For those readers who know me well, today marks the beginning of the end of the finest 30 days in sports television. It starts with the NCAA tournament and culminates with what can often be the best two hours in sports – the back nine at the Master’s Tournament on Sunday.
Even with the history and the azaleas to occupy my attention, on this tournament Thursday, my mind still wanders to the airline industry and I see similarities in golf, aviation and the games people play.
As is tradition at the Masters, past champions Nicklaus, Palmer and, this year, Gary Player (a.k.a Delta, United and Southwest) ceremoniously hit the first tee shots to open the playing of 76th tournament at the venerable Augusta National Golf Club. Past champions (multiple winners) at the Masters Tournament enjoy notoriety and historical significance long past their years of playing.
A popular past champion still participating in the Masters Tournament is Ben Crenshaw (American Airlines). Crenshaw is given little to no chance in this year’s tournament, but the sweet putting stroke possessed by the Texas gentleman keeps Crenshaw a fan (AAdvantage members) favorite.
Some very good golfers have never attended the Champion’s Dinner. Greg Norman (er US Airways) for example. Nobody in Masters’ history lost in more heartbreaking fashion than Norman in 1987 when Larry Mize chipped in on the second playoff hole to beat him; or when Norman beat himself in the final round that handed the green jacket to Nick Faldo in 1996. Norman’s misery is akin to US Airways missing out on consolidation opportunities in 2001(United), 2008 (Delta) and then again in 2010 (United). US Airways’ strategy to attempt a hostile takeover of Delta while in bankruptcy in 2008 reminds this golf fan of Norman’s collapse in ‘96.
Playing in this year’s field and given a real chance to win are world #1 Luke Donald (Alaska Airlines) and world #2 Rory McIlroy (jetBlue Airways). The Europeans are also making a strong showing these days, like defending champion Charl Schwartzel and perennial contender Lee Westwood (British Airways and Iberia).
Bunkers, Birdies and Bogeys
Pressure tournaments like the Masters tend to spawn meltdowns even among the very best players. The young McIlroy, in fact, suffered through a sad Sunday in Augusta last year. Just like airlines have their good years, bad years and critical moments. And just like golfers, the difference between success and spectacular failure in the airline industry depends on how you read the lie. It’s how you think your way around the course, avoiding bunkers like bad decisions, taking advantage of business opportunities (birdies) and minimizing the negatives (bogeys and others) like fuel spikes and bad strategic decisions.
That brings me to US Airways.
US Airways pursuit of Flight Attendant Hearts and Minds
The Masters is an invitational tournament; you have to be invited by the “committee” [UCC] in order to play. US Airways is trying to play to the court of public opinion to get an invite to this year’s event. US Airways had one good round it hoped would help it win an invitation to play in the year’s first major. That was reaching a tentative agreement with its flight attendants. Unfortunately for US Airways, it couldn’t finish. The flight attendants at the company overwhelmingly rejected that agreement despite the fact it offered significant pay increases.
The flight attendants said in a press release: "Since the onset of negotiations, Flight Attendants have been steadfast and determined that an agreement must address the needs identified by the membership. Flight Attendants have subsidized the cost of the merger and rising fuel costs for the 'New US Airways.' Management must recognize that our sacrifices have directly contributed to the success of US Airways," said Deborah Volpe, AFA pre-merger America West President and Mark Gentile, AFA pre-merger US Airways acting President.”
It has been nearly seven years since the “Old US Airways” merged with America West and there is still no done deal with either its flight attendants or its internally troubled pilot group.
And yet before round one has been completed in Augusta, US Airways has allegedly been courting the president of American Airlines flight attendant union, Laura Glading, who is also a member of the Unsecured Creditors Committee (UCC) in order to get that invitation to the year’s first major… a merger with American?
While it’s hard to know exactly who is chasing who in all of the US Airways merging/consolidating with American talk, Glading and the APFA have been anything but shy in their pursuit of an offer from Doug Parker and company. The APFA has boldly stated it thinks there is a better business plan than the one American is offering… mainly because AA’s will freeze pensions and trigger approximately 13,000 layoffs. (Notice no mention of the finer points; that AA’s plan might finally unshackle the company’s ability to compete with other network carriers who rehabilitated under bankruptcy.)
Someone – probably the APFA - has “leaked” stories to specific media about “suitors” talking to the UCC – even though as far as anyone knows the only UCC members actually listening are the unions themselves.
While both the APA and TWU (who are also part of the UCC) have reportedly had serious discussions with AA – and apparently those negotiations might have saved some TWU jobs – Glading has been stomping her feet and pouting about the unfairness of it all. She’s on record as stating the UCC (or, at least, one particular UCC member) is open to seeing a “better” business plan, thus leading to the flirtation with US Airways.
“Better” to Glading apparently means giving up nothing and gaining everything. But what “better” will she glean from this dalliance with US Airways? Not to change sports, but Vince Lombardi, the iconic former coach of the world champion Green Bay Packers said: “the only place you will find success before work is in the dictionary”. Do Glading and other leaders of American’s unions honestly think US Airways will not seek to make major changes to American’s archaic work rules and collective bargaining agreements?
In the tentative agreement, the former America West flight attendants were granted a 22 percent increase and the former “Old US Airways” flight attendants were given an 11 percent increase to even out pay rates – finally, after seven years. What then would US Airways have to do in order to put three groups on par with one another? Would APFA members be willing to work more for less? And if so, why wouldn’t they just stay with their own company? Or entertain commercial opportunities that might not involve a seniority integration process?
Maintaining a Cost Advantage Is Critical for US Airways
US Airways suffers from a stage length adjusted unit revenue disadvantage versus its legacy carrier peers – even more than American. But it also enjoys a stage length adjusted unit cost advantage versus these rivals – much more than American. Despite the revenue generating deficiency of US Airways’ network, the Tempe-based airline is producing very good revenue results relative to the industry.
US Airways’ revenue disadvantage is offset by maintaining its cost advantage – and most of that advantage is very low labor costs relative to the industry. As a result, US Airways’ pre-tax margins are impressive given its structural deficiencies. The cost advantage the carrier enjoys cannot be overstated nor can the company hide behind the fact a significant portion of its profit performance can be found in lower labor costs. By contrast, United and Continental are only now beginning to navigate what it might cost to buy labor peace, particularly among the pilot groups. US Airways has not explored what labor peace would cost, probably because maintaining the status quo is more cost effective. Or did the flight attendants say in their vote that what US Airways could afford was not sufficient to buy labor peace?
US Airways Touting Merger Synergies Before an Invitation is Granted
The most recent version of the US Airways – American merger story leaked to the press suggests the “synergies” of a combination would produce $1 billion in revenue and $500 million in cost savings. The revenue synergy number stems from the idea other mergers have realized a three margin point improvement in revenue resulting from the combination. JP Morgan’s Jamie Baker point to the fact American is weak in Albany, Buffalo, Greesnboro, and Richmond to name a few. What a yawn. In today’s world why are Baker and US Airways not talking about Auckland, Buenos Aires (oh American is positioned there), Guangzhou or Rome?
The strongest example of American’s domestic weakness is that AA is the #4 carrier in the Eastern U.S. in terms of market share and #4 in the highly fragmented Western U.S. So, the question remains, can AA truly address these structural weaknesses organically or does it need a merger partner?
Problem with adapting previous margin calculation to a US-AA merger is they don’t necessarily apply. Other mergers involved carriers with stronger domestic and – and more important – international networks. US Airways flies to mainly second-tier markets and has little international presence. That might seem like a good thing – each partner filling a need – but there is little synching between the two – but for this observer there is nothing that gets me excited from a network perspective. Domestic calculations are one thing – international are another. If I were Delta or United, I would be applauding this possible combination because it adds little to what other combinations might add. And what about the cost savings? We don’t even know what American will look like once it goes through the full bankruptcy process. Therefore how can we know what the cost savings will be?
It is just too early to tell because no one knows what AA will be when it gets through the restructuring process. Stated differently, what if AA wins the ability to have unlimited code sharing in the U.S. domestic market as a result of a changed pilot scope agreement? Then is US Airways the only choice? After all, American’s CEO, Tom Horton, has stated publicly he is not averse to a merger, but will only consider such a strategy once the company completes the restructuring process.
US Airways is absolutely not the only option for American. What about a fully integrated relationship with each Alaska and jetBlue? These would certainly better address the weaknesses on the west coast and in New York, particularly at JFK – two aspects of American’s not-successful-to-date “cornerstone strategy”.
The point is, there are options for American beyond US Airways and I might suggest there are better options than the Tempe-based airline – and they do not require a seniority integration process and potentially do not add seats to the capacity fragile U.S. domestic market. Then again the restructuring needs to be completed in full before we can begin to evaluate options – something that US Airways wants to avoid. For a company that constantly claims it does not need to merge, it seems to this observer to be incredibly desperate and fearful of not merging with its bigger counterpart.
As they say at the Masters, and any golf tournament for that matter, you can lose the tournament on Thursday but you cannot win it. It seems to me that US Airways is trying very hard to win the tournament on Thursday. There is a lot of golf to play in the American Airlines’ bankruptcy case. And until the back nine begins on Sunday, the leaderboard promises to be crowded as American is an important asset to many – most notably employees, British Airways, JAL, the Dallas-Fort Worth Metroplex and Tulsa to name a few.
If employee members of the Unsecured Creditors Committee are going to believe there is a free lunch (egg salad and pimento cheese sandwiches) with US Airways they are surely mistaken. Simply, if US Airways doesn’t fix many of the structural things wrong with American, then in a few years maybe the “New New US Airways” will have to file for bankruptcy and fix some of the obvious problems their desperate overpromise and sure to under-deliver approach to American’s unions will avoid in order to win the hearts and minds of employees to get a deal done.
Most of the naysayers regarding American’s stated stand-alone business plan have vested interests in the outcome of the game. Wall Street has made the case that consolidation and strict capacity discipline absolutely need to be adhered to if the industry is to be stable. They cite American’s 20 percent stated growth as something to fear. And it might be. But what is the 20 percent American has mentioned? Nobody knows. What if it is the ability to generate 20 percent more city pairs to sell through code sharing alliances with Alaska and jetBlue that add no new capacity to the system? Net effect equals zero. Period.
Then we have US Airways. Too big to be small and too small to be big. Like American, there is a case to be made that their route structure is being marginalized each and every day; therefore a merger is more important to its very success. For US Airways it’s only shot at a green jacket is to buy one (remember Crenshaw has two and Norman has none) because over a career opportunities to win one have been missed.
Angst breeds strange bed fellows. Angst does not win an invite to the Masters Toonament. And angst does not win an invite to membership. Yesterday Dustin Johnson had to withdraw from the Masters because of health reasons. For US Airways this sucks because the Masters does not have an alternate list. It must earn its way into the 2013 event because angst will not get it into this year’s Masters Tournament.
More to come.