12.23.2009 It is that time of the year again when it is time to put the packages under the tree. The packages represent my 12 days of Christmas, or the 12 airline industry issues that took place in 2009 that I find important. I have placed my packages under the tree in descending order of importance.
... read more
12.15.2009 Last week, I was in Boston listening to the students in MIT’s Airline Industry class make group presentations on six US airlines. It is always refreshing to hear the analysis, reflection on strategies and recommendations from really smart kids who aren’t burdened, like me, by three decades of taint or cynicism.
Do We Have a National Aviation Policy?
The student presentations got me thinking about the role of national policy on the U.S. airlines. Michael E. Levine, now a Distinguished Research Scholar and Senior Lecturer at the New York University School of Law, wrote an op-ed in the December 1, 2009 Aviation Daily titled: “We Have a National Aviation Policy.” Many will remember Levine as one of the minds behind and framers of the Airline Deregulation Act of 1978. Levine went on to serve in numerous senior management positions at a number of airlines along the way. To the serious industry observer, Levine is a must-read. You may not always agree with his viewpoints, but you always know that the work will be well researched, thoughtful and provocative.
Levine’s Aviation Daily piece has its roots in the recent comments by former American Airlines CEO Robert Crandall and Business Travel Coalition President Kevin Mitchell suggesting that the U.S. lacks an effective aviation policy.
Levine disagrees: “Our government has an excellent aviation policy: continuously improve safety, promote environmental goals, maintain consumer choice, and allow the general public access to a system not run specially for the benefit of stockholders, banks, elite purchasers, aircraft manufacturers and workers more privileged than they are,” he writes. “We even have a mechanism in place to make sure that service is provided where social policy demands it and the market won’t pay for it.”
In Levine’s view:
I encourage readers to find a copy and read Levine’s piece in its entirety. It is good. And of course many of the ideas are those espoused here at swelblog.com. If I have a quibble at all with Levine’s piece, I would say that the US government and the narrow-minded thinkers in Washington who are in power positions on committees overseeing US commercial aviation produce at least as many impediments as do other governments.
Levine’s analysis is also well timed to the formation of Transportation Secretary Ray LaHood’s Blue Ribbon panel to study the industry. A mind like Levine’s would serve the industry well because unlike Crandall and Mitchell, he does not have a dog in the fight. Furthermore, his writing reflects the need to cut to core issues that govern US aviation today and fix the things don’t work – even if those things include some sacred cow(s).
Pilot Fatigue
Last week, FAA Administrator Babbitt testified before the Senate Commerce Committee’s Aviation Subcommittee on a variety of safety issues including pilot fatigue. As I have written here many times, there can be no productive discussion on pilot fatigue until the issue of commuting is included in that discussion.
Until last week, any Congressional testimony fatigue or flight time/duty time regulation changes centered on the work of an FAA Advisory panel that met during July and August to recommend changes to existing rules. But that committee -- comprised of labor, management and other stakeholder groups -- decided that commuting was “outside the boundaries” of their mission. So it is left to Babbitt and the FAA to seek comment on commuting with respect to the proposed rule changes.
Commuting, of course is among the industry’s most sacred cows. I don’t know how many airlines would be willing to go first in telling a pilot, or a flight attendant, that they cannot commute or that they have to live within X miles of their assigned domicile. Clearly, Babbitt is not convinced that commuting is the only major factor in the fatigue question. So for now, Babbitt’s mantra is the right one: Show up fit to work.
But commuting is a management issue as well. Back in the day when I was flying, pilots were paid moving expenses and had the company buy their house (in the event it could not be sold) if they were displaced to another domicile. As the industry began to grow and merge and create new hubs and thus new crew domiciles, the moving expense issue was a big one for companies to consider. Lo and behold, it was one of the early concessions airlines sought from pilot contracts in their efforts to cut costs and the industry structure began transforming itself.
I am glad that we are looking at fatigue and flight time/duty time regulations with a learned eye to make fixes where science suggests fixes need to be made. What doesn’t make sense is this hue and cry that fatigue is an issue because airlines have worked to improve productivity by getting their pilots to fly an additional eight hours a month.
11.25.2009 Stuffing Romy’s Thanksgiving Turkey with Items for Secretary LaHood to Consider
On Friday, November 20, Montie Brewer, most recently Air Canada’s President and CEO, made a presentation at MIT titled: “Five Reasons Why the Airline Industry Will Never be Profitable.” Prior to making his way to Air Canada in 2004, Mr. Brewer (Montie) held senior positions at United Airlines, Northwest Airlines, Republic Airlines, Braniff and Trans World Airlines. He has planned and developed over 20 hub operations worldwide and played an integral role in the founding of the STAR alliance.
I sat down with Montie following his presentation with the intention to write about it, but also to use his talk as context as Secretary of Transportation Ray LaHood considers establishing a Blue Ribbon panel to study the woes of the U.S .airline industry. It seems like the perfect stuffing for 2009’s Thanksgiving turkey.
Brewer’s Five Reasons Why the Airline Industry Will Never be Profitable
The boom and bust cycles of airline industry earnings are well documented, as is the fact that subsequent down cycles to industry up-cycles destroy those earnings and more. The fact remains that any annual airline industry profits rarely exceed the average pre-tax earnings for U.S. corporations. As a preface to his talk, Brewer made clear it would be wrong to surmise individual airlines will not be profitable. Instead he contends the industry will always suffer due to structural reasons.
1. It’s A Capacity Lead Business Model (Causes Constant Overcapacity)
Since deregulation the airline product has been commoditized. In the commodity framework, the only way the industry, or an airline, can grow revenue is to grow capacity. Then, the Computer Reservations Systems and the Global Distribution Systems institutionalized the notion that in order for an airline to grow revenue, it needed to offer more and more capacity even before demand warranted.
The addition of capacity led to low and lower operating costs. On the margin, revenue exceeded cost. Uneconomic capacity was being deployed each and every day. Ultimately an industry too big to be sustainable was created.
The GDS’s were a major contributor to the commoditization of the airline product. Based on this fact, airlines that distribute directly to the consumer have the best likelihood of differentiating, and more importantly, not commoditizing, their product. This fact contributes to the notion that certain airlines can do well while the industry suffers.
2. Airplanes Don’t Go Away (They Just Become More Efficient)
A bad airline industry assumption is consolidation of the industry, whether through a merger or carrier liquidation, leads to industry capacity reduction. The airline industry time and again has demonstrated that once a carrier’s capacity is pushed to the edge, that carrier’s capacity (efficient and inefficient) does not go away.
With the working premise that the only way to grow revenue is to grow capacity, then new aircraft need to ordered. The problem is aircraft do not go away, and: aircraft do not make their way from an inefficient operator to a more efficient operator; aircraft CAN fly forever; even when an airline tries to retire aircraft, they come back like a bad spaghetti sauce (remember ValuJet using Delta’s DC-9s to compete directly with them in Atlanta); and, when carriers grow they realize great efficiencies.
An example of those efficiencies is a 3 percent growth in capacity results in only a 1 percent increase in total operating costs. However, this works in reverse when carriers pull capacity down as the cost savings cannot be achieved commensurate with the reduction. This fact is what plagues the industry today as a floor is created on just how much capacity can be reduced by any one airline.
[Note: If Brewer had his way, Airbus and Boeing would each be allowed to produce 10 new aircraft per year but he would allow the manufacturers to charge whatever amount they could earn on each of those 10 aircraft.]
3. Labor Leverage (Political Organizations Cannot Manage Commercial Reality)
Labor organizations are not structured to manage the responsibility they possess. In Brewer’s view labor has tremendous leverage over the industry. However, they are highly simple political organizations and, as such, only have a short-term view. For the politicians, the short-term view is to remain in their elected position. To overcome this flaw, labor organizations need to completely overhaul their governance structure.
Like the ordering of airplanes, management historically reaches agreements with labor at the very end or the peak of economic up cycles and then faces the prospect of paying the bill during subsequent downturns. Given the high fixed costs of the industry, airlines can rarely afford a strike or intermittent work stoppages. During negotiations, both the airline and labor pretend management is in control. According to Brewer, the working assumption is management will not allow labor to take too much, but in reality, labor can take all it wants - - then both live with the outcome. Brewer believes, when costs like labor, fuel, maintenance, airport fees are factored in on a daily basis, the typical airline has 10 - 20 profitable days a year.
With 10-20 days of revenue to spend, some in labor have asked, “Why would management agree to a contract it can’t afford”? Well, because somewhere during the year, fuel exceeded budget, or the government issued a new airworthiness directive involving aircraft in an airline's fleet, or airport fees increased, or…….the false belief that management will contain labor’s desires from doing stupid things.
4. Input Costs are Too Volatile (Revenue Cycle and Cost Cycle Out of Sync)
Even in the best of years, the airline industry is a low margin business where it is not uncommon for any number of input costs to increase at least 20 percent. A low margin business with volatile input costs is a toxic mix. A good example occurred in 2008 when the price of oil increased from $80 per barrel to $147. As is typical in the airline business, tickets are often purchased months in advance. During the first half of 2008, it was not uncommon for passengers to be flying in June on a ticket purchased when oil was $50 per barrel cheaper.
Is the relationship of volatile costs relative to revenue impossible to manage? No, but it would require companies to maintain outsized cash balances. Cash balances that look good to labor during contract negotiations and to financial raiders seeking to buy a company to harvest that cash.
5. Nobody Really Wants It to Be Fixed
Brewer makes a powerful case that things are fine the way they are… and, for the most part, the airline industry value chain, consumers and the government know it.
When it comes to low fares, the consumer can shop the internet and find some market on sale. They may even find the price of a ticket today equal to, or less, in nominal dollars than a fare charged two decades ago. When adjusted for inflation, it is hard to find any consumer item that is a better bargain than air travel.
Taxes and fees are nearly $60 - or 20 percent - of the price of a ticket today. This compares to $22, or 7 percent, in 1972. The government is getting a bigger share of a shrinking pie.
Perhaps, most compelling is the industry's value chain like airline catering, aircraft lessors, ground handling, manufacturers, airports, distribution systems, fueling; travel agents, maintenance repair organizations and freight operations. Each of these industry sectors in the airline industry value chain earn a higher return on invested capital than the airline companies that keep them in business.
Some Questions for Secretary LaHood to Ponder
Any Discussion Must Begin With a Plan for Roads, Rail and Runways
To date, the only public suggestions that I have seen for the Secretary to consider in forming the panel come from Kevin Mitchell at the Business Travel Coalition. Mitchell, who participated in the Secretary’s discussion with various stakeholders on November 12, wrote LaHood outlining five issues that need studying by the proposed commission:
Mitchell also outlined causes of each, including unbridled faith in market forces; lack of government and industry foresight and leadership; lack of a productive labor-management model; unworkable industry financial model; ineffective FAA management; fragmented industry positions and lack of Congressional leadership. While Mitchell is thoughtful about the problems and their causes, parts of his list of those affected sounds more like advocacy for his clients.
Swelbar’s View
Among the best of Mitchell’s observations is the need for a coherent transportation policy. That policy, though, should not focus on an alleged broken regional airline business model; tarmac delays; that the industry is no longer a desired profession; pressure on safety margins; loss of skilled jobs; lost service; or a loss of international leadership.
The transportation policy should be about roads, rails and runways -- period. After all, there must be some very good reason why Warren Buffett is spending $34 billion to buy Burlington Northern? For aviation specifically, it should address the need to define, resize and equip the desired infrastructure for the 21st Century. For airports that might be disenfranchised from the air transportation grid, do highways need to be built that easily facilitate a different access point for those air travel consumers? It should not be about championing a unique labor force that already has considerable power and very good paying jobs relative to the overall work force or the calls of various consumer advocates.
Organized labor was a force behind LaHood's consideration to form a commission to study the airline industry. But nowhere based on what I have read does labor accept any responsibility for the current condition of the industry. Times have changed, and unions need to understand that. For organized labor – and by extrapolation, airline labor – to be successful, the unions can no longer be in the business of keeping themselves in business. It has to be about meaningful change. Change that entails understanding the new economic realities, or as the Harvard Business Review recently opined “that there will be no going home again…that the landscape of business has been forever altered.” [actually this question can be asked of every airline industry stakeholder] Can unions change or adapt to the idea that instead of being in business to secure decent jobs for the greatest number of people it might be better off securing great jobs for fewer workers?
Mitchell identifies the right stakeholders, but doesn’t ask ALL of the right questions. Brewer poses the right questions and does not suggest the market can answer them all. The answers lie in what this blog is about -- change: can industry stakeholders change and surrender unrealistic expectations of the past? Despite all of the cuts, we still have too much capacity, leading to too many inefficient operations, which lead to a government that really does not want to get out of the way --- because it has a stake in that inefficiency.
I hope that the administration is really going to evaluate the industry and recognize that all stakeholders need to change. And much of the change that needs to take place begins and ends with government accepting that an industry 50 years old ... well, needs to change.
More to come.
11.17.2009 This week, Terry Maxon of the Dallas Morning News wrote about the “surprised” reaction at American Airlines when a correspondent on NBC’s Today Show reported a “potential strike” at the airline following the holidays.
The show was a bit vague on its sources, but my best is that Laura Glading, President of the Association of Professional Flight Attendants, is working her media list to drum up a little coverage for the union’s latest negotiations gambit.
I consider myself a pretty good historian on most things airlines over the past 30 years. And I remember the APFA’s divisive and destructive Thanksgiving strike in 1993 that attempted to bring the airline to its knees over the critical holiday travel period. Last year, the union “celebrated” the 15th anniversary of the strike with a campaign they called “Remember November.”
For this year’s anniversary, the union is doing its best to remind the company of the pain it could again impose in a campaign that all but threatens another strike . . . this one called “Got Guts?”
To be fair, the APFA has made clear that they do not plan to disrupt American’s operations over the holidays. However, the union did say it was prepared to strike next year if no contract agreement is reached by January, with Glading saying she will consider asking the National Mediation Board for a “release” from negotiations – the first step toward seeking the right to “self help” under the Railway Labor Act.
First, let’s review the rules. The NMB will grant a release only if it believes negotiations are at an impasse, and the bar for that is set pretty high. A release would then open a 30-day “cooling off” period. Only after that point and if the parties fail to reach agreement can either side engage in self help -- which for a union means work stoppages or strikes and for management allows a company to impose its “last offer” at the table or lock out striking workers.
So let’s be perfectly clear. The union can’t strike now, no matter what the alarmists may say on Today. There is no guarantee that the NMB would grant a release. And even then, the RLA has several protections built in – the cooling off period and the prospect of a Presidential Emergency Board – to prevent the kind of work stoppages that could ground an airline and impact interstate commerce.
So why is the flight attendant union playing it out this way? Why on one hand are they talking strikes (which in some cases proves reason enough for passengers to “book away” from a particular airline) and on the other hand trying to reassure passengers that their holiday travel plans are safe?
Because that’s what unions in the industry too often have done. . . talk out of both sides of their mouth – paying lip service to their commitment to passengers while at the same time making demands and engaging in work actions that threaten the airlines’ ability to do business.
The Boeing Lesson
Let’s consider the real impact of strikes.
Last September I wrote here: “In what is starting to be a rather ho-hum event in the aerospace/defense world, the International Association of Machinists and Aerospace Workers (IAMAW) have decided to strike the Boeing Company for the second time in three years. Is this a “yawn moment” or a precursor of things to come as the airline industry begins in earnest the renegotiation of concessionary contracts?”
In its negotiations, Boeing was looking to balance its economic offer to the union with added flexibility in its contracts the company needed to address the ups and downs in the business cycle. The IAMAW was not willing to comply. So Boeing ultimately settled with the union, but not before further damage was done to an already fragile relationship.
The real story, however, played out a few months later, when Boeing announced its decision to build a second production line to build the 787– not in Washington, its corporate home for decades, but in the right-to-work state of South Carolina.
Washington State officials reportedly worked hard to try to convince Boeing to stay, but at the end the state’s governor said the company’s decision to build the line in South Carolina came down to one thing: its difficult relationship with the Machinists union and a failure to reach a no-strike deal.
And the pain may not be over for Washington’s IAMAW workers. At some point Boeing will need to begin manufacturing replacements for today’s 737 and 777 lines. Where will those planes be built?
What is particularly telling in this case is that the IAMAW was publicly dismissive of the fact that the union’s actions had anything to do with the company’s decision to add capacity in South Carolina.
This is typical of labor of late. But at some point unions in this space – whether airline or aerospace -- need to recognize the fundamental flaw in their collective bargaining agreements that too often work to choke productivity rather than promote it.
Looking ahead, I believe that the current round of airline negotiations must continue the transition/transformation underway in the US airline industry and address the sticking points in its contractual relationships with its labor force. These include pay (which is unlikely to return to 2001 levels) and productivity (which unions resist for fear of losing dues-paying union jobs).
The crux of the problem for labor as I see it is a failure to appreciate the delicate balance between pay and productivity. Without recognition that balancing the formula is critical, the industry, and individual carriers, will continue to find a more efficient means of doing the work.
Sadly, productivity is driven at its core by seniority and all the protections I’ve discussed in the past that unions provide so that long term members feast while newer members are left to feed on the scraps.
Despite many of the gut-wrenching changes and cost cuts during the last negotiations cycle, the industry did nothing to restructure seniority – the “third rail” on union politics. In my view, organized labor’s blind commitment to preserving seniority lies at the heart of a race to the bottom. Yes, the revenue environment contributes more than its fair share to airline’s financial woes, but at some point labor has to accept responsibility for the role of these Depression-era ideologies. The reality is that, last time around, airline wages were cut more than necessary because of union insistence on preserving seniority and limiting productivity.
Back to the Cabin
So it is in this environment that the APFA waves its strike threat like a red flag in the bullring. The APFA website even features a report the union commissioned highlighting the failures of airline deregulation and the economic pressures on the industry. On a recent trip to Washington, Glading joined AFA-CWA President Pat Friend in urging the Obama Administration to “stabilize an industry that's not working” and reverse the “damage done” to the traveling public.
Call me nuts, but I’m guessing that Glading’s talk of a strike runs counter to her desire to “stabilize” the industry. Perhaps other carriers would benefit from the union’s effort to ground the country’s second largest carrier in terms of revenue. But American – and all of its employees – wouldn’t see many benefits.
Or am I to believe that glorifying 1993 and rallying her members to strike in one of the most difficult times in airline history would alleviate the “damage done” to travelers?
I’ve said it before and I’ll say it again – the U.S. industry needs to do a better job of managing labor costs in boom and bust cycles in which fat contracts are approved in boom years only to require painful and at times draconian cuts when the cycle turns down.
Tellingly, and perhaps predictably, the unions are hoping a labor-friendly administration in Washington will help them gain new power in the industry – evidenced also by their efforts to change election rules at the NMB to make it easier to organize workers (even if the AFA-CWA, which is trying to organize at Delta, is hiding behind the AFL-CIO’s Transportation Trades Department to do it.)
What’s happened in Detroit over the last year is a pretty good indicator of what happens when an industry fails to get its costs in line with the market. A smaller airline industry can’t absorb the same costs – including labor costs – that it did ten years ago. Already we’ve been at this restructuring thing for more than five years and it’s pretty clear that the market has spoken.
So I’m really confused by what the APFA thinks it will get in return for a strategy that will only hurt the company that employs its members.
I don’t know what a strike buys anyone in this fragile business environment except, perhaps, an unpleasant ending. Where I do agree with Ms. Glading is the importance of recognizing history. I, for one, remember Pan Am, Eastern and TWA. At the time, most believed those proud companies could weather any storm. And I’d guess there may be another airline on that list before this cycle is complete.
If the past eight years have been rough and tumble, imagine what the next few years could be like as airlines reach pressure points in contract negotiations. In that case, I can only imagine what would be left to celebrate on the 20th anniversary of APFA’s Thanksgiving Strike.
11.10.2009 I had made up my mind that I was not going to write anything more on National Mediation Board activities, at least until after the scheduled public hearing on December 7 in Washington. Isn’t it interesting that the date for the hearing is synonymous with Pearl Harbor Day? I digress.
I have heard from many people regarding the two recent NMB pieces I posted on this blog. Most of the comments have been private and along the lines of: “How can you oppose something so fundamentally akin to our democracy? “And “How can you possibly be against anything that is so aligned with the Constitution of the United States? “
Negotiation and Compromise Were Wright
As I think about my feelings, I reflect back on the reasons I helped American Airlines a few years back in its campaign against Southwest’s push to repeal the “Wright Amendment.” After all, Southwest’s CEO Herb Kelleher had made a deal in 1979 (or maybe 1978, or maybe 1977, or maybe earlier)when he agreed to the Wright Amendment’s limitations on Southwest’s flying from Dallas Love Field. Then, in 2004, for reasons unstated but not hard to figure out, Kelleher wanted to undo that deal and expand his airline’s ability to fly nonstop on new routes from Love to points beyond the eight state limit that had been legislatively imposed.
The Wright Amendment was negotiated with a purpose and a commercial issue at its core. The law was largely designed to promote stability in the Dallas/Ft. Worth airline market as a then-fledgling DFW Airport came online. In my work on the campaign, I was often asked how I could oppose unfettered competition in the Dallas marketplace. My reasoning was simple: I believed repeal would lead to dangerous instability in the airline marketplace, particularly for American at a time when all legacy carriers were on life support. Southwest's motives were largely intended to take advantage of commercial weakness.
When I assessed the Dallas market and the potential impact on American if the Wright Amendment was immediately repealed, the tenets of a compromise played themselves out in the analytics. That analysis supported a phased-in repeal that immediately allowed through ticketing for Southwest at Love Field. It certainly was not my place to suggest that compromise. That compromise came only after a lot of hand wringing among politicians and senior airline executives alike. But it assured more stability in the market and will ultimately lead to what Southwest sought: Come 2014, it will be "free" to fly to any and all domestic points from its home base in Dallas.
A Cram-Down Would be Wrong
Based on what we know today, the National Mediation Board through its Notice of Proposed Rule Making (NPRM) seems to leave very little room for negotiation or even compromise as to how representation elections should take place. This, despite concerns raised from not only management interests but from other unions with interests as well. Interesting, and disturbing, behavior for a quasi-government agency with the mandate to reach agreements with parties rather than provoke, and perpetuate, actions that lead to disruption and delay, don’t you think?
As I wrote in my last blog, as drafted the NPRM smacks of politics, disregard for prior practice and arrogance in its refusal to address key subjects in the labor arena, including the ability of employees to decertify a union and a union’s right to demand the personal contact information of employees they hope to organize known as an Excelsior list.
Let me be clear here: I have no issue with the rule change per se. But I have major problems with how it is being done. In a real world application of NMB mediation cases, doesn’t the Board provide one or both parties “political cover” in reaching an agreement that might otherwise be politically unpalatable? That sure as hell is not the case here.
The Wright Amendment was a politically and commercially-charged issue between two airlines and two cities that also had national implications because airline activities so often do. Changing the union organizing process under the Railway Labor Act has implications beyond airlines and airline unions as well. I believe that by changing the rule, the NMB will be creating more instability on top of an already unstable airline marketplace. And that has national implications. How many industries have interdependencies on the airline and railroad industries? A stimulus question indeed.
The truth is that some at the NMB are looking to do nothing more than change a rule that would initially make it easier for unions to organize a largely non-union airline (Delta) and add/retain thousands of dues-paying workers to union ranks. But the ramifications have much longer-term implications that very clearly favor one side (union supporters) over the other (those who oppose unionization). That’s one upshot of a draft rule that ignores rail and airline employees’ right to decertify a union or provide their personal contact information to union organizers.
It sounds to me like either the NMB and its proposed rulemaking should be put on ice, or a Presidential Emergency Board be convened in order to make sure that all input be considered. At least in a PEB, history suggests that neither party will be totally happy. Inside baseball tells us that means a good deal has been reached.
In this case, like Wright, compromise would be right but only after all sides have had their say and issues heard and considered. Because otherwise, something tells me that the outcome will be wrong.
More to come, for sure.
11.4.2009 Something is just not right about the speed with which the National Mediation Board issued a Notice of Proposed Rule Making (NPRM) to amend the Railway Labor Act
I’m guessing that the reasons had more to do with politics than good policy. Something is just not right.
In its proposed rule, the NMB is seeking to change the election process by which unions organize workers in the railway and airline industries. The new rule, which would change 75 years of practice, would for the first time determine the outcome of union elections based on a majority of those who vote rather than current practice, where a majority of all eligible voters must support joining a union.
What is laughable about this change, at least to this observer, is that the Board describes the NPRM as part of its “ongoing efforts to further the statutory goals of the Railway Labor Act.” Funny, because the overarching statutory goals of the RLA is to minimize the disruption on interstate commerce stemming from labor-management disputes. And this rule would likely do just the opposite: increase the likelihood of union activities that could wreak havoc on our nation’s commerce.
Never do I remember the use of the formal NPRM process to make such a significant change to labor law.
But before we go too far, it is important to note the dissenting opinion of the Chairman of the Board. The NPRM was issued by NMB members Harry Hoglander and Linda Puchala – the two Democratic appointees on the three-member Board. The Chairman, GOP appointee Elizabeth Dougherty, in a formal dissent challenged the action of her fellow Board members
“Regardless of composition of the Board or the inhabitant of the White House, this independent agency has never been in the business of making controversial, one-sided rule changes at the behest of only labor or management,” Dougherty wrote. And it is this very mindset of Hoglander and Puchala in the drafting of the NPRM that smacks of politics, disregard for prior practice and arrogance in refusing to address subjects of similar importance in the labor arena, including the ability of employees to decertify a union and a union’s right to demand the personal contact information of employees they hope to organize known as an Excelsior list.
Let’s Talk Stability
On September 28, 2009 I blogged in a piece titled: Airline Industry Eyes on the National Mediation Board, that looked at this very issue.. The rule change was sought by labor – the Transportation Trades Department of the AFL-CIO as part of its efforts to make it easier to organize airline workers. But the proposed rule is loaded with the potential for unintended consequences, particularly for incumbent unions that might be the target of “raids” by competing unions encouraged by the possibility of picking up new members in an industry already heavily unionized.
Stability is one issue Chairman Dougherty addresses in her dissent, albeit for different reasons:
“The Board has repeatedly articulated important policy reasons for our current majority voting rule – including our duty to maintain stability in the air and rail industries,” she writes. “This duty stems directly from our statutory mandate to ’avoid interruption to commerce or the operation of any rail or air carrier.’ The Majority attempts to ignore this important statutory mandate by claiming that only our mediation function is relevant to keeping stability in the air and rail industries. This argument has no merit. The statute does not limit our mandate to only mediation, and it is disingenuous to suggest that our representation function does not play an important role in carrying out our duty to maintain stability in these industries. Moreover, the Board has repeatedly in the past raised this policy issue in conjunction with our representation function.”
But it is just that stability that would suffer in the case of more frequent labor disputes and work actions designed to cripple a carrier’s service.
Some will say that disruption of interstate commerce was one thing in the 1930’s when the RLA was last amended and yet another thing in 2009 to justify making changes to 75 years of practice. Not so fast. In the 1930’s, interstate commerce consisted more of construction materials transported by train. Today’s economy is about “just-in-time” delivery of every commodity imaginable and that includes the crucial role of airlines in getting business travelers to and from their destinations. Time sensitive materials and travel are critical to today’s economy and fundamental to the service modern airlines provide. So avoiding disruption is as applicable -- if not more important -- today as it was then.
Why Should You or I Care?
I have been asked by many really smart people why I oppose this change. After all, it would only put in place the very election practice of majority voting that is at the core of our democracy. From that perspective, I could easily wrap myself in the flag and say the change sought by the unions makes absolute sense.
But let’s give it a closer look. Our election practices were established by the U.S. Constitution. The 12th and 17th Amendments changed the rules for electing Presidents and Senators, but only after careful deliberation. And just as the Constitution establishes the framework for the establishment of the Federal government and its relationship with states and citizens, the RLA establishes the framework for the resolution of labor-management practices in the railroad and airline industries.
I am not a lawyer. But I do know that there is much learned discussion around the issue of original intent as it pertains to the Constitution. Changes can be made and have been made to that ruling document. Similarly, changes can be made to the RLA. But that should happen only after careful deliberation. Moreover, it should not occure on the whim of two NMB members. I hesitate to even suggest that these changes are being imposed by the Obama Administration on a struggling industry as a way to pay back labor for its support during the campaign, but it is beginning to smell that way.
Should the Industry Really Care?
The fact is, this proposed rule change is aimed at a single airline, Delta, which is less-unionized than any other legacy carrier. And as the nation’s largest airline following its acquisition of Northwest, Delta is clearly a tempting union target.
So should anyone other than Delta really care? There is probably plenty of water cooler discussion taking place in Dallas, Chicago, Houston and Phoenix to name a few airline headquarters. One can only imagine that, in their view and on one hand, it is high time that Delta has to deal with the same labor challenges that have burdened other airlines for decades.
Delta is unique in the industry in its ability to offer above industry W2 compensation in return for work rule and commercial flexibility. That’s been possible because Delta isn’t constrained by union contracts that limit productivity, add rigid work rules and protections and add other fixed operating costs. Under unionization this past practice and fact becomes a question mark.
But I believe that the industry should be concerned about this Board action, both in impact and in precedent. Assuming the rule is implemented as I believe it will be, then all airlines with unrepresented work groups should prepare for union organizing activity unlike anything this industry has seen in two decades. AirTran, jetBlue, Republic/Frontier and SkyWest should stand ready.
Let me be clear. I am not saying that unions are all bad. Good leadership on the union side and a willing management can make deals. Look at the deals done in 2009. Look at the most unionized carrier in the US industry – Southwest – which thanks in part to a strong relationship with its unions has managed to pay well and do well in the marketplace by building a great corporate culture and making productivity and customer service a priority
On the other hand, unenlightened and parochial thinking pervade the leadership ranks of many airline unions. The industry will continue to face change and challenges. Unions that adapt and are able to let go of the past will flourish. Unions that cannot adapt to the new direction of the global airline industry will struggle to deliver for their members.
Will unions grow stronger and gain members under the new rule? Probably. Does the NMB appear politically-motivated? Absolutely. That’s a real problem.
Today, several airlines are negotiating collective bargaining agreements under the auspice of the NMB. Whereas in the past the parties would have been sent back to the bargaining table to work out their differences, we might in the near future see a reckless use of the release process by a politically motivated Board.
[Note: I am currently a local AFA appointed board member at Hawaiian Holdings, Inc. where the ALPA represented pilots have requested a release from mediation. Writing on this topic is purely my own view on happenings at the National Mediation Board and in no way is intended to represent the views of Hawaiian Holdings, Inc., Hawaiian Airlines, Inc., or represent the views of local HAL AFA President, Ms. Sharon Soper. The opinion stated is solely that of William Swelbar.]
What Does it Mean for Airline Unions?
I always watch with interest what James Hoffa and the Teamsters Union say about the airline and railroad industries. In a November 3, 2009 Wall Street Journal article by Mike Esterl and Melanie Trottman on this very subject, Hoffa is quoted in support of the proposed change: “This reform lets workers choose a union the same way they choose the President of the United States,” he said. Whichever side gets the most votes, wins.”
But I’m guessing that Hoffa’s real goal is something else entirely. Because Hoffa and his Teamsters Union split from the AFL-CIO, they are free to raid another union by petitioning the NMB to organize workers represented by a different union. The leaders of AFA, the IAM and ALPA ought to start looking over their shoulders now, because another union might be standing in the shadows. And that union might just be aiming for dissatisfied members that – whether out of anger toward the incumbent union or the struggling economy – might just be open to considering switching allegiances in hopes of getting a better deal. After all, under the RLA it takes only 35 percent of the workers in a “class or craft” to sign a card showing interest in a union. And then, under the proposed rule, only a simple majority of the minority would be necessary to vote the incumbent union out.
Imagine how tempting the prospect of signing up new dues-paying members from any number of small railroads around the country, whether for the IBT, the SEIU, or any other aggressive union that shows little interest in abiding by the etiquette of the House of Labor? In industries in which two-thirds of workers already are represented by unions, a raid targeting disgruntled employees (an unfortunately large group in the airline industry) would present the best opportunity for a union to gain “market share.”
One can only assume that the strategists at the TTD and the AFA-CWA have thought all of this through. They must be counting on passage; otherwise, why would the AFA-CWA and the IAMAW have moved to withdraw their applications for single carrier determination at the merged Delta that is necessary to initiate a representation election? And the fact that they’ve come this far leads me to believe that they have some pretty powerful friends in Washington, D.C.
Something is just not right
.
10.27.2009 Southwest Airlines’ Media Day – All “Green”, All of the Time
I attended Southwest Airlines’ Media Day last week. Prior to this, I had not witnessed a “Southwest Show” personally, other than occasional Congressional testimony. My takeaways are many, but the main one was the pride the management and the employees have in their company. That point resonated with me in a big way.
The theme of the day was INNOVATION. The morning was painted “green” and focused on the investments Southwest is making in aircraft interiors, engine washing, blended winglets and other programs that have an environmentally friendly end game. Then the program moved on to describe how Southwest is investing in new air traffic technologies as they come available - putting their own money where their mouth is. Of course, savings in flying time saves fuel, which contributes to helping the environment. Southwest presented itself as an industry leader in promoting this agenda.
The afternoon began with Southwest announcing its 68th destination, a “green” field airport serving Panama City, FL. The innovation here was a unique financial arrangement made with St. Joe, a company that owns hundreds of thousands of acres in Northwest Florida, to backstop any losses up to agreed amounts. Under the terms of the deal Southwest is assured of at least breaking even during the first three years of the service. There is an environmental angle to this story as well as the new airport is among the very first LEED rated, Leadership in Energy and Environmental Design, terminal buildings in existence.
While it was grey outside, the Southwest message was innovating with green technologies. I could only think how other airlines would be green with envy that Southwest is planning and investing in tomorrow while so many carriers are busy simply try to stay alive so that there is a tomorrow.
Another Thought on That Agreement between Southwest and St. Joe
One of the unique aspects of the deal between Southwest and St. Joe is an agreement that Southwest will not start air service within 80 miles of the new airport during the term of the agreement. Should Southwest launch service at an airport that is between 80 miles and 120 miles away from Panama City, the terms of the agreement can be renegotiated.
I think the 80/120 mile bands accurately define the primary and secondary catchment areas around individual airports. Service at one location impacts service at another when airports are located within a reasonable driving distance. If one airport in a catchment area has lower fares, then it may prove to be the airport of choice for more air travelers. If a passenger chooses the lower fare rather than the closer airport, then that passenger is diversion within a region. New demand is not created; rather a region’s demand is being accommodated by another airport with attributes the customer finds more appealing.
Herein lies the rub: How many airports do we really need? By my count, there are 451 airports receiving commercial air service. 100 of these accounts for 81 percent of all commercial air service seats. 200 of these (44 percent of the total) comprise 97 percent of all domestic origin and destination traffic.
Stated another way, should 56 percent of the airports – those that account for only 3 percent of US domestic traffic -- really be competing for funds that are needed at more congested airports? The more congested airports lie in the nation’s population centers. This is where air service providers need to be, not in Hays, KS or Joplin, MO or other points on Transportation Committee Chairman Jim Oberstar’s map.
oneWorld and Immunity
Where to start? I just love it when regulatory authorities point to individual nonstop routes when evaluating commercial combinations ignoring the network architecture that describes the airline industry in 2009 versus 1969. They cite fears about consumers being gouged. But when exactly in the past 30+years has the airline consumer really been gouged?
For the first nine months of 2009, passenger revenue on transatlantic routes for US carriers is down nearly 24 percent. On those routes, passenger yield, or the amount of revenue the air travel customer pays per mile, is down 20.5 percent. According to the Air Transport Association, to date, US carriers are earning 10.77 cents per mile -- only modestly more than the 10.50 cents the US carriers earned per mile in 1997. And that’s not adjusting for inflation. No competition?
Now Brussels is apparently stating concerns that American Airlines and British Airways, with their market power at London Heathrow, would raise first and business class fares if granted immunity to operate a Joint Business Agreement. Well, I sure as hell hope that is the case because, without some increases in the price of premium travel, many of the iconic names in the sky today will land in the airline graveyard. A monopoly in an Open Skies regime? Sounds to me like Virgin Air Chief Branson and the Fear Mongers are trying to take a page out of the old playbook to take away slots from the incumbents. Because that, after all, is the way it has always been done. Money for nothin', slots for free.
My bet is if first and business class fares were to get too high on BA/AA, the big winner would be Branson and his Virgin Atlantic as he is positioned in every major US gateway offering service to London Heathrow. No one else has the same ability to impose discipline on the fares charged by two carriers than he does. Or maybe he would be just as happy to raise Virgin’s fares too. But, no, instead he will have us all believe that his sole concern is the customer and there is nothing mercenary in his opposition. Just sayin’.
And before I leave this one, let us not forget that it was these first and business class fares and full Y fares that drove revenues (and helped keep wage rates high) in the past. Now no meaningful yield premium exists in the US domestic market. And we all know that the rapid deflation in first and business class revenue has been a major contributor to the global industry’s loss of $80 billion in revenue. Yet certain US airline labor unions oppose the transaction-based on consumer issues?
Third Quarter Earnings Calls
Given my travel schedule, I did not get to listen to as many earnings calls as I normally do - that is why they have transcripts. That said, was there a major theme? We have said ad nausea that any recovery will be uneven – for carriers and geographies. I did not read/hear much about a specific recovery, just that the worst may be behind us. And I am encouraged by the good signal in the freight sector. But if that’s a leading indicator, is the passenger sector recovery still 6-9 months away? After all, it was nearly 9 months prior to the recession that plummeting traffic and revenues in the freight sector served as a warning.
By now,and unless you have not read a thing on the airline industry the past few years, there is little need to talk about revenue or rehash the direction of the price of oil or try to predict when a macroeconomic recovery might begin. But what did catch my attention during the earnings season was the reference to items “below the line,” namely interest income and interest expense. Think of all of the borrowing that has taken place at relatively high interest rates. Net interest expense is going to take on a more important meaning.
With that said, it is time to perform a calculation that we should have been making for some time: CASM including net interest expense and excluding fuel and transport related expenses. Just thinkin’.
Concluding Thoughts
I am thinking I am ready to put 2009 in the books if for no other reason that the industry would lose less if the year were only 10 months. What is there to say about the various happenings in the industry that hasn’t been said before? So many recent events (labor squabbles, immunized alliances, failure to pass a FAA reauthorization bill, a passenger bill of rights, and how much liquidity is sufficient, to name a few) are cyclical reruns. These are not long-term changes but rather predictable events based on history and the direction of the wind.
I am thinking it will be fun to see this industry finally recover from this economic malaise. I am thinking that 2010 will be a lens through which we will be able to begin to evaluate which airlines have made the right moves in remaking themselves and which carriers have not. Finally, I am thinking that nothing has really changed other than that a new administration is in place and some surface transactions transpired that hold promise only in theory.
If we are going to charge fees, when are we going to charge for the convenience of carry on? Just sayin’.
After all, there are still two months before I can close out 2009.
Boo! And Happy Halloween.
10.13.2009 I keep waiting for real leadership to emerge from labor unions in the US airline industry, particularly from pilot unions. During past down cycles, pilot unions could be found taking the lead in creating a nuanced solution that addressed a company’s competitive needs and the concerns of pilots they represent. The template crafted by pilot union leaders in the past often formed the framework for companies seeking help from the non-pilot workforce.
Today, more often than not, I see the work of pilot unions doing more to pose a barrier to an airline’s success than to promote it. To be fair, the unions at Delta, Alaska and Southwest get credit for smart leadership. But the same can’t be said at other airlines, and here’s one reason why.
The legacy carriers all operate as part of networks that have formed over time, through mergers; asset buys; regulatory frameworks; and, importantly, union influence. By this I refer in part to the dirty little secret in pilot union contracts: “scope” clauses that too often hamstring an airline’s operations in the name of job protection for pilots.
The question we in the industry should be asking is whether those scope clauses are really serving that purpose or, rather, whether some union leaders are using them in a way that is both misguided and harmful to the pilots they represent.
Evolve, Adapt, Reinvent – Or Risk Irrelevance
The ability of mainline carriers to employ regional jets is not new to the industry. Neither is the ability of mainline carriers to engage in international code sharing arrangements with foreign airlines. Both activities are governed by scope clauses in each carrier’s collective bargaining agreements with pilot unions. And before we go any further, let’s remember that the language in these collective bargaining agreements is just that – collectively bargained between the management and the unions.
Much of what I have written at swelblog.com over the past two years has probably earned my picture a place on the dartboard at most pilot union offices. And this column is not intended to resurrect my image with certain pilot leaders in any way. It’s just that union presidents are really the CEOs of their organizations and they deserve the same scrutiny as do airline CEOs.
And yes, I’ll name names. One is Captain Lloyd Hill who is president of the Allied Pilots Association – which represents only the pilots of American Airlines. Another is John Prater, president of the Air Line Pilots Association, which represents pilots across the industry. After watching Captain Hill’s misguided attempts to garner leverage for AA pilots during contract negotiations and Captain Prater’s recent embarrassing diatribes before the House Aviation Subcommittee’s hearings on aviation safety, even I feel sympathy for the pilots they attempt to represent.
Captain Lloyd Hill
In the early days of the blog, I wrote a lot about American Airlines and its strained relations with the APA’s Hill administration. The union was antagonistic toward the company from the very start and began negotiations with an outrageous opening proposal that demanded, among other things, a pay increase of more than 50 percent. I suggested then that it would be a long time before a deal will be reached with these players at the table.
Two full years later, there is not only no deal, but not even the scent of a deal in the air. And from my read of the contract cases now before the National Mediation Board, I could make a case that it will be at least two more years before American and the APA reach agreement or a NMB-declared impasse is declared. But I will leave it to the APA membership and the Las Vegas odds makers to analyze what needs to change in order to improve the odds of a new working agreement.
Never before in my experience have I seen a more misdirected, miscalculated and mismanaged mess of a negotiation by a union. And because we can all read Hill’s playbook and it’s clear he’s not moving the ball down the field, he keeps going back to his current whipping boy -- the “immunized alliance” the company is trying to achieve through a joint business agreement with British Airways and Iberia. After calling the same play on second and third down, I am thinking that this fourth down attempt will result in a loss as well.
Last week the APA issued yet another press release urging the DOT to dismiss American’s application. But this time, the APA was joined in its hollow and transparent opposition by ALPA. In this case, ALPA was less strident, choosing not to oppose alliances generally but instead to urge DOT to ensure that jobs at US airlines are not eroded as a result of international partnerships.
“As a result of two significant developments during the past several days, we urge the DOT to decline American Airlines’ application for worldwide antitrust immunity,” Hill said in the APA release. “The first of those developments was the EC’s announcement earlier this month that American Airlines’ plans may violate rules governing restrictive business practices. Given those stated concerns, we question the advisability of granting approval to a deal that may fail to pass muster with the DOT’s European counterparts.
“Closer to home, American Airlines management has refused to provide industry-standard job protections for our pilots, despite APA’s concerted efforts,” Hill added. “We can only conclude that our worst fears would be realized in the event American Airlines is permitted to proceed with what amounts to a virtual merger with British Airways and Iberia.
No Captain Hill, your worst fears should not be this alliance. You see, your contract permits this arrangement and if this type of commercial activity were to be prohibited, your actions in fighting the alliance will all but ensure fewer US jobs – they may be primarily narrowbody jobs but US jobs nonetheless. Maybe you should begin negotiating with the company with realistic and market-sensitive proposals rather than filing petty grievance after grievance that has resulted in a further weakening of your negotiating position. Maybe you should stop putting up billboards openly criticizing your employer on product reliability and safety issues because trying to hurt the company that employs your members is no good path to trying to improve their contract.
Maybe the goal of “restoring the profession” should be to recognize a changed environment and figure out how best the members you represent can prosper under the new economic reality.
Maybe your dirty little secret is that you do not know how to tell your members that your strategy to “restore the profession” has failed. But the real sad part is the real losers are the professional aviators who deserve better from their union leaders.
Captain John Prater
Over at ALPA, the world’s largest pilot union, we have John Prater at the helm. Prater won the election to head ALPA by beating out his predecessor, the very skilled and seasoned Duane Woerth, on a platform that overpromised and is sure to under-deliver. Over the years some of the very best union leaders in the airline business have come from ALPA: J.J. O’Donnell; Hank Duffy; Randy Babbitt and Woerth to name a few, and that doesn’t include a line of great leaders during the union’s formative years.
Now we have ALPA testifying before Congress in ways that are not becoming of past ALPA leaders. Prater testified at the September 23 hearing on the crash of Colgan Air 3407 about a number of safety initiatives ALPA is promoting across the regional spectrum. But he also spoke about the relationship between mainline carriers and their regional partners in a way I find troubling.
Prater attributed what he called the “low-experience pilot problem” to the mainline airlines’ business model.
“Mainline airlines are frequently faced with pressures on their marketing plans that result in the use of the regional feed code-share partners, whether they be economic, passenger demand or essential air service,” he said. “These code-share or fee-for-departure (FFD) contracts with smaller or regional airlines provide this service and feed the mainline carriers through their hub cities.”
Before mainline airlines had regional partners, Prater said, all flying was done by the pilots of an airline on a single pilot-seniority list, where pilots were trained to and met the same higher-than-minimum regulatory standards."
“A safety benefit is derived from all flying being done from a single pilot-seniority list because it requires that first officers fly with many captains and learn from their experience and wisdom before becoming captains themselves,” Prater said.
Now, he argued, major airlines use multiple, regional “vendor” carriers to drive down their costs, a practice he said “harms safety” because first officers on regional airlines can become captains within a year and “fail to gain the experience and judgment needed to safely act in that capacity.”
Prater goes on: “When a regional airline operates a route for a mainline carrier and offers subpar wages and benefits, only low-experience pilots, who cannot qualify for a job with a better paying airline, are typically willing to accept such employment. It is not uncommon that training at such carriers is conducted only to FAA-required minimums. However, these low-experience pilots obviously need more training than more experienced airline pilots to gain equivalent knowledge of the operating environment, aircraft, and procedures before flying the line.”
Later, in questioning by members of the committee, Prater insinuated that airlines involved in the crash, as well as other carriers that ALPA is in contract negotiations with, are continuing work practices that may compromise safety.
"The managements at Pinnacle and Colgan have not changed their ways. The management at Trans States Airlines haven't changed their ways. Do I need to go further? I have a big book," Prater told the subcommittee. He then suggested that carriers were actually punishing Captains that report maintenance issues with their aircraft, concluding: "Some managements are still insisting that they are going to beat their pilots into submission."
What Prater fails to share is ALPA’s dirty little secret: that the wage rates, working conditions, training provisions and other particulars he criticizes were negotiated by his union. ALPA represents the majority of regional pilots flying in the US today. So maybe ALPA needs to step up and take some responsibility for its contribution to building this sector of the industry. Only by agreeing to lower rates of pay and more flying time at the regional carriers can ALPA justify and sustain the generous pay, benefits and work rules that benefit pilots at the mainline airlines.
Look at any significant relaxation of the scope clause at the mainline carrier that allows the airline to increase its use of jets 70 seats or less. In just about every case the mainline pilots received a significant pay boost in return for that “concession.”
The fact is that ALPA has played a major role in creating the labor Ponzi scheme that survives at the legacy airlines. How does ALPA find a way to pay another group of new pilots less in order to buy “better” contracts for the regional pilots it now represents? It can’t. And you can bet that ALPA would not ask its mainline pilots to take a pay cut to help increase the wages for pilots flying at their regional counterparts. A conundrum indeed.
Concluding Thoughts
Labor leaders in the pilot ranks would have you believe that this (international code sharing and the use of regional flying) is all about management abusing provisions of their collective bargaining agreements to enrich their shareholders. In fact, the creation of B-Scale constructs and the relaxation of scope provisions has been labor’s “quid” in return for increases in compensation and benefits for 20+ years [the “quo].” Even when the industry economics suggested the quo was too much. As I have said here before, labor likes to “eat their young.” This is an issue that is fundamental to the difficulty of today’s negotiating environment.
Hill and Prater are resorting to 1920’s tactics rather than trying to lead pilots in a new world of airline economics. Labor’s “Old New Deal” cannot be supported by today’s competitive environment. What is needed is a “New New Deal”. It will not look anything like the “Old New Deal” to be sure. Just as airline executives have been forced to adapt to new economics shaping the industry, labor, too, must adapt because it has no more young to consume to keep senior pilots fat and happy.
It is hard to be at the top - whether looking for necessary capital or creatively searching to support the expectations of pilots.
09.30.2009 I cannot believe two years has passed. Thank you to all that read this blog. The numbers speak for themselves as I know there are many, many more of you today than there were one year ago by a multiple. With that said, I do not want to celebrate the blog’s second birthday by getting in the way of the traffic and discussion taking place on my most recent post: Airline Industry Eyes on the National Mediation Board.
Off to give a lecture. If you are attending Mike Boyd's Annual Aviation Forecast Summit in Lexington, KY next week, I hope that we will get a chance to meet. I know I am looking forward to an event that prides itself on free thought. Thanks again for the support.
09.28.2009 The Railway Labor Act (RLA), which governs labor relations in the rail and airline industries, has been around longer than the airlines flying today. First passed in 1926 and amended in 1934, it is designed in part to ensure that labor disputes in these key industries can be managed in a way so that they don’t interfere with the nation’s critical commerce.
Decades later, we can all point to the RLA and find certain aspects of the law that should be changed. And that’s a worthwhile discussion. As long as it’s based in the understanding that the purpose of the RLA was to promote stability and not to disrupt interstate commerce with labor strife. In its own quirky way, it accomplished these two inherent objectives.
Now some in organized labor want to inject instability on top of an already unstable industry architecture. Labor leaders insist they want a more predictable, efficient system. The question is whether the reform being sought will bring unintended consequences?
Organized Labor, President Obama and the National Mediation Board
Recently, the AFL-CIO’s Transportation Trades Department (TTD) asked the National Mediation Board to change 75 years of practice regarding representation elections. The practice in place today requires that a union win with a majority of employees within a “class” or “craft” in order to be certified as those workers’ collective bargaining representative. The TTD, running interference for the Association of Flight Attendants (AFA-CWA) and the International Association of Machinists and Aerospace Workers (IAMAW), is seeking to make a major alteration to the practice that would put the union in place if it gets “yes” votes from a majority of those voting, not a majority of all employees in the class or craft.
This issue promises to provide some insight into the power of organized airline labor in the Obama Administration. Clearly, labor played a key role in electing the President. But to date, labor has not reaped the successes many expected in the early months of the new administration. Will the administration pressure the National Mediation Board to make this change?
After 75 Years, Why Now?
It is pretty simple and transparent. Neither the AFA-CWA nor the IAMAW believes that they have the votes necessary to win an election in their efforts to organize the combined work forces from the merger of Delta and Northwest. So labor hopes that a friendly administration will change the process to help them pick up these coveted new members – particularly on the Delta side where the flight attendants and maintenance workers have never been union.
Or, as the union leaders have clearly calculated, if you fail to win hearts and minds at the ballot box (as they have not once but twice) then change the rules.
The AFA-CWA failed twice in its efforts to organize Delta flight attendants. In their last campaign, only 40 percent of eligible flight attendants even voted. And under NMB procedures, those who don’t vote are counted as a “no” vote regarding union representation.
After months of delay in seeking to have Delta and Northwest declared a single carrier – an administrative procedure necessary to hold an election for union representation – the AFA-CWA petitioned the NMB for the single carrier determination in July. The IAMAW followed in August, but is not seeking to organize the entire group of eligible employees in various class and crafts of Delta and Northwest employees. Unfortunately, an election cannot proceed until the TTD’s request of the NMB has been decided upon. Therefore, more hurry up and wait for affected employee groups.
The TTD asked the NMB to change election procedures on September 2, 2009. Since that time, various groups opposed the change in formal comments to the Board. Opponents include the Air Transport Association, the Regional Airline Association, and the Airline Industrial Relations Conference.
The TTD’s position is that the NMB’s policy is “clearly inconsistent with the longstanding, widely accepted understanding of a democratic election process in the public arena.”
I could wrap myself in that flag -- I guess. And as I read through the various filings, I understand the legal arguments being made. But I am not a lawyer. So I am going to think about this in another way.
Majority Rule
The “majority rule” issue that is at the center of the TTD’s request seems to have a philosophical bent toward stability: If a majority of workers in a class or craft want a union to be its collective bargaining representative, the union then has a mandate to bargain with the employer. With less than a majority support, how effective can a union be in representing the work group? If the ultimate weapon of the union is the ability to engage in “self help” (the RLA term for strikes, work stoppages, hiring replacement workers and other actions either side can take if the negotiating parties are “released” from mediation), then how effective can the union be in forcing the employer to improve pay and working conditions if more than half of the workers choose to work during a declared job action?
With nearly 150,000 airline industry jobs lost since 2002, it is easy to understand why labor is concerned about the decline in its ranks. Delta has long been a tempting target for unions. Only the pilots and two smaller groups of workers are now unionized. Delta is a non-union airline by industry measures. So unionizing the world’s largest airline could be a big step for unions trying to replenish their membership roles following the industry’s restructuring period. Simply, labor wants to change the majority rule because union activists are those that vote.
In AFA’s last election attempt at Delta, one assumes that 60 percent of eligible flight attendants didn’t vote because they knew that not to vote was a “no” vote. A clear majority said that they were not interested in changing the labor dynamic at the airline. But the majority of the 40 percent who did vote supported the union.
Now enter Northwest and its 7,000 flight attendants. Prior to the merger, they already were members of the AFA-CWA. Add those votes to the mix and AFA-CWA should easily get a majority of the combined work force.
Fragmented Labor Meet a Fragmented Airline Industry
Today’s AFL-CIO is not the same force that it was during its "New Deal" heyday. Then, the labor movement was consolidated and spoke with one voice. Today it does not. Two large and powerful unions, the Teamsters and the Service Employees International Union (SEIU), recently broke from the AFL-CIO to form a rival coalition. That defection has created a fragmented labor industry in which the old rules no longer apply. Already, unions in rival coalitions have tried to “raid” members from other unions – something the old rules prohibited. Herein lies the rub.
Arguably, one of the fundamental issues that airline labor has struggled to recognize and reconcile in a constructive way is the fragmented airline market. Yes, fragmentation leads to hyper competition, but it also creates an unstable industry structure. This unstable structure has forced airlines to seek wage cuts and productivity gains from labor in order to prevent competing airlines from entering markets and stealing the incumbent carrier’s traffic and revenue - and to live to fight another day.
In my view, changing long-established rules that are intended to promote stability has the potential to exacerbate an already unstable situation. Consider the scenario played out by AMFA following restructuring at United. Because AMFA is not an AFL-CIO union, it could raid - or threaten to raid - at will mechanic groups at those airlines where unions had gone along with deep concessionary agreements under bankruptcy or other financial pressure. In fact, it won a few elections along the way only to lose later when they failed to deliver on their promise of securing “snapbacks” and wage and benefit increases the industry simply couldn’t afford.
I have seen many airlines struggle in negotiations with AMFA-targeted groups. In many cases, the company and the incumbent union could probably have reached agreement earlier but for the union’s fear that by agreeing to some perceived negative change to the agreement, they would invite a raid from AMFA hoping to steal their dues-paying members. This created a destructive and mercenary element to contract negotiations that too often delayed deals and hurt airlines and their employees.
Another question worth asking, but unresolved, is if a majority rule provision were replaced whether a minority of the class and craft could then move to force an election to decertify the union? (The RLA would seem to be silent on this subject) Imagine the destabilizing effect of that situation. Just about any tentative agreement I can think of would have elements or aspects that may not be palatable to some vocal minority. So if an agreement ultimately passes by a razor thin margin, the vocal minority begins a campaign to replace the union that made the deal, looking to a new union that will promise that it can accomplish what the incumbent could not. And so it goes.......
I may be going out on a limb here, but I’d guess this is a scenario that the Teamsters have already thought through in trying to change the RLA. The minority rule should allow for raids that could bring new members into the Teamster ranks.
Concluding Thoughts
There’s a real risk to the change the union seeks, particularly during a collective bargaining cycle like this one in which the expectations of employees are so far from most airlines’ ability to afford. There is enough instability in this industry without creating a situation that would bring even more.
Labor has asked the NMB to move toward quicker resolutions of cases on the docket. But the debate over the RLA must also consider the perspective and concerns of incumbent unions who will be hard pressed to make a deal that offers airlines something of what they need – namely, greater productivity – without facing a raid from a hungry competitor. A hungry competitor that will promise anything without the corresponding responsibilities of working with management and putting together agreements that serve the long-term best interests of the companies and their employees..
It is the burden of management to make very difficult decisions based on the competitive environment in which they operate. In this labor environment, union leaders could very well face the same challenges and be forced to make decisions that are not in the best interests of dues paying members but in the best interest of the institution. And that would be just one unintended consequence of a change in the rules of the game in order to “possibly” achieve a short-term gain.
The alteration sought by the TTD would prove to be a bad NMB policy change I fear -- particularly when one of the most important goals of the new NMB is to resolve cases in a timelier manner.
09.18.2009 Yep, I was one of those observers not long ago suggesting that the current revenue environment would challenge certain carriers’ liquidity. While not specific on those carriers I believed to be marginal, the supposition was always US Airways, United and American. In that order. Of the three, it was understood that American had more options as it had not yet played the cash for miles card.
Well, that story played out yesterday when AMR announced that it had secured $2.9 billion in new financing, in part by selling a billion dollars worth of frequent flier miles to Citigroup. Meanwhile United is hinting that more liquidity raising efforts are ahead and Delta is in the market for $500 million. American’s announcement makes it clear that the credit window remains open for carriers that have quality unencumbered assets to pledge and a reputation for paying their bills. But, I remain unconvinced that the window will stay open for all carriers operating today.
The same day, American announced network and fleet changes I see as important steps the carrier is taking as a decision nears on its immunized alliance with British Airways. Those changes also can be read as important to the ability of American to forge a closer relationship with JAL.
The Changing Face of the Domestic Market
While St. Louis has been a hub in name only for American in recent years, yesterday’s announcement that it would stop serving 20 cities out of Lambert and reduce departures to 36 per day pretty much provides the final eulogy for the former TWA. Now if Delta would only do what it should and pull Cincinnati down to a similar size, much of the necessary work on dismantling unnecessary and redundant secondary, mid-continent hubs will be done.
Unlike Delta, American has historically owned a strong position in New York; therefore, its announced changes to that critical dot on the airline map were minimal. And assuming that American’s immunized alliance is granted, New York promises to be one supremely competitive market between STAR, SkyTeam and oneworld carriers in each the domestic and international markets.
Speaking of Alliances
American has absolutely no choice but to counter Delta’s rumored bid for JAL. The opportunity to make London and Tokyo bookends to a focused domestic network provides the airline the opportunity to finally take advantage of Asia and sell Europe, Africa and the Middle East like their aligned peers.
It’s no secret that US legacy carriers have their problems. But trust me when I say that the US carriers are productive, nimble and agile when compared to JAL. At this point, it appears that American would be working in cooperation with, British Airways and Qantas to court the Japanese airline.
JAL needs major surgery. But assuming that JAL survives the procedure, its recovery requires a presence in all major world regions. That is why I like the fact that each of the critical players in the oneworld alliance are involved. As Japan is almost certain to become an open skies country in the coming months, a healthier and allied JAL is critical.
For those concerned about competition in Tokyo, let’s not forget the presence of STAR in the form of ANA. For those crying about poor little Delta, let’s not forget that Delta remains the largest single carrier in the world in terms of revenue. For those that may cry foul over competition in the North Pacific, let’s not forget about Delta’s SkyTeam relationship with Korean. And a case can be made that Seoul has become a more powerful hub than Tokyo largely because of JAL’s weakness and Korea’s aggressiveness.
Lots of Happenings at American
This latest news is interesting in part because American has been forced to make many changes the hard way as its competitors cut costs through bankruptcy. American has managed through crisis after crisis all the while toting around a cost and an alliance disadvantage versus most of its legacy peers. Moving to renew its fleet in the midst of a nasty economic cycle is bold.
But more impressive to me is the steady, targeted focus on the balance sheet that made yesterday’s liquidity raise possible. It’s not all pretty there. Management continues to struggle to come to agreement with unions on new contracts that won’t exacerbate the company’s competitive disadvantages, and that’s all the harder when union leaders continue to make demands that could not and cannot be met given the competitive environment.
Making this even harder is explaining that the improved liquidity position is only because of borrowing, not that the company has suddenly found the recipe for outsized profits.
Labor: This Is a $2.9 Billion DIP Loan……Without the Consequences for You
It is safe to say that no other US carrier could accomplish this type of a capital raise at this time. Any near-term concerns that analysts or observers might have about American’s ability to meet its obligations should be quelled. Clearly American management believes in the company’s future or it would not be investing in it. After all, the quest of any company is to produce a return on that capital.
American just leveraged the future. And if I am a union leader there I would want to tie my industry-best lot among the US legacy airline world to the carrier that just put its money where its mouth is. To continue resisting changes critical to the company’s future profitability only leads to the propagation of the status quo.
Yes, I’d make some demands. When the economy and the industry do recover, I would insist that some of my members’ earnings are tied to company performance. That is real leverage – not the illusory leverage unions try to create by promoting the false belief that past concessions and 1990’s wages relative to inflation should be restored in an industry vastly changed.
There is ultimately going to be a recovery. Like American’s decision to order aircraft anticipating the recovery, if I am labor at American I would want to get my negotiations done sooner rather than later. Just think how little incentive there will be for companies to conclude negotiations during an economic upturn given the losses suffered over the past 8 years. As I have written before, I am astounded at how much time labor spends negotiating downside protections versus provisions that enable the members they represent to participate financially on the upside – a scenario that promises much more than any negotiated increase in wage rates.
09.2.2009 Yesterday, as I was awaiting a report from the Institute of Supply Management on August manufacturing activity, I was working on a piece I titled: “Government Buys Junk; Consumer in Funk; Airline Recovery No Slam Dunk.” But after reading Ann Keaton’s piece in the Wall Street Journal on how jetBlue and Lufthansa are looking for a code share deal, I started thinking about all the pieces in play in the New York market and, as it happens, of the 1977 Rolling Stones tune “Shattered.”
Was it US Airways’ that said “my brain’s been battered, splattered all over Manhattan?” Or AirTran talking about “rats on the west side, bed bugs uptown?” Was that Continental murmuring something about “all this chitter-chatter, chitter-chatter, chitter-chatter ‘bout shmatta, shmatta, shmatta -- I can’t give it away on 7th Avenue?” [But I can in Newark] I do think I heard Delta saying, “to live in this town you must be tough, tough, tough, tough, tough!” And I am sure I will hear from American “don’t you know the crime rate is going up, up, up, up, up” if it is not granted an immunized alliance with its transatlantic partners.
A Long and Overdue Reshaping of the Competitive Environment Gets Underway
It began on August 11, when AirTran Airways announced a deal with Continental to vacate Newark and give its slots and one gate there to Continental in return for slots at New York’s Laguardia and Washington Reagan. A day later, Delta and US Airways announced a monster deal in which US Airways will give up 125 pairs of Express slots at Laguardia in exchange for 42 pairs of slots at Washington Reagan and rights to fly to Tokyo and Sao Paulo. Both swaps involve no cash and have no impact on the Northeast Shuttle operations run by each US Airways and Delta.
The Delta – US Airways swap all but ensures that Delta will surpass American as the largest carrier at Laguardia. By any measure of market concentration, LGA will continue to have ample competition. For Delta and US Airways, the deal gives each carrier the tools to build out markets they believe are market strongholds. Some say that a split operation (Laguardia and JFK) for Delta is a mistake. But I disagree. Winning passenger loyalty from offering expanded domestic services at LGA should translate into making Delta a clearer choice for passengers to choose the carrier when traveling to international destinations from its operation at JFK.
Absent this kind of deal, there is not much that can be done to increase domestic flying at any of New York’s three major airports. Applying US Department of Justice standards to determine market concentration, Laguardia, JFK and Newark would be considered concentrated or moderately concentrated per the Herfindahl-Hirschman Index. And JFK has limited space to for an airline to run a large domestic operation because of the extensive international operations that occupy the critical late afternoon/early evening hours.
Given all of the constraints of the New York aviation infrastructure, the airlines involved in the slot swaps have taken a proactive approach to advance their competitive strategies. By recognizing their individual strengths and weaknesses, the airlines involved will be better positioned when a recovery gets underway. If the government says you cannot merge, then engage in binge and purge.
Today’s environment does not afford any carrier the luxury of presence everywhere and pricing power nowhere.
Congress and the Regulators
Because these transactions require regulatory approval, I fear that critics will claim that the deals would give the carriers excessive pricing power in those markets.
But look at the data. According to the Airline Transport Association, system passenger revenue is down 21 percent, or $12.5 billion when comparing the first seven months of 2009 to 2008. Add in the $3.1 billion the industry has brought in from those damn fees that everyone likes to write about, and that means revenue is down $9.4 billion.
Where is the pricing power? Where is the gouging? And when will the politicians and regulators take airlines at their word when they say they need change?
“People dressed in plastic bags. Directing Traffic.”