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Sep182011

« Scope Yet Again; Commenting to a Commenter »

There is often some very good reading over at www.airliners.net inside their civil aviation forum with some very good commenters and very interesting threads to follow.  This week, one asked:  “United/Continental Conceding Domestic Market?”  Another speculated about the future of the Air Line Pilots Association (ALPA).  Another asked which is the next US carrier to file for bankruptcy? That speculation is rightfully focused on the regional sector of the industry.  But much of the discussion fails to recognize the tangled web called the domestic network business, which includes mainline carriers, regional carriers and the unions. The players in this web are inextricably intertwined - but too often discussed in silos. 

United-Continental Holdings’ CEO Jeff Smisek once said something I now quote in every presentation I make. Of the world’s now largest airline, he said:  “We’ll have the domestic operations sized solely to feed the international traffic.”  That quote and its derivatives are sprinkled throughout the airliners.net thread focusing on whether United/Continental is conceding the domestic market.

In my view, the US domestic business is at a crossroads.  Do iconic names like United, Delta, American and US Airways continue to make pure domestic flying a significant portion of their route portfolio, or do they continue to attrite pure domestic operations away because cost structures can no longer support mainline flying in what has become an ultra low fare market?

Some in the thread note that Smisek’s words worry some pilots, as they should. And those concerns shouldn’t be limited to the flight deck.  In a ‘be careful what you ask’ for scenario, there are forces at work that ensure the regional sector of the business as we know it today will be smaller tomorrow.

There is a virtuous circle of events at play:  with in the wing oil in excess of $100 per barrel; no 50 seat and less replacement aircraft in the pipeline; regional flying under contract that won’t be renewed because of economics; the prevalence of low cost carriers in the primary and secondary catchment areas of small and non hub airport markets; a pilot shortage that will impact the regional sector; flight time/duty time regulations that will require more regional pilots to perform the same level of flying being performed today; a new law requiring 1500 hours of flying for new pilots; and the fact that the smallest aircraft coming to market will be at least 100 seats. 

And so the circle spirals downward for the regional sector of the business.

I think scope is a cancer because it has been used as a bargaining chip.  It has been, and is, a Ponzi scheme as I wrote in US Pilot Unions’ Dirty Little Secrets.  There has been a B-Scale in place supporting the rich mainline contracts since 1984 when new hires were offered positions at lower rates of pay.  When it was deemed wrong for unions to do such a thing, regional airline code sharing relationships were formed.  This “outsourcing” was agreed to by the union in return for higher wages and benefits for incumbent mainline pilots.   

After my last two posts on scope I expected, and received a lot of interesting mail.  Much of it emotional but some as ugly as the commentator who suggested “a certain poetic irony to the image of you[Swelbar] in a smokin' hole and another Captain Renslow at the controls.  Be careful what you ask for.”

Now it is my turn to say:  Be careful what you ask for.  If no B-Scale for domestic flying is possible and a phasing out of regional jobs is the goal in this round of negotiations, then what is going to cross-subsidize the wages, benefits and work rules at the mainline? By my calculation then, there is even less money to go around to for mainline pilots to win in a new contract.  And with the loss of feed traffic from a smaller regional sector, the real question is just how many mainline narrowbody aircraft does a carrier need?  In a point-to-point world, the answer is a whole lot less. If 14,000 mainline pilot jobs were lost in a decade of downsizing then more job losses are on the way from a loss of feed.  And the effects of a pilot shortage are even less.

And so the virtuous circle spirals downward for the mainline sector of the business.

Commenting on a Commenter

I received the following private email from John, which encompasses the views of many other commenters (public and private). He writes:

I read your blog because I know management does, I’m not your biggest fan.  However, I would like to see your opinion on the consolidation of regional carriers.  To me, scope is synonymous with outsourcing, which you say allows for flexibility.  But the real advantage of outsourcing is the low cost entry into markets (and exit). 

Things have changed, wouldn’t you agree?  Cash strapped regional airline are a thing of the past because consolidation has honed the market down to three: Republic, Skywest, and Pinnacle.  With size came assets, more loan opportunities, and market dominance.  In my opinion, I believe that regional airlines have reached a size where they have serious power over code sharing agreements or have the option to go many markets alone, Skywest is already considered a major airline with a MC of $6B.

I know you love to blame labor, because your audience isn’t.  I understand you have to make a living, and the ATA may not want to hear this, but they are screwing up.  The majors better start thinking of in-sourcing or face another round of upstart airlines entering the market with low cost structure and plenty of established routes thanks to the majors giving them business.

After all, outsourcing worked so well on the 787 it aught to do equally well for the airlines…right?

For the record, I do not see scope as outsourcing as it was agreed by both parties that a certain number of smaller jets can be used within the domestic system carrying a certain airline code.  After all, the mainline pilots did not want to be bothered with those little jets.  As for John, the real advantage of deploying small jets under the airline code is to maintain presence in feed markets that the mainline cost structure could no longer support.  Mainline aircraft in markets like Charleston, WV is a thing of the bygone years that immediately followed deregulation, yet they unfortunately still comprise a disproportionate size of the memory bank called entitlement. 

Yes, things have changed and are changing.  There are haves and have nots within the regional industry today as there were in mainline industry of yesterday.  There is one airline, SkyWest, which stands alone in the industry because of stellar management that understands the carrier’s place in the industry and their role in building a balance sheet that ensures Skywest will be part of the discussion for years to come. While I am sure that SkyWest would love to have a market capitalization of $6 billion that you make fact – on Friday the market capitalization of SkyWest was less than $650 million.

To make a valid argument, John would need to produce economics at the mainline that allow the company to serve Ft. Wayne, Indiana with non-regional (77 seats and more) equipment.  And my guess is that he could not. How many of those 737s/A320s/MD80s are filled with traffic coming from 50 and 70 seat jets?  How could he produce the same economics on the flying without having to make wholesale changes to his existing collective bargaining agreement in order to keep the flying in house? 

I get this argument often from other commenters that look back before looking ahead. Yes you can bring the flying in house - but not until the terms of the collective bargaining agreement reflect the B-Scale terms and conditions the mainline pilots found, and find, appropriate for their regional brothers and sisters.

Many claim I am too quick to blame labor.  In this case, it is the unions that create this purported “outsourcing” to support bloated mainline salaries, benefits and work rules.

John is right in his comment that “the majors better start thinking of in-sourcing or face another round of upstart airlines entering the market with low cost structure and plenty of established routes thanks to the majors giving them business”  -- at least on one front.  Today, the use of the regional industry is a defensive weapon used by networks to curb encroachment into mainline markets.  By forcing regional carriers to fly fewer 76-seat aircraft and less as well as limit their ability to fly anything bigger (again assuming the pilot unions would not change their collective bargaining agreements to meet or exceed the terms available from the regional provider), any airline network will begin to vacate certain markets that may then become an opportunity for a start up or an inroad for an incumbent like Southwest or jetBlue. 

Scope is as much as regulator of the business as is government at a time this industry does not need any more regulation.  Regulation often results in unintended consequences, one of which will be to create market vacuums that an upstart might willingly fill. Nature abhors a vacuum.

And John and many of his fellow mainline pilots end up over-regulating the business of feeding the aircraft they fly.  No feed – assuming that airlines cannot get to the right economics to fly certain routes – will likely result in significantly less mainline narrowbody flying – perhaps just enough to support the international operation.  And that may not be the consequence that mainline pilots have intended.

Reader Comments (13)

Will there come a time when mainline carriers stop subsidizing regional partners through CPAs and instead partner with LCCs that operate successfully in the domestic market without any financial backing from a mainline affiliate? Like an expanded version of the AA/JB agreement? Existing scope clauses dont prevent 'giving away' domestic market share to a strategic partner.

09.20.2011 | Unregistered CommenterFly

WS posted,
"This “outsourcing” was agreed to by the union in return for higher wages and benefits for incumbent mainline pilots. "


If this outsourcing was agreed to in return for higher wages and benefits....where's the money?

Seems to me...those higher wages and benefits were returned in the 2003 deals, but management still held onto the 1997 Scope concessions and we were required to forfiet the pay..

So, what did we end up with in the "Scope Trade".... less Scope and less money.
And our wages have been reset to 1992.

So with that kind of history...tell me again why we should agree to another Scope trade?

No thanks....I think we'll keep Scope and fight for pay and benefits. Industry executives have got a real fight on their hands if they think they're going to keep us locked down.

In the end....all you've got is "TALK" ....we have real skills.

;>)

09.26.2011 | Unregistered CommenterG n P

Sure the Renslow comment is not the most diplomatic response. However, that is the end result of what is desired by ATA. They want to shift the flying to cheaper crews. Who are cheaper crews? Those pilots with less experience of just not good enough for a higher paying job. With those crews comes greater risk. It is the cheap cost of liability insurance that allows this game to continue. Would Colgan still be in business if their premiums went up ten fold after they killed 49 people? You know there is greater risk in this BUT you and ATA know that you can kill passengers every once and awhile and still be profitable. How else can you explain the FAA hold up of PL 111-216 via intense lobbying. That truly is disgusting.

09.30.2011 | Unregistered CommenterDisgusted

I forgot. I challenge you to explain the flaw(s) in my argument.

09.30.2011 | Unregistered CommenterDisgusted

@ G n P -
the money is in mainline pilots pockets. without it, there would be even less.
(I agree its not enough and this profession deserves more)

Outsourcing/regional flying has effectively limited pay cuts.
Public addiction to cheap travel, high fuel and industry regulation limit profitability.
The reminiscent mood of what pilots deserve is based on industry profitability long gone.

(of course as fuel prices drop and and some carriers actually post a bit of a profit everyone will rightly so come screaming for a piece of a small pie).
maybe a profit sharing deal would be beneficial (take some upside, keep company stable in downside) but i doubt ALPA wants anything to do with that?

so if you keep scope where it is (say at a Continental 50 seat level) - what airframes do you think will replace the uneconomical 50seat ERJs over the next couple of years? maybe Turboprobs on shorter routes? and the rest?

@ Disgusted:
I hope the FAA will hopefully pass the new rest rules shortly without too many concessions.
but whilst I sympathize with your demand, i can not follow the logic that gets you there.

your assertion about liability insurance being too low::
higher risk crews would lead to higher premiums.
You are claiming that liability insurance companies are too stupid to adequately price their risk? contrary to airlines they are actually fairly profitable.

besides that i disagree with your point on cheaper crews not being good enough for a higher paying job.
tried finding a mainline pilot job over the last 7 years?
ask the hundreds of united pilots still on furlough if they found another US carrier that would hire them for the same wage...
so rather than being unemployed, a lower paying job doesnt seem so bad to pilots seeking work.

so why do some companies lobby against the new rest rules? because they will need more pilots to cover the same amount of flying.
that still gives them the right to give their input/lobby/ask for changes to new rules affecting them, as much as we like it or not.

10.1.2011 | Unregistered CommenterMike

"i disagree with your point on cheaper crews not being good enough for a higher paying job."

Colgan hired Renslow knowing he had failed a checkride. They hired him anyway. Something a major airline would never do. He later failed another two under their employment. They kept him anyway. Why? Because he would agree to work for slave wages. There is no way a major would keep someone with three failures.

Insurers charge enough to ensure both parties are profitable. If a Renslow event happens every so often it's no big deal. Both parties are still profitable. My implication was that after a tragic Colgan event someone should step in (it would be fantasy to think it would be the FAA) and force the carrier to adjust it's practices via increased premiums or gov't reg.

10.2.2011 | Unregistered CommenterDisgusted

Buffalo, New York- September 16, 2011 – The 'Families of Continental Flight 3407' responded to news of two safety lapses at Colgan Air this week by reiterating the importance of stronger aviation safety guidelines, particularly for the nation's regional carriers. In the space of one week, Colgan had a pilot land his plane at the wrong airport, and received notice of a proposed $1.9 million fine from the FAA for using improperly-trained flight attendants on 172 flights. "

http://www.3407memorial.com/index.php/press-releases/165-flight-3407-families-renew-call-for-one-level-of-safety-in-response-to-colgan-airs-difficulties-this-week

http://www.wgrz.com/news/article/134917/37/Colgan-Air-Plane-Lands-at-Wrong-Airport

ATA, Swelbar and Colgan response: spin, spin, spin. Increase wages to attract better pilots? Never! Hey, do you think they checked the runway length of that wrong runway?

Let me ask you this question Bill, is their any industry you wouldn't sell your soul to for the right price?

http://web.mit.edu/airlines/airline_industry_consortium/airline_industry_consort_members.html

What's so bad/hard about doing real unbiased research the benefit everyone? Do you think Kotlikoff across the river or Merton up the river really have it so bad? Why work at a prestigious institution only to sink to paid shill?

the fact they let him fly failing numerous checkrides is a serious operations flaw.
not acceptable.

but i think this needs to be treated separately from the fact that pay is low.

they probably have enough senior FOs that have been waiting years and have the experience to hold the left seat. (also at these low wages) and they havn't failed a single checkride.

10.2.2011 | Unregistered CommenterMike

What a joke of a career this pilot profession has become. I really am curios if these management types realize what they have accomplished. I don't know anyone who wants to become a pilot anymore. How can one justify the $200k it costs to go to Embry Riddle Aeronautical University to go earn $16k-$20k to finally build upto a lower middle class salary in your mid 50s-60s. Then of course the airline files for bankruptcy and pilots go back to those beginning wages. What a joke. I think I trust the sleazy used car sales guy more than any "respected" management at any airline.

10.3.2011 | Unregistered CommenterJustapilot

"but I think this needs to be treated separately from the fact that pay is low."

How convenient. Yes, pay and performance are never linear! Saying it's so doesn't make it so. Does the ATA really think they're getting their money's worth out of your simple sound bites?

You're setting yourself up to be the next, shooting fish in a barrel, target.

http://davidlereahwatch.blogspot.com/
http://lawrenceyunwatch.blogspot.com/
http://swelbarwatch.blogspot.com

10.4.2011 | Unregistered CommenterFedup

"but I think this needs to be treated separately from the fact that pay is low."

Put your money where your mouth is. Hows about telling Sloan grads that they are worth no more than Northeastern MBAs. Hey, both met the same basic criteria.

Or are Sloan grads somehow worth more?

10.4.2011 | Unregistered CommenterFedup

Sloan grads are worth more because the market says so. Whereas, the market says piloting skills are worth less than historical levels. If enough people stop becoming pilots then there will be a shortage and those skills will be worth more in the market. Simple economics. Is that really that hard to figure out?

10.4.2011 | Unregistered CommenterRichard R.

I'm not an airline insider; only an observer. So if this idea is totally stupid, you'll understand why. But wouldn't it be possible to redefine scope in a way that allows for flexibility? One way I can think of is to restrict CPA flying to a percentage of overall flying, for instance 20% of all ASMs flown by a carrier in aircraft under 99.5 seats (a two class E-190). That way a carrier can fly any mix of aircraft it needs to right size capacity as long as the total CPA flying doesn't exceed 20%. The percentage is only hypothetical, of course.

If the mainline pilot's productivity can make mainline flying more cost efficient, the percentage of CPA flying can decrease, thereby creating more mainline jobs and increasing the airline's profitability. After all, mainline CASM is lower than CPA CASM by virtue of more seats to spread fixed costs over.

The downside for all occurs when the capacity of the airline must shrink. CPA flying would have to shrink along with mainline to maintain the contract limited percentage of ASMs. That's more incentive for both management and pilots to be productive and efficient.

Pilots complain. Management complains. Isn't there a better way where both can win? Isn't there a way to increase pay and productivity. Southwest pilots are among the highest paid, but they appear to work harder and smarter. Maybe both sides of the lagacy carrier labor management equation should look at how Southwest's model can be tweaked to enable both pilots and legacy carriers to make more money. Alaska seems to be very profitabe. Is there something about Alaska that, say, an American could emulate? There's no copyright on good labor and business practices. Maybe a little copycat behavior would be a good thiing?

10.7.2011 | Unregistered CommenterDesertGhost

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