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© 2007-11, William Swelbar.

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Entries from September 1, 2009 - September 30, 2009

Wednesday
Sep302009

Two Years Ago Today: No Swelblog.com

I cannot believe two years has passed.  Thank you to all that read this blog.  The numbers speak for themselves as I know there are many, many more of you today than there were one year ago by a multiple.  With that said, I do not want to celebrate the blog’s second birthday by getting in the way of the traffic and discussion taking place on my most recent post:  Airline Industry Eyes on the National Mediation Board.

Off to give a lecture.  If you are attending Mike Boyd's Annual Aviation Forecast Summit in Lexington, KY next week, I hope that we will get a chance to meet.  I know I am looking forward to an event that prides itself on free thought.  Thanks again for the support.

Monday
Sep282009

Airline Industry Eyes on the National Mediation Board

The Railway Labor Act (RLA), which governs labor relations in the rail and airline industries, has been around longer than the airlines flying today.  First passed in 1926 and amended in 1934, it is designed in part to ensure that labor disputes in these key industries can be managed in a way so that they don’t interfere with the nation’s critical commerce.

Decades later, we can all point to the RLA and find certain aspects of the law that should be changed.  And that’s a worthwhile discussion. As long as it’s based in the understanding that the purpose of the RLA was to promote stability and not to disrupt interstate commerce with labor strife.  In its own quirky way, it accomplished these two inherent objectives. 

Now some in organized labor want to inject instability on top of an already unstable industry architecture.  Labor leaders insist they want a more predictable, efficient system. The question is whether the reform being sought will bring unintended consequences?

Organized Labor, President Obama and the National Mediation Board

Recently, the AFL-CIO’s Transportation Trades Department (TTD) asked the National Mediation Board to change 75 years of practice regarding representation elections. The practice in place today requires that a union win with a majority of employees within a “class” or “craft” in order to be certified as those workers’ collective bargaining representative.  The TTD, running interference for the Association of Flight Attendants (AFA-CWA) and the International Association of Machinists and Aerospace Workers (IAMAW), is seeking to make a major alteration to the practice that would put the union in place if it gets “yes” votes from a majority of those voting, not a majority of all employees in the class or craft.

This issue promises to provide some insight into the power of organized airline labor in the Obama Administration. Clearly, labor played a key role in electing the President.  But to date, labor has not reaped the successes many expected in the early months of the new administration.  Will the administration pressure the National Mediation Board to make this change?

After 75 Years, Why Now?

It is pretty simple and transparent.  Neither the AFA-CWA nor the IAMAW believes that they have the votes necessary to win an election in their efforts to organize the combined work forces from the merger of Delta and Northwest.  So labor hopes that a friendly administration will change the process to help them pick up these coveted new members – particularly on the Delta side where the flight attendants and maintenance workers have never been union.

Or, as the union leaders have clearly calculated, if you fail to win hearts and minds at the ballot box (as they have not once but twice) then change the rules. 

The AFA-CWA failed twice in its efforts to organize Delta flight attendants. In their last campaign, only 40 percent of eligible flight attendants even voted. And under NMB procedures, those who don’t vote are counted as a “no” vote regarding union representation. 

After months of delay in seeking to have Delta and Northwest declared a single carrier – an administrative procedure necessary to hold an election for union representation – the AFA-CWA petitioned the NMB for the single carrier determination in July.  The IAMAW followed in August, but is not seeking to organize the entire group of eligible employees in various class and crafts of Delta and Northwest employees.  Unfortunately, an election cannot proceed until the TTD’s request of the NMB has been decided upon.  Therefore, more hurry up and wait for affected employee groups. 

The TTD asked the NMB to change election procedures on September 2, 2009.  Since that time, various groups opposed the change in formal comments to the Board. Opponents include the Air Transport Association, the Regional Airline Association, and the Airline Industrial Relations Conference.

The TTD’s position is that the NMB’s policy is “clearly inconsistent with the longstanding, widely accepted understanding of a democratic election process in the public arena.”

I could wrap myself in that flag -- I guess. And as I read through the various filings, I understand the legal arguments being made. But I am not a lawyer.  So I am going to think about this in another way.

Majority Rule

The “majority rule” issue that is at the center of the TTD’s request seems to have a philosophical bent toward stability:  If a majority of workers in a class or craft want a union to be its collective bargaining representative, the union then has a mandate to bargain with the employer.  With less than a majority support, how effective can a union be in representing the work group?  If the ultimate weapon of the union is the ability to engage in “self help” (the RLA term for strikes, work stoppages, hiring replacement workers and other actions either side can take if the negotiating parties are “released” from mediation), then how effective can the union be in forcing the employer to improve pay and working conditions if more than half of the workers choose to work during a declared job action?

With nearly 150,000 airline industry jobs lost since 2002, it is easy to understand why labor is concerned about the decline in its ranks. Delta has long been a tempting target for unions. Only the pilots and two smaller groups of workers are now unionized.  Delta is a non-union airline by industry measures.  So unionizing the world’s largest airline could be a big step for unions trying to replenish their membership roles following the industry’s restructuring period.  Simply, labor wants to change the majority rule because union activists are those that vote. 

In AFA’s last election attempt at Delta, one assumes that 60 percent of eligible flight attendants didn’t vote because they knew that not to vote was a “no” vote. A clear majority said that they were not interested in changing the labor dynamic at the airline.  But the majority of the 40 percent who did vote supported the union. 

Now enter Northwest and its 7,000 flight attendants. Prior to the merger, they already were members of the AFA-CWA.  Add those votes to the mix and AFA-CWA should easily get a majority of the combined work force.

Fragmented Labor Meet a Fragmented Airline Industry

Today’s AFL-CIO is not the same force that it was during its "New Deal" heyday.  Then, the labor movement was consolidated and spoke with one voice.  Today it does not.  Two large and powerful unions, the Teamsters and the Service Employees International Union (SEIU), recently broke from the AFL-CIO to form a rival coalition.  That defection has created a fragmented labor industry in which the old rules no longer apply. Already, unions in rival coalitions have tried to “raid” members from other unions – something the old rules prohibited. Herein lies the rub.

Arguably, one of the fundamental issues that airline labor has struggled to recognize and reconcile in a constructive way is the fragmented airline market.  Yes, fragmentation leads to hyper competition, but it also creates an unstable industry structure.  This unstable structure has forced airlines to seek wage cuts and productivity gains from labor in order to prevent competing airlines from entering markets and stealing the incumbent carrier’s traffic and revenue - and to live to fight another day.

In my view, changing long-established rules that are intended to promote stability has the potential to exacerbate an already unstable situation. Consider the scenario played out by AMFA following restructuring at United.  Because AMFA is not an AFL-CIO union, it could raid - or threaten to raid - at will mechanic groups at those airlines where unions had gone along with deep concessionary agreements under bankruptcy or other financial pressure. In fact, it won a few elections along the way only to lose later when they failed to deliver on their promise of securing “snapbacks” and wage and benefit increases the industry simply couldn’t afford.

I have seen many airlines struggle in negotiations with AMFA-targeted groups.  In many cases, the company and the incumbent union could probably have reached agreement earlier but for the union’s fear that by agreeing to some perceived negative change to the agreement, they would invite a raid from AMFA hoping to steal their dues-paying members.  This created a destructive and mercenary element to contract negotiations that too often delayed deals and hurt airlines and their employees.

Another question worth asking, but unresolved, is if a majority rule provision were replaced whether a minority of the class and craft could then move to force an election to decertify the union?  (The RLA would seem to be silent on this subject) Imagine the destabilizing effect of that situation.  Just about any tentative agreement I can think of would have elements or aspects that may not be palatable to some vocal minority.  So if an agreement ultimately passes by a razor thin margin, the vocal minority begins a campaign to replace the union that made the deal, looking to a new union that will promise that it can accomplish what the incumbent could not.  And so it goes.......

I may be going out on a limb here, but I’d guess this is a scenario that the Teamsters have already thought through in trying to change the RLA.  The minority rule should allow for raids that could bring new members into the Teamster ranks.

Concluding Thoughts

There’s a real risk to the change the union seeks, particularly during a collective bargaining cycle like this one in which the expectations of employees are so far from most airlines’ ability to afford. There is enough instability in this industry without creating a situation that would bring even more.

Labor has asked the NMB to move toward quicker resolutions of cases on the docket.  But the debate over the RLA must also consider the perspective and concerns of incumbent unions who will be hard pressed to make a deal that offers airlines something of what they need – namely, greater productivity – without facing a raid from a hungry competitor.  A hungry competitor that will promise anything without the corresponding responsibilities of working with management and putting together agreements that serve the long-term best interests of the companies and their employees.. 

It is the burden of management to make very difficult decisions based on the competitive environment in which they operate.  In this labor environment, union leaders could very well face the same challenges and be forced to make decisions that are not in the best interests of dues paying members but in the best interest of the institution. And that would be just one unintended consequence of a change in the rules of the game in order to “possibly” achieve a short-term gain.

The alteration sought by the TTD would prove to be a bad NMB policy change I fear -- particularly when one of the most important goals of the new NMB is to resolve cases in a timelier manner. 

Friday
Sep182009

Nibbling on a Little Crow While Watching Eagles Fly

Yep, I was one of those observers not long ago suggesting that the current revenue environment would challenge certain carriers’ liquidity.  While not specific on those carriers I believed to be marginal, the supposition was always US Airways, United and American.  In that order.  Of the three, it was understood that American had more options as it had not yet played the cash for miles card. 

Well, that story played out yesterday when AMR announced that it had secured $2.9 billion in new financing, in part by selling a billion dollars worth of frequent flier miles to Citigroup. Meanwhile United is hinting that more liquidity raising efforts are ahead and Delta is in the market for $500 million.  American’s announcement makes it clear that the credit window remains open for carriers that have quality unencumbered assets to pledge and a reputation for paying their bills. But, I remain unconvinced that the window will stay open for all carriers operating today. 

The same day, American announced network and fleet changes I see as important steps the carrier is taking as a decision nears on its immunized alliance with British Airways. Those changes also can be read as important to the ability of American to forge a closer relationship with JAL. 

The Changing Face of the Domestic Market

While St. Louis has been a hub in name only for American in recent years, yesterday’s announcement that it would stop serving 20 cities out of Lambert and reduce departures to 36 per day pretty much provides the final eulogy for the former TWA.  Now if Delta would only do what it should and pull Cincinnati down to a similar size, much of the necessary work on dismantling unnecessary and redundant secondary, mid-continent hubs will be done. 

Unlike Delta, American has historically owned a strong position in New York; therefore, its announced changes to that critical dot on the airline map were minimal.  And assuming that American’s immunized alliance is granted, New York promises to be one supremely competitive market between STAR, SkyTeam and oneworld carriers in each the domestic and international markets.

Speaking of Alliances

American has absolutely no choice but to counter Delta’s rumored bid for JAL.  The opportunity to make London and Tokyo bookends to a focused domestic network provides the airline the opportunity to finally take advantage of Asia and sell Europe, Africa and the Middle East like their aligned peers. 

It’s no secret that US legacy carriers have their problems. But trust me when I say that the US carriers are productive, nimble and agile when compared to JAL.  At this point, it appears that American would be working in cooperation with, British Airways and Qantas to court the Japanese airline.

JAL needs major surgery.  But assuming that JAL survives the procedure, its recovery requires a presence in all major world regions.  That is why I like the fact that each of the critical players in the oneworld alliance are involved.  As Japan is almost certain to become an open skies country in the coming months, a healthier and allied JAL is critical.

For those concerned about competition in Tokyo, let’s not forget the presence of STAR in the form of ANA.  For those crying about poor little Delta, let’s not forget that Delta remains the largest single carrier in the world in terms of revenue.  For those that may cry foul over competition in the North Pacific, let’s not forget about Delta’s SkyTeam relationship with Korean.  And a case can be made that Seoul has become a more powerful hub than Tokyo largely because of JAL’s weakness and Korea’s aggressiveness. 

Lots of Happenings at American

This latest news is interesting in part because American has been forced to make many changes the hard way as its competitors cut costs through bankruptcy.   American has managed through crisis after crisis all the while toting around a cost and an alliance disadvantage versus most of its legacy peers.  Moving to renew its fleet in the midst of a nasty economic cycle is bold. 

But more impressive to me is the steady, targeted focus on the balance sheet that made yesterday’s liquidity raise possible. It’s not all pretty there. Management continues to struggle to come to agreement with unions on new contracts that won’t exacerbate the company’s competitive disadvantages, and that’s all the harder when union leaders continue to make demands that could not and cannot be met given the competitive environment.

Making this even harder is explaining that the improved liquidity position is only because of borrowing, not that the company has suddenly found the recipe for outsized profits.   

Labor:  This Is a $2.9 Billion DIP Loan……Without the Consequences for You

It is safe to say that no other US carrier could accomplish this type of a capital raise at this time.  Any near-term concerns that analysts or observers might have about American’s ability to meet its obligations should be quelled.  Clearly American management believes in the company’s future or it would not be investing in it.  After all, the quest of any company is to produce a return on that capital.

American just leveraged the future.  And if I am a union leader there I would want to tie my industry-best lot among the US legacy airline world to the carrier that just put its money where its mouth is.  To continue resisting changes critical to the company’s future profitability only leads to the propagation of the status quo. 

Yes, I’d make some demands. When the economy and the industry do recover, I would insist that some of my members’ earnings are tied to company performance.  That is real leverage – not the illusory leverage unions try to create by promoting the false belief that past concessions and 1990’s wages relative to inflation should be restored in an industry vastly changed.

There is ultimately going to be a recovery.  Like American’s decision to order aircraft anticipating the recovery, if I am labor at American I would want to get my negotiations done sooner rather than later.  Just think how little incentive there will be for companies to conclude negotiations during an economic upturn given the losses suffered over the past 8 years.  As I have written before, I am astounded at how much time labor spends negotiating downside protections versus provisions that enable the members they represent to participate financially on the upside – a scenario that promises much more than any negotiated increase in wage rates.

More on this. 

 

 

Wednesday
Sep022009

“Go Ahead, Bite the Big Apple; Don’t Mind the Maggots”

Yesterday, as I was awaiting a report from the Institute of Supply Management on August manufacturing activity, I was working on a piece I titled:  “Government Buys Junk; Consumer in Funk; Airline Recovery No Slam Dunk.”  But after reading Ann Keaton’s piece in the Wall Street Journal on how jetBlue and Lufthansa are looking for a code share deal, I started thinking about all the pieces in play in the New York market and, as it happens, of the 1977 Rolling Stones tune “Shattered.”

Was it US Airways’ that said “my brain’s been battered, splattered all over Manhattan?”  Or AirTran talking about “rats on the west side, bed bugs uptown?”  Was that Continental murmuring something about “all this chitter-chatter, chitter-chatter, chitter-chatter ‘bout shmatta, shmatta, shmatta -- I can’t give it away on 7th Avenue?”  [But I can in Newark]  I do think I heard Delta saying, “to live in this town you must be tough, tough, tough, tough, tough!”  And I am sure I will hear from American “don’t you know the crime rate is going up, up, up, up, up” if it is not granted an immunized alliance with its transatlantic partners.

A Long and Overdue Reshaping of the Competitive Environment Gets Underway

It began on August 11, when AirTran Airways announced a deal with Continental to vacate Newark and give its slots and one gate there to Continental in return for slots at New York’s Laguardia and Washington Reagan.  A day later, Delta and US Airways announced a monster deal in which US Airways will give up 125 pairs of Express slots at Laguardia in exchange for 42 pairs of slots at Washington Reagan and rights to fly to Tokyo and Sao Paulo.  Both swaps involve no cash and have no impact on the Northeast Shuttle operations run by each US Airways and Delta.

The Delta – US Airways swap all but ensures that Delta will surpass American as the largest carrier at Laguardia.  By any measure of market concentration, LGA will continue to have ample competition.  For Delta and US Airways, the deal gives each carrier the tools to build out markets they believe are market strongholds.  Some say that a split operation (Laguardia and JFK) for Delta is a mistake.  But I disagree.  Winning passenger loyalty from offering expanded domestic services at LGA should translate into making Delta a clearer choice for passengers to choose the carrier when traveling to international destinations from its operation at JFK.

Absent this kind of deal, there is not much that can be done to increase domestic flying at any of New York’s three major airports.  Applying US Department of Justice standards to determine market concentration, Laguardia, JFK and Newark would be considered concentrated or moderately concentrated per the Herfindahl-Hirschman Index.  And JFK has limited space to for an airline to run a large domestic operation because of the extensive international operations that occupy the critical late afternoon/early evening hours.

Given all of the constraints of the New York aviation infrastructure, the airlines involved in the slot swaps have taken a proactive approach to advance their competitive strategies.  By recognizing their individual strengths and weaknesses, the airlines involved will be better positioned when a recovery gets underway.  If the government says you cannot merge, then engage in binge and purge. 

Today’s environment does not afford any carrier the luxury of presence everywhere and pricing power nowhere.

Congress and the Regulators

Because these transactions require regulatory approval, I fear that critics will claim that the deals would give the carriers excessive pricing power in those markets. 

But look at the data. According to the Airline Transport Association, system passenger revenue is down 21 percent, or $12.5 billion when comparing the first seven months of 2009 to 2008.  Add in the $3.1 billion the industry has brought in from those damn fees that everyone likes to write about, and that means revenue is down $9.4 billion. 

Where is the pricing power?  Where is the gouging?  And when will the politicians and regulators take airlines at their word when they say they need change?

“People dressed in plastic bags.  Directing Traffic.”