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© 2007-11, William Swelbar.

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Entries from February 1, 2009 - February 28, 2009

Thursday
Feb262009

Sullying the Airline Safety Story

In my recent speech to the Aero Club of Washington, I said that I have seen plenty of reckless labor leadership in my day. And that I believe that the use of safety as a stick to create economic leverage for contract bargaining purposes – as the unions have done at United, US Airways and American -- is not just wrong, it’s contemptible.

That’s essentially what happened at Tuesday’s House Aviation Subcommittee hearing on the US Airways Flight 1549 accident. According to the Summary of Subject Matter, the hearing was to focus on safety issues including Pilot and Crew Procedures for Emergency Landings; Crew Training; Crash Survivability; Bird Strikes; Engine Design and Testing; and Bird Radar Detection. Nowhere in my reading was this hearing intended as a platform for employee compensation or airline industry labor relations. That, however was the story the media told.

Headlines like: “Sullenberger: Pay Cuts Driving Pilots From Job”;”‘Sully:’ Airlines Risking Safety With Cuts”;” Pay Cuts Put Lives at Risk – Hero Pilot”; “Hero Pilot Says Benefit Cuts Driving Out Experienced Pilots”; and “Airline Finances May Hurt Safety, Sullenberger Says” took one small piece of a day’s testimony and, leveraging Sully’s popularity, sensationalized the story. What didn’t make the headlines were the very safety issues the hearing was called to spotlight: the dangers bird strikes pose or the industry’s efforts to address the problem.

This morning, Ben Mutzabaugh blogging for the USA Today writes: Advances make airline crashes more survivable. This is the real story. Mutzabaugh quotes Kieren Daly of Air Transport Intelligence from a CNN interview: "the low number of casualties in both crashes [US Airways and Turkish Airlines] was testament to technical advances made by the aviation industry." As Daly tells CNN: "It is a tribute to Boeing and Airbus that their aircraft are so safe. Most accidents now are caused by single causes, like bird strikes, that you simply can't legislate against."

It appears to me that U.S. Airline Pilots Association, the union that represents US Airways pilots, is using Sully’s well-deserved celebrity to take their disputes with management public. Sadly, the mainstream press writes the labor relations story and no one talks about the advances in safety that also contributed to minimizing casualties.

Sullenberger argues in this testimony that the future of the pilot profession will be harmed by reduced earnings – a troubling reality for all airline employees in recent years as the industry has changed and simply no longer supports the same costs it used to. Today’s airline pilots are rightly frustrated, but until the market is such that passengers are willing to pay much more per seat thus improving the financial structure of the business, the airlines can only pay pilots what the market will bear. And that market is not the unsustainable wages and benefits paid at the top of the last boom cycle.

Keep in mind, too, that pilot salaries are pretty high compared to the norm – even after the reductions airline restructuring brought. Most major carrier captains earn well more than $100,000 per year. And pilot attrition rates are down.

I sympathize with the depth of some of the pilot pay cuts and I certainly sympathize with those airline workers who lost defined benefit plans in bankruptcy. But what the unions fail to tell you is that disproportionate pay reductions on many of their members is the direct result of language in respective collective bargaining agreements written over 40 years ago.

Among pilots, some of the pay reductions are the result of moving from the left seat to the right seat as airlines reduce capacity and get smaller – another effect is moving from a bigger piece of equipment to a smaller piece of equipment. It is the terms of collective bargaining agreements that set pay, with that for captains higher than that for first officers.

Maybe it is time to rethink how we pay pilots. Contracts that pay hourly rates based on the equipment a pilot flies may not fairly take into account other realities of flying today. In a maturing industry that does not promise growth rates like those experienced over the past 30 years, it is probably time to pay a salary so that downsizing does not disproportionately impact some pilot's pay more than others.

I have thought long and hard about writing this particular piece. But enough is enough. In no way am I insinuating that the actions by Captain Chesley B. Sullenberger III and his crew were not exemplary, professional or even heroic in their Hudson River landing on January 15, 2009. They were and more.

 

Monday
Feb232009

Mumblin’, Bumblin’ and Stumblin’ for Something to Write

It’s pretty sad when . . .

. . . the reports that US Airways will discontinue charging for water and soft drinks is the best news out there. Not just in the airline industry, but in any industry for that matter. Water for nothin’ and cokes for free.My guess is Southwest was more than happy to have US Airways charging for water and soft drinks. And that is the nature of a competitive market– what is good for someone in this industry may not be good for another.

For me, the best news out there are reports that the government is telling the automotive industry that its turnaround plans do not go far enough in addressing the structural problems of Detroit’s automakers. The Big 3 is about to become the Big 1.75.

What will that mean for the airline industry which already is suffering from a sharp decline in business travel?For one, it will probably throw a klieg light on the fact that U.S. airlines have too many hubs in the middle part of the country. That might provide incentive for the industry to actually rid itself of marginal hubs that have outlived their useful lives. And that could portend well for the underlying economics of the industry once the toxins are extinguished from the macro economy.

In other news, Delta flight attendants have come up with a seniority list they say embraces the important tenets of equity and fairness for the former Northwest flight attendants who joined their ranks following the merger. The problem is that the Association of Flight Attendants, which represents the former Northwest cabin crews, does not yet recognize the combined airlines as a single carrier. It is no surprise that the AFA is digging in its heels – after all, Delta flight attendants are not unionized and in fact twice voted down the union’s organizing efforts -- in 2008 and in 2002. Merging workforces is never easy and anxiety over relative seniority will only grow if further capacity reductions become necessary. Expect a tough battle when the AFA goes back for yet another unionization vote.

Speaking of capacity, we are now seeing more impact from the transfer of industry capacity from domestic markets to international that began in 2004. All trends point to a very tough international environment, particularly for transatlantic services. Deteriorating fundamentals at British Airways have been in the news off and on for the past year. Now even Air France and KLM are cutting capacity. Lufthansa just keeps shopping but being the smart carrier it is – a deal is a deal and they will not pay too much.

Pacific region fundamentals are holding up, but China could change that equation. At a time that the West really needs China to increase consumption, that trend now is on hold as the Chinese economy continues to sicken. Economic problems in India that took route last fall continue to grow. Now the economic weakness is beginning to impact airlines throughout the region. Japan Air Lines is looking to its government for a $2+ billion dollar handout and economic ills already are beginning to hurt financial performance at Singapore and Qantas and Cathay Pacific.

The Middle East is perhaps the only economic bright spot for the airline industry, where both fledgling and well-financed carriers continue to grow and take delivery of new equipment, although not without occasional talk of potential mergers. And while Latin America shows pockets of strength, don’t forget that more than half of that region’s demand is focused on Mexico and Brazil.

In the US, we actually have some labor deals getting done. Earlier this year, Southwest ratified an agreement with its mechanics and announced an agreement in principle with its pilots. This month, Alaska Airlines announced a tentative agreement with its flight attendants with a vote scheduled for March. In each case, the contracts demonstrate the difficult state of labor negotiations in the industry. A prime example is the Southwest pilot agreement that attempts a delicate mix of pay increases, productivity measures and new scope restrictions.

Finally stock prices seem to be suggesting that another round of bankruptcy filings might just be around the corner. It is hard to totally discount what market values seem to tell us. Air Canada finds itself back in the news as a bankruptcy possibility following the financial engineering done in the prior bankruptcy that leaves the airline with nothing to fall back on this time around. At this point it looks like the only potential safety net is the Canadian government, which seems intent on increasing the ownership limit to 49 percent, but it is too soon to say how that will ultimately play.

Maybe the current economic Armageddon will generate interests in increasing the ownership limit for U.S. airlines– which could provide them a source of new capital and the opportunity to minimize expenses and leverage economies of scale. Most important, such a change would force recognition that competition for competition’s sake at home does not make for an industry structure that can grow and prosper.

Last week I had the opportunity to speak to the Aero Club of Washington and addressed the legislation limiting airline alliances that sponsors -- visionary Rep. James Oberstar among them – support based on misguided arguments of anti-trust issues. To make the point, I quoted economist Henry George who said:“What protectionism teaches us is to do to ourslves in time of peace what enemies seek to do to us in time of war”. George is absolutely right when it comes to those regulating the U.S. airline industry, which in their protectionist views have largely done what George suggests.

This time is different. Very different. The past is less prologue. Those companies that revise history will be best served because simply, you cannot do business today with yesterday’s mindset and practices and hope to be in business tomorrow. This will prove to be true in the airline industry over the next 18 months.

 

Wednesday
Feb112009

A Look at US Airline CEO Compensation Through a Different Lens

'Tis the season when we will begin buying tickets to the Fourth Annual US Airline Executive Compensation Kabuki Dance. The airline dance follows the US CEO Kabuki Ball that has been playing out on Wall Street since the T.A.R.P. monies began to fill the coffers at many investment banks. Then we learned that some $18 billion of those taxpayer monies were used to pay executive bonuses in a year where the US banks clearly underperformed. Yes the Wall Street number starts with B.

Ever wonder whether: if the bankers had worked half time would they have lost only half as much? And based on losing half as much, they probably would have made more than the $18 billion.  But I digress . .

Last week, Andrew Compart writing on Aviation Week’s blog, Things With Wings, posted a piece entitled Executive Pay And U.S. Airlines.  After reading Mr. Compart’s piece, I was left wanting more – a deeper look at airline CEO compensation. 

According to the Institute for Policy Studies and United for a Fair Economy, the ratio between the average compensation of U.S. CEOs and the average income of U.S. workers was 344-to-1 in 2007. How, then, does CEO pay in the US airline industry compare to compensation for airline employees? 

In Mr. Compart’s analysis of executive pay at the 10 major US airlines operating independently at year-end 2007, he includes among executives’ salaries, bonuses, stock awards, stock options, payments to savings plans, and other income and rewards reported in federal filings. As Mr. Compart points out, a CEO’s salary typically accounts for only 20 percent of his or her total compensation.

I turned to MIT’s Airline Data Project to explore a bigger picture, looking at average salary and benefit packages for each the employee and pilot workgroups at the same 10 airlines.  Then I did a simple ratio analysis by company.  One technical note: per diem pay should have been included for any employee groups that receive it; however the way this date is reported makes it impossible to do an exact accounting.  Therefore, per diem expense is excluded for employees and pilots and would have been included in other compensation for the CEO.

In 2007, CEO compensation ranged from a high of $10.3 million at United to a low of $800,000 at jetBlue.  At $10.3 million Glenn Tilton’s pay is 142 times that of the average worker at United.  The 142 multiple is 41 percent of the average multiple of 344 experienced across all US industry in 2007.  The simple average for the 10 airline grouping was 63 times the average airline worker, or 18 percent of US multiple of 344.

The employees at Southwest and American have the highest average employee compensation among the airlines studied, with ratios at 14 and 57 respectively.  Of the six legacy carriers operating in 2007, Delta had the lowest ratio of CEO compensation at 52 – a year when Gerry Grinstein passed the gavel to Richard Anderson.  Among the LCCs, AirTran had the highest ratio at 53 times.  It is interesting to note that in 1980, the multiple of CEO compensation to average worker compensation was 40. 

Among pilot groups, United’s CEO compensation was 68 times that of the average United pilot’s compensation.  The average for the 10 airline group was 29 times.  jetBlue had the lowest at 6 times, a year when Dave Barger replaced founder David Neeleman as CEO.  Among the legacy carriers, American had the lowest ratio of CEO compensation to average pilot compensation at 23 times.

Concluding Thoughts

The relationship of executive compensation to worker compensation has been a measure used for decades by those on both sides of the “is it fair?” debate.  I am not trying to answer that question. What is relevant is the perspective and context as it pertains to the US airline industry.  It is right that airline executives have a large performance component of their compensation.

CEO and executive compensation is volatile in part because the money a proxy officer pockets is risk-based and therefore highly dependent on market conditions.  Most employee compensation, by contrast, is guaranteed and has very little risk so the denominator (employee pay) does not deviate to the extent that the numerator (executive pay) does.

If nothing else, this simple analysis underscores what I’ve long preached: on balance, jobs in the airline industry pay quite well as they relate to jobs that require similar training and experience across the employment spectrum.  And too often, that fact gets lost in the debate.  

 

Friday
Feb062009

Disequilibrium Everywhere; Stimulus Nowhere

It will be clear soon as to why my writing time has largely been invested elsewhere.

I have been thinking about a theme for this post for a few days as I criss-crossed the country. I started considering “Pigs at the Trough” as a theme as I read story after story about the pork finding its way into the various versions of the stimulus bill. I then moved to something like, “For Organized Labor: Will It Be OHbama or NObama” as it pertains to the controversial “card check” legislation? Then it was something like, “And this Little Piggy Cried Wee, Wee, Wee All the Way Home” after reading about Jim “Hell NO”berstar introducing legislation to block additional immunization of airline alliances and explore ways to undo those that exist.

What a sad state of affairs this country finds itself in. What a sad state of affairs airline labor finds itself in . . . where union leaders have time and again failed to lead because they’ve put politics and self-promotion first rather than face hard truths and labor’s role in improving productivity and helping turn around the long decline of the domestic airline industry. What a sad state of affairs the US and global airline industries find themselves in because of patronizing, parochial protectionists like Oberstar whose antiquated, short-sighted views fly in the face of everything we know about the industry’s current financial challenges and competitive burdens.

I am not only disheartened but dismayed. There is plenty of blame to go around. Some goes to the airline executives that have returned to cutting fares in a misguided stimulus plan to fill seats – and too few controls on the number of cheap seats up for sale. There is little to “stimulate” when you consider that some major portion of historic demand for air travel was created by consumer access to easy credit – whether through the new Mastercard that arrived every few months in the mail or the willingness of Americans to take out a third home equity loan to finance yet another family trip to see Mickey Mouse.

By looking at the traffic, capacity and load factor data for January 2009 it becomes pretty clear that the aligning of supply and demand still requires work. Moreover, a realignment will have to occur in international flying as the economies in Europe and Asia particularly are sick and getting sicker.

What is it going to take to get the politicians – whether those in Congress or big labor– to understand that the US airline industry is headed down the very same destructive path that the US auto industry is headed? Many airlines did the right thing last year when, faced with record fuel costs, cut capacity and made some hard choices about pricing and costs. That was an industry that demonstrated discipline with conviction. But to work for the long term, capacity discipline must be practiced with pricing discipline too. After all, that is the theory at work with the industry’s too little, too late recognition that it is the revenue line holds promise for profits.

In my view, the system should have let the weaker airlines liquidate because, in the longer run, they aren’t strong enough to survive. Just look at US auto industry, which supports too many brands; has too much manufacturing capacity; carries legacy labor costs that can possibly be sustained only by a growing industry; and is modeled on an outdated demand curve built on cheap oil and readily-available capital.

The airline industry, too, has too many brands; too many hubs; a product priced below cost; and a high-cost, inflexible labor construct that limits a company’s flexibility and ability to adapt the size of the operation to economic realities. Current contracts and labor assumptions force airlines to pay nothing short of ransom to make necessary operational changes, and only because that is the way it has always been done. Just like the job bank provision in the auto industry.

To bet on a profitable 2009 just because of the price of oil today is, to me, nothing but an attempt to mine fool’s gold. I get the math..... On the other hand, liquidating an airline or two, and investing the proceeds in gold could be a proposition with some upside for airline shareholders.

The Virtuous Circle of Value Destruction is taxiing into position to prepare for a rendezvous with history – I fear.