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© 2007-11, William Swelbar.

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Tuesday
Oct162007

« “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"

Reader Comments (1)

Hi Bill,

I would first like to thank you for providing the extensive amount of data regarding pilot compensation and efficiency with the MIT website. I also want to wish you all the success with that endeavor and this blog.

Pertaining to consolidation, I don't see that as a benefit to the employee or the customer. Speaking of Doug Parker, the US Airways merger is still problematic with seniority integration. The TWA acquisition by American Airlines created similar problems. Then with load factors at record levels already, consolidation will probably increase them even further. I have seen too many times in off schedule operations due to weather or a maintenance cancellation agents stress level increase exponentially, and passengers at wits end trying to get to their destination. While consolidation may initially generate higher ticket prices, I doubt passengers are going to accept higher fares for poorer service.

One other point pertaining to labor, I am not convinced that the UAW approach of establishing a two-tier pay scale will succeed in the long-term. As you know, I was one of the first pilots hired at AA under a two-tire pay scale system known as the "B-scale." Although it created a competitive cost structure enabling growth, it also created the dysfunctional labor-management relationship that still permeates today.

I will not dispute the importance of critical numerical analysis in this "razor-thin" profit margin industry, but executives and analysts alike must not loose sight of the fact that the airline industry is a service industry and people are also critical to the profitability equation. Southwest and Continental are shinning examples of that.

10.18.2007 | Unregistered CommenterCarmen Villani

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