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Jun292011

« If Greece Is The G in PI(I)GS, Then U.S. Unions Are The P, Government Is Part Of The S’s And The GDS Are One of the I’s »

In case you didn’t know, “pigs” is now spelled PIIGS.  No, not the source of bacon at the breakfast table; rather the troubled nations in Europe that threaten to undermine the Euro – and the heath of the world’s economic recovery -  as a result of their respective weak economies; Portugal, Ireland, Italy, Greece and Spain – PIIGS.

I awoke this morning thinking about the last two cover articles of The Economist:  “The World Economy:  Sticky Patch or Meltdown?” and “If Greece Goes…”  In a very simplistic way, there are similarities between the story playing out in Greece and the U.S. airline industry.  Both are about economies that have long lived beyond their means, that borrow from tomorrow to fund yesterday and are rich in entitlement thinking -- even if the facts suggest yesterday’s promises just no longer work.  What’s happening in Greece is, admittedly, much more complicated, but there are parallels and, more importantly, it offers a stark lesson that change is mandatory.

Just like society and its governing bodies, there are multiple stakeholders in the airline industry: unions; distribution systems (where three providers control 85% of the business); airports, associated communities, local, state and federal governments (taxing authority); MROs (where the top five control 50% of the business) and, of course, the airlines themselves (management, shareholders, employees, and multiple other vendors). All of them have to change if there is to be a vibrant industry that serves as the economic facilitator to the world. All these stakeholders have been financial winners at some point, but usually at the expense of the industry that keeps them in business.

Everyone supports austerity or “fiscal common sense” - except when it requires them to change. Think of it as the economic version of “NIMBY” – Not In My Back Yard. This is particularly true of the Global Distribution Systems (GDS) that are stuck in the 1980s. It’s somewhat true of the unions that somehow think they can still negotiate guaranteed job security as well as pay and benefit increases that hamstring employers – like what the pilots at United did to the company in 2000.

The Economist article, “If Greece Goes …,” challenges the leaders of the EU.  The piece criticizes their “strategy of denial” – refusing to accept Greece cannot pay its debts.  The article suggests that strategy is untenable for three reasons.

  1. “Politics blocking a resolution to the Euro crisis is becoming ever more toxic.  Greeks see no relief at the end of their agonies (Swelbar adds true).  … The main opposition party has committed itself to voting against the austerity plan.  As the climate gets more poisonous and elections approach in France, Germany and Greece itself, the risk of a disastrous accident – anything from a disorderly default (Swelbar adds another Chapter 11) to a currency breakup (Swelbar adds a Chapter 7) is growing.”
  2.  “Second, the markets are convinced that muddling through cannot work.  ….Private investors are shying away from a place where default and devaluation seem imminent, giving the economy (Swelbar adds company) little chance of growing.”
  3. “Third objection to denial is that fears of contagion [Swelbar defines as leadership contamination] are growing, not receding.  Early hopes that Greece alone might need a bail-out were dashed when Ireland and Portugal also sought help.  The Euro Zone has tried to draw a line around these three relatively small economies.  But the jitters of recent weeks have pushed Spain and even Italy back into the market’s sights again.”

I love this European story and believe there are parallels to the U.S. airline industry pre-restructuring and the current industry negotiating its first agreements since the bankruptcy-laden 2000s.  But no major deals have been done other than the practical Frontier pilots recognizing balance sheet fixes at the parent company are necessary and the deal done between the Delta and Northwest pilots to facilitate their airlines’ merger that works to ensure their survival today.

Here’s my definition of PIIGS as it pertains to the U.S. airline industry today.  While it would be easy to start with “P” for “pattern,” the fact is – and one many unions and analysts have trouble accepting – is there is no “one size fits all” in the airline industry. Every carrier has different business models, strengths, weaknesses and, yes, even very different labor needs and rules.

The entanglements among stakeholders in the airline industry are a series of triangles that remind me of a Southwest route map in its infancy and as it has added routes over the years.

So my “P” is for “paralysis,” which is union leadership’s most difficult hurdle to overcome.  On one side of the theoretical concentric triangle of interests I have the union’s leadership, then management, and on the third side, members/employees.

The dictionary defines paralysis as a failure to take action or make progress.  As a result, paralysis easily defines pilot negotiations at each of three U.S. network carriers:  Continental/United; US Airways East/US Airways West; and American Airlines.  Hard to believe American’s pilots might have the best chance for a deal after three years of absolute paralysis as they were over -promised and under-served by former Allied Pilots Association (APA) president Capt. Lloyd Hill. The new union head, Capt. David Bates, actually talks about progress and common-sense deals.

The latest saga surrounding United/Continental finds Continental pilots filing grievances against the company for allegedly moving flying to United pilots.  I can’t say one side violated protocols because I don’t know, but I have to admit, I’m not sure what filing grievances gain the Continental pilots. They and their counterparts at United are both represented by ALPA, and when the FAA grants a single operating certificate later this year they’ll be a single entity. Posturing simply slows everything down.

So here we go again.  The company cannot run itself in the way it deems best for all employees because the pilots tell them so.  Paralysis.  Then we have the showdown between United pilot leader Wendy Morse and Continental pilot head Jay Pierce over control of the negotiations.  Paralysis.  Nothing will get done without leadership – and of course it will all be management’s fault that negotiations do not move as fast as pilots want toward a merged pilot agreement.  Paralysis.

Nothing is going to get done at United’s pilot – or flight attendant bargaining table - as long as everything negotiated somehow comes back to seniority.  Delta supplied the blueprint.  First, negotiate a collective bargaining agreement. (Delta’s arguably took much of the best from both the Northwest and Delta contracts.)  After determining how the combined work force would be governed, seniority issues were decided.  A collective bargaining agreement does little more than determine the number of heads necessary to do the flying proposed by the company. There was no paralysis at Delta and a major deal got done benefitting all stakeholders because there was leadership.

At United/Continental, I think Morse is the leader with the most credibility because she has experienced the extremes at the bargaining table.  She helped negotiate the pilot contract that cost so much, the airline ultimately went bankrupt.  Then she helped negotiate the agreement in bankruptcy that took many of the unsustainable gains away.  Pierce doesn’t have that background.  To me, the latest grievances are a charade, a stall tactic to show the membership the union (even though they’ll soon be the same union) is in control instead of really making decisions to get things done. 

The pilots at the new Delta have already shown negotiating a joint agreement is not that hard – well, at least it can be done in historically short order.  If Smisek and his team give in, then United did not negotiate an agreement in the best interests of all employees and the airline’s stakeholders.

Ineptitude

When it comes to US Airways, I do not know what the shape of the triangle is.  Synonyms for ineptitude include lack of ability, lack of skill, clumsiness and ineffectiveness.  Any one of these descriptors can be used for the leadership at USAPA, the union representing the professional air men and women at US Airways.  What a sad state of affairs when the company has to go to court to understand what they can and cannot do as it pertains to bargaining with its own employees.  It has been nearly six years since America West’s merger with US Airways served as the latter’s ticket out of bankruptcy II.  Calling the handling of the pilot situation at the carrier clumsy and the union leadership ineffective is an understatement of the new decade – and the previous one for that matter.  How about a straight line to nowhere?

Incongruence

Incongruence is defined “as not corresponding in structure or content.”  Most flight crews I know want to come to work, do their best job and go home.  But when you start negotiating staffing levels is where you find incongruence. Management and union leadership know the most competitive business model is one where the maximum level of flying can be done with the minimum number of people. Unions, though, are also business with a self-interest served by having more customers (members). So they continue to insist on less pay for the greatest number of people when a much better standard of living can be negotiated with fewer people. Common sense says that thinking simply costs everyone – management, pilots, and other employees – in the long-run because, like Greece, it’s not a sustainable model and devalues the product.  

Government

The government has skewed the triangle of management, labor and potential members.  The government appears to be trying to level (make congruent) the playing field for unionism when the market for representation seems to be saying something else. The triangle should be based on market forces and to artificially change the parameters seems to be bastardizing the concept. The government is doing exactly what it says it’s trying to prevent by unbalancing interests.

The government has skewed the interests of airline companies, airline customers, and those that serve the airline industry – all in the name of consumer protection.  I get angry when I hear the consumer is disserviced by the airline industry.  My simple take is that you get what you pay for.  That is true in any business.  The government has over stepped it’s bounds as it pertains to taxes, fees, 3-hour tarmac delay headline-making unnecessary rules – by the way,  where is Kate Hanni?  Now it wants full transparency on fees.  What about government fees?  The fact that 20%of a ticket goes to taxes and fees probably goes unnoticed to the average air travel consumer.

The government is nearly conspiring with labor and consumers to ensure there is no market.  Ted Reed of TheStreet.com asks the pertinent question:  Is the Obama Administration Labor's Best Friend?

Stakeholders

Earlier in this piece we defined a number of stakeholders in the industry.  While the global airline industry defines fragmentation, vendors and suppliers to this industry can be defined as anything but.  Airlines will, of course, survive... at least, most of them.  Some will die as cost structures will ultimately determine their fate. 

This is not a U.S. domestic story even though that might be how it reads.  At current cost structures, American Airlines cannot afford to compete for purely domestic traffic over the long term. Neither can United or Delta.  US Airways can because of the labor arbitrage produced by their pilots’ paralysis. Nobody has to be more careful of how much it pays labor than US Airways because of its heavy reliance on the U.S. domestic market – when and if it is ever allowed to give employees a raise.  American remains in the tenuous spot of being the high-cost producer and going first in an industry that loves pattern bargaining.  It already has a proposal on the table that pays flight attendants too much. 

Final Thoughts

In no way am I calling anyone stakeholder in this article a pig.  Rather I am taking liberty with a significant international story, and an ensuing acronym, to describe problems with change in the U.S. airline industry.  As is typical with this blog, I am expecting friends nowhere and enemies everywhere.  But let’s get it together.  If it means short-term labor negotiating and working feverishly in the interim to find new-age, long-term solutions… then so be it.  The GDS have to evolve or dissolve.  The government has to wake up and smell the coffee that the U.S. air travel consumer is the big – and only – winner of deregulation.

At the end of the day, labor and government have to stop standing in the way of progress or it will run each of them over.  Just look at the steel industry.

Perhaps what’s most important is to understand the same way of doing things –then or now – simply won’t cut it. The airline industry needs to not only think about, but implement, change. Or, as is the case with Greece, it will find change disorienting, volatile, damaging and most of all, painful.

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  • Response
    If Greece Is The G in PI(I)GS, Then U.S. Unions Are The P, Government Is Part Of The S’s And The GDS Are One of the I’s - Aviation Articles and Commentary - Swelblog / Swelbar on Airlines

Reader Comments (9)

Save your blather, BS artist.........

Deregulate the labor market for pilot wages and working conditions by getting rid of the Railway Labor Act and allow the mechanism of collective bargaining to work like it does in every other industry.

No market is "perfect" the mechanism of collective bargaining is the closet thing to it....and the RLA subverts it.

Industry executives simply hide behind the skirt of RLA regulations to avoid negotiating with their pilots in good faith thus distorting the market for pilot wages all the way back to 1992.

They can't beat us. This is obvious. At some point they have to come out and fight or cave.

FUPM!!

If the company had its way the company would deem the best way to run the company is to have the pilots work for free because that is what they love to do! LOL.

Wait til the retirements start. Pilot pay is about to go up Up UP!

07.1.2011 | Unregistered CommenterNewPilotEra

Hey Bill, Go F yourself.

07.2.2011 | Unregistered CommenterUA Pilot

“P” is for “puppet." An example of the word "puppet" used in a sentence, "Bill Swelbar is a "puppet" for ATA."

Tomorrow's word will be "shill."

07.4.2011 | Unregistered CommenterChitragupta

Actually, the "G" in the airlines' equation stands for "gas". Airline fuel is the one thing besides debt that is keeping the airlines from profiting and, more importantly, growing. Paying $4 for a gallon of Jet A consumes about 30-35% of an airline's revenue (and for some carriers the burden is greater). Were the price $2, there would be no hand-wringing. Airlines would profit, consumers would pay less for a ticket (or for ancillary revenues), and growth would be on everyone's minds because each incremental ASM would bring in more money to the airlines' coffers than it would drain away. Extra flights would mean extra revenues - and additional investment in new facilities - for airports. And we would not be having this discussion about unrealistic expectations.

07.6.2011 | Unregistered CommenterGSB

Tub thumping aside - open skies is beginning to globally level crew compensation in the same way that free-trade agreements are levelling manufacturing labor costs.

If US legacy crew costs are uncompetitive then the business model and investment potential for domestic start-ups (a la JetBlue, Airtran a decade ago) is strengthened. Internationally, open skies will govern crew costs or else the US could become more of a destination for international airlines than a country with its own large flag carriers (what is one reason why Emirates doesn't want to be a part of an alliance? So its block hour per pay hour productivity advantage isn't limited by intra-alliance labor llimits on capacity share).

The day when unions could simply pitch "more pay for less work" is over. Long-term compensation stability and gains for all employees has to originate with globally competitive productivity and efficiency.

07.8.2011 | Unregistered CommenterTristan

"G" is for "Gullible." Oil could be a dollar a barrel and the airline executives would still manage to find a way to lose money all the while accusing labor of being the problem.

Here is an excellent article by Bob Lutz, the former Vice Chairman of General Motors and he blames the MBAs for the reason GM filed for bankruptcy and not the UAW.

http://www.time.com/time/magazine/article/0,9171,2081930,00.html

07.10.2011 | Unregistered CommenterChitragupta

No apologies. No reservations. No sacred cows. Were you typing that with a straight face when you wrote it William?

What’s funny is that you hold yourself out as some sort of beacon of knowledge, inferring that your concepts or ideas are somehow different than what has been written or stated by others previously in the industry. In your speech to the RAA in 2010, you state just that in so many words. You left the business world to tell people what they don’t want to hear. Let me tell you, William, I have been in this business for a long time, and your concept of the “cold hard truths” are no different than the anti-labor/pro-management rants we have all read for years. I know you think you’re something special, but unfortunately you’re not. And your analogy comparing airline unions to the PIGS of the EU is beneath even you. Spare me the “in no way am I calling any one (I fixed your typo there) a pig.” We know exactly what you are inferring.

It's funny how we don't see any "Swelblogs" about excessive airline management compensation. Nothing about the executives that have left the airlines with country club memberships for life, cars for life, positive space first class seats for themselves and their immediate family for life, office space for life, golden parachutes, multi-million dollar compensation packages that don't reflect market rates or realities, etc., etc. But hey, let's write PLENTY of blogs about those evil unions. And to add a little insult to injury, let's give them a little back of the hand by insuating that unions could do the same amount of damage to the airline industry as the PIGS could do the ECB (or the EMI or whatever they're calling it nowadays). Yeah, there's a good analogy.....not.

As far as what has happened with negotiations at American, well, American management fed at the trough, all the labor groups saw the feeding, and surprise, surprise- they wanted what American management gave themselves. So of course those negotiations are going to go on forever. Or at least until other airlines' labor costs come up to American's. If management hadn't been so greedy, they likely would have found more willing partners in their negotiations dance. William criticizes union leadership. This is a clear example of lack of management leadership at American.

USAPA is a mess. No arguments there. But of course you're happy about that because your 'bud Doug gets cheap pilot labor until the dust settles.

However, you spend plenty of time criticizing poor union leadership, but Doug over at US Airways is an embarrassment to the airline industry and should not even be sitting as CEO. If I had done what he did in 2007, I would have been unemployed and unable to earn gainful employment as a pilot for the rest of my life likely. It's funny how CEO's are held to different standards than us lowly pilots, huh? It's sure nice to be a member of the good 'ole boys club. Did I miss the blog about the Board's decision to keep him as CEO despite his actions? No holds barred, right? Ah, don't worry about it, William. I know what you really meant when you said "no sacred cows." ;)

Northwest/Delta had two sides willing to get the deal done quickly. Management even threw both groups a bone to help grease the skids. Although the negotiations were difficult, the environment was there to get the deal done. And it was.

Meanwhile, at United/Continental....my friends there tell me that management could care less about labor's participation in making the deal go smoothly. The Board was quick to give Smisek his due for his "additional responsibilities" though, weren't they? Funny how that works, huh William? If I were a Board member, I would have withheld all executive compensation increases due to the additional responsibilities associated with the merger until all employee contracts were settled. If I were CEO, I would have not accepted any increases until my employees' contracts were settled. You know, the troops eat first then the officers. That's leadership……and also a rare sight in the executive offices.

Anyway, with an antiquated 85 year old Act on their side, and labor costs negotiated under the duress of bankruptcy (UAL) or close to it (CAL), of course Smisek is in no rush to negotiate anything. He'll drag this out as long as he can, knowing that he has to give SOMETHING to labor.....someday. That something is going to be relatively large for the pilots, considering they haven't had their pay scales adjusted for inflation in years, and retro pay will likely be owed to them as well. Of course, when the big numbers do come out (the magic of compounding), William will be out here telling us all how they're going to bankrupt the airline again. There will be no mention of the years without raises, the years Smisek has dragged out negotiations, the fact that every pilot at United makes less than a SWA pilot, or anything like that. It will just be those darn greedy union pilots ruining the airline industry!

Your comments about government are not surprising. Of course Obama is going to be a friend to labor. He’s a democrat and that party is largely supported by unions. If McCain had been elected, it would have been the opposite and unions would have baseball-style arbitration forced down their throat. It’s the whole ying-yang thing. Regardless, the Republicans lost. Get over it. You should worry about finding a decent Republican candidate to field against Obama. The Republican’s bench, like the depth of your original ideas, is quite shallow unfortunately.

As far as airline regulation, the government has had to step in because airline management has proven to be incapable of regulating themselves. The tarmac rule is a perfect example. The recent legislation passed concerning pilot rest and experience requirements are another. Airline management partakes in some moronic behavior sometimes, and the flying public needs to be protected from those flashes of brilliance. If you and your peers don’t like it, then don’t do stupid things that draw attention to yourselves. Stop blaming government for airline management’s lack of judgment.

I hear your friends at the RAA have some members that are starting to have some difficulty filling their pilot classes, and the retirements at the majors haven’t even started yet! You guys had better start looking beyond one inch of your noses when it comes to compensating your professionals (and negotiating their contracts), or you’re going to be parking some very expensive jets for lack of qualified crews within the next year or two. I can’t understand why young people don’t want to be pilots anymore. I hear some say it's economics, but I really do think it’s the airlines’ business model.

07.11.2011 | Unregistered Commenterglobalexpress

To hear chitty, globalexpress, et al. blame every ill in the world on "management" is pretty pathetic. Their refusal to recognize the changing world is sad because I'm sure they consider themselves quite enlightened.

The sycophants who blindly blame the messenger on this blog have the most to lose in this industry because of their blindness to reality. I could care less if Chitty or global express have to sell their BMW's in a couple of years because of their ignorance. I wish those who have more forethought could detach themselves from the direction these sycophants are taking them down. Unfortunately, I think they'll all down down in the ship with Chitty, globalexpress, et al. still screaming at the top of their lungs.

07.12.2011 | Unregistered CommenterRichard R.

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