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May282009

« Aboard UA #2: Reading Captain Wallach’s Latest Half Truths »

I have a long institutional history at United, primarily working on behalf of the Association of Flight Attendants. In this role, I worked with the flight attendants through every concessionary period, the ESOP attempts, and Phase One of bankruptcy -- a long association that ended when I spoke my mind in a media interview on the vulnerability of defined benefit pension plans and, in doing so, angered some in the union leadership with my candor. .

All by way of saying that there is very little in United’s recent history, at least between 1985 and 2003, that I did not witness up front and personal.

 

The Recent Spat

The latest static at UAL involves a war of words surrounding United, Continental, Air Canada and Lufthansa in their application for anti-trust immunity to operate an international alliance. This debate is creating much more noise in Chicago than it is in either Washington or Brussels and that’s for one reason: the noise comes from a desperate union leader who waited ten months to voice concern about any potential impact on United workers.

This is the very same union leader who sits on United’s Board of Directors. His administration was subject to a federal court injunction to end what Judge Joan H. Lefkow ruled was a job action in clear violation of federal law. This, in fact, is a union leader who fancies himself as the second coming of ALPA boss Rick Dubinsky – the legendary golden goose hunter that worked more than 15 years to create many of the problems that still plague United. But, Mr. Wallach, you are no Rick Dubinisky.

Sometime after Wallach’s anti-trust immunity concerns were made known via the press, United COO John Tague, sent a letter to employees explaining United’s successful alliances with ten airlines over the course of the past ten years – none of which had led to problems or complaints with the carrier’s unions. A day later, Wallach responded with an open letter to Tague and copied all United employees – a tirade he then shared with the media as demonstrated by this submission to Forbes.com.

 

Wallach’s Letter

Wallach opens citing what he calls blatant mischaracterizations and outright falsehoods contained in Tague’s letter. But after reading Wallach’s letter, I am of the mind that it is he who is guilty of blatant mischaracterizations and outright falsehoods.

In building his case, Wallach attempts to blame United’s role in the STAR Alliance for the airline’s trouble today . . . a dubious case he makes by comparing the size of United in 1997 when it first joined STAR to the carrier’s size today. That argument conveniently fails to note that 1997 marked the middle of the greatest up cycle in US airline history, and then neglects to account for all the industry trouble that has transpired since. But that’s what the industry has come to expect from unions that spend more time and capital attacking companies through half truths and blatant misinterpretations rather than working to address the economic and competitive realities at the root of the industry’s struggles.

A more honest analysis would take into account the full breadth of events that have had a profound impact on the airline industry since 1997, including but not limited to SARS

  1. SARS
  2. The growth of the US low cost carriers
  3. The rapid deflation of the IPO bubble
  4. The puncture of the stock market bubble
  5. The advent of internet distribution and pricing (transparency that contributes to lower ticket prices
  6. The Summer of 2000 (where actions by UA pilots to “work to rule” impacted service)
  7. Ratification of a new pilot contract with rates far higher than the rest of the industry
  8. September 11, 2001
  9. US Airways bankruptcy filing that led to significant reductions in labor rates
  10. United bankruptcy filing
  11. Oil prices begin increase to historic levels; crack spreads depart from historic norms
  12. Delta and Northwest bankruptcy filings
  13. Oil reaches $147 per barrel, driving run up of other commodity prices
  14. New rash of airline industry oil hedges in anticipation of further price spikes,
  15. Followed by plummeting prices that put many hedge contracts underwater
  16. Credit crisis takes hold
  17. Consumer confidence falls
  18. Economy enters recession in late 2007
  19. Recession deepens to become worst on record since 1930’s with global reach into Asia and Europe
  20. Pandemic flu outbreak with hardest initial impact in Mexico.
  21. United pilots in negotiations over new contract for first time since bankruptcy agreement.

The real lesson is in the extent to which the entire industry has changed over the past 12 years with a permanent impact on the legacy carriers. Wallach weakens his own case by suggesting that alliances have hurt US airline employment without identifying the many factors in the equation.

In fact, I would argue that without the alliance partners United works with today, the airline would be even smaller.

Has the management at United made some mistakes along the way? Of course. The current UAL leadership has no compunction about forgetting the past other than to recognize that the carrier’s past was largely a dysfunctional disaster. But that recognition led to many of the changes to United’s structure and operations in place today. As CEO Glenn Tilton often makes the case, the industry has to earn its cost of capital – something the global industry has rarely achieved over its long history.

 

Corporate Campaigns and Organized Pilot Labor

The airline unions – particularly those now in contract negotiations, have not shied away from full-barrel attacks on the carriers as one method of soliciting support during labor talks. Ginning up opposition to airline alliances seems to have become the latest tactic in this long-running campaign. But it should not be lost on any industry watcher that the loudest rhetoric comes from the union halls of the pilots at United and American. Ironically, the least noise is coming from the most successful US legacy carriers – Continental and Delta. I’ll leave it to the readers to weigh in as to whether there’s a connection.

But outside the rhetoric there’s a pretty clear case for the benefits of these alliances, particularly for an industry that needs desperately to hold on to its customer base. Maintaining and expanding the current alliance structure is one sure way to do so.

 

Concluding Thoughts

It is important to filter the daily missives fired from the labor bunker with the understanding that many in the industry are understandably frustrated by the changes and challenges in the airline industry. At some level, the best labor leaders recognize that the industry will not return to the unsustainable bargaining patterns and demands of yesteryear. Captain Wallach should take a very careful look at his union’s history at United and role in contributing to the precarious position the airline now finds itself in.  In other words, make yourself relevant in shaping United's tomorrow.

That history lesson should begin with the pilot-led majority purchase of the company in 1994, a process that began following a strike in 1985. With that purchase, the unions had unprecedented power in the governance structure and influence so strong it included hiring and firing power. But as the ESOP sunset, there was no transformation – no new culture or structure that prepared the airline to weather the trials to come. Instead, the transformation has come as the result of seismic economic factors that are redrawing the global airline industry map. And that map includes alliances – a necessary partnership in an industry in which US airlines aren’t permitted to act like other global businesses and merge.

There is not one legacy carrier in the US today that could stand alone and compete on a global scale. To stand in the way of market evolution is to stand on a dangerous path.

Reader Comments (8)

I couldn't agree with you more regarding the need for labor leaders who are willing to change and adapt to the current climate as opposed to labor leaders who are willing to bankrupt their airline with unsustainable demands. Unfortunately, the labor leaders at United are drinking the same Kool-Aid as those at American Airlines. While the APA leadership is still able to rabble-rouse with the best of them, it's my experience that the pilots at AA are now, more than ever before, willing to consider management's position in coming up with a reasonable and sustainable contract.

05.28.2009 | Unregistered CommenterSky Guy

Skyguy

I hope you are right. A failed campaign at AA that the membership must be realizing.

05.28.2009 | Unregistered Commenterswelbar

This is a well-articulated commentary. The APA maintains any alliance will be bad for the pilots without putting forth one shred of evidence that it will be detrimental. Along with that buffoon Oberstar, they are crying foul when it is pretty clear that these alliances are good for business.

06.2.2009 | Unregistered Commenterwhenry

I'm honestly getting sick of this "debate", if you can call it that when the facts clearly point so heavily to one side. The pilots (ALPA, APA, you name it) are dead wrong on this issue. All one needs is to look at the continued rapid growth in international markets by carriers engaged in ATI agreements, like the UA/LH deal. Hell, I was on a Delta flight last week and they were bragging that they fly to 36 cities in Europe.

Does that sound like less jobs to any of you?

06.3.2009 | Unregistered Commentermalcontent

Dear Mr. OverpaidAirlineConsultantGuy:

Tell the truth about numer 6 in your list Summer 2000!

6. Causing the Summer of 2000 by negotiating the USAir merger deal behind the pilots backs while stalling on their contract talks which they were expecting to be a "seamless" agreement.

06.10.2009 | Unregistered CommenterBudLight Ad exec

Dear Mr. OverpaidAirlineConsultantGuy:

Please also add to your list the following:

22. Avolar - Multi million $ business jet subsidiary abortion
23 Failed US Air merger (two maybe three times)
24 Failed Delta merger
25 Failed Continental merger
26. DC-10 cargo operation doomed from the start
27. Shuttle by United
28. Ted
29. Billion lost on fuel hedging
30 Jetways which drive themselves and eventually crush planes
31. Providing seed financing to your own competition - Independence Air
32. India Call centers "Hello Dell Support..oops United Airlines please hold"
33. Bankruptcy - 3 years and 100 million in legal fees a new record
34. $43 million dollar CEO
36. Paying Airbus to AVOID aircraft deliveries
37. $ billions in stock buybacks near the peak stock price in the late 1990s.
38. $750M ($250M one-time dividend, $500M in early debt repayment) in cash squandered in 2007/8.
39. Parking of an entire fleet (Boeing 727s on 11/1/01) on one day just ahead of the holiday travel season requiring the rebooking of 2.5M reservations and upsetting countless customers while still having to pay for everything but the gas.
40. ESOP failure due to management stonewalling / empire building / fortressing and use of power-based negotiation.
41. Failing to overhaul archaic IT infrastructure even though WIndows 3.1 has proven to be an effective anti-virus strategy.

06.10.2009 | Unregistered CommenterBudLight Ad exec

Other than 6 & 7, it would seem the entire industry had to contend with all the issues on the list, yet domestic legacy carriers have spent the last decade shrinking while international alliance partners grow. Your assertion that United would be even smaller without it's alliances is never supported in the blog. There is a lot of blather about industry transformation, seismic changes, and labor's mischaracterizations, but nothing about why alliances are good. If anything, the fact that alliance partners have grown while United has shrunk supports the counter to your statement that United would be smaller without alliances. Logic suggests that growth in the partnership happened at the expense of United for the benefit of it's partners. Was the point of your blog that alliances are good, or that you can't trust anything that labor says? You never support the former, and you certainly use your own mischaracterizations in your own rant. This appears to be today's missive from the anti-labor bunker- few facts poorly supported with illogical conclusions. Typical Make Believe Analysis.

06.14.2009 | Unregistered CommenterRobD

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01.22.2010 | Unregistered CommenterCiar

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