jacksonville, NC.  Today, American and US Airways offer 50-seat or less service in 60 common markets.  Can we honestly believe that all of that service will be maintained?  I think not, particularly when Delta has taken leadership in beginning to wean its system of the inefficient smaller aircraft and adding more 70-seat platforms and B717s.

Criticism of American’s stand-alone plan by the likes of Jamie Baker at JP Morgan point to the fact that a large portion of the proposed revenue synergies will be driven by the Ft. Worth carrier addressing its deficiency in the 70-seat jet arena.  Others cite concern that American would be dependent on a share shift away from incumbent carriers where a renewed AA will compete. 

Given the current significant overlap of the Delta network and the combination of American and US Airways networks, can we really believe that the new combination will stimulate new demand in the US Southeast?  Or will it be a share shift from Delta?  I am betting on the latter and that is a tough synergy to count on as the Delta network has a significant head start and a commensurate first-mover advantage in building presence where it and SkyTeam will compete with oneworld.  And that doesn’t even take into the account the fact that the two networks would be fenced off from one another while the pilots sort out lingering seniority issues?

To underscore the issue of share shift, Baker in his March 2012 report on the proposed US Airways – American combination suggests that a combined Delta – American probably could not pass muster with regulators based on the overlap of the two networks.  Imagine, then, the overlap a combined American and US Airways would have with Delta -- overlap in mature markets that offer little opportunity for significant stimulation of new demand. In that case, any market share model would point to a share shift among existing operators within the city pairs being served.

Where are the tough questions about capacity? This week, United announced it was cutting capacity in the face of weakening economic signals. If US Airways were truthful about their revenue and capacity plans they too would be signaling that the overlap between American service and its own would require a capacity haircut.  And in that case, you have little choice but to idle employees or furlough them.  We know the US Airways plan is designed to appease American’s unions.  What we don’t know is whether US Airways was honest with American’s unions in making clear the unions’ own contracts undermine the carrier’s ability to best manage its network, whether it be a cost disadvantage or restrictive pilot scope clauses.

To give you some idea as to American’s scope disadvantage, in July of 2012 American operated 7,175 70-seat departures or 231 per day.  That sounds like a lot except when you take into consideration what the competition is operating.  Delta offered nearly 36,000 departures with aircraft between 51-76 seats and United offered 26,000.  Hell, US Airways with a tiny network operated 13,000. There is no doubt that the ability to offer two-class service in smaller markets, at the right time of the day, equates improved revenue.

I do not need to be sold on the virtues of consolidation despite the best efforts of US Airways’ public relations firm when they sent me Baker’s report. 

I appreciate that few city pair combinations are overlaps between US Airways and American.  Baker identifies 33 East Coast markets that could gain access to the oneworld network as a result of US Airways becoming a new member of the oneworld alliance.  They range in size from Hartford to Elmira, to Lynchburg to Greenville, NC.  Lovely cities all, but not likely to tip the balance of power to a new combination when compared to Delta and United.  And hopefully a judicious British Airways recognizes this as well. 

The real balance of power is about the West Coast and New York.  US Airways does still operate the Northeast Shuttle but it sorely lacks at New York JFK and Boston.  A much deeper relationship with jetBlue does more for American than does a messy merger with US Airways.   And I am not talking about a merger with jetBlue.  US Airways does not give American what it needs in the West either.  So if this becomes all about Lynchburg and Richmond then I think this is probably not the right deal no matter what Wall Street, Doug Parker and the chorus of reporters tell us. 

Are there alternatives that do not add capacity to the system? The naysayers claim American’s stand-alone plan will add capacity to the system to the tune of 20 percent.  But Delta is replacing 50-seat RJs and bringing on more 70-seat platforms and 717s, and no one is crying foul about what that might mean from a capacity point of view.

My bet is that United and Delta continue to poke at US Airways to keep up the fight for American.  Not because a merger will be a silver bullet to improve the industry but because they would love to compete for traffic and revenue as the two go through a complex integration.  With Non-Disclosure Agreements now in place, I can only expect that the due diligence will spur the tough questions this pairing deserves and yield real answers that might temper the enthusiasm of stakeholders who believe another merger will produce the same results that first movers United and Delta enjoyed.

I have heard from many who question my skepticism about this potential merger when I have been an ardent supporter of consolidation in the past.  My interest is, and always has been, in the economics.  Facebook may have a lot of “friends” but show investors the money.  Can the economics of a US Airways-American marriage create a carrier that can not only compete in the vicious US domestic market but also with the global networks?  I remain unconvinced.

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.