Archive Widget
Monday
Nov142011

« FORT WORTH, Texas: The Longer It Goes, The Worse It Will Get »

Another Sunday in the Washington D.C. area means being forced to watch the Redskins if you want to watch some football.  I wanted to watch some football, but catching up on my reading was much more interesting.  As is typically the case, my starting point is Terry Maxon's Airline Biz Blog.  Three of Maxon’s last four posts pertain to the negotiations between American Airlines and the Allied Pilots Association.

Each of the parties issued a statement regarding the decision not to negotiate over the past weekend with both pointing fingers at each other.  The understanding, at least for those of us on the outside looking in, is the company is seeking to reach an agreement in principle with pilots before this week’s regularly scheduled AMR Board of Director’s Meeting. 

I have participated in numerous troubled negotiations between management and labor, and taking time off because someone is tired prior to a deadline just does not make any sense.   Maybe the APA doesn’t think it is negotiating against a deadline.  I am also someone who knows a little bit about Board of Directors meetings and fiduciary duty, so if I was the APA, I would be taking Wednesday’s meeting seriously.

After all of the news, reviews and Wall Street’s muse over American’s financial blues I am guessing that AMR’s Board of Directors is feeling under pressure.  And Boards under investor pressure often feel the need to act.  As I wrote in American: Limited Options, Pain Likely, something at the Fort Worth, Texas carrier likely needs to give if no labor deals are reached – particularly a pilot deal that could serve as a template for other work group agreements.  The potential scenarios are, of course, bankruptcy, getting significantly smaller outside of bankruptcy or getting smaller inside of court-assisted restructuring.

Some of the messages I received on that piece suggested bankruptcy is an acceptable solution for American’s situation, particularly when dealing with the current management.  I think all of American’s union groups, and especially the pilots, should be very careful what they wish for.  Never forget the truism that it is probably best to deal with the devil you know.

The fact is employees at American still have their benefits, including pensions, because CEO Gerard Arpey chose not to use bankruptcy proceedings to cut costs the way everyone else in the industry did. Whether the unions like or dislike Arpey, though, is moot. If American files Chapter 11, creditors and the courts probably won’t let Arpey guide the airline during its time in bankruptcy.  They’ll want a restructuring guy, possibly in the mold of United’s Glenn Tilton, who turned his back on company history and acted in the best interests of financial capital, not employees to reposition the enterprise. That caused some serious labor/management relationship wounds.

American can survive labor discord as it has since Robert Crandall was in charge. I’m not as sure American comes out of bankruptcy unscathed – at least, not the American Airlines that we’ve known for the last 85 years. A much different airline would likely emerge, if at all, so emotionally-charged employees might rue their actions today.

Let’s review a few facts about bankruptcy and North American airlines.  Since 1991 there have been 14 airline bankruptcies and only one carrier remains a stand-alone airline today – financially troubled Air Canada.  Eight of the airlines have been liquidated or ceased operations:  Pan Am, TWA, Aloha, ATA, Skybus, EOS, Arrow and Mexicana (Eastern filed for bankruptcy in March of 1989 and ceased flying in January of 1991).  The remaining five airlines have been merged:  US Airways, United, Delta, Northwest and Frontier.

While the merged companies are stronger, they lost most – if not all - of their individual identity.  A merger partner with American in its current financial and labor condition is unlikely.  Private equity would only be interested in American after a deep cleansing of labor contracts in bankruptcy.  After all, even private equity wants clean fingernails when the entity emerges from court protection.

Union groups need to think long and hard about what that means for them. For American’s flight attendants and ground workers, a Chapter 11 filing would be the end of the world as they know it.

American’s flight attendants fly the least of any cabin crew in the U.S. airline industry. They currently pay less for medical coverage than their peers and still have pensions and retiree medical that are but faded memories for flight attendants at other carriers.

There are roughly 25,000 TWU members employed at American – mechanics, baggage handlers, cabin cleaners. A bankrupt American would dramatically slash that number, outsourcing a majority of jobs as much of the industry already does. Pensions, retiree medical – all gone. The reverberations would shake big cities like Miami and communities like Tulsa where the American maintenance base is the largest private corporate taxpayer.

Pilots like to think they’re different, more crucial to the operation, more prepared to handle anything that arises. That’s their job, and most are very, very good at what they do. The members at the Allied Pilots Association, though, should use the same reasoning and spend some time rethinking their position.

As MIT’s Airline Data Project shows, on average, American’s pilots are already making about two-percent more than their peers. The thing that should make pilots uneasy, though, is when you look at their benefits, which are worth about 40+ percent more than what pilots at other network carriers make. There is not a bankruptcy judge in the country who won’t immediately allow the company to toss all of that out the window.  It is not the wages per se; it is the benefit package and relatively poor productivity that makes the American pilot agreement uneconomic when compared to peer carriers. 

I’m not privy to what’s being talked about at the table between pilots and American, but the company is posting all of its proposals on its public web site, AANegotiations.com. From what I’ve seen, American’s current offers don’t dramatically change pilot benefits… they would still be significantly better than other carriers. What hasn’t been posted is any item on scope, and I’m sure the pilots would vehemently oppose any changes, no matter how necessary or warranted they might be.

If anyone on the APA Board foolishly thinks bankruptcy wouldn’t be so bad, they should review those facts I mentioned earlier. Besides the loss of pensions and work rules, a post-bankruptcy American would either be much smaller – meaning fewer pilots needed-- or prey to other airlines circling its carcass. If it’s plucked as a weak-sister acquisition, those APA pilots would most likely lose their seniority taking a backseat – or right seat – to their new colleagues.  And that assumes that acquiring airlines would even want former American employees – particularly in seniority order.

I could absolutely envision a U.S. airline industry without American.  Think of the value of the Heathrow slots, the LaGuardia slots, the JFK slots, the Washington National slots, the related real estate at each of the former, a ready-made Deep South America operation in Miami and an opportunity for network and low-cost carriers alike to finally get necessary real estate at Chicago O’Hare to mount a competitive operation.  American’s parts could be worth more than its whole to creditors and other airlines.

From a Board of Directors perspective, there are some basic facts to contend with. You cannot restructure the price of jet fuel.  Most, if not all, of American’s assets are pledged as collateral so little might be achieved in the airplane area other than rejecting certain leases on the oldest and most inefficient narrowbody fleet in the industry.  The company faces significant loan repayments and pension contributions.  In other words, AMR has every reason to file.

The pilots and the APA can belay that. They can be the leaders they think they are; not just for themselves, but for every other employee at American. Negotiating a deal now sends a signal to Wall Street, creditors and even consumers that things really can change. It also lessens the pressure on AMR’s Board of Directors to take a more active role in the company’s day-to-day dealings. Without it, the only pragmatic course for the Board would be to seriously examine its next steps. It can’t wait on the promise of a labor deal, especially if the APA mistakenly believes it has leverage and wants to try and use it.  Even if an agreement were reached today, it will be sometime in the first quarter of 2012 before the voting on a new agreement is concluded - that is why time is not on the side of the pilots and why AMR's Board is likely to grow restless if something does not happen soon.

Should a Chapter 11 restructuring end in Chapter 7 for some reason (a probability greater than 0 given that the company may be forced to cede control of its right to file a plan of reorganization), one can envision U.S. air transport system without American Airlines.  History suggests that the capacity void left will be filled in short order by the remaining players.  If a profitable hub opportunity exists for a remaining airline, it will be filled.  Will there need to be a hub at DFW?  No.  But there is plenty of local traffic to fill new service from existing airlines as well as Southwest at Love Field.  American’s aircraft order will likely be absorbed by the remaining carriers over the coming years to help fill the void left.

I just wrote “An Unpleasant Situation That Continually Repeats” last week that focused on unions thinking they know what is best for the company at both Qantas and Air Canada.  Maybe American was the sequel I was thinking about when I wrote that piece.  If that sequel includes bankruptcy, I know the story ends badly for the working men and women at American.  The rest of the industry will applaud the demise.

Reader Comments (7)

" The rest of the industry will applaud their demise ". Are you kidding me Mr. Swelbar ? As a fellow airline employee I most certainly would NOT applaud the demise of AA. I have sympathy and respect for the employees of American and I wish them the best even though they are a competitor. Unemployment, especially after several decades at a flagship company like American, Qantas, Pan Am, etc is one of the most emotionally difficult things on can face in life ranking near the death of a loved one in terms of stress. Any airline employee who applauds the demise of another airline should be ashamed of himself. We as airline workers are not in competition with one another but rather with those who control " financial capital " as Mr Swelbar likes to call it. The only people who would applause the demise of American Airlines would be the Gordon Gecko's of the world and their cheerleaders in the sterile world of airline analysts

11.14.2011 | Unregistered CommenterMr Id

The usual Swellbar company hack drivel. Blame it on labor blah, blah, blah...........

I'm assuming the Good Professor teaches his esteemed MIT MBA students that locking yourself in your office with a purple paper mache dinosaur as your trusted consultant and thinking oneself is a reincarnation of the reclusive Howard Hughes is sound business practice?

Next week tee me up a piece of how Gerard Arpey tanked Bob Crandall's airline in less then eight years. Here I'll help you get started seeing as how you have writers block every time this subject comes up, "Just because you have a MBA it doesn't make you a leader."

11.16.2011 | Unregistered CommenterChitragupta

C

I would expect nothing less from you as you have had your head stuck in a sock drawer for as long as you have commented here. You talk about how Arpey destroyed Crandall's airline? You are kidding right? Ever think that Bob Crandall might have built an airline too big to compete the past 8 years. I did not think you would have thought of that as it would require you to study the underlying economics of the industry.

Honestly C, I have alot of friends that are line pilots. I will feel bad for them just as I did for the line pilots at United. What I do not feel sorry for is people allowing themselves to be led by so called visionary union leadership (Hill, Prater, USAPA etc and it might even include the desperate leadership at UA/CO). And that would include you.

You have told me many times that the company gets the union it deserves. Sadly, pilots with their heads in a sock drawer get the union leadership they deserve. Should AA choose to file, I am sure you will enjoy court because that will be something else you can blame without accepting some responsibility for the company's predicament. Maybe it is time to put the black sock with a blue sock. It might resemble what might be coming.

Bet you are happy that Lloyd Hill wasted the last three years. But I digress.

As for hiding and admiring Howard Hughes, maybe someday you will have the guts to sign your actual name to the drivel you post here.

Godspeed.

11.18.2011 | Unregistered Commenterswelbar

A few months ago I started reading this blog hoping to learn more about the dysfunctional business I’ve gotten myself into. I’ve learned nothing. According to Swelbar the only problems facing the airlines are unproductive and costly labor. If they could only break the unions hold the airlines would be remarkably successful.

Hogwash.

I’ve been at a major airline for 14 yrs. This year I’ll make $90,000. IS THAT TOO MUCH? As for Swelbar’s incessant whining about productivity here’s one I’d like to hear him comment on. Day one of my next trip has my flying DCA to ORD, sit 3:59 and fly one hour to DSM. The union’s got nothing to do with that. This is a schedule devised by our stellar management. Speaking of, let’s start a discussion about the incompetent execs that mill around the airline business.

In 1998 Darryl Jenkins (Aviation Institute) published a paper “An examination of why new (airline) entrants fail”. His conclusion was that it was due to the fact that the same drooling idiots were forever wandering around the airline business. Start an airline, run it into the ground, repeat.

We in the non failed airline world suffer from a similar malady. Think about it, the smart, new MBA wants to get into a business with fat, sustainable margins so she can get her payoff. She’s not interested in the zero margin airline world. The smart ones go the software, pharmaceuticals, etc. We get what’s left. I know a guy who was unemployed for years. He’s never been successful and I don’t think he cares. Guess who hired him as a ramp manager? My airline.

I don't hear SWA yapping about it's employees wages. Smart people running a smart airline.

How about just one short blog concerning this “elephant in the room” issue?

11.20.2011 | Unregistered CommenterEnough

Oh I love it, comparing Arpey vs. Crandall and who is the better of the two CEOs. Reminds me of the Heaven's Gate cult group sitting around debating who was the better Starship Captain on the TV show Star Trek, Captain James T. Kirk or Captain Jean-Luc Picard.

Sorry but Crandall made money vs. Arpey who has lost billions.

American has been run by finance types, with their financial goals, instead of having business goals, which in turn would deliver financial objectives. American is missing the middle piece. Every manager at AMR has a spreadsheet to hid behind to prove your innovative breakout idea wrong. The hallowed spreadsheet says it will fail.

Did Crandall know it all, of course not but at least he had vision. We would say, "Crandall is a SOB but at least he is our SOB." He at least had the courtesy to show you the knife before he lunged at your throat. He was respected and feared by the competition in an industry he reveled in.

You can't lead troops by being a recluse with some secret plan. Employees want to work for a winner and who can beat the other guy at their own game. What has Arpey done since 2003? Nothing. No real initiatives. No real marketing thrusts to zap competitors. Nothing. That’s not leadership. Also who is this guy named Horton? President of AMR, right?

Enough,

Don't come here expecting to hear Swellbar give you anywhere close to a balanced report on how both management and labor share the demise of the U.S. airline industry. As you can see from the link and the quote below Swellbar even admits to being bias. Your time is better spent organizing you sock drawer.

http://www.swelblog.com/articles/musing-on-cars-planes-and-readers.html

"I am not writing a news blog. If you want to read a story that represents balance through general reporting then pick up a newspaper without an op-ed section. This blog is opinion - based on a long time of witnessing events and studying underlying data."

11.22.2011 | Unregistered CommenterChitragupta

You two (Chitty and Enough) represent all that is wrong with airline unions today. All you have are complaints with no ideas. At least Bill backs up his rhetoric with facts.

You two should start your own airline and see how long it lasts. But I doubt either one of you have the balls to put your money where your mouths are.

11.22.2011 | Unregistered CommenterRichard R.

At least Bill backs up his rhetoric with facts.

Facts: http://findarticles.com/p/articles/mi_m0ZCK/is_27_8/ai_50125409/

Here's an idea: how's about extracting revenue from the customers instead of the employees.

11.24.2011 | Unregistered CommenterEnough

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
Post:
 
Some HTML allowed: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong>