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Friday
Feb152008

« Thinking about This Week’s Airline News: Industry Structure; Labor; and the Customer »

Setting the Table

On October 8, 2007, I wrote the following in a post: “Some want to believe that the cost cutting is done. It is not. Some want to believe that it cannot get worse and it likely will . . . at least for some carriers. The low hanging fruit has been picked from the expense tree which only means that the hardest work is still ahead”.

“Over the next 2-3 years the winners of this war of attrition will begin to emerge. I am not alone in my belief that there are simply too many airlines– mainline and regional -- too many hubs and too many parochial interests among the stakeholders to make this market work for everyone”.

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

Yesterday, The Economist ran two separate articles that are a must read from my perspective. The first opinion piece entitled The Need to Shrink picks up on the very themes that have been written in this blog since its inception. The second, entitled Aviation A normal industry? cites the many catalysts for consolidation that we have discussed here as well.

But more importantly the article raises the specter that US aviation is anything but a normal industry due to the protectionist policies in place as well as the entitlement issues that the various industry stakeholders possess. The article also offers the global view that success for commercial aviation needs a healthy US market – a theme that this blogger believes firmly lies at the foundation of US carrier secondary status in the global marketplace today.

Labor and Expectations in Consolidation Scenarios

I am encouraged by the involvement of labor by each Delta and Northwest. There have been numerous news stories throughout the week on the subject. We should not be discouraged by the delay in announcing the deal as they engage labor in the discussion. A delay in the announcement measured in weeks could potentially take months off of the time it takes to get a deal approved.

What I am discouraged about is the sense by some that labor will be able to reclaim a significant level of concessions granted in return for agreeing to a deal. If we are looking for a merge lane back onto the virtuous cycle of value destruction that has plagued the industry since it was deregulated, let’s just stop the process and continue the war of attrition. If this is to be the transformational period that can hopefully address many of the remaining structural deficiencies that exist, this simply cannot happen.

As in any negotiations, there were more than likely some changes made to respective collective bargaining agreements that have not yielded the desired results for either management or labor. Those are the types of things that can be fixed.

Commercial transactions like these are not undertaken lightly. Consolidation for the sake of consolidation is not what this is about nor should be about. Rather, this is a careful examination of what continues to stand between the status quo and what is necessary to create sustainable, investable enterprises. Increasing costs for the sake of peace does not create a pathway to a sustainable and investable business.

All airline labor should explore other means of wealth creation rather than increases to base wages. It is called at-risk compensation. Sure your buy-in to any proposed deal is critically important. The industry just does not have the ability to pay today – not that it ever did.

But as The Economist article suggests: today’s managers are focused on the business of cost cutting that is necessary to adapt the business to the rough and tumble operating environment of today and prepare it for heightened competition tomorrow. Like it or not, these very same managers will make many tough decisions that their “nicer” predecessors did not address in the spirit of harmony. And in the end, those that acknowledge the need for change and that a continued restructuring and transformation is necessary will reap benefits that today’s structure simply cannot produce.

The Customer

In all of our talk here and elsewhere about the need for fundamental and transformational change, I am in hopes that the customer finds its way to the very top of the list. We spend lots of time discussing employees, communities, shareholders, Congress and industry vendors. Each of these stakeholder groups believe that they have some entitlement to reap from this industry.

Unlike in the bankruptcy process when the customer barely got mentioned as important to a plan of reorganization, the only stakeholder that is truly entitled to a better tomorrow is the customer. There are no other stakeholders without customers. The investment in the business needs to be in the customer and to demonstrate over time that airlines can regain their confidence. Continental, beginning in the mid 1990s, invested in gaining customer confidence in their product and it translated into higher revenue. It can be done.

Reader Comments (2)

I've been reading your columns for awhile now. Your distaste for labor is transparent. Why is this? Perhaps labor should start a blog about the distaste many have for accountants...oh, that's right!...YOU are an accountant!...Perhaps the wages and benefits that need to be reduced are the ACCOUNTANTS!!!...Many feel (rightly so) that YOU guys are OVERPAID.

02.18.2008 | Unregistered CommenterAnonymous

I appreciate your reading many of the columns here.

For clarification, I do not have a distaste for labor. Rather, I do have a distaste for reckless and unenlightened labor leadership. Labor leaders are put in place to lead and find solutions to problems -- not to whine about yesterday and how they were victimized when the rules of that game were known.

That explanation of where I stand should be totally transparent.

And for the record I am not an accountant and have never been trained as such. So I guess you can shout at someone else who is trained as an accountant. April 15is coming.

02.18.2008 | Unregistered CommenterSwelbar

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