Wondering Thoughts From 5 Time Zones Away

The underpinning of this blog is that change in the US airline industry is underway -- whether some like it or not. Over the past week there were some stories that grabbed my eye and are listed in order of importance from my point of view. There were many stories that warranted discussion like the orders coming from the Dubai Air Show, another meeting between US Airways CEO Doug Parker and Senator Arlen Specter, oil prices testing $100 per barrel, airline stocks getting beaten down, schedules at JFK, United suggesting it might, and could, put up to 100 airplanes on the ground given the changing economics and the list goes on that further underscore change.

Speaking of the Dubai Air Show and the aircraft orders being placed there – doesn’t it bother US readers that the orders are not from US carriers but rather from previously obscure points on the map that have every plan to change the shape of global aviation? It sure does me. Is the US being relegated to a supporting role in tomorrow’s global aviation market? I sure hope not.

These Are Not “Competitively Virgin” Markets

Holly Hegeman in Planebuzz ran a great piece last week where she summarized a research note from Gary Chase at Lehman Brothers click here. In his note, Gary finds that Virgin America is pulling down capacity in its transcon markets without any noticeable shift of that capacity to other markets.

The markets where the low cost sector has chosen to operate have generally been the densest US domestic markets. You would have thought that Virgin would have learned something from jetBlue and others that the competitive profile of the network carriers is vastly different today than just 4 years ago. The days where the legacy carriers that are most dependent on transcon revenue, whether from nonstop or connecting flights, are going to stand idly by and see further market share and revenue degradation take place are over.

In a Spring 2003 MIT forum, I did a piece on the Low Cost Carriers, subtitled “Thou Shalt Not Inherit the Earth” click here. LCC growth was the talk of the time. This piece was shared with mainstream press but largely ignored. Now it is mainstream, and even “futurist” by some, to talk about the revenue generating difficulties faced by the LCC sector. Whereas, Virgin America is well capitalized and arguably has a brand, it further underscores the point that the opportunities are limited for this sector to grow at previous rates.

We talk about consolidation with respect to the legacy sector of the industry when in reality the more interesting plays may be in the LCC sector – a sector that is highly dependent on revenue in the largest US markets. A capacity shift here, a capacity pulldown there and ………

Say It Ain’t So Joe

AirTran Chairman, Joe Leonard, sells his remaining stock holdings a week after stepping down as CEO click here. As for AirTran, it is unfortunate that their bid for Midwest fell apart. This company has performed admirably, but remains badly in need of diversification of its route portfolio and Milwaukee, along with Minneapolis, remain two of the largest markets without meaningful LCC presence.

While Northwest suggests it is only passive in its partnership with TPG, you have to look at that partnership and wonder what TPG sees other than to know an exit strategy is there for them at any time. Midwest’s recent performance does not warrant that kind of interest from a TPG and its business plan is circa 1999.

Do these changes at AirTran signal something?

This Is Not Bill Nyrop’s Airline: At Least Today?

Following a wrenching summer of customer and labor strife after emerging from bankruptcy, the external messaging we hear from Northwest is quite different from what we have ever heard in Minneapolis? In an article by Liz Fedor in the Minneapolis Star-Tribune: NWA Puts An Emphasis on Service click here highlights comments from the Board’s new Chairman, Roy Bostock, citing his desire “to create a better environment for Northwest's employees and customers and develop more sophisticated techniques for measuring customer experiences”.

Is this real or will Northwest realize the same fate that is playing out in Ft. Worth between labor and management after an attempt to find a new way? Given the contentious nature of the labor-management relationship that has historically been the norm at Northwest, this would at least appear to be a good start. It is always easier to begin these programs when amendable dates are years away. However, with Northwest in the center of consolidation talk (click here and click here) we will be watchers of the airline’s progress on service and employee relations.

Maybe This Time, “Delta” Really Does Mean Change

In an AP story covering Delta’s President and Chief Financial Officer, Ed Bastian called consolidation a “front burner” issue for the carrier click here. And as the company discusses consolidation, its message to all stakeholders has been consistent. But while the company suggested it would like to answer the consolidation question before it makes any decisions regarding spin offs, it made an agreement last week that would grow its internal maintenance operation click here.

This on top of its transatlantic deal with Air France and KLM and a decision pending on whether to sell Comair suggest that this company is doing anything but managing its enterprise for the future. I could not have been more wrong on my views of this company. I have spoken publicly about an airline with presence everywhere, pricing power nowhere and generally lacking a plan and direction. We will not know for sometime whether or not their international strategy is the right one, but the results since emerging are impressive.

Business Week made a case that the logical acquisition target for Delta should be Northwest click here. This story is a good read, not so much for the combination case it makes but more to the references made about an industry badly in need of continued restructuring ….

American and the TWU: Talk of gAAin v. pAAin

Trebor Banstetter of the Ft. Worth Star-Telegram did a nice summary of the TWU’s remarks as it presented its Section 6 opener to the company last week click here. If there is a union at AA with a substantial opportunity, and a competitive platform, to discuss “gain sharing” with the company it is the TWU. But I would argue it is not the entire TWU membership that is in the same position. It is the mechanics, the skilled workforce, that have this substantial subject matter to discuss.

One does not have to read too many articles to realize that American has chosen to invest in its maintenance organization – obviously a profit center that warrants the use of internal capital to fund an operation that has been successful in bringing in new work – and new revenue. The TWU suggests that they would like to return to 2003 levels of pay and work rules (not likely given the industry’s profit position). The company seems open to linking earnings to performance and productivity goals click here (an opportunity to make at-risk compensation a reality).

Whereas the AP story suggests a union “less friendly” – that may be true. But at least on its face, there is an understanding that preventing an environment that has caused significant pain for their co-workers at other carriers that filed for bankruptcy is a better path to follow. My hope is that the TWU and AA find some inventive ways to proceed that can reward the skilled workforce that is making Tulsa a new revenue source.

I further hope that the TWU does not use the skilled workforce to cross-subsidize the other members it represents as the sub-labor markets are quite different. There are too many lessons to be learned from the IAM on this subject ….

My Beginnings and Increasingly Appreciating Tilton's Message

This little bit on me should go a long way to helping you understand where I came from and how it impacts my views on the airline world today. I now have history to reflect upon – I did not when I began in the industry and was forced to make decisions as a union leader to ensure that my carrier survived the war of attrition.

Glenn Tilton, UAL’s Chairman and CEO said last week in a speech to the Nikkei Global Management Forum in Tokyo: “If there is one imperative for every business in the global economy today, it is simply this: evolve, adapt, reinvent . . . or risk irrelevance in the global marketplace”. He went on to say: “As everyone here today knows well: the reality of our world is that globalization is relentless. Think of any industry represented in this room; choose any business listed on the Tokyo Stock Exchange; and one can be sure: it looks nothing like it did ten years ago; and looks nothing like it will ten years from now”.

Some Personal Background

In 1979, I was a sophomore at the University of Minnesota in Minneapolis. And like many, going to school required I worked a job or two to make ends meet. In trying to incorporate all things important in life at the time -- beer, going to class or not going to class, going to work, girls, beer and getting up to do it all again, one thing was clear - I was not getting much out of school that felt particularly inspiring.

It was at this time that I had a conversation with a cousin who had been a flight attendant for TWA; she suggested that the job would allow me more than sufficient time off that I could finish school. I was turned down by Braniff and ultimately hired by North Central Airlines. While I was in training, North Central and Southern merged to form Republic Airlines. So, by the time I graduated in 1979, I was a Republic flight attendant on an airplane to be based in Detroit.

I had no idea what I was getting into, but it was more than I bargained for. I sat reserve for the first six months, constantly putting in for lines on the Convair 580. Soon, I was able to hold a line that had me overnighting in Huron, SD after making 11 landings from Detroit and facing 10 landings back the next day. So, in that first year at Republic, there was no school for me. The industry was deregulated just nine months before I was hired. Republic grew quickly and my relative seniority allowed me hold a line of illegal overnights. With that relative security, I enrolled at Eastern Michigan University.

There I was blessed to find a great academic environment with only 20 declared economics majors. Classes were small, the professors were engaged and, finally, the lust for learning emerged. I carried 15-18 hours per semester while flying my line and finally finished my undergrad in 1982. My flying took me from Huron to sleeping in the basement of the Sault Ste. Marie Airport on Friday, Saturday and Sunday nights. With only rare exceptions, I flew two years and never left the State of Michigan – flying at night from Detroit to Traverse City to Pellston to the Sault and then retrace those steps again beginning at 5:30 the next morning. Often the basement of that airport was my study room.

In 1981, the industry began an era of massive change promised by the deregulators. The dinosaurs, free from the yoke of regulation, began to rethink their approach to the business. What followed was the the quick liquidation of Braniff, the rapid entry of carriers into markets of all sizes based on the hub and spoke network model, the grounding of the DC10s, the PATCO strike, the birth of upstarts like New York Air and PEOPLExpress, multiple mergers and the era of Frank Lorenzo. By the end of 1981, Republic had acquired Hughes Air West and I got to experience a merger firsthand.

Republic and its lineage were highly dependent on government subsidies that encouraged airlines to serve the small communities I flew to on a daily basis like Pellston, Muskegon and Ironwood. And as this subsidy was coming to an end, it was clear that Republic's costs and their revenues were falling out of alignment. Between 1981 and 1983, airlines across the industry negotiated several concessionary contracts during an era of change in which concessions were the rule rather than the exception. The contracts were in effect for only a few months at a time because most people assumed that the economic cycles were similarly short-lived ... and in virtually all cases, as soon as the concessions came to end, the return to the bargaining table was not far behind.

As I neared graduation, I was encouraged by my co-workers to run for President of the Detroit domicile, a position I won in the middle of this concessionary era. I crunched numbers and made some mistakes, but also began a different phase of my education in an industry well into transition. By mid-1983, the five Republic unions were tired of this constant return to the concessionary bargaining table and formed a steering committee to explore a leveraged ESOP of the company where I served as the flight attendant representative.

Our first job was to hire the professionals needed to do the job. We hired an airline economics firm, an investment banker, a labor lawyer, a lawyer familiar with ESOP law and a communications firm. Our second job was to figure out how to pay them – a task we accomplished by assessing the members of each union.

With professional arsenal in tow, we began to create a business plan that required hard discussions about the amount of labor concessions that would be required to fund an LBO. In our view, it was well worth the effort to try to fix the company rather than be forced to endure more and more concessions that amounted to mere Band-Aids that labor was putting on a carrier that was hemorrhaging cash as the industry changed around us.

The centerpiece of the union’s business plan was a the build up of the Detroit hub. So with business plan in hand, it was off to New York to talk with banks that might be interested in lending us inmates the $400 million or so it would take to buy the asylum. For the most part the five unions stayed together. The IAM and its maverick investment banker at the time, the late Brian Freeman, were in and out, but generally on board with a deal.

During one trip to New York that took us to Citibank -- Republic’s lead lender -- Republic CEO Dan May was relieved of his duties and replaced by a very tall man in red suspenders. Into the room walked Stephen Wolf. As Wolf came on board, the negotiations moved away from a leveraged deal to a more traditional give-and-take with equities as the quid in return for concessions – and take they did.

In the end the flight attendants agreed to a 23.5% pay cut and some work rule changes. In return, the best we could negotiate for all employees was approximately 20 cents on the dollar for concessions granted, a return on our “investment” made up of common stock, warrants and a liquidating preferred stock that was paid down with earnings. Following Northwest’s purchase of Republic in 1986, the employees at Republic were made whole for their concessions. That is the “upside” of variable compensation that has left an indelible mark on my thinking.

21 Years Later

Today’s airline environment feels about the same as it did in 1986. Structural change. Consolidation talk. And many people attempting to convince themselves that the Band-Aid approach to labor costs will only need to last through one cycle before they can get it all back.

This time, however, it is not so simple. For one thing, foreign airlines now play a far greater role in the important “domestic markets” that span the globe. Events like the Air France – KLM merger will dictate commercial strategies. Strategic models like the one LAN is implementing are sure to have made a lasting impact on commercial airline development when we look back in 2028. The two great unknowns are how Asia will develop and what will transpire in the nations comprising the United Arab Emirates. This region will certainly force change across the globe over the long term and will surely cause the European market to look in the mirror in the relatively near term.

Twenty-one years ago, we didn’t have the same rules of engagement or recent history as our guide - as there was none. In a changing marketplace, it took a proactive approach to make a flailing/fledgling carrier live to see another day and “create value” for a new platform when leveraged across a much bigger network.

UAL CEO Glenn Tilton, one of the most maligned CEOs in the US industry, began talking about the changes necessary for the industry and his carrier to survive soon after United emerged from bankruptcy. As can be expected, a lot of people took shots at the messenger, as they did at US Airways' Doug Parker who echoed Tilton’s warnings. But these chief executives now have company in the form of nearly every CEO at the major US network legacy carriers in discussing consolidation in their third quarter conference calls.

It’s time we accept the fact that this is a time of opportunity for both management and labor. Just as it was during immediate period following deregulation of the US domestic airline industry, the dinosaurs face continued, significant change or extinction. The old ways are certain to face additional challenges from the new, with youthful competition making inroads into our respective markets and new competition from airlines emerging from previously unknown dots on the world map.

The Pentultimate Question

In his Tokyo speech, Tilton asks the following question: “As globalization gives rise to new economic powers within the developing world, the real question for all of us operating in mature economies today is this: will the legacy systems that contributed to the success in developed nations in the 20th Century be an asset or an impediment to growth in the 21st Century”?

He goes on: “The airline industry is a perfect platform from which to focus this discussion, because it is subject to virtually every imaginable challenge -- every human challenge, industrial challenge, financial, regulatory, and security challenge -- throughout the global economy. And then, of course, we also contend with the weather”.

Aloha

Swelblog.com: The First 31 Days

Whereas it has only been one month since I ventured into this unknown world of blogdom, suffice it to say that this labor of love has been among the most gratifying endeavors I have ever experienced. As I said in my very first post entitled Swelblog.com Taxiing Into Position: click here “I did not start this blog to win friends or influence anyone. I’m a data guy, and I’ve been studying the industry long enough to come up with some strong opinions . . . many of which aren’t popular in either boardrooms or union halls. My approach is analytical because, in my view, the numbers don’t lie.”

I have been moved by the comments made in other blogs and the press about this site and the use of some of the comments expressed here. To Holly Hegeman Planebuzz, Terry Maxon Airline Biz, Trebor Banstetter Sky Talk, and Loren Steffy Houston Chronicle I am grateful. To these, and all other, enlightened influential watchers of the industry and the many other readers who have commented to me via other mediums, I very much appreciate your welcome.

While I may not need to reiterate this point, I am going to as I want to make sure the readership fully understands that this blog and the MIT Airline Data Project are separate. I use the MIT site’s data to analyze issues because I know how the various metrics have been calculated, vetted and presented.

It was the second post, “All Eyes on Texas” that certainly seemed to launch this blog. Some agreed with my ordering of the difficulty of the pilot negotiations and others questioned my ordering. That is the sort of healthy debate that I hope happens here as the blog matures. As a result of my immediate previous post where I addressed a sensitive issue regarding the cost of the APA pilot opener, there were a number of comments made. I have always wanted this site to show both the “positive” and the “negative” comments regarding what I have written and, until Monday, I have made each of the comments available for public review.

But as the days following that piece unfolded, Monday morning I posted a comment that I should not have posted and ultimately deleted it. While it had some valid points, this blog was starting to become a venue supporting the views of one employee at AA challenging another. Then after I authorized the post to be published, a follow on comment was made which I deemed was exacerbating the situation versus having a meaningful exchange of views. I rejected this post. It is one thing to attack me -- and trust me you are in a long line of those that have had the opportunity long before I started this blog.

I welcome, no, I want comments on the issues discussed here -- but check the emotion at the door. From this point on, this site will not be used for personal attacks on another person commenting – period. There are many other venues for that. This is my blog and my rules. And they are changing as I learn.

There was a comment from flyby519 posted to Swelblog that I did not acknowledge and should have as it was precisely the type of thoughtful comment that I want to address in this blog click here. We will pick up here over the next couple of days.

Happy Halloween

Just Put It On Ice: American’s Ability to Pay ≠ APA’s Expectations

As I read this morning’s Wall Street Journal, the headline on page 2 is “Economy’s Weak Signals Persist” and the headline on page 3 is “Oil Tops $90 on Range of Worries.” What this means for the airline industry is well documented in Planebuzz click here.

We said the eyes would be on Texas airline labor negotiations, and we got a good glimpse of that this week. The Allied Pilots Association presented its Section 6 opener to American Airlines on Tuesday. This writer’s take on what American is seeking is a cost-neutral contract (which in effect preserves APA’s industry leading position) where productivity gains could cross subsidize increases in other sections of the agreement. By contrast, APA asked for pay increases in the 50% percent range.

This is one rich deal. Add the productivity gains and the multiplier effect of wage increases on pension and benefit costs (and well before any opportunity costs or opportunities lost are analyzed), my back of the envelope calculation suggests the price tag on this proposal is comfortably a three comma number. Yes, the number starts with a B and not an M. And this is before negotiations start with the other unions representing the vast majority of AA employees.

Let’s put this in perspective: Today, American has a pilot cost per block hour disadvantage versus every single one of its major competitors in the US market click here. If American had a pilot contract along the lines of the Continental agreement, that is at or above the industry in terms of compensation and productivity, American would need to reduce its annual total pilot costs by as much as $500 million click here. But American is not seeking concessions; it is seeking a competitive contract recognizing the “gives” by labor outside of bankruptcy.

I argue that the APA proposal fails to serve its members. Not just because of the costly demands, including the proposal that pilots receive holiday pay if they fly Super Bowl Sunday, but because the union’s demands insist upon a return to 1992 wages adjusted for inflation. That sets completely unrealistic expectations when put in context of the massive change in the landscape for network carriers, and the US airline industry for that matter, since the mid-1990s. American’s average “nominal” domestic fares were actually lower in 2006 than they were in 1995 click here.

In the media coverage, the APA suggested that its opening proposal would lead to a quick settlement. I beg to differ.

When two sides are so far apart on an agreement that there is no basis for movement, it is said that negotiations are “put on ice.” For many reasons, this round of labor negotiations is the most important since deregulation. For the major airlines to have any hope of succeeding for the long term, this upcoming round of contract talks must produce agreements that are durable and sustainable and make strides toward eliminating the cyclicality that has plagued discussions between labor and management for the deregulation generation.

There remains a real opportunity for these negotiations to be “industry interesting” in a good way and think about ways for employees to share in any upside while still realizing some protection in the downturns. That’s what the unions should be aiming for in getting their members a deal.

But if, in the APA’s view, the upside means in a 50+% increase in base rates then there really is no starting point. Openers are supposed to be starting points, not the point of no return.

Executive Compensation

We cannot discuss industry economics and labor without also discussing executive compensation. For as long as I have been in this industry, airlines have been run for pilots, by pilots and in fear of what pilots might or might not do. As a former flight attendant – that is how I put myself through school - I constantly questioned it and still do. For virtually any carrier, in a list of the top 100, 200 or 500 most highly-compensated employees, the majority would be pilots.

This industry has never had a deep bench of management talent . . . in part because airline executive contracts have historically not been as rich as executive contracts in other industries. The executive management team in the airline industry is usually there because they have jet fuel running through their veins, not because the financial upside is so great.

Many say that there is no justification for the executive payouts in recent years across industry – not just the airline industry, but throughout corporate America. But the simple fact is that markets are at work. Not all markets are rational, but given that markets by definition operate on perfect information, ultimately they return to the trend line.

For CEO’s, CFO’s and CIO’s the market rates are set in New York, Des Moines, Singapore, London and Los Angeles as companies in the US and around the globe are seeking the same talent to do the job for them just as American seeks to find the best people to fill these positions as well.

The reality is, however, that a new market rate has been set for pilots and it is not 1992 times inflation to the sixteenth. It is $120,000 and not $180,000 click here.

For awhile, “pattern bargaining” fueled an unrealistic – and unsustainable – growth in average pilot wages. It began with Delta’s lucrative pilot contract in 1999, followed by United’s topper in 2000 as it followed the "Delta Dot" along the road to bankruptcy.

Now there’s a new pattern, and a new market reality, and that is the contracts reached in bankruptcy and ratified at United and US Airways in 2002 and 2003. That’s how the market works, and airlines – like companies in any other competitive industry – generally compensate management and employees at the going market rate and as necessary to retain its best people – period.

Don’t assume that I support executive compensation packages that have benefited senior leaders while workers have seen their lives negatively impacted. I do not. But, I am a believer in markets. The convergence of what is paid to pilots, flight attendants, ramp workers has found an equilibrium and that is what markets with perfect information do. Will the market rethink executive compensation as well? I think so.

So......

We can spend a lot of time thinking about the APA proposal or just recognize that negotiations in this round will take some time. During restructuring, the market realities dictated quick negotiations and resolution. This time it is different. Neither labor nor management has significant leverage. Labor is trying to create leverage using the executive compensation issue because there is little else that resonates as well with a broad base of employees and the public. Meanwhile, management teams are doing their job and actually posting profits at a time when pricing power continues to decline - with no adjustments for inflation. The only structural change now permitting increases in revenue is in reduced capacity and in the lofty levels where oil is trading and, finally, an industry willing to pass on a portion of those increases to the consumer.

There are many who say the industry’s recent profitability comes on the backs of labor. That argument ignores the fact that the recovery is the result of tactical and strategic decisions, combined with other management actions, to achieve profits in an environment that has been structurally changed.

Keep in mind: $4-5 billion in profits in an industry earning $130 billion in revenue does not signal a healthy recovery.

I’ve titled this post “On Ice” for more than one reason.

The first page I read in the newspaper is the sports page. In an interview in the October 25 USA Today, Paul Kelly, the new Executive Director of the National Hockey League’s Players Association had some profound thoughts to share click here.

1. "Do we need to understand where we should cooperate and where we should draw the line? Absolutely," Kelly said. "But anyone who thinks I'm going to fire the first shot across the bow of the NHL, they've got it all wrong."
2. "My view of the world is that unless you have a personal relationship, a real human relationship with someone, it's difficult to transact real difficult business," Kelly said. "I want to get to know Gary, and I want him to get to know me. And I understand that there is a line there — that we represent different interests."

Perhaps hockey and airlines have little in common. But negotiations are negotiations, and they are not done on an island.

At American, as well as across the industry, pilot negotiations are going to result in "transacting difficult business". Captain Hill, reach out to Gerard Arpey and begin a real negotiating process. Mr. Arpey, reach for Captain Hill and reiterate the commitment you have made, and kept, to maintain pension benefits and retaining the components of the pilot’s agreement that ensure that AA employees will have dignity in retirement and in their day to day living to the best of your ability to pay – something that cannot be said of all carriers in this industry. Otherwise it could be a long, cold winter in Ft. Worth.

Circular Logic: US Airways and the Economics of Entitlement

Since US Airways’ failure to convince the US Congress, employees and the Delta Unsecured Creditors Committee that their deal provided many stakeholders with a long-term blueprint for success, issues faced by the US Airways’ management team continue to get more and more parochial. The recent news announcing the continued downsizing of Pittsburgh has elicited responses from Congressmen that this writer finds baffling. And the move by unhappy former US Airways’ East pilots - caused by an arbitrator’s ruling regarding the seniority integration with the former America West pilots - to consider an alternative union to the Air Line Pilots Association is troubling.

The Pulldown of Pittsburgh – A Long History of Weak Hub Economics

To start, let me reiterate my views on the market: there are too many network legacy carriers; too many low cost carriers; too many regional carriers as a result of having too many network legacy carriers; and there are too many hubs which keep too many network legacy carriers and regional carriers operating.

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.

Remember the early 1990’s: It was during this time that the industry emerged from a recession that was triggered by the Gulf War. American exited Nashville and Raleigh-Durham. Continental was emerging from Bankruptcy #? and exited Denver. Delta’s presence in the Western US, purchased from Western Airlines, was being pulled down. Other carrier’s were also reducing west coast capacity as the market was being impacted by the growth of Southwest and question marks about how successful United would be following its ESOP agreement reached in 1994. And I am confident that I have missed other significant events during this period. What I do sense, is that we are about to embark on a similar period.

The period also marked the beginning of the end for US Airways as accidents, increased competition and the hangover of management decisions to “give away the store” in collective bargaining agreements to all employees from each of the companies it acquired during the late 1980’s were being fully realized. It was at this time, that the management team was changed significantly to see just how many tricks could be pulled out of the hat of an airline with a bloated cost structure and a revenue base under attack from all directions.

Last week there were two articles that caught my eye. The first story, by Dan Fitzpatrick of the Pittsburgh Post-Gazette click here defines the unfortunate position Doug Parker, US Airways’ CEO, finds himself in as his management decisions are being challenged by an uninformed Senator Arlen Specter. An enlightened David Grossman of the USA Today click here does a wonderful job of describing the declining economics of the Pittsburgh hub while at the same time capturing the consumer friendliness of the facility. The facts outlined by Mr. Grossman were intact before US Airways’ merger with America West and should have been a signal of things to come for each the employees, customers and city fathers in Pittsburgh along with the Pennsylvania congressional delegation.

So Senator Specter:

- When you say you might not help US Airways with political issues in Washington DC - that is truly unfortunate. I thought you represented all of Pennsylvania and not just Pittsburgh. I thought that the Senate was interested in the success of companies and industries, particularly those that are inextricably linked to the health of the US economy and assuring that US industry can be as competitive as it can be in the global economy.

- US Airways has reciprocated, and has shown the Pittsburgh area consideration in return for Congress’ support in building a new airport. Quite honestly, the reciprocation has come in spades as Pittsburgh has been among the most overserved cities in the US when considering the fact that only 20% of the airport’s traffic was local Pittsburgh traffic (pointed out in Mr. Grossman’s article). Simply stated, this is just bad economics for an airline hub and all Mr. Parker is doing is making a prudent management decision that should contribute to his company’s financial health.

- Finally, your decision to fly Southwest is certainly yours and I agree that they are a very good competitor in the markets they serve. Government policy in the US aviation market has led to significant market fragmentation and as a result the consumer has benefited from lower ticket prices. But I urge you to look in the mirror and ask yourself who is serving Allentown, Harrisburg, Wilkes Barre-Scranton and Erie. It sure is not the low cost carriers that have been the darlings of Capitol Hill. It is the network legacy carriers that invest in the right sized airplanes to serve those markets when the low cost sector tries to lure those travelers to the big markets they only serve.

So US Airways East Pilots:

- When you say you are unhappy with the Air Line Pilots Association over an arbitrator’s decision and you want to leave ALPA - for the historical success of non-national unions? - be careful for what you ask for. How do you really think things will be better for you and your followers under a new union with little clout?

- It is time to simply recognize that the merger deal with America West was the most important component of the Plan of Reorganization that permitted you and the remaining work force to emerge from bankruptcy #2. Your problems began a long time ago and are not the result of this agreement. Without it, my guess is the US Airways logo (whichever one it is) rests somewhere with Pan Am, Eastern, and TWA.

So Senator Specter, you are not entitled to service in this economic environment just because you have had it in the past; and US Airways’ employees are not entitled to employment. What is troubling to this writer is to have Senators not looking around their own state and recognizing that it is the network legacy carriers that are serving “your” cities of all sizes – not just the largest markets despite the difficult economics facing the industry. If you think that the low cost carriers are the answer to your service dilemmas, then keep making statements about not wanting to help a carrier that has invested, and generated, billions in “your” economy when they visit your office in Washington DC. If you think about it carefully, your logic is circular.

To the US Airways’ pilots, your circular logic is more like the virtuous circle of failure that began long ago. You finally have a CEO that is committed to the operation, committed to finding success comprised of a network with limited short term upside and committed to avoiding a walk down the plank that promises no return. But if the world begins to change along the lines suggested by the last two posts in this blog, then it will be nothing different than the parochial interests that stood in the way of commercial opportunities at the “Old US Airways”.

“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"

Transforming the Transatlantic Market Into a Transcon Market?

Saturdays can be such dull news days unless of course the story is about the 2007 wacky world of college football. But this story popped up on my radar screen as having intrigue click here. Intrigue, or a sign of things to come as the largest transatlantic carriers explore strategies to best exploit the new US – EU Open Skies deal? Clearly British Airways is (re)evaluating the best use of its capital as the current architecture of the transatlantic market is being (re)examined. This story comes on the heels of reports that BA is considering a major expansion of new services into the US market.

Another interesting aspect to consider is whether the best use of capital is to consolidate at home or with an international partner?

Self Help

No, I am not talking about the expiration of a “cooling off period” under the Railway Labor Act where a deal is not reached and either management or the union has the ability to engage in self help. Rather, I am captivated by the creative bargaining that is taking place between the United Auto Workers (UAW) and the “Big 3” US automakers. As I was flying home yesterday from Boston, I found myself reading an article in the Wall Street Journal twice and reflecting on the airline industry.

The article, How Less Pay, More Risk ‘Sells Itself,’ is a compelling read for anyone in the airline industry click here. The UAW – GM deal has three major tenets:
1) freezing base pay for 4 years
2) shifting a significant amount of the burden of retiree health care from GM to the union
3) creating a two-tier compensation structure in return for job protections of the current workforce.

According to the WSJ, the UAW leadership set out to manage the expectations of its members because it recognized “that the problems facing unionized U.S. auto makers were deep-seated and not the result of cyclical forces soon to change.” These comments were made to the current UAW leadership by Doug Fraser, the revered UAW leader who had to navigate his way through a deep concessionary period in the early 1980’s as the auto industry began feeling the pressures of new competitive forces. Sound familiar? The recognition of “structural change” in the industry and “far sighted solutions” became the mantra for the new UAW leadership as a result of the comments from Fraser.

The GM deal with the UAW was ratified yesterday, the same day the UAW reached a tentative agreement with Chrysler. The Chrysler deal is reported to have the similar tenets as the deal with GM, including the two-tier compensation structure. Now it is off to Ford where the “structural issues” are even worse than those at either GM or Chrysler.

So why are we talking about the auto industry? Because it has similar attributes to the airline industry. Just to name a few: 1) It is capital intensive; 2) It is labor intensive; 3) It is a mature industry; 4) It has major legacy cost issues; 5) It is a hyper competitive industry (although it can be argued it has more global competition versus the airline industry with domestic competition); 6) it is susceptible to the ebb and flow of the domestic and global economies and 7) The cycles of competitive forces impacting labor negotiations are eerily similar.

In this blog I have written about the need to get the mainline GROWING again. We have talked about pilot scope. What pilot scope limits have done is allowed the regional sector of the industry to grow at the expense of the mainline. We have talked about “structural changes” in the industry namely in passenger revenue click here which lies at the core of the industry’s need to maintain a vigilant focus on costs.

We have talked about labor arbitrage and the fact that as total compensation rates have converged, this round of negotiations places us at a crossroads. Or stated another way, an opportunity is present to discuss “far sighted solutions” like reconsidering a two-tier compensation structure as the UAW ultimately did. In fact it was this system that provided the fuel for the airline industry to grow and build lasting networks following deregulation.

This is real “structural change” an issue recognized by the leadership of the UAW, but yet to be acknowledged in public comments by airline labor leaders. So, absent this recognition of the structural change, it is hard to even think about discussing “far sighted solutions.” But the tired notion of entitlement and the restoration of pay levels in an environment where average fares are the equivalent of those earned in the 1990’s is not the answer. The answer is also not base pay rates but variable compensation that can address many of the cyclical issues that have plagued collective bargaining negotiations in the past.

The historic compensation levels in this industry were built largely around technological innovation, government actions and a growing economy. Suffice it to say that two of the three are not present today. And, if government action is needed to make the system operate more efficiently, then technology cannot operate at its stated maximum output.

Somewhere in the problems lie what I think is more effective “self help” – and that is the kind of “far sighted solutions” that incorporate risk for labor, management and shareholders – thereby vesting everyone in the ultimate success of the industry so that everyone is better off in the long term.

Musings and Meanderings Over the Past Week

Over the past week or so, it seems like the news about the airline industry is getting even more interesting. On Thursday, October 4, US Airways click here actually increased its order for new narrowbody equipment – yes, a net increase in new narrowbody aircraft. The next day, Glenn Tilton, UAL CEO, speaking in a taped message to employees, actually talked openly about increasing non-aircraft capital expenditures click here – yes, an increase in the airline business itself. And for United, this represents a significant increase.

Then over the weekend, Dave Koenig of the Associated Press wrote a story on American’s labor situation click here predicting a tough road there as the company engages in negotiations with its pilots and other work groups. Today the Wall Street Journal carried one story by by Melanie Trottman who issued a warning on American’s stock price click here, and another quoting Tilton on the divestiture of assets and consolidation – areas where he is often the lone voice in the industry click here.

So in a span of a few days the industry chatter veered from a new round of investments on one front to speculation about divestitures and consolidation on another. Together, the news coverage makes clear that there is no clear path to success for the major carriers, not with – no compelling investment thesis and the on again, off again desire of some airlines to “go it alone.” There is ample reason for all the carriers to fear the next round of labor negotiations with unions itching for a fight. Add to that fuel nearing $80 per barrel and heading higher, little fat left on the bones of the operation and an infrastructure that is certain to stand in the way of efficiency gains. And with a revenue environment totally influenced by a hyper-competitive industry, pricing decisions are left almost entirely to market forces, giving airline management teams little room to maneuver.

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.

All Eyes on Texas

As the airline industry turns away from the round of labor restructuring that began in 2002, it is now at a crossroads. Pilot negotiations now underway, or about to begin, at each of the Texas carriers underscore how difficult this next round will be. And depending on which side of the table you sit, these negotiations are blessed and cursed in many ways.

In each case, fragility rules the day, whether by the condition of airline balance sheets, relationships, expectations, competition, over promising, under delivering. What is clear at the outset is that U.S. airlines need to seriously reexamine their communications to employees and shareholders if they are going to successfully negotiate this treacherous path.

I rank upcoming negotiations at the Texas-based airlines from easiest (nothing will be easy) to most difficult (requiring a new prescription in the rose colored glasses) in this order:

1) Continental, in that the company and its pilots negotiated a protocol agreement that will help preserve effective communications and a productive process.

2) American, in that, by virtually any metric, its pilots are already at the top of industry in terms of total compensation but have the ability to create currency through improved productivity that might be used to subsidize other parts of a new agreement; and

3) Southwest, in that the company and its pilots already lead the industry in productivity click here and as a result do not have much “give” on that front;; have the highest average wages click here; and face slower growth. Man, I would not want to be in Gary Kelly’s shoes on this one.

A case can be made that this upcoming round of negotiations with airline unions may be the watershed event since deregulation. It could go far in determining tomorrow’s airline winners, losers – and mere survivors. Remember Eastern and Pan Am. Every 15 years or so something happens that changes the game.

So why are all eyes on Texas?

Continental and the Air Line Pilots Association’s negotiating protocol paves the way for them to begin bargaining early in an attempt to complete negotiations by the scheduled amendable date of December 31, 2008. American’s contract with the Allied Pilots Association is amendable in April of 2008. And Southwest and its pilots are currently working under an extended agreement that is currently amendable

In my view, Continental has one of the best – if not the best -- management teams of all the network legacy carriers. They were first in signaling the end of the small regional jet euphoria – or, as the former Chairman of the Federal Reserve Bank, would call it “exuberance.” Continental has leveraged its Newark hub to grow transatlantic flying (a model others are trying to emulate but with population bases one-sixth the size of the New York CMSA – but I digress); and they have continued an open communication with all of their employee groups that evolved after the airline emerged from bankruptcy hell in the mid 90s and has clearly led to a good internal operating environment.

In Continental’s case, neither the management side nor the labor side negotiate agreements that prohibit the goose from laying “golden” eggs for all stakeholders. They, too, negotiated concessionary agreements outside of filing for court assistance but they did not have to go near as deep given the competitive pay rates and productive work rules in the collective bargaining agreement.

Between the two Texas network legacy carriers (NLCs as we refer to them at MIT), American faces the toughest negotiations. Its cockpit crew members currently have the highest total compensation per pilot in the sector. More importantly, when total compensation is calculated (wages, pension and benefits and personnel expenses as dictated in the contract) AA has the highest pilot cost per block hour of any carrier in the industry click here.

Given this unenviable cost disadvantage, is it any wonder why American did not immediately agree to the whopping 30.5% pay increase and other sundry contract enhancements demanded by the APA’s prior administration – and now we wait on a new proposal that is speculated to be even more? In fact, that number is uncomfortably close to the number sought by then-Chairman of the United Pilot MEC, Rick Dubinsky during the dreaded summer of 2000, which all but killed the UAL “golden goose” and forced the carrier into bankruptcy. It was said to me at the time that the tentative agreement made nearly two-thirds of United's international flying unprofitable. Now, as a result of the extended trip through bankruptcy, UAL's pilots are among the lowest paid versus the highest paid in the industry.

American’s pilots today enjoy a cost per block hour advantage against no major competitor in the industry click here whereas Continental enjoys a cost per block hour advantage against four of its six NLC competitors.

But it is American’s cross-town competitor, that faces the toughest labor situation of all, at least to this observer. Yes, I mean Southwest -- the envy of the industry in terms of pilot/employee productivity. And therein lies the rub. The magic in collective bargaining – and historically for Southwest - is to find a way to trade productivity for higher wages. When you have a pilot group that flies an average of 65 hard hours per month against a mandated industry maximum of 1000 hours per year, there is not much room to move. This, on top of the fact that Southwest pilots are already the highest compensated in terms of average salary per pilot along with an arguably rich benefit package – begs the question: where do they go from here? As growth slows, it will be increasingly difficult to move the “productivity needle” through operational changes click here. And don’t look now, but Southwest pilots fly the least number of available seat miles per dollar of total compensation than even the network legacy carriers – output per labor dollar has declined more than 25% since 1995 click here.

So as we watch the airline labor negotiating world begin the contract kabuki dance, all eyes should be on Texas. Like it or not, the concept of pattern bargaining still is alive and well in the industry and it is just as much of who’s on first (industry leading) as it is who is going to go first – and set the pattern?

Swelblog.com Taxiing Into Position

Welcome to Swelblog.com . For some of you, the name Swelbar is recognized. For others it will be new. Following nearly 30 years of airline industry experience, mostly in the consulting world, I hope to use this space to focus on the most talked-about issues in the airline business: the people running the airlines, the labor unions, customer service, competition and finances in one of the most interesting industries in the world.

Of course we may deviate some to talk about golf, college basketball or wine and other vitally important things, assuming there are any.

I did not start this blog to win friends or influence anyone. I’m a data guy, and I’ve been studying the industry long enough to come up with some strong opinions . . . many of which aren’t popular in either boardrooms or union halls. My approach is analytical because, in my view, the numbers don’t lie.

I want to start with scope, which has powerful implications for airline fleet use, labor and the bottom line. I spent a lot of time studying labor contract “scope clauses” in a prior incarnation, looking specifically at the issue of scope clause constraints on market development in 1999. Some agreed with the analysis, others did not. Some were dignified in their responses to the analysis, others were not. I expect much of the same here and it is my hope that the site can in time lead to a cogent, coherent and congenial discussion on the many issues and opinions that are sure to rear their head.

I rejoined the scope debate in a recent issue of Aviation Daily. In August, a well known and respected regional airline industry analyst raised issues with pilot scope clauses as an impediment still plaguing certain carriers. That piece was followed by a response from a current leader of a pilot labor organization and then followed by a response from the current President of the Regional Airline Association. After reading it all, I could not quiet my fingers.

In my posting you will find many issues that I have addressed publicly over the years, not only scope, but also the regional-mainline carrier relationship in general. I have taken the liberty below of sharing the opening and closing paragraphs of each submissions that lead to my response which I have published in full. Much more to come……..

Swelbar

Scope Disparities Growing on 8/2/07

By Doug Abbey, Partner in Washington-based aviation market research and consulting firm The Velocity Group

First Paragraph:

As Continental commences formal negotiations with its pilots on a new multi-year contract, it is ironic to note that the carrier now has the most restrictive scope clause language in the industry. By having successfully avoided bankruptcy, Continental (along with American) has been rewarded commensurately; both carriers now find themselves widely out of competitive touch with their post-reorganization peers.

Closing Paragraph:

We therefore encourage Continental and American to consider a new direction not encumbered by old ways of thinking or doing business. Scope is an anachronism — both in and out of bankruptcy — that does far more harm than good.

Opinions expressed are not those of Aviation Daily or McGraw-Hill. Bylined submissions should be sent via e-mail to aw_departures@aviationnow.com.

Scope: Beneficial To Pilots And Airline Managers on 8/17/07

First Paragraph:

In the “Departures” section of the Aug. 2 edition of The DAILY, airline industry consultant Doug Abbey expresses the view that the scope clauses contained in some pilot contracts do more harm than good for major carriers’ key constituencies. A brief examination of the facts illustrates that he could not be more mistaken.

Closing Paragraph:

It’s a tired refrain for consultants like Mr. Abbey to blame labor contracts for corporate shortcomings. I submit that it’s management’s responsibility — the executives who lavish themselves with hundreds of millions in bonuses — to fix the factory through vision and leadership.

Capt. Lloyd Hill is president of the Allied Pilots Association, collective bargaining agent for the 12,000 pilots of American Airlines.

Stop The RJ-Bashing on 8/23/07

First Paragraph:

Blaming this summer’s air traffic hassles on regional jets brings to mind Yogi Berra’s reason why he didn’t want to eat at a popular restaurant: “No one goes there anymore — it’s too crowded.”

Closing Paragraphs:

But don’t blame RJs. Or the airlines — which lose big with flight delays. Or the FAA’s controllers, since not even Tiger Woods could hit 350-yard drives playing with persimmon head clubs. Instead, can’t we just all get along, stop playing “blame ball” and work together to fix the system — even if it’s one delay at a time?

Then maybe we can make one of Yogi Berra’s lesser known quotes come true: “It’s not too far, it just seems like it is.”

Roger Cohen is president of the Regional Airline Association.

It’s More About Labor And Economics, And Less About Scope

I have one word for the discussion that began in Departures on Aug. 2 and continued throughout the month regarding the issue of scope clauses — hypocritical.

While scope clause limits in mainline pilot contracts were a significant issue in the late 1990s, they can hardly be considered a similar impediment at any carrier today. You can’t claim that scope defines work for mainline pilots any more than you can say that small narrowbody jets have a place only in the regional airline industry.

While I do not agree with Capt. Hill’s economic analysis of the use of 35- to 90-seat jets, I believe he has identified a key issue facing airline labor unions in the next round of negotiations. The arbitrage in labor rates between the mainline and regional sectors of the industry fueled the growth of the regional industry over the past 10 years. Now, as rates have converged across nearly all sectors of the industry, one can make the case that the economics of the relationships between mainline carriers and their regional affiliates may not be the best operating model for tomorrow.

Mr. Abbey cites American and Continental as the airlines with the most restrictive pilot scope clauses. In fact, each carrier has been judicious in its use of its regional fleets and has outperformed the industry during a tumultuous time. Continental made the first declaration that its 50-seat growth would come to an end sooner than expected, and American has been the most vocal of the mainline carriers about the need to keep constraints on domestic capacity.

There are many issues that should be of equal or greater importance to the regional industry than scope clauses — particularly building an airport and airway infrastructure that meets America’s 21st century needs, as suggested by Mr. Cohen. The debate surrounding the reauthorization bill seems to be lacking an important push from labor, as both mainline and regional pilots have a lot at stake in this debate. The current situation does not bode well for growth in either sector, and growth is a critical ingredient for stakeholder success.

We are at a crossroads as the next round of mainline pilot negotiations begins: 1) Will mainline pilots continue to relax their scope and watch as significantly more small narrowbody flying is done by another sector of the industry that could potentially rekindle the discussion of labor arbitrage? or 2) Will mainline pilots seriously reflect and understand that the facilitation of growth at the mainline is their best course of action in terms of job protection — and maybe even job creation?

One necessary outcome in this next round of negotiations is a recognition that structural impediments to success exist within each sector of the industry. Cost maintenance/reduction remains paramount in this less-than-robust revenue environment. We cannot forget that vigilant cost controls must remain the focus if we are ever to find an enduring operating model that creates capital for all stakeholders, rather than recycling capital among them.

Today, network legacy carriers operate nearly 700 fewer aircraft with fewer than 150 seats than in 2000. Just because Embraer- and Bombardier- manufactured equipment resides with the regional sector of the industry today does not mean that the sector is entitled to all aircraft made by these two companies.

So, in addition to getting on with the business of fixing the infrastructure, let’s get busy and negotiate an economic framework that can get the mainline sector of the industry growing again. Unless mainline pilots find a new way to think about domestic flying in this next round of negotiations, aircraft manufactured by Embraer and Bombardier will remain the entitlement of the regional carriers.

This topic, and the fact that it has again reared its head, serves only to remind us that the industry’s restructuring is far from complete.

William Swelbar is a Research Engineer at MIT’s InternationalCenter for Air Transportation.
Labels: Air Line Pilots Association, airline labor, Allied Pilots Association, American Airlines, Aviation Daily, Continental Airlines, pilot scope clauses, Regional Airline Association, William Swelbar draft by Swelbar 8:32:00 AM Delete

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