Today I had the pleasure of participating on a panel at the 35th Annual FAA Aviation Forecast Conference, my second consecutive year taking part in one of the breakout sessions. I shared a dais with the President of the Regional Airline Association, Roger Cohen, and long-time industry consultant, historian and photographer George Hamlin on a panel titled: New Decade......Dawn or Dusk for Regional Carriers? I had the hotseat – responsible for discussing the reliably controversial subject of mainline pilot scope clauses.
It is my view that there can’t be an honest discussion on the shape or structure of the US domestic airline industry without talking about scope – the contractual clauses pilot unions negotiate to protect certain flying for their members. I believe that this round of contract negotiations at major carriers will be the most important since deregulation, and scope will play a pivotal role as the airlines take a hard look at economics. And mainline pilot scope agreements are all about economics.
Today’s industry architecture in which regional carriers fly large numbers of aircraft with 76 seats and less was drawn on the equivalent of vellum paper using compasses, triangles, French curves, triangular scales and protractors. The working structure did not come about easily. First, earlier era scope clauses were relaxed during the late 1990s and early 2000s to permit carriers to deploy 50-seat regional jets between hubs and markets that could no longer support the economics of a mainline jet. Delta and Continental had a significant head start on the rest of the industry in using these smaller aircraft because they had few limitations imposed through their pilot agreements.
Other mainline carriers: American, Northwest, United and US Airways, were late to the game. Scope-relaxed competitors were using the 50-seater to claim traffic that was traditionally the domain of the scope-constrained carriers still limited to feed markets within the turboprop drawn 400 mile radius around a hub. Now these little jets could overfly hubs, aggressively changing the competitive structure in the US domestic market.
So those carriers that needed the permission of pilots to compete on a level playing field recognized the need to relax restrictive scope clauses that limited what type of aircraft regional pilots could fly. And that made the scope clause important trading currency for pilot unions that agreed to relax scope protections only in return for improvements in other parts of the agreement. For example, when United pilots negotiated a new agreement in the Fall of 2000, the union leveraged scope relief to demand a weighted average 23 percent wage increase and two subsequent 4.7 percent increases, as well as a number of other contract enhancements that ultimately contributed to landing the carrier in bankruptcy.
I am convinced that, if not for bankruptcy, we would not be seeing mainline carrier’s regional partners flying aircraft 70 seats and greater in the numbers we are seeing today. So if today’s architecture was drawn with outdated tools, then tomorrow’s architecture will likely require Computer Aided Design (CAD) software. That, as old-school architects might say, is equivalent to replacing the pencil with a keyboard -- limiting in that the digital world requires exact inputs rather than the less precise nature of sketching. And that has real implications for pilots and the carriers that employ them.
From my perspective this next round of pilot negotiations could be the tipping point for scope: the critical juncture in an evolving situation that leads to a new and irreversible development. What if mainline pilots again treat the relaxation of scope as trading currency to make improvements in the collective bargaining agreement? Wouldn’t they ultimately be ceding mainline narrowbody flying in the US domestic market? I think so.
This approach would be a mistake for management, too, because scope relief has historically been assigned too much value in bargaining. There is value in the shift of flying from the mainline to regional partners to be sure. But the differences in labor rates between the mainline and the regional are nowhere near what they were before the last round of industry restructuring. Domestic revenues continue to suffer, particularly compared to the revenue environment when values were last ascribed to scope relief. And with little growth expected in US domestic flying, airlines must question where they’ll find the arbitrage.
I make this projection for domestic flying based in part on a comparison to historic growth rates. Today, the travel spend as a percent of GDP produces $35+ billion dollars less in revenue than did the high water-market in 2001. Labor rate differentials between mainline and regional carriers are significantly smaller than they were in 2001. Regulatory oversight of the regional industry will add expense that is not yet known or understood. Negative media coverage could undermine passenger acceptance and willingness to fly regional carriers. Most mainline airlines are ordering narrowbody equipment to replace aircraft in their fleets, not expand their fleets. And there are still thousands of mainline pilots on furlough.
Does Scope Produce the Intended Outcome?
In the most simplistic terms, scope is the definition of work for the class and craft of employees governed by the provisions of a collective bargaining agreement. Its purpose is to provide job security for those employees. But it is safe to say that most scope clauses produced unintended consequences. Between 2000 – 2008, legacy carriers reduced the number of narrowbody aircraft they fly by 800, and more than 14,000 pilot jobs have disappeared.
So, one could argue that scope is just another example of protectionism that failed. As economist Henry George, a sharp critic of protectionist policies, once said: “Protectionism teaches us is to do to ourselves in times of peace what enemies seek to do to us in times of war.”
Scope negotiations have been divisive not only between labor and managements but just as much between the unions representing mainline pilots and those representing regional pilots. Ultimately airlines must determine whether the 90-125 seat flying of tomorrow should go to the mainline or be flown by their regional partners. To arrive at the right economic solution, it is time for organized pilot labor and management to stop putting a Band-aid on problems.
The Boyd Group International recently released an interesting fleet forecast that looks in part at new aircraft orders. So far, the only area of real growth is in the 75-125 seat category. Orders in other seat ranges are forecast simply as replacements from now until 2015.
Ironically, 2015 is when many regional contracts expire, primarily those for 50-seat flying. These expirations could eliminate nearly 500 existing airplanes currently under contract between now and 2016; with the lion’s share coming off contract in 2015. This is a conundrum for the regional industry for sure. There will be a thirst for new flying.
It Is All About the Economics
Perhaps a better way than scope for pilot unions to think about job protection is to find the economics that will employ the most pilots at the mainline. That challenge must acknowledge the fact that today’s industry is not the industry of yesteryear. If the regional industry has been used as currency to cross-subsidize pilots at the mainline; and assuming that the trading currency is not what is was as we engage in this round of bargaining, then something has to give.
There are two solutions as I see it: 1) relax scope in order to win bigger increases in wages, benefits and working conditions for pilots that remain at the mainline; or 2) embrace the absolute fact that contractual rates, work rules and benefits need to be lower for US domestic mainline flying. That type of carve out can be negotiated. Domestic market flying differentials can be the new trading currency used to adapt any pilot contract to the market realities of today. There is no way to “perfume the pig” here; the mainline did something similar in 1984 in order to average down labor costs to facilitate growth. When it was decided that the concept was not internally healthy, mainline pilot labor made the regional industry the new vehicle for cross-subsidization of mainline pilot terms of employment.
One trend is clear: the industry’s pricing structure cannot now support labor rates that keep pace with inflation. An unpopular message -- yes. But there needs to be a structure in place that recognizes the different conditions in the US domestic market versus international markets. This structure must recognize that not all flying is created equal, just as the airlines are coming to appreciate that a one size fits all operation is not financially sustainable. There is a tremendous opportunity to put in place something better – if only the players at the table can let go of the past and come to terms with a new era in the airline industry.
Where Do I Come Out?
I recently saw a piece by Lori Ranson on the Airline Business blog titled: “A New Line In the Sand” that cites comments by long-time Raymond James analyst Jim Parker on the future of scope: “As employee groups seek to regain some concessions made early last decade as a host of carriers spent time in Chapter 11, there could be some leeway in the size of jets flown by mainline regional partners,” according to the analysis. James sees the potential to renegotiate current scope clauses, moving the dial from 70-seats to 90-seats.
I am not one to be on the other side of Parker often, but on this one I am. I do not believe that the mainline pilot unions can afford to make another mistake. Their arrogance toward regional jet flying led to their current predicament. The economics of US domestic flying is simply much more difficult now for the legacy carriers. If labor can’t let go of their memories of what the industry was 20 years ago to focus instead on where it’s going over the next 20 years, then they will have no one to blame but themselves if they fail to help position airlines – and the pilots they represent – for success. John Kennedy once said: “Change is the law of life. And those who look only to the past or present are certain to miss the future.”
It won’t be easy for pilot union leaders to find a solution for a problem that they helped to create. Just as the US Airways East scope clause defines small, medium and large regional aircraft, it is time to define small, medium and large narrowbody equipment necessary to profitably serve the domestic market.
Once again, a call for pilot union leadership. My view is that management is indifferent as to which pilot group does the flying. I am thinking we are at that critical juncture in an evolving situation that leads to a new and irreversible development – mainline legacy carrier pilots performing narrowbody flying in the US domestic market 20 years from now – or NOT.