Since writing the last blog titled “A Race to the Bottom,” I have received a lot of mail, much of it critical. Many readers wrote about the ratification votes on tentative agreements for pilots taking place at American Eagle/Envoy and Republic. After a heavy travel schedule, I finally got around to perusing my e-mailbox.
I have long challenged the approach of the Airline Pilots Association (ALPA) and other collective bargaining agents on the mainline-regional relationship, so the last post should not have come as a surprise. Simply put, the relationship needs fixing but the fix is not going to come from one pilot group voting down a contract in the false hope that a “pilot shortage” will resolve differences between regional carriers and the unions representing pilots. The only fix will come with a far more strategic effort on the part of many industry stakeholders – management, labor unions, universities, Congress and the regulators.
Consider the Republic situation. I’m hearing rumors of a concerted “Vote No” campaign intended to put the screws on management and extract more money. Based on my analysis of the industry, Republic pilots should take a step back and think long and hard about that approach. Republic is well-positioned to be a major player in the US domestic airline industry of tomorrow – an industry that will look much different than it does today. So what is important in the interim is to negotiate the very best agreement – one that addresses the makeup of a carrier’s seniority list today and ensures pilots a seat at the table looking forward.
What I like about Republic’s tentative agreement are things that address the future like an early re-opener. It calls for a four-year contract, allowing for adjustments when the contract is amendable at just about the time we’ll start to see significant changes in the industry. The TA also paves the way for what appears to be a more open relationship with the company to address scheduling and operations. These issues are critical to running the very best regional airline possible. American and Envoy took a different approach – an approach some call concessionary whereas Republic is offering improvements.
There are, of course, profound seniority differences between Envoy and Republic. Envoy is a “Legacy Regional” because of its relatively high seniority, while Republic’s seniority makeup is quite different. Among the many difficulties network legacy carriers faced in negotiating labor agreements in bankruptcy, seniority issues more than any other exacerbated the problem of cutting costs to compete with lower cost carriers. As I have said over and over, you cannot restructure seniority. Envoy took one approach in negotiating a way around seniority by significantly improving the flow through agreement with American.
Republic has gone another route by negotiating the very best pilot agreement it believes it can afford over the next four years taking into account the progression through the pay scales. Affordability matters. Republic is currently performing flying under contracts negotiated with mainline partners before this new pilot agreement was negotiated. Because those terms are set, increased pilot costs only degrade the airline’s margins.
It’s all about balance. Capacity purchase agreements are a reality for now, no matter how outdated the model, so the most realistic remedy is to accept that as fact and improve the situation one step at a time.
THE NATIONAL MEDIATION BOARD
I can hear the battle cries now: the NMB will release us and allow us to strike. Republic pilots will say that, after seven years of negotiations the agreement is simply unacceptable. But the union(s) should understand that the threat of a strike is not what it was 15 years ago. The NMB would be hard pressed to make a case to the White House that a sector-leading agreement in many important economic areas is not a good outcome and therefore allow the pilots to engage in a work action.
And, yes, commerce would be disrupted. Regional airlines provide the only air access for hundreds of smaller communities, making it even more unlikely that the NMB would grant a release. [Being remanded back to mediation only prolongs a process already gone too long] Consolidation in the mainline sector only compounds this factor as there is no longer sufficient capacity to accommodate the disenfranchised demand that would result from a work stoppage.
Yes it may be true that smaller cities could in the future lose air service in part because of a shortage of pilots willing to work for the regional carriers, but that argument would not outweigh the risks of a strike today. Are regional pilot salaries too low? Based on the education and skills required for the job, I think the clear answer is yes. But at a time the administration is focused on truly low wage workers and income inequality, it is highly unlikely that the White House would allow this issue to distract from its efforts to raise the minimum wage and allow a work action that could bring more financial pain to areas already punished by a weak economy.
So Republic pilots should perhaps think twice about the conditions for this particular battle and instead focus on the bigger picture and positioning for the future.
A SECTOR IN FLUX WITH THE POTENTIAL TO BE SIGNIFICANT
I’ve been putting a lot of thought into this subject, in part to prepare for a presentation I gave last week on what the North American airline industry will look like in 2025. Projections this far out are never easy, particularly in a business in which long-term planning is too often viewed as planning for the next month. I gave it a go, however, and came down on the side of today’s freight railroad industry. This is an industry that has a created a blueprint for sustainability that began with the passage of the Staggers Act and the departure of large railroads from their non-core businesses like passenger rail.
I see the Big Three airlines soon shedding small market service as it becomes less and less a part of their core business. If Southwest can influence more than 95 percent of demand by serving just a fraction of the markets served by the network carriers, so too can American, Delta and United who will concentrate their service on the nation’s top 100 or so markets along with transoceanic flying.
As costs creep up at the largest airlines, serving more markets won’t make economic sense, whether they do it themselves or in conjunction with a partner airline. Capacity purchase agreements won’t go away, but it is likely that carriers in today’s regional sector will become hybrid carriers that offer service to many markets the mainline carriers vacate.
I fully expect that naysayers will take a page out of an antiquated playbook to say that the economics will suddenly improve because the network carriers will “fix” agreements in place with their regional partners. As Lee Corso says every Saturday on ESPN’s College Gameday as the group picks winners and losers: “Not so fast.” You won’t hear it from the network carriers because it wouldn’t be politically astute for them to say it out loud, but my guess is that they would be very happy to begin exiting many of the small markets they now serve.
You don’t have to look too far to appreciate this fact as nearly every hub that has, or had, regional fleets as the backbone of its flying are now disbanded. Delta is trending away from 50-seat aircraft as quickly as it can in exchange for larger 76-seat and B717 aircraft for service to its smaller markets. Whereas in the past the network carriers would participate in subsidized Essential Air Service flying, that trend is dying. American will surely park the “scope-buster fleet” at Envoy. That leaves United which, in the midst of a $2 billion cost-cutting exercise, will certainly be looking hard at the billions of dollars it spends on regional lift and questioning how much is too much.
There is nothing in the data or the trend lines to suggest that legacy carriers will be willing to change the terms of existing capacity purchase agreements just because the economics of regional carrier labor agreement need fixing. These trends do, however, suggest that the regional sector as we know it will be smaller and that will mitigate some of the pilot shortage concerns in the short-term. The medium and long-term are another story but that is not going to get fixed in this round or address the pending problem of putting a qualified supply of pilots into the commercial airline pipeline.
SURVIVORS AND LOSERS
I see two big winners in the regional sector in 2025: Republic and SkyWest, in part because of their commitment to running the very best regional airlines. Yes, Envoy and the former US Airways’ wholly-owned carriers may evolve as stand-alone airlines, but their success is uncertain.
Republic and a SkyWest, by contrast, can successfully transition as hybrid carriers, much like Class II railroads did. Think airlines with multiple code share agreements on the same flight. At-risk flying will be more the norm. There will be capacity purchase agreements with the network carriers, albeit fewer, but only for those who demonstrate a track record of reliable service. Republic and SkyWest have that record where a carrier like Mesa does not. Ultimately, it will be Republic – assuming it can move forward with a new pilot agreement - and SkyWest who command the markets too small to be big enough for network carrier’s mainline aircraft.
Warren Buffet said: “In a chronically leaking boat, energy devoted to changing vessels is more productive than energy devoted to patching leaks.” Republic pilots who vote “no” on the current tentative agreement to protest realities of the market are doing nothing more than trying to patch leaks, and not successfully. The sector is changing and will change and the best energy now should be spent looking ahead to the next contract with greater clarity about what the business will be four years from now.
An early re-opener allows time to do just that: change vessels and improve the economics for those who want to stay and have a career at Republic [and Envoy]. Voting “no” does a disservice to the pilot profession because the problem is simply bigger than one carrier’s collective bargaining process. Voting “no” may feel good for a moment, but the long-term impact leaves Republic pilots with no seat at the table or real influence in fixing the industry’s medium and long-term economics. Does voting “no” send a signal? Perhaps, but in my view its equivalent to throwing the life preservers out of a leaking boat in a futile protest of reality.