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Entries in Boyd Group International Aviation Forecast Summit (1)

Sunday
Aug282011

It Shouldn’t Be About Scope This Time – Rather Benefiting More Than One Stakeholder Is Key

It is Friday, August 26, 2011 and I am aboard United flight #701 bound for Albuquerque to participate in the 16th Annual Boyd Group International Aviation Forecast Summit.  Many third rail issues get addressed at this widely attended conference and this year promises to be no exception.  The conference will address what Boyd refers to as futurist issues that will ultimately result in structural change to the architecture of the industry.  And I have been asked to help Mike open the conference along with Captain Michael Baiada.  I cannot wait.

What is significant about United flight #701? Seven years ago, a significant part of my career was assisting communities to attract airlines to begin new service. I was working with a talented air service development team at the Metropolitan Washington Airports Authority and my former firm, Eclat, and at the time there was very little domestic service to relevant markets that Washington Dulles did not have, whether regionally, mid-con or trans-con. 

But there were unserved markets like San Antonio and Albuquerque that were made interesting with regional aircraft service.  We approached United about a regional service from Dulles to the Land of Enchantment starting with a regional jet.  United agreed that the market could support a 50-seat aircraft on that route.  Over time, that route could support a 70-seat plane. Tonight I sit aboard a United mainline A-319 flown by a United mainline crew. 

If not for the ability to initiate a route that had fledgling demand with a right-sized aircraft, there would not be a mainline flight today that would get passengers from Washington Dulles to New Mexico in three hours and nineteen minutes. And this is but one example of many similar stories.

Today's pilot unions might look at this through a different lens.  How can we talk about any positive development stemming from the relationship between a mainline carrier and a regional partner?  In the view of many, any flight flown under the flagship name should be flown by mainline pilots. That's why unions negotiate scope clauses. That's job protection.

Or is it?

Ahh -- the law of unintended consequences rears its head in union halls.  Scope language is negotiated – in the mind of the pilot unions - to protect jobs.  But it does not.  Just note the loss of more than 800 mainline narrowbody shells and nearly 15,000 mainline flight crew members over the past decade and ask how successful the pilot unions have been at protecting jobs. 

More cuts will come if management negotiates the wrong scope language this time – language that limits their ability to remain agile when responding to competitive threats.  Domestic mainline network attrition will occur by 300-400 additional paper cuts per airline if done otherwise.  Nothing can artificially alter market forces.  Airlines have found ways around regulations governing international air transport and they have found ways around the biggest regulator of all – unions and scope language.

All I hear from negotiations at United/Continental, American and a renegade wannabe union challenging ALPA at Delta is that this round is about Scope, Scope and more Scope.  And I smile and wonder where the magic will come this time as lower cost competition remains keen to take full advantage of its labor and other cost advantages to find future growth opportunities.

Jeff Smisek, President and CEO of United Continental Holdings, recently lambasted the federal government - the other regulator - in a presentation at the Global Business Travel Association Convention in Denver.  Where might the U.S. look for a model of more effective air policy? Dubai, Smisek said, according to an article by Fred Gebhart in Travel Market Report.

“Emirates is a good example of an airline with a government that has good aviation policy,” Smisek said.
“Dubai recognizes the importance of air. It has an intelligent policy with a government that cares about the success of the air sector. It doesn’t throw up roadblocks, doesn’t over-tax it, and doesn’t beat it down at every opportunity. The U.S. government does all those things every day.”

 As usual, Smisek is spot on.

He talked of wanting to make United an airline that customers want to fly and investors want to invest in.  But while he spoke, Gebhart reports, nearly three dozen pilots and staffers picketed Smisek outside the conference, claiming that the company was "outsourcing jobs while creating unsafe working and flying conditions for employees and passengers.”

Nothing, and I mean nothing, disgusts me more than the actions of the US Airways and United/Continental pilots playing the safety card to create leverage in negotiating a collective bargaining agreement.  Is it really useful to try to frighten passengers? The vast majority of employees recognize that the best job security is a successful company and successful companies need customers to provide the revenue and shareholders to provide the capital.

Keep in mind that the pilots doing the picketing agreed to the language that allows the outsourcing of certain flying.  If not for the regional partners as a lower cost alternative, United, Continental, Delta and US Airways mainline operations would be but a shadow of the shadow they are today.

The United/Continental and US Airways pilot groups should get out of the court room and the arbitration tribunal business and get back to the bargaining table and negotiate an agreement that takes into account their companies' unique strengths and weaknesses.

Scope is not their problem.  Global competition is the challenge, and no scope language is going to protect them from that.  Any attempt to hamstring the airlines from making decisions that are in the best interests of all employees/stakeholders will only weaken the companies down the line. When it comes to United/Continental and US Airways ability to survive, Smisek and Parker are not the enemy; Emirates and Southwest/AirTran and Air Asia are.

Qantas Compared to the US Network Carriers

Speaking of being hamstrung by labor - the Qantas story playing out has strong parallels to the US network carriers that used the bankruptcy process to remake their operations during the 2002 – 2007 period.  The only real difference is that Qantas is quickly losing its competitive advantages to the emerging international “low cost” network carriers whereas the US network carriers lost their competitive advantage to the emerging domestic low cost carriers.

Last week Qantas outlined for the world the initial phase of an intended restructuring in its international operations designed to get its operating costs down – beginning with a new, high end, narrowbody intra-Asia operation with 11 Airbus aircraft.  Needless to say, Qantas CEO Alan Joyce’s decision to embark on such a strategy only poured more fuel on the fire burning between the kangaroo and its unionized pilots. 

Joyce is one tough leader.  Last week, Qantas announced that its profits doubled.  You know if you are making money why would you need to possibly embark on a radical, non-Australia based operation?  Because the international operation is under fire from Emirates and Air Asia and Virgin Australia and . . . Qantas announced that the mainline domestic and international – not subsidiary JetStar - made AUD 228 million, an improvement of 240 percent over the prior year period.  So what’s the problem?  The international operation lost AUD 200 million, meaning a very small domestic operation made a staggering AUD 428 million.  Therein lays the problem.  A money losing international operation, given the large fixed investment made, could quickly land a smallish carrier like Qantas in the memory bank.

Not only does Qantas suffer a structural geographic disadvantage of being at the end of a network system easily making its markets captive by the competition, it also suffers from a labor cost disadvantage, particularly in its international operations.  With successful competitors springing up in all sectors of Asian commercial aviation, the Qantas brand is potentially isolated and damned for extinction unless the network procreates outside of Australia.

This is why Joyce is making his move and doing so before it is too late.  And that is what the unions do not understand.  Scope is only as valuable as a met condition makes it.  Scope is negotiated before the future landscape is fully known and understood.  Airlines overpay for scope because the opportunity costs to shareholders are disregarded.  And this must come to an end because it only hurts the bottom line and job protection in the future.

Smisek, Anderson, Parker and Arpey (and maybe even Kelly as his airline gets more complicated) should take a long hard look at the history of scope.  Has it produced the desired consequences for employees, shareholders and the company?  Has it produced the kind of goodwill a company might expect from negotiating job protection measures in collective bargaining agreements?  Has it stopped unions from using the "safety card" to attack their own airlines by making customers leery of flying?

I challenge each of the US CEOs to resist caving into union demands for scope language in negotiations with the unions. There is no job security for any employee if the company is made weaker because management tried to buy labor peace with short-sided, limiting "job protection" clauses designed to make one employee group feel better.  In today's airline industry, the root of job security is the ability to fly profitably and with the flexibility to fly the right aircraft with the right costs on the right routes for the network.

More to come later this week.