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Tuesday
Jan052010

Let’s Make Today’s Unions Tomorrow’s Source for Labor

A Challenge to ALPA Captains Paul Rice and John Prater

On the last day of 2009, Caroline Salas of Bloomberg (edited) wrote an article on the regional airline industry titled:  Pilot Complaints Highlight Hazards of Regional AirlinesIn it were references to Gulfstream International (a training academy and airline) that were first reported by Susan Carey and Andy Pasztor of the Wall Street Journal on December 1, 2009. Salas quotes Captain Paul Rice, First Vice President of the Air Line Pilots Association (ALPA) alleging that the industry contracts flying to regional carriers to circumvent pilot agreements at the mainline carriers. 

Rice says: "The way the industry is structured is that management will go out and find a new airline and start siphoning off the business to whoever will fly for cheaper.  The American public is only just starting to wake up to that. What they are buying is the lowest-cost operation that's available."

This is a gross misrepresentation of the truth. What Rice does not say is that his very own union is a primary reason why the industry is structured the way it is. ALPA and others negotiate contracts with mainline carriers that proscribe the terms on which an airline can outsource flying to its regional partners.  Under the restrictive collective bargaining agreements common in this industry, most airlines can’t even make these important business decisions without the authorization of the pilot unions.

It is high time for ALPA and Captains Prater and Rice to tell the truth and take some responsibility for the current structure of the industry, even when it doesn’t necessarily serve the interests of big labor and its members. 

In a recent post, Sacred Cows and Fatigue, I referenced a thought-provoking column by Michael E. Levine in Aviation Daily that took on some of the debate over regional flying today.  In it, Levine noted that the February 2009 Colgan Air crash near Buffalo raised issues about pilot experience, fatigue and performance that “underscore the need to revisit negotiated seniority rules and pay scales that pay pilots more to fly bigger aircraft, leaving some of the least experienced pilots to do some of the most demanding flying.”

Earlier, in US Pilot Unions’ Dirty Little Secrets, I discussed the complex structure of airline networks that have developed over time through mergers; acquisitions; regulation and, importantly, union influence. And one place that labor influence plays out is in pilot contract “scope” clauses that too often hamstring an airline’s operations in the name of job protection for pilots.  The question we in the industry should be asking is whether those scope clauses really serve that purpose or, rather, whether some union leaders use scope in a way that is both misguided and ultimately harmful to the pilots they represent.

My Challenge to Captains Rice and Prater

Based on the testimony of ALPA since the Colgan accident, there has been nothing said that makes me think that the nation’s largest pilot union is ready to take responsibility and become part of the solution. Yes, regulatory barriers play a role in many airlines’ ability to serve certain markets profitably.  But at the same time scope clauses also contribute to a situation in which airlines are forced to outsource flying to their regional partners when mainline economics cannot support that flying. This fact is as true today as in the late 1980’s when the architecture of the network carrier's relationship with the regional airline industry was being drawn.

How about this resolution: Beginning in 2011, ALPA and other unions that hold collective bargaining rights for airline workers actually employ the members they now represent. Let’s use pilots as the example:

Let’s say Airline X needs pilots for 1.7 million block hours of mainline flying.  Of that, the airline needs .6 million hours of 777 flying; .2 million hours of 767 flying; .5 million hours of 737 flying; and .4 million hours of 757 flying.  Based on its projections of the revenue it can earn to fly these routes, Airline X is willing to pay $1.2 billion for pilot labor. In addition, and a result of the current industry structure, Airline X will require .5 million hours of CRJ flying and .5 million hours of EMB70 flying for which it can pay $500 million.  So, in total, Airline X needs pilots to perform 2.7 million hours of flying and is willing to pay $1.7 billion for those services.

Based on calculations compiled in MIT’s Airline Data Project and an assumed split for captains and first officers, on average, the industry pays a captain cost per block hour of $325 and a first officer cost per block hour of $225 for small narrowbody flying.  For 757 flying, the cost per captain block hour is $350 and $250 per first officer hour.  And for widebody flying, captains cost $563 per block hour and first officers earn $400 per block hour.

So, in our example, simple math produces a mainline cost that is $85 million more than what Airline X can pay based on projected revenue for that flying.  As an employer, ALPA would either have to agree to reduce the rate charged for each pilot or find another way to get the flying done at that cost.  That might mean increasing pilot productivity beyond the average 40-50 hours per month most network pilots now fly.  Or expanding the arbitrary and artificially low limit most unions put on pilot duty time. Or rethinking the level of benefits provided.  But the exercise itself – one not dissimilar to what most airlines are trying to do through labor negotiations to correct for bloat and inefficiency in current contracts – would be an eye-opener for labor leaders who don’t now have to trouble themselves with the hard work of making the airline’s budget actually balance.

The Math Is the Math

Now ALPA has to decide if it is in their best interest to maintain a greater number of pilots (today’s practice in which younger pilots ultimately subsidize the generous pay provided more experienced flyers) or fewer pilots who would earn more based on what the market is willing to pay. 

That decision must include many considerations, including:

  • Is there really a difference in the cost of a life flying on a 50-seat regional jet versus a 250 -seat B777?;
  • As market economics have made mainline narrowbody flying uneconomic in a large number of markets, is it good practice for a union to negotiate lower rates and different work rules for pilots at one carrier in order to support higher wages and more time off for pilots at another carrier?;
  • Is it the case, as Prater testified before Congress, that “a safety benefit is derived from all flying being done from a single pilot-seniority list because it requires that first officers fly with many captains and learn from their experience and wisdom before becoming captains themselves”?; 
  • If ALPA actually employed all pilots, then wouldn’t the creation of a single pilot seniority list facilitate the implementation of a system to address the experience problem at the regionals where, as Levine suggests,  a  30-year 737 captain might actually be assigned by ALPA to fly the demanding flying that today is performed by 50 seat CRJ pilots?; and
  • Does a system of pilot promotion from right seat to left seat; from regional to mainline in a market that promises only a growth rate roughly equal to the rate of attrition at best, really work anymore?

As employers, the unions might be forced to make decisions like management must – based on what is in the long-term best interests of the airline and all of its employees.  From that position, it is much harder to throw stones or seek job protections and wages that don’t recognize market realities. ALPA and the unions would have to answer some really tough questions.  

Given that the market offers little promise for growth like that experienced between 1978 and 2001, it is time for a new compensation and work rule model.  Perhaps it is time to put the most experienced pilots on trips that include the most demanding flying. 

And it is time that organized labor, particularly ALPA, to step up to the plate and become part of the solution rather than continue to contribute to a troubled industry’s troubles by not accepting any responsibility for today's structural predicament.  ALPA can put its dues money where its mouth is and truly promote safety.  But that might just mean a total overhaul of the way pilots are compensated.  

Thursday
Jan312008

Swelblog.com: Taking Great Exception with Congressman Oberstar

Congressman Oberstar says: “Hell No”; I Say What’s Different

In today’s Aviation Daily, Correspondent Madhu Unnikrishnan published a story entitled “Oberstar Strongly Opposed to Airline Consolidation”. The full text of the story is included at the end of this post.

Congressman Oberstar, I grew up in your congressional district and am quite familiar with the “Socialist Republic of Minnesota” moniker that is sometimes used to describe politics there.

You speak often, and proudly, about deregulation and the consumer benefits derived from the Act. But wasn’t it also designed to allow the free market to work? Wasn’t it designed to force efficiency that would ultimately bestow lower prices on the consumer and to get them flying?

A Lot of Questions About Why “Hell No”

I am attaching a 1979 - 2005 chronology of actions between the State of Minnesota and Northwest Airlines that were compiled by Senate Majority Research. Certainly there are a number of actions included on the list that are anything but free market. As you reflect back on many of these actions that have your fingerprints all over them, how would you measure their success? Certainly you would not make the case that this was the free market at work. Parochial and protectionist -- yes. Free market -- no.

A big question for you today asks: is it more important to have an airline with its headquarters based in Minneapolis/St. Paul or a strong industry carrying the US flag around the globe?

Did the numerous financial aid packages you helped to author keep Northwest out of bankruptcy?: No. Have Northwest workers been subject to the same loss of income and benefits that have been suffered across the industry?: Yes. Northwest’s need to reduce cost and the resultant employee loss of income is a function of the free market that you were part of creating. Are you confident that the current environment ensures the success and staying power of Northwest as an independent entity that will forever employ all its workers that remain?

If there was ever an airline antitrust issue that was bound to impact Minnesota – Minneapolis/St. Paul and Duluth for that matter - it was the Northwest – Republic merger that was announced in 1986 when you were a member of Congress. Why was it OK then to remove a competitor in a hub market and any talk of consolidation today of a fragmented and hypercompetitive domestic market gets a “Hell No” from you?

The Darwinian struggle to survive initiated by Airline Deregulation Act drove Northwest to buy its primary competitor in Minneapolis -- Republic. That new competitive environment created by the ADA caused virtually all incumbent airlines to evaluate the relative size of their respective networks to that of the other domestic competitors in the market. When Northwest bought Republic, the industry was in its infancy and the focus was on the domestic market as network size could not be built organically in the face of deregulated pricing.

Today US airline competitiveness in the global marketplace is in its infancy. All that is different is that now we’re talking about network size relative to the global marketplace. Just like when Northwest bought Republic, today’s networks that are necessary to survive cannot be built organically. Certainly not when airlines lack critical pricing power that stems from a fragmented and hypercompetitive home market.

The size of the commercial aviation market is not confined to the eighth district of Minnesota, the borders around Minnesota or the 48 contiguous states. I know you are sent to Washington to represent your Minnesota district – and you do it well. But in your Chairmanship role, you represent the entire US. I thought that Congress was interested in the success of US industries, particularly those that are inextricably linked to the health of the US economy and assuring that US industry can be as competitive as it can be in the global economy.

That is not what I read and hear in your public statements. Am I wrong on this one: “Hell No”.

Aviation Daily, January 31, 2008

Oberstar Strongly Opposed To
Airline Consolidation

The House Transportation and Infrastructure Committee this week reinforced its opposition to airline consolidation.

Aviation subcommittee Chair Rep. Jerry Costello, D-Ill. said at a news conference that airline consolidation will be on the Transportation Committee’s radar screen this year. He noted the subcommittee will “examine and investigate” any mergers that “develop beyond rumor and discussion.”

But Committee Chairman Rep. James Oberstar, D-Minn., stepped
up the rhetoric on airline consolidation considerably, offering his opinion on the subject as “hell no!”

“Airline mergers do not serve the best public interest,” Oberstar said, arguing that consolidation can cause service to decline in remote areas and will almost certainly cause fares to rise.

The architects of deregulation didn’t predict the hub-and-spoke system would be a result of their actions, Oberstar noted, and he fears that further consolidation will cause the passengers “at the end of the spokes” to suffer cuts in service. Moreover, passengers are benefiting from the lowest fares, in real dollar terms, since deregulation, and this will end if consolidation reduces choice in carriers, he said.

Airlines will take defensive actions against a “mega-carrier,” Oberstar believes, and this will further reduce passenger choice.

The Justice Dept.’s oversight of airline mergers has been “sporadic,”
Oberstar said, but if a merger does happen this year, he said he will press the DOJ to examine it closely for antitrust violations. The U.S. Transportation Dept. also has a role to play in “defending the public
interest in aviation,” and Oberstar said he will “badger” DOT if necessary to prevent its approval of any airline merger.

If any airlines move closer to merging, Oberstar said the Transportation
Committee will hold hearings to “mobilize public opinion against airline mergers.” Consolidation only “benefits airline executives,” he warned.

Costello implored the Senate to move on the FAA reauthorization bill. The passage of the bill is crucial to the committee’s continued “aggressive” oversight of FAA and the airline industry, he said. Costello added that the committee will pay special attention to the issue of runway incursions this year.
-madhu_unnikrishnan@aviationweek.com

Monday
Oct012007

Swelblog.com Taxiing Into Position

Welcome to Swelblog.com . For some of you, the name Swelbar is recognized. For others it will be new. Following nearly 30 years of airline industry experience, mostly in the consulting world, I hope to use this space to focus on the most talked-about issues in the airline business: the people running the airlines, the labor unions, customer service, competition and finances in one of the most interesting industries in the world.

Of course we may deviate some to talk about golf, college basketball or wine and other vitally important things, assuming there are any.

I did not start this blog to win friends or influence anyone. I’m a data guy, and I’ve been studying the industry long enough to come up with some strong opinions . . . many of which aren’t popular in either boardrooms or union halls. My approach is analytical because, in my view, the numbers don’t lie.

I want to start with scope, which has powerful implications for airline fleet use, labor and the bottom line. I spent a lot of time studying labor contract “scope clauses” in a prior incarnation, looking specifically at the issue of scope clause constraints on market development in 1999. Some agreed with the analysis, others did not. Some were dignified in their responses to the analysis, others were not. I expect much of the same here and it is my hope that the site can in time lead to a cogent, coherent and congenial discussion on the many issues and opinions that are sure to rear their head.

I rejoined the scope debate in a recent issue of Aviation Daily. In August, a well known and respected regional airline industry analyst raised issues with pilot scope clauses as an impediment still plaguing certain carriers. That piece was followed by a response from a current leader of a pilot labor organization and then followed by a response from the current President of the Regional Airline Association. After reading it all, I could not quiet my fingers.

In my posting you will find many issues that I have addressed publicly over the years, not only scope, but also the regional-mainline carrier relationship in general. I have taken the liberty below of sharing the opening and closing paragraphs of each submissions that lead to my response which I have published in full. Much more to come……..

Swelbar

Scope Disparities Growing on 8/2/07

By Doug Abbey, Partner in Washington-based aviation market research and consulting firm The Velocity Group

First Paragraph:

As Continental commences formal negotiations with its pilots on a new multi-year contract, it is ironic to note that the carrier now has the most restrictive scope clause language in the industry. By having successfully avoided bankruptcy, Continental (along with American) has been rewarded commensurately; both carriers now find themselves widely out of competitive touch with their post-reorganization peers.

Closing Paragraph:

We therefore encourage Continental and American to consider a new direction not encumbered by old ways of thinking or doing business. Scope is an anachronism — both in and out of bankruptcy — that does far more harm than good.

Opinions expressed are not those of Aviation Daily or McGraw-Hill. Bylined submissions should be sent via e-mail to aw_departures@aviationnow.com.

Scope: Beneficial To Pilots And Airline Managers on 8/17/07

First Paragraph:

In the “Departures” section of the Aug. 2 edition of The DAILY, airline industry consultant Doug Abbey expresses the view that the scope clauses contained in some pilot contracts do more harm than good for major carriers’ key constituencies. A brief examination of the facts illustrates that he could not be more mistaken.

Closing Paragraph:

It’s a tired refrain for consultants like Mr. Abbey to blame labor contracts for corporate shortcomings. I submit that it’s management’s responsibility — the executives who lavish themselves with hundreds of millions in bonuses — to fix the factory through vision and leadership.

Capt. Lloyd Hill is president of the Allied Pilots Association, collective bargaining agent for the 12,000 pilots of American Airlines.

Stop The RJ-Bashing on 8/23/07

First Paragraph:

Blaming this summer’s air traffic hassles on regional jets brings to mind Yogi Berra’s reason why he didn’t want to eat at a popular restaurant: “No one goes there anymore — it’s too crowded.”

Closing Paragraphs:

But don’t blame RJs. Or the airlines — which lose big with flight delays. Or the FAA’s controllers, since not even Tiger Woods could hit 350-yard drives playing with persimmon head clubs. Instead, can’t we just all get along, stop playing “blame ball” and work together to fix the system — even if it’s one delay at a time?

Then maybe we can make one of Yogi Berra’s lesser known quotes come true: “It’s not too far, it just seems like it is.”

Roger Cohen is president of the Regional Airline Association.

It’s More About Labor And Economics, And Less About Scope

I have one word for the discussion that began in Departures on Aug. 2 and continued throughout the month regarding the issue of scope clauses — hypocritical.

While scope clause limits in mainline pilot contracts were a significant issue in the late 1990s, they can hardly be considered a similar impediment at any carrier today. You can’t claim that scope defines work for mainline pilots any more than you can say that small narrowbody jets have a place only in the regional airline industry.

While I do not agree with Capt. Hill’s economic analysis of the use of 35- to 90-seat jets, I believe he has identified a key issue facing airline labor unions in the next round of negotiations. The arbitrage in labor rates between the mainline and regional sectors of the industry fueled the growth of the regional industry over the past 10 years. Now, as rates have converged across nearly all sectors of the industry, one can make the case that the economics of the relationships between mainline carriers and their regional affiliates may not be the best operating model for tomorrow.

Mr. Abbey cites American and Continental as the airlines with the most restrictive pilot scope clauses. In fact, each carrier has been judicious in its use of its regional fleets and has outperformed the industry during a tumultuous time. Continental made the first declaration that its 50-seat growth would come to an end sooner than expected, and American has been the most vocal of the mainline carriers about the need to keep constraints on domestic capacity.

There are many issues that should be of equal or greater importance to the regional industry than scope clauses — particularly building an airport and airway infrastructure that meets America’s 21st century needs, as suggested by Mr. Cohen. The debate surrounding the reauthorization bill seems to be lacking an important push from labor, as both mainline and regional pilots have a lot at stake in this debate. The current situation does not bode well for growth in either sector, and growth is a critical ingredient for stakeholder success.

We are at a crossroads as the next round of mainline pilot negotiations begins: 1) Will mainline pilots continue to relax their scope and watch as significantly more small narrowbody flying is done by another sector of the industry that could potentially rekindle the discussion of labor arbitrage? or 2) Will mainline pilots seriously reflect and understand that the facilitation of growth at the mainline is their best course of action in terms of job protection — and maybe even job creation?

One necessary outcome in this next round of negotiations is a recognition that structural impediments to success exist within each sector of the industry. Cost maintenance/reduction remains paramount in this less-than-robust revenue environment. We cannot forget that vigilant cost controls must remain the focus if we are ever to find an enduring operating model that creates capital for all stakeholders, rather than recycling capital among them.

Today, network legacy carriers operate nearly 700 fewer aircraft with fewer than 150 seats than in 2000. Just because Embraer- and Bombardier- manufactured equipment resides with the regional sector of the industry today does not mean that the sector is entitled to all aircraft made by these two companies.

So, in addition to getting on with the business of fixing the infrastructure, let’s get busy and negotiate an economic framework that can get the mainline sector of the industry growing again. Unless mainline pilots find a new way to think about domestic flying in this next round of negotiations, aircraft manufactured by Embraer and Bombardier will remain the entitlement of the regional carriers.

This topic, and the fact that it has again reared its head, serves only to remind us that the industry’s restructuring is far from complete.

William Swelbar is a Research Engineer at MIT’s InternationalCenter for Air Transportation.
Labels: Air Line Pilots Association, airline labor, Allied Pilots Association, American Airlines, Aviation Daily, Continental Airlines, pilot scope clauses, Regional Airline Association, William Swelbar draft by Swelbar 8:32:00 AM Delete

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