swelblog

Earnings season is upon us and we all anxiously await guidance from airline executives on a forward looking basis. On the eve of past earning seasons, cues from industry executives have mostly used words starting with “C.” This time around, I want to hear commentary on topics starting with “L” namely:

Liquidity

I believe that we are nearing the final chapters for one carrier, possibly two. I do not know which they might be, only that there are not enough rabbits left in the hat for every airline to survive in this market.

Why?

- Because labor will not be the internal source of capital that it has been in the past;
- Fuel costs are uncontrollable;
- Maintenance repair and overhaul will not offer hundreds of millions of dollars in savings in the future as most airlines already have outsourced as much of that business as they can;
- Distribution costs already have been wrung out of the system at every airline;
- Airport costs ebb and flow with the level of traffic;
- Aircraft rentals and other vendor contracts are largely fixed;
- Commitments made to feed providers are contractual;
- Interest obligations are known.

In other words, there just is not much room on the income statement for airlines to maneuver.

In the U.S. airline industry, we could be fast approaching the tipping point– the critical juncture in an evolving situation that leads to a new and irreversible development. With credit tight, would you put money into an industry that has historically destroyed capital? Would you bankroll an industry that has few opportunities to reduce costs in a weak economy? Would you lend money to companies facing labor strife? To get to the bottom line, would you invest in a company in an industry that has never made a dime? In this economy, there may not be many takers.

The airline industry is not special. Like other industries, it needs a plan to earn at least its cost of capital and compete for a limited pool of funding. And those who hold the capital will likely look first toward companies and industries that reward their capital providers more than once or twice every two decades.

I share the belief of some others that the domestic market may be stabilizing, but think this recovery will be an uneven one. The real driver may be the international market and the global economy’s interdependencies that I do not pretend to fully grasp. So I have concerns about American, Continental, Delta and United. Asia has been troubled in certain spots for nearly a decade now. Europe was a strong performer while the US industry faltered, but now shows signs of weakness across the continent. And Latin America’s economy appears to be similarly troubled.

Beginning today, when American leads the first quarter’s earnings parade, I will be all ears. Because what I see for some is troubling. Others will benefit from the weakness.

Labor

The recalcitrant unions at American remain the lead story as outlined in Mike Esterl’s piece in an April 14 Wall Street Journal entitled: Labor Negotiations Cloud Outlook for American Airlines Parent. American is being joined by United which opens negotiations with all of its major unions this month. Between the two, there will be plenty to read and write about as union leaders at each airline continue to promise outcomes to their members that could not be met even in the best of times. Real leadership would instead recognize that no airline can long survive overpriced labor contracts that put them at a competitive disadvantage in the industry.

I read somewhere this week that the United Airlines flight attendants union is promising its members a new contract that will give them industry-leading pay rates. The American pilots union is taking an old page out of the Continental pilots’ playbook that “the loan is due” to gain back pay levels the industry no longer supports. The problem is that concessions granted or forced in past years were a necessary correction of market costs that had risen above the industry’s ability to absorb those costs. Those concessions were never a “loan” and there isn’t a labor contract in the industry that includes terms on rates or principal that would make them so.

American has a first – at least in my recollection – in having all of its negotiations in mediation at the same time. United could be in the same place as date certain contractual understandings are in place to file for mediation in the event no agreement is reached. As for US Airways and the labor unions that have not been able to complete an agreement following the airline’s merger with America West, I have given up trying to apply logic to that situation. The damage done to employees is done and that was the work of the unions involved.

OhhhhhhBama – Release Me (And Let Me Love Again)

The Allied Pilots Association, which represents American pilots, has been on an ill-conceived, death-march strategy that the leadership somehow believes will get them closer to a release from mediation. Negotiations began in September 2006 -- a long haul by any perspective – but the clock was reset when a new union president, Lloyd Hill, was elected in June 2007. I don’t pretend to know the union’s strategy in these negotiations beyond what plays out publicly, but I do know that the Hill administration has made contract demands that are so far removed from reality that I question whether he is really representing the best interests of AA pilots.

With each union that files for mediation, my guess is the American pilots move yet another group down the pecking order for a release and thus the ability to engage in Self Help. The APA should be taking a clue from the Obama administration and its dealings with the UAW. The UAW’s Gettelfinger demonstrated a real understanding of that industry in balancing the interests of his members with the economic reality, in part by working to preserve wages and benefits of current employees by negotiating lower rates for new employees. But even that didn’t change the reality that, as the economy continues to collapse; the UAW is still not close to having moved far enough from work rules and wage rates that put the Big Three at a huge cost disadvantage in the global auto industry.

Finally, to the pilot leadership, I can’t imagine what possible benefit you would gain through strikes or other work actions that few airlines could survive. First, there is little chance the White House would allow a union at a carrier the size of American or United or Continental to actually go on strike and potentially threaten the economy’s ability to recover. No matter how labor friendly the new administration is, I believe that any union will need to make a pretty powerful case to the White House as to why a strike is more important than the recovery of the United States economy. Any union that can make a case that restoration of inflation-adjusted wages can be easily paid for by the airlines may have a chance, but that’s going to be a tough case to make.

I refer to the American pilots union in this example, but it applies to any large airline. Too much stimulus is potentially threatened by a strike in an industry as crucial to commerce as the airline industry.

Here’s my bet on where pilot contract negotiations will end up at the legacy airlines: With the Delta deal done under the leadership of ALPA’s Captain Lee Moak, the remaining negotiations will be completed in the following order: 2) Continental; 3) United (following the lead taken in the CO negotiations); 4) US Airways (assuming a final resolution to the seniority issues scheduled for the end of April); and 5) American (and perhaps only after a “leadership” change takes place.)

Congrats to Southwest for having put to bed their negotiation with multiple groups at reasonable rate increases.  With little management distraction, the airline can focus on finding needed revenue.

Legislation

Finally, there are legislative issues important to this industry that deserves color in the upcoming earnings calls. First and foremost is a reauthorization bill that will fund the FAA’s activities. A committed industry must find a way to fund enhancements to the air traffic control system. Everyone in the industry recognizes the need to make changes. Now we’re just fighting over who will pay for them. It’s time to move forward and for the various factions to present a united front on "who will pay what".

Second on the legislative front is Oberstar’s bill to evaluate airline alliances every three years -- a clear attempt to make the formation of these alliances increasingly difficult. Never did I think I would write that former AMR Chairman Bob Crandall and Minnesota Congressman Jim Oberstar are on the same page regarding a controversial commercial issue, but I am - and I am even writing it in the same sentence.

In an interview with the National Journal’s Lisa Caruso, Crandall actually says: “In my view, an objective observer would have to look very hard to find a way in which alliances have benefited consumers.” His remarks point to the “dominance” of slots at Frankfurt and Paris by the aligned carriers. Is this any different than the structure "Crandall built" in the US domestic market where carriers were reluctant to offer service between the hubs of a competitor? Absolutely not. Instead, the competition offered a menu of one-stop competing services that presented the consumer a choice.

Are we not to acknowledge that the air travel consumer in Toledo benefited significantly from the Northwest – KLM alliance that offered seamless connecting service to Amsterdam and points beyond? Wasn’t it Crandall that coveted a partner in Brussels to partake in these very same traffic flows? Does Crandall really believe that Detroit and Minneapolis would have multiple non-stop services to Amsterdam if not for the alliance? Does Oberstar really believe that Minneapolis would have the international service to Europe it does without the network of KLM and now Air France on the other end?

Crandall even makes the point that the foreign carriers have been the beneficiaries at the expense of US carrier interests. Crandall is the one that brought the concept of time-of-day departures to the networks of the nation’s carriers. This alone has contributed to a significant amount of the uneconomic capacity that pervades the industry today. Do we really think that all of the departures that “Bob built” were good for anyone? If we did not have alliances to begin filling all of the ill-conceived capacity deployed in Crandall’s domestic network, then we would have even fewer US carrier domestic departures than we do today – even after all of the cuts.

For a guy I admired, Crandall’s comments leave me perplexed, confused and confounded. Some of his fixes are on point, like a changed labor structure. But Crandall should accept some of the blame for an industry struggling today as his pit bull instinct toward competition became a blueprint to build an industry too big. Or maybe he should explain to airline employees that his blueprint caused an industry to hire too many people that now believe they are entitled to wages higher than the industry can pay.

More to come on this one.

I am thinking that we should consider changing the name of the NMB, National Mediation Board, to the AAMB or the American Airlines Mediation Board. Or the FWMB, the Fort Worth Mediation Board, because the docket at the Mediation Board is about to be anything but National.

Trebor Banstetter, at the Fort Worth Star-Telegram’s Sky Talk blog, reports that American Airline’s flight attendants represented by the Association of Professional Flight Attendants (APFA) have jointly filed with the company to the NMB to take over the talks. This one did catch me by surprise but as I think about it, this is a brilliant strategy.

If the application by American and APFA has indeed been made, it raises some very interesting scenarios. Terry Maxon asked on his AIRLINE BIZ blog the other day: Will TWU be first American Airlines union to impasse? Maxon’s question was spot on given that the company and the TWU, sans the mechanic group, had arguably narrowed their differences in a super negotiation session that concluded one week ago. I do appreciate that the starting point will be something other than the final issues remaining on the table, but the TWU and the company each made clear to one another what is important to each side in their negotiations.

We potentially have the majority of American’s employee groups in mediation. The one group not in mediation, the mechanics, is the one labor group at AA that have a sound platform from which to negotiate "gain-share" improvements given the outside work being conducted. This is not to say that there are not some difficult issues ahead in these negotiations given that AA is planning to park their older – maintenance heavy – MD80 fleet on an accelerated pace beginning in 2009. But the fact is this group has enabled AA to find new revenue sources.

Brilliant, Why?

Often, the NMB is forced to make a decision as to which negotiation on its docket has reached impasse first. Typically a decision is between airlines and not labor groups at the same airline. American now has an entire company in mediation. A release of any one group would certainly result in sympathy strikes from other groups with unresolved contracts.

How quickly would new President Obama agree to ground the nation’s second-largest airline? With nearly $2 trillion in economic stimulus to be injected into the economy during the early days of his administration, I am not sold that “labor’s savior” will be trigger quick to ground a company of American’s size in an industry that is inextricably tied to the health of the economy.

Another benefit is that the NMB will be able to truly gauge progress within each negotiation. This is particularly important when determining the “impasse pecking order”. With regard to the TWU and APFA groups, at least some movement has taken place in the non-economic areas. The APA cannot say the same as it has put itself into such a politically-tenuous position that it cannot move off of an opening proposal. A proposal that could not be afforded on the day it was presented – let alone now.

Mediation in this industry can be a good mechanism to work through issues but only after issues begin to narrow. That is how the process is designed to assist. Not to clear the underbrush from 30+ sections of a collective bargaining agreement.

I still think Maxon is right that the TWU group in mediation is number 1 on the “impasse pecking order” list. For the APA, you just moved to a distant third on that list – unless of course you get to participate in a sympathy strike. Or maybe, the APA will actually read the tea leaves and remove their opener and conduct a negotiation with the real world in mind and not the terms and conditions offered at Air Nirvana.

This really is fun to watch.

Like Holly Hegeman at Planebuzz.com, I am having my own computer week from hell and as a result I am cranky. In my crankiness, I am actually thinking about the shot-gun wedding of airline labor and airline consumers, destined to fail, first initiated by the Business Travel Coalition.

This post is kinda about international alliances. Moreover, it is kinda about international alliances not being on the same page. I understand that without Anti-Trust Immunity (ATI), carriers are limited in their discussions with one another. But I find that Air Canada’s decision to rescind second bag charges at a time when United announced it would double its fee for a second bag to be a black eye for the STAR Alliance. North America is one thing. Tomorrow is not about North America.

What good is my STAR Alliance Gold Card if I do not have a clue? And I pay attention. Let’s be honest and frank here, Air Canada, under the leadership of Montie Brewer, has done great things with the internet. They have taught us about simplicity and transparency while teaching the air travel consumer about the concept of “value-added” services when making decisions to purchase an Air Canada product. These include preferred departure times, seats, meals etc.

Further, let’s not let it be lost that Air Canada’s approach, begun long before US carrier’s decisions about ancillary fees, gives them a leg up on the consumer education aspect. So, rather than charge for a second bag, Air Canada will roll its previously stated fuel surcharge associated with buying a seat on a particular sector into the base fare.

Ben Smith, Air Canada’s Executive Vice President and Chief Commercial Officer said: "These initiatives are made possible by the recent relief from all-time high oil prices and even though fares will remain dynamic”. Dynamic is the key word in this phrase. It simply means volatility. We can expect volatility going forward. The fact that a barrel of oil has dropped $55 per barrel in a little over 60 days after rising nearly $60 per barrel in a little over 200 days we should not immediately jump to the conclusion that the global industry is out of the woods. For statistical types: what is the standard deviation?

Air Canada does have it right. If dynamic cost increases are plaguing the industry, then let fares be dynamic. Addressing, and implementing, these processes goes a step further to educate the consumer and labor on the argument that the industry simply cannot sustain a fixed cost, fixed fare, environment that does not produce a profit for those providing the metal. Moreover, dynamic pricing is about addressing the boom and bust cycle that has plagued this industry for nearly three decades. It is about the education of stakeholders.

US carriers are using volatility to create rigidity through ancillary charges. And that is what defines legacy in many ways. Dynamic should be the word of the day. Dynamic is the action that needs to describe the immediate future of this industry as well as the outcome of the next labor negotiations – any airline’s largest controllable expense. Sadly, no US carrier is articulating this point.

Whereas labor continues to assimilate consumer issues into its leverage-grab for higher wages, dynamic base fares versus second bag charges best exemplify the issue describing why we need a flexible labor construct. This boom and bust cycle simply must end. We really need to think about this.

And if we are going to make an alliance argument, let's make one as differentiation is lost.

At least in the race for the US Presidency, a winner will be declared. In the corporate campaigns being run by the American and United pilots against their respective employers, no one wins. 25 years ago, corporate campaigns had some effect as they were new. They are often targeted at individuals, either senior executives or board members in hopes of exposing something “dirty” in exchange for leverage that can be traded at the bargaining table. As we have written here before, this upcoming round of labor negotiations is odd in that neither side has significant leverage and the most important in history since the industry was deregulated.

So the pilots, the “professionals”, the “flying investment bankers”, at United and American have taken to erecting billboards, calling for the heads of their CEO, challenging executive compensation schemes, talking openly about safety and ensuring that each carrier’s operating statistics remain in the press long after they have been reported - all the while hiding behind the veil of improving the product for each carrier's customer base. And hiding behind the financial and still unknown economic condition of the industry. What a laughable approach that promises no more leverage than what they have today as the path to a Presidential Emergency Board is carved.

I could have entitled this blog: The Summer of 2008 Part II.

Presidential Campaign

Like many I talk to, I am disappointed that we have not heard peep #1 of substance from either McCain or Obama on transportation issues generally and nothing on the airline industry specifically as they march toward the November general election. Some band-aid ideas on energy from Obama and the energy solutions suggested by McCain would have a long road to hoe to be implemented. Nonetheless, I am disappointed at this juncture that little is being discussed regarding this battered industry.

Corporate Campaign(s)

My view of the antics undertaken by the Allied Pilots Association and their current leadership, who still can claim that they represent 8,300 airmen at American Airlines, has been well documented in this blog. But most of the unprofessional behavior demonstrated by this current administration has been displayed by leadership of this independent union during every other cycle in the past.

Not so long ago, a desperate grasp for leverage only cost APA’s members $45 million in dues dollars. Today, their inflexible bargaining position based on a dream and actions undertaken against the employer to try and bully the employer to accept their outlandish ask could cost the American pilot membership more. Maybe much more. But they have been there before………. And I am still betting that this one gets put on ice and lands before a Presidential Emergency Board 18 months from now - long after the Delta and Northwest pilots begin to enjoy the improved terms of their new collective bargaining agreement that required the loss of certain legacy mindsets.

One thing that has always perplexed me about this industry, and I was persuaded to pursue the same actions in my past as a union leader: why do this industry’s unions perpetually make deals that minimize the headcount reduction while maximizing the pay cut undertaken by all employees? I have talked about how the industry has always over-expanded in the up cycles and never taken enough uneconomic capacity out in the down cycles. Well the same is true with labor.

The unions choose bigger paycuts to preserve jobs in the down cycles. Stated another way, pay cuts have masked the fact that legacy labor has engaged in bargaining practices that have made them less and less productive in the down cycles. These practices then lead to the airline hiring more employees than needed in the subsequent up cycle. This is a classic example of another inefficiency that has compounded itself over three decades of deregulation. But no, we will try to injure the entire membership to protect 200. Makes a strong cost-benefit analysis case don’t you think?

Corporate Campaign #2: United Pilots Call for Tilton to Resign

I was beginning to believe that the corporate campaign season would be limited to the independent union suspects: APA; and USAPA. But no, we are now joined by the United Airlines chapter of the Air Line Pilots Association. [And anyone that knows a few things about ALPA politics know about the cowboys at United.] First we have a public cry challenging the safe maintenance of their airplanes by the company’s own mechanics. Then we have the claim of an unlawful action on the part of the union by the company. Now we have the pilots at United calling for their CEO’s head.

This Is Nothing New......

A little history would be helpful here. Let’s take a walk down memory lane of United pilot and CEO relationships. In 1981 I believe, the United pilots made a significant concessionary pact in productivity to the company called “Blue Skies”. The subsequent negotiations between the company and the pilots did not return those concessions to the pilots and the result was a six-week strike in May of 1985.

The pilots claimed that Richard Ferris, who remained Chairman and CEO following the strike, was diverting money from the airline to invest in Westin and Hertz, a combination that ultimately became known as Allegis and included United Airlines. The United pilots hire F. Lee Bailey and began a push to buy the company following the end of their strike. Ferris was pushed out and the company sold its interests in Hilton and Hertz along the way. The CEO and Chairman chairs were held warm until Stephen Wolf was named head of the airline in late 1987.

But the pilots at United were exercising their power over being disgruntled with Ferris’s actions and were making headway toward a leveraged buyout until “Black Monday” – the market crash in October of 1987. Yes, the stock market crash in October of 1987 ended their initial bid. A failed attempt where the pilot union still paid its advisors some $16 million. Ever think how much that was in 1987?

Then, in walks Wolf in late 1987, a deal-friendly CEO that had cashed out nicely at each Republic Airlines and the Flying Tiger Line. By late 1989, Wolf was Chairman and CEO, the Allegis name was dropped and the subsidiaries sold. As Wolf’s tenure in the Chairman and CEO chair began, the economics of the industry were generally strong. Then came 1991. High oil prices and a recession. In 1993, Wolf turned to the unions seeking concessions from contracts negotiated in a much better economic period. [What we did not know at the time was that an inside ALPA lawyer would be financially rewarded for being an intermediary to turn these talks from simple concessions to the vehicle that would be used to sell the company to the employees] The company sold the flight kitchens following a near $1 billion loss in 1992.

The 1993 concession negotiations ultimately led to the ESOP structure that was closed in July of 1994. Nearly seven years after their initial attempts, the United pilots had their wish. Wolf was paid off handsomely and in came former Chrysler CEO Gerry Greenwald to head the company and usher in this new era of employee relations. Greenwald was hand-picked by ALPA to head the new airline, as was his number 2, John Edwardson. And the pilot advisors were paid yet another $16 million in the process.

Employee seats on the board were negotiated with unprecedented and unhealthy corporate governance power. Greenwald makes himself a lame duck during this period by announcing half way through that he would only fulfill the initial 5-year term of his agreement. My guess is he fully appreciated that the economics and the governance construct would inevitably lead to a bad outcome. He left in 1999.

During 1998, employees that had made concessions to buy the airline were entitled to begin negotiating interim wage increases. Management recognized that the increases being sought could not be sustained. Then, using their power at the board level, ALPA and the IAM voiced strong opposition to John Edwardson – the chief opponent - and he was ultimately replaced by Jim Goodwin. Goodwin, was another President and COO that needed the blessing of the unions. Then in early 1999, following Greenwald’s departure, Goodwin was named Chairman and CEO.

The ESOP construct ended in 2000. But as the ESOP construct was ending, which meant that United had to negotiate new collective bargaining agreements with all of its bargaining units except the flight attendants, Goodwin began to pursue a merger with US Airways. Labor tensions mounted as the merger now posed many issues that could negatively impact the outcome of their negotiation of a new collective bargaining agreement.

The pilots ultimately won a ransome-like contract, based in part on their actions, that made virtually their entire portfolio of international flying unprofitable. Further the contract established a false market on the rates the industry could afford to pay for pilot labor. Ultimately the US Airways bid was abandoned in 2001. Then the events of September 11, 2001 unfolded, exactly one-year after ALPA agreed to accept its ransome. And surprise, surprise: as the unions still possessed the extraordinary governance powers negotiated during the ESOP transaction, Goodwin was gone by November of 2001. His chair was held warm by board member Jack Creighton until a successor could be found.

Like the rest of the industry, United suffered in the aftermath of 9/11. The company began negotiations with all of its unions seeking an unprecedented give of $2.5 billion annually. Creighton retires, as he was not the one to lead this company through this difficult period. With governance powers still in place, ALPA, the IAM and the board replace the retiring Creighton with Glenn Tilton. The former oil executive will be the one to lead United into, and out of, bankruptcy protection. Remember, it was ALPA that hired Tilton - like many before him citing that it was one expensive hire but definitely the very best of the candidates interviewed.

Concluding Thoughts

Now United is nearing the time to begin negotiations to replace the consensual agreements reached while the company was in bankruptcy. One of Tilton’s strongest attributes upon his hiring was his familiarity with the bankruptcy process so I guess in some ways that makes him a restructuring guy. It did not take him long to recognize that the negotiations with the unions that were concluded prior to the filing on December 9, 2002, were not going to be enough. And I do not think that Glenn believes the work is done at United yet.

For years, the United pilots have taken to calling for the head of each and every CEO that said no. They were more than willing to put in place those they believed would say yes. But even they had to say no at some point and when they did - they were gone. Tilton has said no and continues to say no so that means that the United pilots should keep with what they know and call for his head. But any good restructuring guy knows when the work is done and when it is not done. Many have stayed too long. I don’t think this will be the case as United works toward righting its operation in anticipation of an alliance with Continental Airlines.

I think some history is important for those looking at the United pilots calling for Tilton’s head as a significant event. It is not significant. It is nothing more than a piece of a tired, three-decade old tactic that the United pilots are using in Corporate Campaign 2008. If the United pilots are serious, as they were in the mid 1980’s, then buy the company again. Otherwise there are two choices: be creative and constructive; or be legacy-minded and destructive. United probably has a liquidation value that shareholders might just view as attractive.

I love how history repeats itself in this industry. This blog was largely written from memory as I have spent a lot of my life at United in these dealings. I am sure that I will be corrected if I have made a mistake on the chain of events.

And further, isn’t it interesting that on the day the pilots call for Tilton’s head, the Delta and Northwest pilots approve a new collective bargaining agreement that will be in place when the merger of the two companies is finally approved. At least at some carriers represented by ALPA there are constructive actions being undertaken to address a changing world.

More to come.

As I have written often and recently, the competitive position of the US legacy carriers in the global arena is a major concern to me. My thoughts on this topic are largely contained in a talk I gave at the ACI-NA International Aviation Issues Seminar in late November click here.

With the combined market capitalizations of the Big 3 EU legacy carriers (Air France/KLM, Lufthansa and British Airways) exceeding the market capitalizations of the Big 6 US legacy carriers (American, Continental, Delta, Northwest, United and US Airways) combined by nearly 33%, something clearly needs to change. And if Air France/KLM is successful in integrating troubled Alitalia into its fold, then the margin will become even more embarrassing for airlines carrying the US flag.

What a Cool Job

If there is a job I want in the airline space today, it would be the UPS whiteboard guy click here. Why? Because the UPS model, and the way they talk about it in their whiteboard campaign, demonstrates the futility of US carriers trying to operate successfully under collective bargaining provisions that are at least 35 years old. The UPS guy is not encumbered by existing lines or parameters as he connects UPS’s dots on the map. More importantly, the company actually connects the product to what customers want and demand –a novel concept! If there is a time to throw the past away (erase) and look to the future (redraw), it is now.

So maybe, just maybe, the Allied Pilots Association is on to something in its latest proposal to American Airlines. While I would never suggest that the APA “one liner” scope provision click here makes sense for the AA network as we know it today, anything that simplifies the ability of US airlines to implement commercial, tactical and strategic decisions to react to a changing domestic and global landscape makes very good sense to me. More importantly, anything that gets the mainline growing again is the best solution to some of the labor-related hostilities in the industry today.

Whiteboard Analysis – Regional and Codeshare Flying

What I like about the simplicity of the APA proposal is that it provides a starting point to begin serious negotiations – something the American Airlines negotiations are sorely lacking.

Given that scope defines who can do what flying necessary to operate the network, AA would get to go to the “whiteboard” and lay out for the APA the cost for feeder flying relative to the revenue generated by that flying, as well as the traffic and revenue contributions to its mainline domestic and international routes. As part of AA’s whiteboard exercise, they also get to demonstrate the value of revenue and traffic contribution the international codesharing partners now contribute.

If APA puts forward a scope proposal that reserves all flying for its member pilots and that makes economic sense, then there would be no need to scale back the current size of the network – all other things being equal. On the other hand, if APA is not willing to agree to terms – pay rates and work rules – that, when the interdependencies of all contractual issues are understood and at least match what AA pays today for this business, then the company would need to make some decisions about how much to shrink the current network.

Whiteboard Analysis – Mainline Flying

Let’s take it further.

The cost of the APA flying will ultimately determine the size of the network for regional and codeshare flying. The next calculation is the cost of operating the existing, or remaining, mainline network. If the network can sustain the 50+ percent increase in rates and all other items included in the union’s current proposal, then the APA will have realized its goal of restoring lost earning power to their members and establishing the pattern for the rest of the industry to follow.

Based on the cost of operating the mainline network under the APA proposal, there are two paths to explore on the decision tree: 1) if the remaining network cannot incorporate the cost of the entire APA proposal, then determine what portions can be operated profitably and the remaining network would need to be dismantled; or 2) determine how much increase in pilot cost the network could absorb and then ask the APA to adjust its proposal downward.

Whiteboard Analysis – What Is the Right Formula for US Legacy and LCCs?

This conversation is underway not only in union halls, but also on Wall Street and in corporate boardrooms. It is a topic on the Dallas Morning News’ airline blog click here. While Mr. Maxon sees the APA proposal is a bombshell, I see it as a starting point for negotiation that appears to be stuck. Historically, scope language is among the last issues negotiated in pilot contracts. Let’s switch it up this time and figure out exactly what unions want their respective companies to be - global leaders or niche players?

We talk a lot here about CEOs that are genuinely concerned about value creation versus value destruction – Glenn Tilton at UAL, Doug Parker at US Airways and Richard Anderson at Delta. But another CEO has been hard at work totally rethinking his business as well: Gary Kelly at Southwest. This past week, Kelly spoke directly to the “perils” facing the industry click here. Kelly and his pilots are also engaged in a discussion of scope language as their business is about to get more complicated with proposals for international flying and code shares as a way to boost revenue production.

With little to no clear investment thesis in the core business of airlines, UAL this week declared a special dividend to its shareholders click here, much to the chagrin of its employees and a very passionate Holly Hegeman who writes about the action in her blog, Planebuzz click here. If nothing else, Tilton and UAL are consistent in their focus on the shareholder – often the most ignored of stakeholders in the airline industry. While I can see the employee view, at-risk compensation is a way around this angst.

So unless the business of the business starts to have a clearer line of sight to the customer – meaning delivering a product that the customer is willing to pay more for – then the payment of special dividends, the selling of wholly owned subsidiaries, consolidation and/or a slow liquidation of US flag airlines will continue. You know, money talks and #$*&! walks.

Concluding Thoughts

I really think the APA is on to something with its scope proposal. Let’s talk about scope first among the tough questions that will determine the future shape of the US airlines. Once that question is answered we can move on to a meaningful discussion about how to better compensate a workforce because the current seniority-based, hourly rate system simply is not effective in the modern market.

Structured properly, this round of negotiations may just lead to finding the right network architecture to make the US carriers global leaders again. Or not. But doing business circa 1970 is not going to get it done. So let’s remove the clutter and the underbrush and start with a clean whiteboard. Maybe even do what the European carriers do and create business units that carry cost structures to match the sub markets they serve because they recognize that a one size fits all just does not work. And this approach could indeed be done with pilots on the APA list – just ask Northwest and US Airways.

Let’s stop saying it just cannot happen. It can.