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© 2007-11, William Swelbar.

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Monday
Dec312007

« Ringing Out the Old, Ringing In the New.  NOT »

It is the last day of 2007, and as I prepare to write my final blog post for the year, I want to say something positive about where I see the industry – particularly the US industry. There are plenty of encouraging things happening in Latin America, Europe, Asia and the Middle East with carriers like LAN, Air France/KLM/Alitalia, Lufthansa/Swiss, Singapore, Cathay and the Chinese airlines. The global marketplace is where it is happening

In the US, however, we seem stuck with the old and little hope for new – with only a few exceptions.

While CEOs are speaking to the structural deficiencies plaguing the US airline industry, there is little “public” effort being exerted to address those deficiencies. I am encouraged at what seems to be the beginnings of US carriers like United and American, who have been sitting on the sidelines for too long, again investing in their product. But my excitement is muted by the endless news accounts of poor customer service and flight delays that work only to chase travelers away.

There should be a connection between product and customer and revenue – right? Gary Kelly at Southwest sure seems to be focused on product; the one word that never leaves the LUV vernacular is “customer.” Many are questioning Southwest’s recent actions to expand its customer base. Not me. This is a great story unfolding– the low cost leader and low fare provider now openly discussing its need to change. This means a need to find new revenue and a need to make its product attractive to a wider range of customers. And they are actually doing something about it.

I encourage readers here to visit the Dallas Morning News’ blog click here and read Terry Maxon’s take on the top 10 aviation issues in 2007, and the Air Traveler’s Association’s Top 10 issues for 2008 click here. Finally, click here to read an interview with Herb Kelleher, Southwest Airline’s departing Chairman, in the Southwest Economy published by the Federal Reserve Bank of Dallas. Kelleher’s comments on globalization are particularly interesting.

For another barometer of how the financial markets view the US airline industry, consider select carrier’s stock price performance over the course of this past year. As of December 28, 2007, US Airways, jetBlue and American share prices have dropped by more than 50 percent; Continental, AirTran and Alaska shares have all declined between 30-50 percent; and Frontier, Southwest and United shares have fallen between 20-30 percent.

In the six months after coming out of bankruptcy, Northwest shares are down 36 percent, while Delta’s shares fell 26 percent.

Suffice it to say that I’m joined by many other industry watchers in failing to find many positives in the US airline industry space. Let’s hope that in 2008, the US industry makes some positive steps toward reclaiming a leadership role in this critical sector.

2007: Looking Back.

1. Crowded Skies: This was the (another) year of air traffic congestion and its troubling impact on airlines. Authorities have now enacted limits on air traffic in both New York and Chicago – an approach that can only be viewed as a Band-Aid solution to a much more serious problem. It’s time for Washington to get serious.

2. Consolidation: US Airways’ “hostile” play for Delta took talk of industry consolidation from a murmur to a roar. It was the right idea for the right reasons, only to again be thwarted by labor, the regulators and the legislators. At what point are the naysayers going to accept the fact that the current industry structure does not serve the best interests of the airlines, employees the transportation infrastructure or any stakeholder for that matter?

3. Fuel: The eye-popping price of fuel underscores the ongoing need for the industry to identify ways to cut fixed costs, despite the fact that most of the low-hanging fruit is already plucked. And that’s before we even begin to calculate the price tag of anticipated environmental mandates on an industry already groaning from the weight of taxes and fees.

4. Labor Voice: Lee Moak, Chairman of the Delta ALPA Master Executive Council, emerged as a new voice in the industry labor front with his nod to the need for structural change in the industry. Because he combined straight talk with a serious commitment to representing his pilot members when faced with an unwelcome advance to Delta from Pardus Capital, Mr. Moak demonstrated real leadership by suggesting that he will play a significant role in structuring any deal that impacts his constituents when his carrier is put in play.

5. Foreign Capital: Lufthansa’s investment in jetBlue appears pretty benign on the surface. But Lufthansa, with this investment, has put its money behind carriers housed in two of the most important airport markets in the world – jetBlue at JFK and bmi British Midland at LHR. At the end of the day, this business is nothing more than a real estate game connected by sexy things with wings. No real estate, no access. Ultimately, foreign capital in US carriers only ensures that the weak market structure surrounding the US industry remains intact. These investments are no different than the good money chasing bad business plans that allowed US carriers to fund their exits from bankruptcy.

6. Staffing Woes: The Northwest Airlines system breakdown that followed its emergence from bankruptcy was the fault of productivity changes that were too fast, too aggressive, and resulted in a staff shortage that wreaked havoc on its flight schedule. The only good news was the negotiation between ALPA and the company that provided incentives for flight crews as a way to man the planes. This may be one of brightest spots in the labor arena in 2007.

7. Capacity Chokehold: The sharp slowdown in capacity deployed by the low cost and regional sectors offers important perspective for regulators as consolidation talk continues. Too bad Congress remains convinced that every congressional district is entitled to air service, no matter whether the industry can fly all of these routes profitably.

8. Labor Leading with its Chin: The extraordinary opening proposal made by the Allied Pilots Association as it begins its Section 6 negotiations with American Airlines sought pay increases some estimate at more than 50 percent -- and that is before we even try to incorporate the headcount increases with the remainder of its initial demands. While the aggressive proposal underscores the deteriorating relationship between labor and management at the airline – and in the industry overall -- the question remains whether the APA’s gambit will be a bellwether for the industry or the first in a long line of mediation cases making their way to a Presidential Emergency Board.

9. Capital Connections: In an administration that has not had much to cheer, the US Department of Transportation has served the airline industry well under the leadership of Assistant Secretary’s, Andy Steinberg and Jeff Shane. Unfortunately, these two soldiers of change will be moving on this year at a time when their skill and expertise will be sorely needed.

10. Detroit’s Deal: The agreement forged between the United Auto Workers and the Big Three automakers click here, illustrates the many similarities between the auto and airline industries. Will we see these kind of talks at the airlines? No sign of it yet. Leaders please step forward.

11. Integration Frustration: That US Airways' East pilots believe a new, independent union will right the wrongs of an arbitrator’s decision and do better by pilots than ALPA, demonstrates the triumph of hope over experience. Experience shows us that there is no entitlement clause that applies in these situations. Under globablization, there will be fewer and fewer entitlements left in an increasingly competitive marketplace. But there is opportunity, and the US Airways' pilots should be working together to figure out how to make their airline stronger, and their members better off, rather than fight among themselves.

A Toast to the Customer

Some readers may interpret my views as unrealistic – that I’m looking for some incarnation of Air Nirvana without any of the usual industry friction – but neither is true. I know that structural change will inevitably lead to friction. And some of that friction will come as part of the reality that the airline industry will look very different in a few years, with some carriers no longer in the picture.

My real fear is not the loss of a carrier or carriers – it is the complete loss of customer confidence in an industry that relies on its reputation. Both labor and management should stop pointing fingers regarding customer issues and instead focus energy there first.

Richard Branson Gets the Final Word Here in 2007

As Virgin Atlantic faces a potential job action by its flight attendants, Richard Branson, the carrier’s flamboyant leader writes the following letter to his employees click here. The closing paragraphs state very clearly where I think we are headed and the words that will need to be spoken.

There comes a time in any negotiation when a good management team has to draw a line in the sand and I agree with them that time has come. To go further would result in unacceptable risks and would set a dangerous precedent to the company as a whole. It would be irresponsible of our management and they, rightly, are not going to take that risk.

For some of you more pay than Virgin Atlantic can afford may be critical to your lifestyle and if that is the case you should consider working elsewhere. For the vast majority of you, the pay rise you were offered was the best in the industry this year, which is why the union strongly recommended it. I’d urge you not to put at risk our ability to solve this dispute by messing up our customers’ travel plans.

We all want to resolve this situation and give the best pay increase that the business can afford. The best way to achieve this is by keeping all of our planes flying and delivering what we do best - making sure that all of our passengers leave with a smile”.

Thank you for making Swelblog.com a read for you. Much more to come as the final chapters are a long way from written.

Reader Comments (22)

Bill,

Readers who check out our Top 10 list at the Aviation Biz blog [aviation.beloblog.com] hould take note that ours is a very Dallas-Fort Worth view of the world.


For example, I put the controversy over the executive stock awards at AMR/American No. 2 on my list because of the impact it had on labor relations at American.

In a global view of aviation, it wouldn't have made the Top 10 -- but it has and will continue to affect American and the Dallas-Fort Worth area, particularly as all three of American's major unions get their negotiations in high gear.

For a global view, I like your take.

12.31.2007 | Unregistered CommenterTerry Maxon

12. Airline Management 101 by Professor Marie Antoinette - The “Let them eat cake” attitude by the current management teams at AMR & UA will destroy both airlines. The workers will revolt and storm the Bastille.

I find it interesting you didn’t touch on this in your 2007 musings. It’s all labor’s fault huh?

01.1.2008 | Unregistered CommenterChitragupta

Terry

There is no doubt that the exec comp issue is a big one in your market and I agree that it deserves a prominent place on your list of issues. You are covering the most exciting commercial aviation market in the US and nobody does it better. Readers here should be referencing your blog daily as I do not cover the broad spectrum of issues that you cover.

I am just simply out of ideas on how to address the exec comp issue. Further, I am learning quickly that no matter how you try to address the issue there is just simply no right answer.

01.1.2008 | Unregistered CommenterSwelbar

Chitragupta

And both airlines might get destroyed and the industry should not fear the loss of either or both. There are other airline tombstones that are more recognized globally than either United or American.

If you read carefully, where there are reasons to acknowledge labor and its leaders, I have done so. No, it certainly is not all labor's fault. So storm the Bastille -- maybe that will help facilitate meaningful consolidation.

01.1.2008 | Unregistered CommenterSwelbar

Oh you wish!

Even if the Bastille is over ran tomorrow you still haven’t solved one of the biggest players in the airline industry is it attracts maggots to upper management positions. Anyone with morals, ethics and backbone is quickly chewed up by the bobble head road to management.

The list is endless of Frank Lorenzo wantabees. No matter which airlines you cobble together you have lost a generation of C.E. Woolsey and C.R. Smith kind of men. Until the BOD becomes more involved at over seeing and recruiting management who truly wants to run an airline vs. the current group of greedy rat bastards you will never achieve your Air Nirvana.

I’ve started to wonder if there is a shelf life to an airline. Will WN be around when I turn eighty? Only time will tell.

01.3.2008 | Unregistered CommenterChitragupta

Chitragupta

I will let this one go with some trepidation. RB is a term better left for the golf course and one of my buddies and not your senior management team - at least on my blog.

You know, at some point I would think that APA would be proud to have the best agreement - and I will stipulate among the peer carriers that provide transportation to people - in the industry as measured by salary and benefit compensation per employee.

But I guess the days of having the leading agreement are not enough. And don't point me to the amateurish analysis of hourly rates which explain maybe 45% of the cost. Remember in addition to unit price we cannot forget volume and all of the contractual terms that drive volume.

You know, there is one way to address all of these issues including having a Board you consider to be engaged -- BUY THE COMPANY. It is getting cheaper by the day.

01.3.2008 | Unregistered CommenterSwelbar

Ahhhh but you forget Ourpay had his man in place at APA and he left him standing naked in the storm that occurred over the PUP payouts. Ourpay has lost all creditably with the employees in the trenches. Working more hours for the same rate of pay is not a pay raise. “Pull Together, Win Together” never said, “You win by keeping your jobs while our wives drive Bentleys on your pay cut.” To put it bluntly they have my money in their wallets. How would you feel if your boss was standing at the bottom of the Convair’s airstair each day you went to work and took money out of your wallet and then stuffed it into his wallet?

In the end the PUP payout will be pail in comparison to what all three unions will extract in real live flesh. You just have to be here to understand the venom that is held in check by the RLA. Each union is chomping at the bit waiting for the bell to ring to signal the end of the thirty-day cooling off period. Can AMR with stand a strike by all three of its unions in the next 18 to 24 months? Will PEB be invoked? Will CHAOS strikes keep a PEB in check? Will AFL-CIO pull it’s stings to keep a PEB at bay and let APA lead the way for ALPA?

You should ring up the current APA Secretary-Treasure and chat with him about his ESOP proposal he had many years ago. He claimed it was only going to cost 10% of everyone’s 401K to take AMR private at a price it is rapidly closing in on.

May you live in interesting times!

01.3.2008 | Unregistered CommenterChitragupta

Chitragupta

And may you. Might be time to dust off that financing plan. At least you still have an A and a B plan. Not an option for others.

Catch you later,

01.3.2008 | Unregistered CommenterSwelbar

Swelbar: Interesting to me that you decided to allow a post with profanity in it where you have denied it in the past (and explained in a comment why you did).

What gives here? A New Year's resolution to allow a more free and open discussion for all?

01.3.2008 | Unregistered CommenterPlaneWatcher

Planewatcher

Glad you called me out on this. I mentioned in my response to Chitragupta that I was allowing the comment with trepidation because of the words used. My not allowing a previous post had to do with one employee not attacking another and that it where I violated my own rule here - as it is one AA employee attacking senior management. You are right, they are each, and all, employees of the same company and I was wrong. Maybe from this point on, we might see employees of one airline focused on the competitive pressures from other airlines rather than directing hostilities at each other.

Yes I have been trying to allow a little more here as the emotion, and even logic, have made a step forward from where we started. Again my mistake and I am not afraid to admit it when I make them.

Swelbar

01.3.2008 | Unregistered CommenterSwelbar

I apologize for using profanity in my previous post. For my further edification which word was the profane word in today’s airline industry: morals, ethics, backbone or all of the above?

01.3.2008 | Unregistered CommenterChitragupta

Swelblog said...
"You know, at some point I would think that APA would be proud to have the best agreement - and I will stipulate among the peer carriers that provide transportation to people - in the industry as measured by salary and benefit compensation per employee."

O's Razor says....
Well your stipulation is fundamentally flawed...as pilots, what's carried in the "aluminum tube" shouldn't drive my wage rates. The fact is, that airline pilots are drawn from the same labor pool as cargo pilots. Our ratings, experience, training requirements, procedures and work environments are "identical", regardless of what's behind the cockpit door.

My logic is more relevant than management's SEC Def14a filing, where they justify their compensation schemes by comparing themselves to Coca Cola executives with a market cap of $150 Billion vs AMR's $3 Billion. As if!

I argue that comparing the cockpit controls of a Fedex 767 with an AA 767, is a more germane comparison than what the executives draw in their Def 14a filing.

Swelblog also said...
"But I guess the days of having the leading agreement are not enough. And don't point me to the amateurish analysis of hourly rates which explain maybe 45% of the cost. Remember in addition to unit price we cannot forget volume and all of the contractual terms that drive volume."

O's Razor says...
The nature of this industry's fixed costs and the fact that over half of its capacity was bankrupt after 9-11, required a major period of adjustment to align capacity with demand.

Because of the trauma of 9-11, pilots were willing to do their part, in order to Pull Together Win Together. If fact, we pulled MORE than our fair share of the burden. That period of adjustment is now over. AA management has re-engineered the operation to EXACTLY what they want. Any remaining, so called inefficiencies, is due to the intentional design of their global network model.

So.....it should be obvious to anybody, that decimating my "legacey" work rules, cutting my pay and benefits 23%, and then telling me I now have an industry leading contract because of a Demand Shock brought about by the events of 9-11, is an insult to my intelligence and every other pilot in this country.

Swelblog also said...
"Remember in addition to unit price we cannot forget volume and all of the contractual terms that drive volume."

O's Razor says.....
Are you really implying that our contractual terms are the "driver" of pilot labor volume? You're kidding, right?! You keep talking "Legacey" work rules and other such inefficiencies....but those very work rules were decimated in 2003. This argument has no merit.

The real driver of pilot labor volume is network design and asset utilization. The network, despite all the recent tweaks, is still one based on AA connecting as many city pairs as possible, NOT minimizing operational costs.

Collecting as much revenue as possible, on a "per departure" basis, is the real driver of pilot labor volume....not work pilot rules. And you know it! The "dawn of the jet age" argument you keep bringing up reveals either a professional bias or an amatuer understanding of this industry.

I will refer you to your own MIT website to make the point.

http://web.mit.edu/airlinedata/www/Documents/Aircraft%20and%20Related/AC%20Utilization%20-%20Total.htm

Given all the work rule changes and the paycut to do our part in Turning AAround this company....AA aircraft utilization rates are essentially unchanged from 1995!! What this means is that AA has exactly the "design" they wanted. Aside from a few tweaks, the operation, in terms of utilization rates, is no different than before 9-11.

AA is a Revenue Collection Machine. What this means is that having both airplanes and crewmembers "wait" around on the ground to board as much revenue as possible is the real driver of operational costs. However, readers should understand that sitting around and waiting has real costs associated with it.....and if passengers are unwilling to pay for the costs...so am I.

01.4.2008 | Unregistered CommenterOccam's Razor

C

It was simply the term used to describe the senior management team and you know the term you used. Nuff' said.

01.4.2008 | Unregistered CommenterSwelbar

Razor

And do not insult my intelligence. I have spent a significant part of my career assessing and costing work rules in an agreement. To suggest that your contract does not have terms that drive headcount over and above what is necessary to fly your network if you had another set of work rules is an insult to my intelligence.

I do not question for a minute the significant "gives" you made in your 2003 agreement. But in my mind the issue is not so much your utilization rates today, but rather the incredibly inefficient utilization rates that were being realized in 2003. Pilot utilization rates in the high 30 or low 40 hours per month is not sustainable. And if your rates were not sustainable, then just look at United's at a similar point in time.

And you do not have to do a video to put words in my mouth about some comparison with Southwest. Another insult to my intelligence. I do not envision a network legacy carrier achieving 65 hours per month pilot utilization based on the network architecture you describe. I have a public record that your union clearly has studied and I have never, ever suggested anything close to such a statement.

Thank you for referring the MIT site on aircraft utilization. You are right, AA's narrowbody utilization is less than the industry and yes that has some effect on headcount. If you read the text, age of aircraft is identified as an issue impacting utilization and the site further suggests you refer to vendors that track such data - as the MIT site does not and does not intend to.

AA is in no position to begin replacing those aircraft - and for that matter the US industry simply does not generate sufficient returns to make the type of capital expenditure that is necessary.

I am not going to engage on the continued reference to exec comp. And yet again in an insult to my intelligence, over 25 years there have been other attempts in negotiations to use cargo rates as comparators. Two different revenue models, period.

In conclusion, if you want to work for a cargo carrier, do so. I am all for free agency and the right of anyone to maximize earnings.

And I said to Chitragupta, BUY THE COMPANY. Upon closing the deal, you will begin to see that the market for CEOs, CFOs etc. is a different labor market and what it will cost to replace your existing management team. And further, you might even find out how difficult the passenger business is and why they cannot afford anywhere close to the opening proposal you have made. No one can, this is not isolated to carriers housed in the metroplex.

Swelbar

01.4.2008 | Unregistered CommenterSwelbar

So..... as AA buys fleets of new RJs, build new terminals, renovates old ones, does interior make overs on airplanes with sleep beds, and Admirals Clubs and of course payments of hundreds of millions in management pay restorations....I fully expect management to say "We can't afford a pilot pay raise." If I were in management, I'd say that too. But that's not the truth.

Equally untrue is management's proposal to simply fly more hours for higher W2 wages. That is simply NOT possible with a network that is organized for Revenue Maximization. Since we are paid only when the aircraft is moving, waiting around for passengers to connect eats into my FAA legal "availability" and is at the core...responsible for any unfavorable block hour comparisons. I personally, have no problem flying to the FAA max, each and every day I come to work. But AA's operation will not permit pilot work to be organized in this manner.

Pilots at AA pay a penalty working for an airline that organizes our work based on Maximizing Revenue on a "per departure" basis.

Whereas Southwest,conversely, has both higher rates and higher volumes of daily work, because their work is organized towards higher "daily" utilization of both aircraft and crews.

I know in my own case, a promise of higher W2 earnings based on increased flying opportunities will change my W2 pay by exactly ZERO. Which is management's primary objective....to lock-in a wage rate induced by the unique circumstances of 9-11.

THIS WILL NOT STAND!

As for the downturn in pilot utilization numbers you cite, in terms of block hours, airlines typically carry excess crews through recessions to minimize training cycle costs. So the fact that you highlight low pilot BHs during a severe recession, means nothing.

In addition, at AA we bought TWA and subsequently shut that operation down. The data clearly show a spike in these years as capacity was brought down necessarily, both to eliminate TWA capacity and respond to 9-11 fears. To indicate that our work rules were responsible for keeping utilization at low levels is flat out wrong. But you knew that...didn't you?

There was a furlough protection clause, but that quickly disappeared in the wake of 9-11. Members now fully realize such clauses aren't worth the paper they're printed on. I'm be surprised to see any such agreement next time around.

01.4.2008 | Unregistered CommenterOccam's Razor

Razor

I am coming to appreciate your comments and while not sure who you are, I do appreciate the much improved tone versus the previous voice of APA here.

But I am growing weary of you and your union putting words in my mouth. My world is much broader than negotiations in Ft. Worth. Every airline is in a revenue maximization mode. Each airline does it differently through their operational approaches.

No single airline is talking about finding new revenue sources more than Southwest. Imagine the changes that will be necessary for their pilots to negotiate this time around in terms of scope? Their operation will get marginally more complicated versus the simple structure it operates under today.

I did not say that your work rules were the sole contributor to low utilization rates as I believe I acknowledged - and you rightly pointed out - that aircraft utilization is a contributor as well. But they do contribute. In fact I am working on a journal submission as I write this to that effect.

But, collective bargaining agreements do impact productivity on the margin - some significantly more than others. And there is no reason why legacy airlines cannot operate in the 50-55 hour per month pilot utilization range.

As the Airline Data Project also states, it does in no way try to make adjustments for all of the airline specific nuances that drive the numbers. So your TWA point is a fair one but left for the bargaining table and not me to make assumptions on the magnitude of the impact it had on AA's numbers. I am not making assumptions, rather I am just doing the calculations.

Despite what you may think, I do hope that this industry can pay more which is why I think a portion of pay needs to be variable and tied to similar terms where management is paid whatever amount is deemed to be "at risk" in their individual agreements.

I look at it this way: base wages are nothing more than an individul's working capital. Wealth is not built until we are making money when we are sleeping.

As for your first paragraph, I assume those investments were all deemed to produce a higher return than what could be achieved with the core product. Facilities (terminal and clubs) and seats are important to the customer. At the end of the day, AA's ability to pay begins and ends with the customer.

But rather than ask me, your union has relied upon outside experts like Robert Mann and Michael Boyd in the past. I suggest that maybe you consult them and make the adjustments to the actual numbers in order to arive at an apporpriate baseline.

01.4.2008 | Unregistered CommenterSwelbar

Yes, there is a lot about which to be pessimistic concerning the state of the U.S. airline industry. But, I feel these concerns mirror those that we see worldwide in the media concerning the status of our country as whole.

While there are many factors that would lead to such pessimism, both the U.S. and the airline industry have historically been sources of creativity and have a talent for reinventing themselves. Perhaps it's the natural optimist in me but I feel that, while we might get a bit bloodied en route, we will still emerge on the top of the heap.

What is utterly lacking in the airline industry is the type of creative destruction which has kept America's companies at the forefront of research, development, innovation, and change. Whether or not this comes as consolidation or another form of players exiting the market, it is clearly necessary.

Swelbar, I think you might have posted something at one time about the airline industry having higher barriers to exit than barriers to entry. With such diverse constituencies as employee groups, airports, lenders, aircraft lessors, etc... all working to prevent such an exit from the market, it is hard to imagine how ANY airline could have gone out of business. If all the major carriers survived the post 9/11 upheaval more or less intact, how can such an exit take place now?

Consolidation for consolidation's sake is not the answer, in my opinion. Look at the only example of the recent generation of it, US Airways. With each passing day it reminds me more and more of a late 1980s Continental, with a ragtag fleet of airplanes, various employee groups that hate each other, and a product which is shoddy at best. It is the present-day version of Gordon Bethune's comment about making the pizza so cheap, no one would want to buy it. Certainly such an entity cannot compete in the global marketplace. Neither shareholder nor stakeholder value is enhancing with the current situation.

Perhaps the market would be better served with exits rather than consolidation. The difficulty is of course in how these would actually take place. The current labor situation at some of the legacies are filled with enough animosity to make an Eastern Airlines-style Pyrrhic victory possible. If I had been subjected to what some of these employees went through in the bankruptcies only to see their executives line their pockets with millions, I probably wouldn't be opposed to seeing the whole ship go down. Still, I would have to say this is the only option I find less palatable than consolidation. It will, indeed, be an interesting year.

01.4.2008 | Unregistered Commenterblackbook

Blackbook

Welcome back and Happy New Year. You ask many great questions and I will attempt to answer them in this comment back. But I think many of the ideas you espouse will require some separate writing and thinking.

As for your source of optimism on US aviation emerging again as global leaders, nothing would make me happier. Bloody road, yes; better off, yes.

As I asked my audience in a talk given recently: Why should we fear individual carrier failures or consolidation? We should not, although it will be painful for the subject carrier or carriers lost. Labor wants changes to the bankruptcy laws. Be careful for you ask for as the European approach may indeed be right.

I did respond to a commenter's suggestion affirmatively that the barriers to exit are higher than the barriers to entry. We talk alot about the need for consolidation here but I like your term of creative destruction.

And destruction may just be beginning as some stocks are acting like another round of bankrutptcies may be ahead. And some of these bankruptcies may be in the regional and LCC space which is precisely where this industry needs to begin the process of shedding duplicative capacity and the associated fixed costs and tax on the infrastructure.

I definitely agree with you that consolidation for consolidation's sake is not the answer. What I have stated here many times is that any combination where one plus one is less than two is good - if not very good for the industry as a whole. So yes, that is destruction of capacity in some form.

Your reference to Eastern serves as a reminder that icons can be tombstones and three carriers that can emulate that disappearance today are American, US Airways and United. My sense is you read here so it does not take much to sense the anger emanating from the AA pilots that write to this blog.

Whereas the timing of the executive payouts probably could not have been worse, I am not sympathetic to that issue. It is hard to attract experienced people to this industry when they have many other choices in front of them. My experience as a board member has made this very clear and real.

Maybe the only way to create value in the immediate term would be to engage in a prepackaged Chapter 7 filing where proceeds from the sale of core and non core assets would flow directly to the shareholders? Value creation and creative destruction all at once?

But yes, consolidation that is good for shareholders, employees and the health of the core business would certainly seem to be more palatable that a liquidation -- one would think.

I just may write on this. Thanks for making me think yet again.

01.4.2008 | Unregistered CommenterSwelbar

Swelblog said....
"It is hard to attract experienced people to this industry when they have many other choices in front of them. My experience as a board member has made this very clear and real."


Your statement defies the evidence. Exhibit one....here's AMR's executive bio page.

http://tinyurl.com/2mrp8f

You'll notice that with the exception of some lawyers in the mix, all of the executives have followed "in-house" executive development paths or have simply been with the company a very long time. As have most other AMR employees. There is very little "new blood" at the top that needs to be "attracted". Nope....this company has plenty of bench strength.

In the rare instances when executives do leave AMR, they are easily replaced with someone beneath them "champing at the bit" for their job. When C. David Cush left, he was quickly replaced by someone who can do the job. No shareholder was doing any hand-wringing.

After all....we are simply selling a "commodity" that requires very little marketing insights, right? What was the last truly great marketing innovation at AMR? CRS? AAdvantage? That was a very, very long time ago. Those "innovators" have long since left the company with nothing close to the recent PUP payout.

We are constantly reminded that "price and schedule" is all the customer wants....so how hard can the marketing job be? Really?

Readers....be under no delusion that replacing these guys is difficult. It's not! Our own VP Flight Hetterman could be replaced by another line pilot tomorrow. This also holds true for Redding, Brundage and others as well. Their skills are not unique or exceptional. Flight Attendant executives/management even easier to replace.

Horton's skills as a CFO are not unique either. In many ways, monitoring the finances of a service industry, like an airline, is much less demanding than say a manufacturing or merchandising concern. From an accounting/finance standpoint there are fewer moving parts involved in running an airline than say building and selling an airplane.

Running an airline is not rocket science...as Branson and JetBlue remind us. Could Branson and the rest of his executives pass a "no-notice" drug test that we are required to take?

No....the pilots rightly view management payouts as simply a commission paid for confiscating a good chunk of our wages and work rules. We pull, they win. They are not innovators or risk-taking entrepreneurs....they just want to be paid lik them. Angry? Maybe just a little.

01.4.2008 | Unregistered CommenterOccam's Razor

Razor

As I said in a post to C, my world is really much more interesting than the happenings in Ft. Worth.

With regard to exec comp and finding and retaining execs in this industry, you know where I am and I have no words left. I am exposed.

I am appreciative however on your comment that the passenger business is a commodity business which implies little to no pricing power. With little to no pricing power in the industry for arguably 30 years, how do we return base wages to an an inflation adjusted 1992 level even before we add in all the other costs included in the 35 + proposals APA has made?

With respect to commissions, I would be happy as leaders of APA to pay anyone $200 million of promises to keep by DB plan intact.

And hell, I really do not care.

01.4.2008 | Unregistered CommenterSwelbar

Swelblog said....
"With respect to commissions, I would be happy as leaders of APA to pay anyone $200 million of promises to keep by DB plan intact."


Ahhhh....Would this be my "at risk" "variable component" of my "total compensation" you talk about? If so, you're probably aware that the DB plan management "kept intact" included THEIR OWN. The pilot's DB plan is simply one of four others....Management's, Flight Attendants, TWU and pilots.

Anyhow....Bill don't take my postings so personally. You have a blog. Boyd and Mann don't. I'd much rather pick Boyd's brain. He "charges" a fee to pick his brain. And I'm a cheapskate...aren't all pilots? Wink-wink.

However, You're viewed as an "industry expert", and have a postable blog, as such you will have influential readers and visitors....ie Terry Maxon. That's why I'm here.

You don't have to respond to all my posts. Unless you truly want to.
I'm getting the impression, however, that it's just you and me and a couple of other occasional visitors.

Perhaps my posts can spark some popularity here. Isn't that what bloggers want? After you make your post in the Wall Street Journal, you're going to need some content for the inevitable visitors. That's where I can help.

BTW.....I disagree. DFW is the epicenter for coming industry events.

01.4.2008 | Unregistered CommenterOccam's Razor

Razor

Thanks for being among the few that visit the blog each and every day.

Believe me, I do not take this stuff personally. As I said in one comment, I am just growing weary of you and your union constantly putting words in mouth. That is all.

I do appreciate your reading and your taking the time to comment. So I guess it is just you and me. Have a good weekend.

01.5.2008 | Unregistered CommenterSwelbar

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