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© 2007-11, William Swelbar.

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

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

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

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

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

Transition v. Transformation (Labor Actions Hold A Key)

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

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

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

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

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

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

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

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

Over The Weekend, A Comment From a Reader

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

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

Charlie Bryan’s Tombstone Would Probably Like Some Company

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

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

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

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

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

Reader Comments (1)


Great post Bill - you made many excellent points. And belated happy birthday.

Sounds like you have a case of the airline blues, or maybe there is another name for it, something like AFS, Airline Fatigue Syndrome. I can understand. Let’s take a look at the legacy’s.

AA – No innovation going on. Did you see the recent article in Fortune with Arpey. ‘Woe is me’ type article. Unions are strong and implacable. Unions are getting rid of anyone who speaks of compromise or innovation. OK. Next.

UA Tilton talks consolidation, but apparently, so far anyway, cannot pull it off. Will the UA/USAire work? -- as you’ve pointed out, if there is not overlap, what exactly is the point? Extra revenue maybe, but the reductions in costs due to extra aircraft, crews, gates, facilities, are not there. Just thinking about a UA/USAir merger gives me the willies. I think it is because of the seniority issue between the 3 pilot groups. However, the scenario you sketch re that issue is quite plausible. Some irony there. USAir East guys will be bitter and that too ultimately costs quite a bit.

DL/NWA Maybe this one will work and maybe there will be some fun stuff here. The NWA pilots will have a 3% raise as their payoff to allow their struggling company to merge with DL. Seniority issues CAN be resolved, for the right price. Does anyone really think DL will keep both CVG and MEM? (when/if they do 'de-hub' those cities the low cost guys will be in there quick).

USAir With or without UA, they are and will continue to struggle. The pilot seniority issue continues to be a big drag here. It would be interesting to know what synergy’s are being blocked, and how much the lack of action on ‘the synergy’s’ is costing USAir.

CAL Trucking along. Doing OK. I can understand why management is reluctant to merge. IMHO it is CAL management who should be leading any merger. They seem to have their house in order more than the other guys.

Yes – fuel is a dominant story and its’ rise is wrecking financial plans. However, besides the fuel story there are other places where management could take action, but they don’t. Hence the tiring fatiguing story line you reference.

Things to do. Raise fares a quickly as possible across the board. This is being done in some cases, but more is needed.

Raise fare in specific markets – I read recently somewhere that AA was looking at a way to raise fares on flights they know have high demand. Duh? That is something I thought they had already. I travel a lot on Sunday evenings – flights are packed. Very high load factors. It amazes that the airlines have not figured out a way to charge more for those flights as everyone is heading back home and certainly would pay a few extra bucks for it. It is not like SWA or JB are not full either. I’ve asked some of my friends on the revenue side and I feel like I never get a straight answer.

Work smarter -- and here is where the fatigue (for me) really sets in. Management and Union could sit down and seriously develop ways to operate smarter. In my corner of the world significant savings are potentially there, but the willpower to make things happen is not. Both senior management and senior union officials chose not to act. The status quo groups usually look for ways to knock down innovation and hold back change. I am glad that they were not advising Wilbur and Orville when they were considering what to do with their lives.

Then the picture does come into focus. The legacy carriers continue to cling to the status quo. Management for a variety of reasons cannot lead their company and their workers out of the morass. Long term it appears that the low cost guys will continue to eat away at domestic market share. However, that is not a given. With the current fuel prices, it is possible that JB or Airtran could go under, leaving more market share for the big guys. If the market place is allowed to ‘attrit’, then that does become a possibility. If, however, the low cost guys hang in there, then the legacy carriers will continue to lose domestic market share and job-share from the union perspective. Little bit like the UAW workers keeping their high paying jobs and the new lower paying (but still good) jobs going to ‘the foreigners’ in the auto industry. To a certain degree I see the US legacy carriers becoming ‘Pan Am’d’. Putting a lot of their eggs in the International basket. I can understand the logic, though it is risky business, as that market can turn on a dime. Delta in particular comes to mind with their ‘International’ strategy.

In the mean time, as I’ve said in an earlier post, the consumers continue to enjoy significant benefits. They are getting to travel at prices that are below the cost of production. Good for them and beneficial to the economy to a certain degree. However this is uneconomic long term. The airlines themselves are subsidizing air travel, and are therefore discouraging other modes of transportation/communication. I wonder – with fuel at the price it is, what should the airlines be charging in order to make a profit? And assuming the industry is successful in raising fares (which they must), what alternatives will benefit? More teleconferencing, more driving, more conference calls? I don’t know. That question at least is new and fresh. Better than the same old, same old.

The market place is working. It is not pretty, nor should it be. More change has to come – hard to say what it is going to be. Stay tuned.

05.11.2008 | Unregistered Commentercp5000

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