Stuffing the Turkey

The drum beat is growing louder now that we may soon see the outcome of all those merger talks between American Airlines and US Airways.  As Ray Neidl of the Maxim Group wrote in a November 20 research note this morning:  “We believe a merger would definitely benefit the industry since it would promote further consolidation and enhanced pricing power for the carriers in general. However, we also believe that an AMR/US Airways merger, if it were to happen, would not be an easy endeavor to manage (as was Delta/Northwest merger, even with AMR union support). We believe that the benefits in market mass would not be as great as either the Delta/Northwest or UAL/Continental merger are proving to be.”

US Airways and others tout the benefits of synergy – relying mostly on the experience of recent mergers that may not apply in this case. Proponents are less likely, however, to spotlight dis-synergies. The fundamental question: What are the net synergies?

This question is particularly relevant in the case of a potential merger that creates an unstable labor situation.  I tried to address this before in the most-read blog in swelblog history:  US Airways and American and the Elephants in the Room.

The labor issues we’ve seen recently at several airlines offer a big window into the risks of brand and service degradation. But let’s focus just on pilots.  What’s most important to a pilot’s career, flying opportunities and pay? Seniority. What is for pilots at most risk in a merger?  Seniority.

We already know what can happen when pilots are unhappy . . . they uniquely have the means to affect the operation by something as minor as a slow taxi to the gate.  Look no further than American’s on-time performance in September and October. .

Difficulty in merging seniority lists is likely the rule, not the exception. Even MaCaskill-Bond, legislation designed to make the process fair for each side, does nothing to ensure a smooth integration. 

So imagine for a moment the seniority integration monster a merger between American and US Airways could create because there are not two but FOUR pilot groups involved: American’s pilots represented by the APA, US Airways pilots and former America West pilots both represented USAPA but working under separate contracts, and former TWA pilots who have never been very happy about their treatment when American acquired TWA’s assets in 2001.

By the time you involve management in that equation, it could be a 5-way or 6-way conversation..  We have seen enough cases of difficult outcomes with three parties at the table, let alone more.

Enter arbitration.

At US Airways, an arbitrated seniority award under ALPA merger policy resulted in the decertification of the union by a majority of US Airways pilots because some more junior America West pilots were placed ahead of them on the combined list. This happened in part because America West pilots had more certain career expectations than the original US Airways’ pilots whose carrier was in bankruptcy for a second time with little hope of surviving as a stand-alone carrier.

If an AA-US merger were to occur before American exits bankruptcy, the two pilot groups at US might successfully argue that AA is a failed carrier and that, as pilots for a successful carrier they deserve super-seniority consideration.  This scenario, known in the industry as the Failed Carrier Doctrine, has long played a role in combining seniority lists in mergers involving a profitable carrier and a bankrupt carrier

Former TWA pilots at AA won a recent court case arguing that ALPA did not meet its “duty of fair representation” in the AA-TWA integration. The APA was originally part of this litigation but was dismissed because the court found that APA did not yet represent the TWA pilots at the time the lists were merged.  Now, the TWA pilots working at AA may demand that wrong be undone as part of their support for a merger with US Airways.

Now consider this: If an integration list is created using a pilot’s date of hire (the most common method of determining seniority) then it is likely that many US Airways East pilots would be placed at the top of the new list. And you can be sure that would not be received well by the AA pilots or the former TWA pilots who could argue that the AA list should be adjusted to reflect their hire date at TWA.

Fences (an industry term for isolating respective operations from another) can fix some of the seniority concerns but also add complexity and unknown costs to the merged operation. At the end of the day, what usually makes pilots happy is a big check from the company.

Bottom line: A merger between American and US Airways would likely be the most difficult seniority integration in history. Some or all pilots will feel disenfranchised as a result because integration results in winners and losers - perceived or real.  Could the pilot unions work together to negotiate integration?  Maybe, but given the history of these pilot groups not without a lot of blood on ground.

Therefore the most likely path to integration is one in which every pilot at AA and US would put their future in the hands of an arbitrator with no guarantee of a positive outcome. There is plenty of precedent for the arbitrator to consider, but very little that indicates an outcome that would be acceptable to a majority of the combined pilot group.

Moreover, it could take years to work out the implementation of a new seniority list. During that time Delta and United would do everything possible to gain a competitive advantage. These carriers already have a first mover advantage over American and US Airways.  So put me in the C-Suite in Atlanta and Chicago and I’m cheering this proposed merger on with a megaphone because there is nothing but opportunity for Delta and United, not only from improved domestic market fundamentals but also from any fallout that occurs should the new American fail to produce.

No valuation of the merger is complete without consideration of this factor during what will be a critical transition period that could make or break the value equation.   And no shareholder should buy the optimistic prospectus from Doug Parker without taking into account this very real risk.

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.

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.

Former America West Pilots Prevail in Phoenix District Court

A group of former America West pilots prevailed this afternoon in a Phoenix, Arizona courtroom.The jury ruled that the US Airline Pilots Association failed to uphold its Duty of Fair Representation. Read the story by Dawn Gilbertson of the Arizona Republic.

Nobody should be terribly surprised by the outcome. Unfortunately, it is only the fifth inning of a scheduled nine inning game for the US Airways pilots to agree to a merged list. The right decision was reached by the jury in this case.

Are represented employees ever going to learn that the grass is never greener when AMFA ideology is utilized? Their approach is simply to over promise and under deliver.

What no one will say publicly at least: without the plan of reorganization for the former US Airways that included a merger with America West, the former US Airways [East] pilots would likely have landed in the unemployment line.  And someone other than "Sully" Sullenberger would have been the captain on the flight that successfully landed on the Hudson.

It really is high time to put together a national seniority list in order that transactions like mergers can take place without labor diversions. 

Campaign Season: Little Substance and Fewer Facts

At least in the race for the US Presidency, a winner will be declared. In the corporate campaigns being run by the American and United pilots against their respective employers, no one wins. 25 years ago, corporate campaigns had some effect as they were new. They are often targeted at individuals, either senior executives or board members in hopes of exposing something “dirty” in exchange for leverage that can be traded at the bargaining table. As we have written here before, this upcoming round of labor negotiations is odd in that neither side has significant leverage and the most important in history since the industry was deregulated.

So the pilots, the “professionals”, the “flying investment bankers”, at United and American have taken to erecting billboards, calling for the heads of their CEO, challenging executive compensation schemes, talking openly about safety and ensuring that each carrier’s operating statistics remain in the press long after they have been reported - all the while hiding behind the veil of improving the product for each carrier's customer base. And hiding behind the financial and still unknown economic condition of the industry. What a laughable approach that promises no more leverage than what they have today as the path to a Presidential Emergency Board is carved.

I could have entitled this blog: The Summer of 2008 Part II.

Presidential Campaign

Like many I talk to, I am disappointed that we have not heard peep #1 of substance from either McCain or Obama on transportation issues generally and nothing on the airline industry specifically as they march toward the November general election. Some band-aid ideas on energy from Obama and the energy solutions suggested by McCain would have a long road to hoe to be implemented. Nonetheless, I am disappointed at this juncture that little is being discussed regarding this battered industry.

Corporate Campaign(s)

My view of the antics undertaken by the Allied Pilots Association and their current leadership, who still can claim that they represent 8,300 airmen at American Airlines, has been well documented in this blog. But most of the unprofessional behavior demonstrated by this current administration has been displayed by leadership of this independent union during every other cycle in the past.

Not so long ago, a desperate grasp for leverage only cost APA’s members $45 million in dues dollars. Today, their inflexible bargaining position based on a dream and actions undertaken against the employer to try and bully the employer to accept their outlandish ask could cost the American pilot membership more. Maybe much more. But they have been there before………. And I am still betting that this one gets put on ice and lands before a Presidential Emergency Board 18 months from now - long after the Delta and Northwest pilots begin to enjoy the improved terms of their new collective bargaining agreement that required the loss of certain legacy mindsets.

One thing that has always perplexed me about this industry, and I was persuaded to pursue the same actions in my past as a union leader: why do this industry’s unions perpetually make deals that minimize the headcount reduction while maximizing the pay cut undertaken by all employees? I have talked about how the industry has always over-expanded in the up cycles and never taken enough uneconomic capacity out in the down cycles. Well the same is true with labor.

The unions choose bigger paycuts to preserve jobs in the down cycles. Stated another way, pay cuts have masked the fact that legacy labor has engaged in bargaining practices that have made them less and less productive in the down cycles. These practices then lead to the airline hiring more employees than needed in the subsequent up cycle. This is a classic example of another inefficiency that has compounded itself over three decades of deregulation. But no, we will try to injure the entire membership to protect 200. Makes a strong cost-benefit analysis case don’t you think?

Corporate Campaign #2: United Pilots Call for Tilton to Resign

I was beginning to believe that the corporate campaign season would be limited to the independent union suspects: APA; and USAPA. But no, we are now joined by the United Airlines chapter of the Air Line Pilots Association. [And anyone that knows a few things about ALPA politics know about the cowboys at United.] First we have a public cry challenging the safe maintenance of their airplanes by the company’s own mechanics. Then we have the claim of an unlawful action on the part of the union by the company. Now we have the pilots at United calling for their CEO’s head.

This Is Nothing New......

A little history would be helpful here. Let’s take a walk down memory lane of United pilot and CEO relationships. In 1981 I believe, the United pilots made a significant concessionary pact in productivity to the company called “Blue Skies”. The subsequent negotiations between the company and the pilots did not return those concessions to the pilots and the result was a six-week strike in May of 1985.

The pilots claimed that Richard Ferris, who remained Chairman and CEO following the strike, was diverting money from the airline to invest in Westin and Hertz, a combination that ultimately became known as Allegis and included United Airlines. The United pilots hire F. Lee Bailey and began a push to buy the company following the end of their strike. Ferris was pushed out and the company sold its interests in Hilton and Hertz along the way. The CEO and Chairman chairs were held warm until Stephen Wolf was named head of the airline in late 1987.

But the pilots at United were exercising their power over being disgruntled with Ferris’s actions and were making headway toward a leveraged buyout until “Black Monday” – the market crash in October of 1987. Yes, the stock market crash in October of 1987 ended their initial bid. A failed attempt where the pilot union still paid its advisors some $16 million. Ever think how much that was in 1987?

Then, in walks Wolf in late 1987, a deal-friendly CEO that had cashed out nicely at each Republic Airlines and the Flying Tiger Line. By late 1989, Wolf was Chairman and CEO, the Allegis name was dropped and the subsidiaries sold. As Wolf’s tenure in the Chairman and CEO chair began, the economics of the industry were generally strong. Then came 1991. High oil prices and a recession. In 1993, Wolf turned to the unions seeking concessions from contracts negotiated in a much better economic period. [What we did not know at the time was that an inside ALPA lawyer would be financially rewarded for being an intermediary to turn these talks from simple concessions to the vehicle that would be used to sell the company to the employees] The company sold the flight kitchens following a near $1 billion loss in 1992.

The 1993 concession negotiations ultimately led to the ESOP structure that was closed in July of 1994. Nearly seven years after their initial attempts, the United pilots had their wish. Wolf was paid off handsomely and in came former Chrysler CEO Gerry Greenwald to head the company and usher in this new era of employee relations. Greenwald was hand-picked by ALPA to head the new airline, as was his number 2, John Edwardson. And the pilot advisors were paid yet another $16 million in the process.

Employee seats on the board were negotiated with unprecedented and unhealthy corporate governance power. Greenwald makes himself a lame duck during this period by announcing half way through that he would only fulfill the initial 5-year term of his agreement. My guess is he fully appreciated that the economics and the governance construct would inevitably lead to a bad outcome. He left in 1999.

During 1998, employees that had made concessions to buy the airline were entitled to begin negotiating interim wage increases. Management recognized that the increases being sought could not be sustained. Then, using their power at the board level, ALPA and the IAM voiced strong opposition to John Edwardson – the chief opponent - and he was ultimately replaced by Jim Goodwin. Goodwin, was another President and COO that needed the blessing of the unions. Then in early 1999, following Greenwald’s departure, Goodwin was named Chairman and CEO.

The ESOP construct ended in 2000. But as the ESOP construct was ending, which meant that United had to negotiate new collective bargaining agreements with all of its bargaining units except the flight attendants, Goodwin began to pursue a merger with US Airways. Labor tensions mounted as the merger now posed many issues that could negatively impact the outcome of their negotiation of a new collective bargaining agreement.

The pilots ultimately won a ransome-like contract, based in part on their actions, that made virtually their entire portfolio of international flying unprofitable. Further the contract established a false market on the rates the industry could afford to pay for pilot labor. Ultimately the US Airways bid was abandoned in 2001. Then the events of September 11, 2001 unfolded, exactly one-year after ALPA agreed to accept its ransome. And surprise, surprise: as the unions still possessed the extraordinary governance powers negotiated during the ESOP transaction, Goodwin was gone by November of 2001. His chair was held warm by board member Jack Creighton until a successor could be found.

Like the rest of the industry, United suffered in the aftermath of 9/11. The company began negotiations with all of its unions seeking an unprecedented give of $2.5 billion annually. Creighton retires, as he was not the one to lead this company through this difficult period. With governance powers still in place, ALPA, the IAM and the board replace the retiring Creighton with Glenn Tilton. The former oil executive will be the one to lead United into, and out of, bankruptcy protection. Remember, it was ALPA that hired Tilton - like many before him citing that it was one expensive hire but definitely the very best of the candidates interviewed.

Concluding Thoughts

Now United is nearing the time to begin negotiations to replace the consensual agreements reached while the company was in bankruptcy. One of Tilton’s strongest attributes upon his hiring was his familiarity with the bankruptcy process so I guess in some ways that makes him a restructuring guy. It did not take him long to recognize that the negotiations with the unions that were concluded prior to the filing on December 9, 2002, were not going to be enough. And I do not think that Glenn believes the work is done at United yet.

For years, the United pilots have taken to calling for the head of each and every CEO that said no. They were more than willing to put in place those they believed would say yes. But even they had to say no at some point and when they did - they were gone. Tilton has said no and continues to say no so that means that the United pilots should keep with what they know and call for his head. But any good restructuring guy knows when the work is done and when it is not done. Many have stayed too long. I don’t think this will be the case as United works toward righting its operation in anticipation of an alliance with Continental Airlines.

I think some history is important for those looking at the United pilots calling for Tilton’s head as a significant event. It is not significant. It is nothing more than a piece of a tired, three-decade old tactic that the United pilots are using in Corporate Campaign 2008. If the United pilots are serious, as they were in the mid 1980’s, then buy the company again. Otherwise there are two choices: be creative and constructive; or be legacy-minded and destructive. United probably has a liquidation value that shareholders might just view as attractive.

I love how history repeats itself in this industry. This blog was largely written from memory as I have spent a lot of my life at United in these dealings. I am sure that I will be corrected if I have made a mistake on the chain of events.

And further, isn’t it interesting that on the day the pilots call for Tilton’s head, the Delta and Northwest pilots approve a new collective bargaining agreement that will be in place when the merger of the two companies is finally approved. At least at some carriers represented by ALPA there are constructive actions being undertaken to address a changing world.

More to come.

The Summer of 2008 ……..

Rather than proving who is right, can’t we just recognize that much is wrong?

Will it be the sequel to the Summer of 2000? An early opening to “goose season”? Or a leading indicator of what is to come as we enter the post – 9/11 labor negotiations season? Or all of the above? With only a short amount of time to check the news as I continued my tour of the domestic US last week, I am talking about the news that United Airlines filed suit over a perceived abuse of sick leave by its Air Line Pilots Association unit, or some of them.

Between the USAPA; APA and the United pilots, we have the beginnings of something good – in a perverted kind of way. Yes we will have the sympathizers; the empathizers; the hypothesizers; the criticizers; and of course the legitimizers. But the something good is the continuation of extinguishing 50 years of bad labor practices. It is a painful and necessary process begun in 2002. I was addressing a group last Tuesday, and as the talk continued there seemed to be one theme that emerged from those carriers that have better labor relations. [Answer] They were not in existence prior to 1978, or were in a fledgling state, when the industry was deregulated.

Yes you can argue that Continental was a pre-1978 carrier. But by the time the Old Continental finished its second or third trip through the bankruptcy process, the whiteboard of outdated contractual language was virtually clean and it looked very little like its legacy self. And take advantage of the ability to rewrite the construct they did. Management made the effort to be inclusive of its battered work force. Employees were grateful to be acknowledged by a management team that promised to include them and to reinvent the airline; execute on their plan to do so; all the while implementing a better employee relations environment.

Fast forward to the Summer of 2008. Continental now finds itself at the top, or near the top, of total compensation in each class and craft of employee when compared to its network legacy carrier brethren. But they are also a highly productive work force when compared to their network legacy carrier brethren which permits the higher compensation. Somehow the importance of this relationship gets lost on union leadership. It is this relationship that provides Southwest the leeway to improve the earnings of its work force - and I am not suggesting that the hub and spoke carriers with senior work forces can realize the levels of productivity generated at Southwest.

The pilots at American Airlines somehow believe that they gave up amounts similar to the amounts conceded by their counterparts at United and US Airways. Not close. Not even in the zip code. And now they want it all back. The irony is: if the United pilots are actually calling in sick and standing in the way of the most efficient operation that can be run during the peak summer season, then this does smell some of the Summer of 2000 when Dubinsky brought the airline to its knees and the airline gave them an unprecedented contract.

The one subtle difference between the two periods is that the Summer of 2000 was about negotiating a collective bargaining agreement that followed a failed ESOP arrangement. The sad part was that the collective bargaining process was about negotiating a fixed-cost agreement that would somehow compensate for the failure of a risk-based stock ownership regime. It cannot be done but there has to be a hybrid that is good for all stakeholders.

The Summer of 2008 is about preserving a few more jobs against the backdrop of an industry in need of capacity cuts.

The Summer of 2000 collective bargaining agreement lasted all of 15 months before United filed for bankruptcy. First it was wage reductions. Then it was productivity. Then it was the pensions. Pension terminations are where I have sympathy. Relatively unproductive work forces in this environment do not get much sympathy as deregulation was as much about removing the inefficiencies as it was about making air travel affordable to the masses. Would I like to see some wages restored to help ease the rise in the price of fuel and food? Yes, but……….. risk needs to be shared. For both sides, using the collective bargaining process to further complicate contract language that is outdated only serves to make for confrontation over a sense of entitlement.

Are we ever going to ask the hard questions:

1. Are 30+ sections of a collective bargaining agreement really necessary?;

2. Why is it good practice to continually modify and expand on paragraphs that were originally written long, long ago when route networks were vastly different and air traffic control was much less burdened?;

3. Is the seniority system really the best way, or is it time to consider changing the seniority system going forward for those that ultimately hire on and will be the backbone of the US airline industry tomorrow?;

4. As we approach 150,000 lost jobs, isn’t it time to begin planning for the industry of tomorrow? This can be done while preserving much of what the legacy employee has today and creating a compensation system that best reflects the industry’s reality of macroeconomic ebbs and flows;

5. Are we ever going to try and fix it or are we just going to continue to lay blame? And that holds true for both sides. But when I see APA so resistant to a change in their sick leave policy, and in turn file a lawsuit, well, the type of necessary change seems so far away.

So as we read stories about how United and its pilots negotiated a standstill pact at the end of last week, more and more stories will appear about the deplorable labor-management relation in the airline industry. It takes two sides to negotiate. It takes two sides to recognize that writing new language that will somehow “right” the old language is just bad practice. It is 2008, not 1938.

We write about change; we read about change; we recognize that industry conditions change; but somehow the more things change, the more they stay the same. And the more they stay the same, the further we are from finding a successful industry construct.

Yawn

This post represents the longest period between pieces for me since I started swelblog.com in October of 2007. Change has been the theme to date. Change will continue to be a theme. Bloggers typically are not sources for news. Instead we rely on reports from the Wall Street Journal, the Financial Times, Bloomberg and other trusted sources for the news and views.

Last Monday, Susan Carey and Melanie Trottman wrote: Continental Rejects Merger Overtures. The subtitle read: Move Marks Rebuke to Rival United; Shifting Alliances? OK. That story ran on A1. Today Susan Carey writes a piece entitled: UAL Merger Discussions With US Airways Intensify. The subtitle reads: Companies See $1.5 Billion In Savings, Synergies; Decision Within 10 Days. Yawn. This story ran on B1. And of course the story comes replete with the now familiar disclaimer: “according to people familiar with the matter”.

In the past, news of airline mergers and potential structural changes in the industry had an air of intrigue and suggested something new in the age old debate was about to emerge. Not this time. Throughout this current period of M&A discussion, I have hoped for something that suggests a path toward transforming of the industry. Something different. Something that tests the current shackles that tie the industry to the same old, same old.

Something like British Airways testing the ownership limits and investing in American and/or Continental. Deal is intended to highlight the importance of the subject as the US and EU negotiate Phase II. Or, labor agrees to a single collective bargaining agreement that makes changes to scope that opens up the globe to new revenue sources all the while protecting US jobs and ensuring that growth will largely remain with the US carriers involved. In return, labor wins meaningful equity in the deal and ties compensation to the same metrics as management. The changed compensation structure begins the process of aligning interests in the company's success.

But I think the market will be the ultimate driver of change. Not the carriers themselves. But maybe that is the good news in all of this and honestly, the only way it can get done.

Transition v. Transformation (Labor Actions Hold A Key)

No matter what direction the industry was going to fly following the emergence of Delta and Northwest from Bankruptcy in early 2007, the subsequent five years or so was going to be a period of transition. The era was sure to be marked by increased competition from non-US carriers; higher oil prices; an economy that was tiring; and more than likely a recognition that no carrier that filed for protection probably had done enough, or tried to preserve too much, given the trajectory of the oil curve.

Then we were going to be faced by the demands of labor to return what was conceded during the restructuring period. Because that is the way it has always been. Right? So maybe it is labor, and their ultimate actions, that is the transition. The transition to transformation? And this transition holds a high probability of the death of an icon.

We already schooled on the many labor issues surrounding Delta and Northwest. But United and US Airways provide their own interesting twists. And those twists begin with the pilots.

No group of pilots has even approached the unrealistic and "head shaking" behaviors of the American Airlines’ pilots except for the former US Airways pilots (US Airways East). These are the pilots that chose to form an independent union by selling an unachievable (from this writer’s opinion, anyway) overturn of an arbitrator’s decision regarding seniority integration of the former America West and US Airways pilots.

But if United and US Airways do decide to join hands, some very interesting possibilities come to the fore. With 5,000 United pilots represented by ALPA; 2,200 former America West pilots that largely voted for ALPA I would guess; and the 2,700 or so former US Airways East pilots that bought the pipe dream sold by the USAPA upstart – an election for representation is all but ensured. And ALPA would likely win. The integration would more than likely get done - yet again. This is the best hope for the former US Airways' East pilots who should recognize that they were fortunate to have found a way out of Chapter 22.

As for the concept of rent sharing discussed in the previous post, a combination of United and US Airways would result in less transfer of capital from the deal and into hush money paid to labor given the relative proximity of average salaries and productivity levels of the two groups.

A United – US Airways combination would also prove most interesting for the flight attendant group as the AFA-CWA represents not only the United class and craft but each the former US Airways and former America West flight attendants as well. From my perspective, this could very well become a “game changer” in the AFA’s attempt to organize the current Delta flight attendants. AFA will be put under the spotlight as to how the union will deal with the integration of its own members that are sure to have varied interests.

As for the other represented groups in the United – US Airways combination, labor stories exist but they are less headline making than what could go on with each the pilots and flight attendants in this scenario.

Over The Weekend, A Comment From a Reader

In my most recent post, Swelblog.com: Let’s Just Continue the War of Attrition, cp5000 commented: “Bottom line is that in a free market, management and labor are free to do whatever they please and capital should be able to make its way to those companies that make arrangements with their work groups that make sense to the providers of capital. Letting the market place sort this all out is difficult for a politician, particularly for a politician from an area that will lose jobs due to the workings of the market. However, our political leaders should be able to see that the pain experienced by some in the past has led to many benefits today”.

cp was speaking to events like the loss of TWA that arguably provided for the opportunity for jetBlue to be granted the slots necessary at JFK that were instrumental to its successful start. The demise of Pan Am was critical to United building Asia and gaining early access to London Heathrow. It could be said that the loss of Eastern ultimately created the vacuum for AirTran today as it has morphed from its prior incarnation as ValuJet. And Southwest has just “triangulated” its way through it all and now has its footprint in all four corners of the US domestic market..

Charlie Bryan’s Tombstone Would Probably Like Some Company

Whether it be the integration of seniority, the overreach for corporate rents by various stakeholder groups, or the failure to recognize that the historic patterns of bargaining and capital recycling are over – labor will definitely play a role in this transition period.

In a post on October 21, 2007, I wrote a piece where I was addressing employee and community entitlement to employment and air service. “Defining Entitlement Economics: all are conferred a lifelong right to employment and/or abundant service despite the fact that the economics of the US airline industry, particularly its domestic operations, have changed significantly since the early 1990’s”. Nobody is entitled to a lifelong right of anything.

Why this period is not viewed as an opportunity by labor and policymakers, I just do not know. Instead opponents will point to executive compensation; service problems; loss of service; a menu of potential dislocations; and just plain ignore the economic reality that this industry needs to figure out how to make money. Period. That is the only thing that will benefit everyone.

Yawning at United – US Airways and the drumbeat in anticipation of it. Not sure if I am just weary of the tired refrain of executive compensation and entitlement of economics and seniority; or if bored because the arguments and scare tactics remain the same all the while the world around the arguments continues to change; or if oil is just sucking the oxygen out of the industry and limiting the interesting things that could be done proactively. But I will be patient as some great stories and perspective will emerge.

Or maybe it is simply because I celebrate five decades of life on Thursday. I probably should have written this piece on Mayday. But it is Cinco de Mayo.

Circular Logic: US Airways and the Economics of Entitlement

Since US Airways’ failure to convince the US Congress, employees and the Delta Unsecured Creditors Committee that their deal provided many stakeholders with a long-term blueprint for success, issues faced by the US Airways’ management team continue to get more and more parochial. The recent news announcing the continued downsizing of Pittsburgh has elicited responses from Congressmen that this writer finds baffling. And the move by unhappy former US Airways’ East pilots - caused by an arbitrator’s ruling regarding the seniority integration with the former America West pilots - to consider an alternative union to the Air Line Pilots Association is troubling.

The Pulldown of Pittsburgh – A Long History of Weak Hub Economics

To start, let me reiterate my views on the market: there are too many network legacy carriers; too many low cost carriers; too many regional carriers as a result of having too many network legacy carriers; and there are too many hubs which keep too many network legacy carriers and regional carriers operating.

Defining Entitlement Economics: all are conferred a lifelong right to employment and/or abundant service despite the fact that the economics of the US airline industry, particularly its domestic operations, have changed significantly since the early 1990’s.

Remember the early 1990’s: It was during this time that the industry emerged from a recession that was triggered by the Gulf War. American exited Nashville and Raleigh-Durham. Continental was emerging from Bankruptcy #? and exited Denver. Delta’s presence in the Western US, purchased from Western Airlines, was being pulled down. Other carrier’s were also reducing west coast capacity as the market was being impacted by the growth of Southwest and question marks about how successful United would be following its ESOP agreement reached in 1994. And I am confident that I have missed other significant events during this period. What I do sense, is that we are about to embark on a similar period.

The period also marked the beginning of the end for US Airways as accidents, increased competition and the hangover of management decisions to “give away the store” in collective bargaining agreements to all employees from each of the companies it acquired during the late 1980’s were being fully realized. It was at this time, that the management team was changed significantly to see just how many tricks could be pulled out of the hat of an airline with a bloated cost structure and a revenue base under attack from all directions.

Last week there were two articles that caught my eye. The first story, by Dan Fitzpatrick of the Pittsburgh Post-Gazette click here defines the unfortunate position Doug Parker, US Airways’ CEO, finds himself in as his management decisions are being challenged by an uninformed Senator Arlen Specter. An enlightened David Grossman of the USA Today click here does a wonderful job of describing the declining economics of the Pittsburgh hub while at the same time capturing the consumer friendliness of the facility. The facts outlined by Mr. Grossman were intact before US Airways’ merger with America West and should have been a signal of things to come for each the employees, customers and city fathers in Pittsburgh along with the Pennsylvania congressional delegation.

So Senator Specter:

- When you say you might not help US Airways with political issues in Washington DC - that is truly unfortunate. I thought you represented all of Pennsylvania and not just Pittsburgh. I thought that the Senate was interested in the success of companies and industries, particularly those that are inextricably linked to the health of the US economy and assuring that US industry can be as competitive as it can be in the global economy.

- US Airways has reciprocated, and has shown the Pittsburgh area consideration in return for Congress’ support in building a new airport. Quite honestly, the reciprocation has come in spades as Pittsburgh has been among the most overserved cities in the US when considering the fact that only 20% of the airport’s traffic was local Pittsburgh traffic (pointed out in Mr. Grossman’s article). Simply stated, this is just bad economics for an airline hub and all Mr. Parker is doing is making a prudent management decision that should contribute to his company’s financial health.

- Finally, your decision to fly Southwest is certainly yours and I agree that they are a very good competitor in the markets they serve. Government policy in the US aviation market has led to significant market fragmentation and as a result the consumer has benefited from lower ticket prices. But I urge you to look in the mirror and ask yourself who is serving Allentown, Harrisburg, Wilkes Barre-Scranton and Erie. It sure is not the low cost carriers that have been the darlings of Capitol Hill. It is the network legacy carriers that invest in the right sized airplanes to serve those markets when the low cost sector tries to lure those travelers to the big markets they only serve.

So US Airways East Pilots:

- When you say you are unhappy with the Air Line Pilots Association over an arbitrator’s decision and you want to leave ALPA - for the historical success of non-national unions? - be careful for what you ask for. How do you really think things will be better for you and your followers under a new union with little clout?

- It is time to simply recognize that the merger deal with America West was the most important component of the Plan of Reorganization that permitted you and the remaining work force to emerge from bankruptcy #2. Your problems began a long time ago and are not the result of this agreement. Without it, my guess is the US Airways logo (whichever one it is) rests somewhere with Pan Am, Eastern, and TWA.

So Senator Specter, you are not entitled to service in this economic environment just because you have had it in the past; and US Airways’ employees are not entitled to employment. What is troubling to this writer is to have Senators not looking around their own state and recognizing that it is the network legacy carriers that are serving “your” cities of all sizes – not just the largest markets despite the difficult economics facing the industry. If you think that the low cost carriers are the answer to your service dilemmas, then keep making statements about not wanting to help a carrier that has invested, and generated, billions in “your” economy when they visit your office in Washington DC. If you think about it carefully, your logic is circular.

To the US Airways’ pilots, your circular logic is more like the virtuous circle of failure that began long ago. You finally have a CEO that is committed to the operation, committed to finding success comprised of a network with limited short term upside and committed to avoiding a walk down the plank that promises no return. But if the world begins to change along the lines suggested by the last two posts in this blog, then it will be nothing different than the parochial interests that stood in the way of commercial opportunities at the “Old US Airways”.

“I hear the train a "C"omin'”

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

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

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

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

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

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

“It's rolling round the bend"