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Thursday
Mar262009

The United – Aer Lingus Venture: The Chicago Tribune Perpetuating the Past

Since starting this blog and taking advantage of opportunities to be “media trained” over the years, I was told that I would never read the news the same again. How true.

I am a little late in weighing in on a March 16 story by Julie Johnnson in the Chicago Tribune: Clipping Union’s Wings; United – Aer Lingus Plan to Outsource Pilots on Overseas Flights, which I believe errs in just about every aspect in understanding what is really going on in the airline industry.

In the article, Johnnson suggests that the arrangement between United and Aer Lingus will spark an uproar as pilot contract negotiations begin next month. But what the author fails to mention is that the Airline Pilots Association (ALPA) knew of this deal long ago. And while I am not in the business of selling newspapers as the Chicago Tribune is, I do believe that negotiations that already stoke emotional fires do not benefit from stories that throw fuel on those fires.

I’ll start with the article’s assertion that the United-Aer Lingus deal would allow the airlines to “outsource” pilots and, in the process, clip the union’s wings. But this argument ignores the fact that the UA – AE venture is permitted by the UAL pilots’ collective bargaining agreement.

Indeed, there is no evidence to suggest that the collaboration between the airlines is equivalent to outsourcing or in any way a violation of the pilot agreement. Worse, the story goes further by suggesting that these flights would be flown by under qualified pilots.

The article also raises questions – unfairly in my view -- about safety, noting that it is unclear who would regulate an airline not based in the home country of a parent carrier. U.S. limits on foreign ownership would not apply because the partnership would be based overseas. The author’s raising of the safety issue is specious as established carriers like United and Aer Lingus would not put their reputations at stake by knowingly engaging in unsafe practices.

But the story does underscore a common slant of some newspapers that key challenges can all be distilled into labor issues. It is, perhaps, no coincidence that the story implies that the company is working against the best interests of it pilots, while failing to mention that United has begun paying bonuses to its employees for operational performance.

So let me say what the newspaper article didn’t. The real story is network economics.

In this alliance, United is considering Washington Dulles to Madrid for the initial route. Keep in mind that Madrid is a hub for Iberia, which is part of the oneworld alliance. And so the plot thickens, as industry observers know that several oneworld carriers (American, British Airways, Iberia, Royal Jordanian and Finnair) have applied for anti-trust immunity to fly between the US and Europe. United, meanwhile, is part of the STAR alliance. The majority of its transatlantic flying is gateway-to-gateway flying between North American carrier gateways and gateways of European partners.

The advantages of gateway-to-gateway flying are many. Foremost is the ability to sell not just traffic in the local market; but also traffic behind the US gateway to the European hub. And not just traffic from the US local market to points beyond the European gateway; but also bridge traffic traveling from points behind the US gateway to points beyond the European gateway.

The STAR alliance is not now well positioned geographically to serve Madrid and Lisbon and even some points in the UK and France because its primary gateways are located much deeper into the European market. So for United to make Washington – Madrid work by itself requires the carrier to rely only on local Washington – Madrid traffic and feed traffic to Madrid from cities connected to the Washington gateway. The route therefore has a limited pool of traffic and revenue as compared to Washington – Frankfurt or Washington – Munich. Moreover, the Washington – Madrid route is much different from Washington – London where the local market itself can support multiple daily flights.

Iberia currently serves Washington Dulles - Madrid. My guess is that United, and STAR, have identified this as a strategically important flight to its network. But as a stand-alone UA route -- with its inherent cost structure (labor or otherwise) – I would be surprised if United could turn a profit. All of which demonstrates how important it is for United and STAR to establish a presence in a strategically important city pair at a cost structure that will improve the economics of the route.

The United Pilot Collective Bargaining Agreement

Under the terms negotiated between United and its pilot union, Section 1 of the collective bargaining agreement explicitly states that, prior to entering into code sharing agreements with foreign carriers, UA will confer with ALPA.

The agreement further obligates United to negotiate with the prospective partner any labor protections that it deems appropriate to the circumstances consistent with its business judgment, including a commitment to negotiate as much reciprocal code share as possible taking into account limitations that are beyond the company's control.

In my read, there is nothing in the scope section of the UAL-ALPA contract that prohibits revenue sharing, cost sharing or branding, as long as the code share tests are met. The agreement also stipulates that the company cannot remove a scheduled non-stop flight from a joint international non-stop market unless it can demonstrate that the flight fails to pass what is known as “base rate of return” test – in other words a route must achieve pre-ordained financial results. Moreover, the pilots’ contract permits United or one of its affiliates to acquire as much as 50 percent of the equity of a STAR alliance carrier, contingent upon certain details.

 

Concluding Thoughts

Finally, the story concludes with predictable comments from the unions representing pilots at both United and American – the two carriers expected to face the toughest contract negotiations and where the unions are most openly antagonistic toward management. These negotiations capture some of the most difficult issues facing domestic airlines, where in many cases labor leaders have failed to acknowledge or address some of the core structural economic factors changing the industry. But the story, and its take on this development, would be greatly strengthened by providing more context regarding the global airline environment and the pressures on US airlines to build a truly global network and route structure.

The question, quite simply, is whether the US airline industry can compete with lower-cost and better capitalized carriers from around the world, particularly in this challenging global economy?

The reality is that United is doing nothing more than what it is permitted under its agreement with its pilots. Yes, there may be union leaders and airline employees who simply resent that the era of US dominance in global aviation is on the wane, but to ignore this reality does nothing to position any airline for a new global marketplace.

Perhaps the Tribune erred mostly by painting the challenges and opportunities facing United in the time-worn management-labor construct, rather than with the complexity the situation demands. The industry will change and change dramatically. And companies that fail to find new ways to create value through branding and revenue sharing and cost sharing could fail to exist.