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Monday
Nov222010

The United and Continental Pilots Engage In MISInformational Picketing

Today in Newark; tomorrow in Houston; and on December 1 in front of UAL Headquarters in downtown Chicago the United and Continental pilots have announced they will engage in “informational picketing” regarding the new company’s decision to redeploy certain United 70-seat regional jet flying into former Continental hubs Newark, Cleveland and Houston.  In return for that redeployment, certain Continental 50-seat jets will replace the United 70-seat jets flying out of certain former United hubs.  Note the tradeoff:  no one loses flying; no one loses a job; no mainline flying is impacted; and everyone benefits from a network made stronger by matching the right-sized aircraft to routes that either need a larger or smaller aircraft.

Yet the message from the "informational picketing" will deflect what has been going on between the United and Continental pilots of late and make the company the villain.

Seems so simple.  Just like the combined Delta and Northwest networks moved quickly to best match aircraft size to markets with commensurate demand, Continental and United are moving to do the same. 

Part of the Continental and United pilots message to the public will be that the combined company is violating their respective collective bargaining agreements, in particular the section called scope that swelblog has covered so extensively..    In a November 12, 2010 Continental pilot communiqué, the call to arms read as follows:  “It’s time to get serious and stand united against outsourcing. In response to management’s attack on our current scope provisions, and their clear leveraging of it in negotiations for a new JCBA, the CAL SPSC, in cooperation with the UAL SPSC, will jointly organize informational picketing at both Newark and Houston airports as well as United world headquarters in downtown Chicago. It is time to show the new United management and the public that ideas and plans to violate our contract and outsource our jobs to the lowest bidder will NOT be tolerated by pilots.”

OUTSOURCING

The pilots first fallacy is ‘outsourcing”.  The fact is that the pilots’ union, ALPA, has played a major role in creating the labor Ponzi scheme that survives at the legacy airlines. Over the past 15 years, how did ALPA find a way to pay mainline pilots more?  By agreeing to allow another group of pilots to fly where mainline flying is no longer economic and to be paid less to do so in order to buy “better” contracts for the mainline pilots they represent. 

What the Continental and United pilots fail to share is ALPA’s dirty little secret: that the wage rates, working conditions, training provisions and other particulars they criticize at the regional carriers were negotiated by their very own union. ALPA represents the majority of regional pilots flying in the US today.  So maybe ALPA needs to step up and take some responsibility for its contribution to building the regional sector of the industry that they now deprecate.  Only by agreeing to lower rates of pay and more flying time at the regional carriers can ALPA justify and sustain the generous pay, benefits and work rules that benefit pilots at the mainline airlines. 

Look at any significant relaxation of the scope clause at the mainline carrier that allows the airline to increase its use of jets 70 seats or less. In just about every case the mainline pilots received a significant pay boost – or were able reduce the level of concession - in return for that “concession” as they were given economic credit for allowing the deployment of regional jet flying by regional partners.

Stop calling it outsourcing.  It is not.  It is a convenient word to use given the disdain for the practice by the now lame duck Chairman of the House Transportation and Infrastructure Committee.  The practice of relaxing scope to permit regional partners to perform uneconomic flying has kept more mainline pilots on the payrolls than it has cost jobs as the network has been kept largely intact when routes would have needed to have been cut because it was not economic for 100+ seat aircraft to perform the flying.

SOME FACTS

This redeployment, or better said a swap of one-sized regional jet for another, has gone so far that an expedited grievance has been filed by the joint Continental and United pilots.  On November 15, 2010 the union filed grievance:  File 11.10.041CG.  “Pursuant to the Collective Bargaining Agreement (CBA) between Continental Airlines, Inc. and the airline pilots in its service, as represented by the Air Line Pilots Association, International, (ALPA) the undersigned hereby files this grievance, on behalf of all affected pilots, protesting the Company’s violation of Section 1 (Scope) and all related sections of the CBA by placing and planning to place the CO code on United Express flights using jet aircraft with an FAA certification of fifty-one or greater seats to and from CLE, EWR and IAH.  As a remedy, ALPA requests that the Company cease and desist advertising and placing the CO code on such flights, and all other relief that may be appropriate.”

The union’s position “is that Section 1, Part 3-A of the CBA clearly prohibits the Company action, unless it is authorized by some other Part of Section 1. No other Part of Section 1 authorizes the Company course of action, as none of the express carriers performing the work is a Company affiliate; only 50-seat and turboprop flying, not 70-seat jet flying, is permitted by Part 4; and flying to a Company hub (if not to or from a hub of the other carrier) is not permitted by Part 5.”

The union says that the Company’s position relies on Part 7, arguing that it is flying by another air carrier while participating in a Complete Transaction in accordance with Part 7. The union suggests, however, that while Part 7 specifies rules for separation and merger of mainline operations, Part 7 does not change the rules in Parts 4 or 5 for operation of Express carriers or Complementary Carriers. Nor does Part 7 license Continental to permit United Express carriers SkyWest or Shuttle America to carry the CO code without observing the limits in Parts 4 or 5, because neither of them is a "participant" in a Complete Transaction. Neither express carrier is acquiring any part of Continental, nor is it becoming a Parent of the Company. Nor is Continental acquiring Control of assets of either carrier. Further, if either of these air carriers were participating in a Complete Transaction with the Company, that participation would trigger a series of obligations that the Company has not applied.

Note to self:  Then what comprised the United network at the time the combination was contemplated?  and the transaction closed?  Mainline flying only?  I think not.

The union says the Company also argues that following the merger closing, United and Continental will each continue to operate as an air carrier, but they are not prohibited from integrating their marketing, reservations systems and livery, ultimately marketing and operating their service under a blend of the United name and Continental livery. But this argument relies on general actions associated with a merger to dissolve specific protections at the heart of the CBA, as well as mixing those actions which the Company can undertake now with those that must wait until after a JCBA (and integrated seniority list) are reached.

Note to self:  Why should the company wait to maximize revenue when it can do so today?

The union concludes, their [the company’s] actions are not an effort to transition Continental and Continental Express operations to the single UA code, but to replace 50-seat jets in Continental hubs with 70-seat jets and to connect them with Continental flights, branded as Continental flights under the CO code, strictly as a way of carrying more passengers and thus making more money.

A Paper Tiger

A paper tiger is seemingly dangerous and powerful but is in fact timid, or as Frederick Forsyth put it: "They are paper tigers, weak and indecisive."

Sometimes the actions of pilots and scope are like that of a paper tiger – a mighty roar but no real threat. I thought the pilots of the combined carrier were looking to share in the synergies of the combined carrier.  In this instance, they talk about the company redeploying regional lift – remember no loss of jobs – as a way of carrying more passengers and thus making more money.  If the carrier makes more money, then don’t the UA and CO pilots potentially make more money?

The pilots claim that this is about the company trying to gain leverage in negotiations.  Let’s not forget that on August 27, 2010, the United and Continental pilots made a proposal to management to end outsourcing to regional airlines.  This is the issue pure and simple.  The joint UA and CO pilots are fishing for ways to block the carrier from finding the most economic way to serve cities of all sizes all the while somehow making the case that the same network economics can be achieved at the mainline level for performing tomorrow the regional flying of today.  It cannot be done absent significant concessions at the mainline level.

Finally, the joint bargaining teams have been publicly lobbing grenades at one another over compensation proposals that might favor one group over another during the seniority list integration process.  This is a group that has said publicly that they will first negotiate a joint collective bargaining agreement before engaging in the seniority list integration process, just like the Northwest and Delta pilots did so successfully.  If memory serves me, the Delta – Northwest negotiation was not without its disagreements and wrinkles.  That said, the Delta – Northwest agreement ultimately paved the way for sufficient numbers of 70+ seat flying to be performed by a number of regional partners. 

At least in Delta’s case, the union recognized that the regional flying being performed today was critical to supporting mainline jobs.  Regional carriers were contracted to perform domestic flying in markets where the poor underlying domestic economics remain.  The Continental and United pilots should be looking at the very same thing.  The unintended consequence of undoing the regional relationships today will be a smaller mainline tomorrow.  Smaller network architecture does not produce the synergies promised by a combined United and Continental.

Less in generated synergies means less to be shared among the pilots of the combined company.  Less in generated synergies means that the collective bargaining agreement ultimately reached will have less upside and will look more like the agreements that would have been ultimately reached if the companies remained as standalone entities. Less in generated synergies means that the combined entity will likely not attain its status as the world’s best airline.

There is a financial concept lost on union leaders today:  Net Present Value or NPV.   It means simply that cash flows realized in the short term have more value to the firm (or individual) than cash flows generated years down the road.  Captain Jay Pierce, the head of the Continental ALPA unit, argues rightly that the company’s action of swapping five 70 seat jets in Continental’s hubs for five 50 seat jets is strictly a way of carrying more passengers and thus making more money.  It is what companies should be doing - maximizing the revenue earning power of the network.

The benefits to the new United’s actions in this limited case are obvious.  The risks are, well,  timid and weak as no jobs are being lost.  Energy spent during one of the most traveled weeks of the year should be spent negotiating a joint collective bargaining agreement and not preparing for an arbitration that in reality is nothing more than a desperate grab of leverage that - if the pilots prevail - will result in fewer jobs, less mainline flying, fewer synergies to be shared among pilots and a degradation of the combined carrier’s status within the STAR Alliance.

Thursday
Feb182010

Patience and Perseverance: Tilton Walks It Like He Talks It

There is no way to describe United Airline leader Glenn Tilton other than resilient.  He is disliked internally by organized labor and questioned externally by nearly everyone who has an eye on this industry.  He has taken his role as the industry spokesperson seriously, perhaps more seriously than anyone before him.  We listen intently to Giovanni Bisignani, the CEO of IATA.  But we do not listen enough to Tilton. Why? Because Tilton’s is a message of change not cluttered by this industry’s history, and some people don’t like the message.

Tilton was quoted shortly after United ended a three year stay in bankruptcy: “If I were able to draw a visual image of the beginning (of bankruptcy) to today, it would be one continuous experience of knocking down internal and external barriers.”  In his role as chief spokesperson for the US airline industry as Chairman of the Board of the Air Transport Association, Tilton waxes philosophical about the barriers that impede the industry’s natural evolution.

I have a long history at United and knew the “old company” well.  United epitomized all that was wrong with the US airline industry prior to its bankruptcy in December of 2002.  One of Tilton’s predecessors as CEO, Stephen Wolf, did some very good things along the way that provided United with its global roots.  But even Wolf did little to address the company’s bloated cost structure and a management bureaucracy that often resulted in paralysis.  For every cubicle in Elk Grove Village, one could find at least one silo. 

Tilton cares less about the history of United than its future.  His history lesson was a short one – whatever structure in place when he arrived in 2002 did not work and therefore needed to be changed.  If Tilton was wed to preserving United’s legacy, then he likely would not have taken the same course in fundamentally reshaping the company. He would not have taken on the pilot union, ALPA, over its actions to disrupt United’s operations – winning an airtight legal victory for management that ranks among the most significant victories in decades.  Rather he would have permitted bad behavior – or paid the pilots to stop behaving badly - just as prior administrations had done. 

Today United is a lot smaller, with a mainline operation 30 percent smaller than it was 10 years ago.  For this, Tilton takes a lot of heat.  As the pilots union watches its ranks diminish, ALPA constantly reminds Tilton that an airline cannot shrink its way to profitability.  This may have been true in United’s past, but on Tilton’s watch growth will only occur if it is profitable growth.  It is hard to envision a day when United will again have 12,000 pilot equivalents on the payroll.

Tilton and others recognize that the industry is still too big.  In the most read Swelblog article to date, Montie Brewer makes a clear case that the industry’s capacity-lead business model is the number one reason why the airline industry will never be profitable over a sustainable period.  Also weighing in on the subject is Professor Rigas Doganis who writes about over capacity in Airline Business.  According to Doganis, the airline industry is inherently unstable and airlines have only themselves to blame for the constant state of oversupply and the downward pressure on fares that result.

Doganis goes on to discuss how airlines are “spasmodically” profitable, quoting Tilton on the fact that the industry has "systematically failed to earn its cost of capital."  This is a fact that has long bothered the former oilman.  In a recent speech to the Wings Club in New York, Tilton raised the industry’s continuing and daunting challenge: “How to navigate to sustainable profitability in light of our financial instability.”

In London he made the point again and differently:  “Volatility and losses have been the norm for this industry, as has our systemic failure to earn our cost of capital and achieve any level of consistent financial resilience. The industry has lost nearly $50 billion worldwide since 2000 and a staggering $11 billion last year alone.”

Tilton at United – From Hands On to Chief Strategist

One can be sure that when Tilton arrived at United in September 2002, he had little idea just how bad things were.  But he would soon find out.  Three months after his arrival in Elk Grove Village, United landed in a downtown Chicago courtroom for more than three years as the company restructured itself.  There were mistakes along the way.  There was some bad luck along the way particularly as it pertained to rising values in the aircraft market.  There was the decision to terminate employee defined benefit plans, which among other things permanently damaged Tilton’s reputation in the labor ranks, but enabled the airline to get the exit capital it needed to start anew.

As United exited bankruptcy protection in February 2006, oil prices were on the rise.  The company restructured itself around $55 per barrel oil – a price that was fast becoming a memory and a bad assumption in the company’s plan of reorganization.  Company performance – operational, financial or otherwise – was nowhere near expectations set based on an entity that had spent three years fixing itself.  For either right or wrong reasons, Tilton kept many of United’s legacy management team around to complete the bankruptcy process.  What he belatedly came to appreciate is that leadership at the company had to change – and change it did.

United mainline is much smaller today than it was the day it emerged from bankruptcy.  Tilton oversaw its downsizing in bankruptcy and continued the work as oil prices climbed.  But he also recognized that he was not the guy to handle the day to day operations. Like any good restructuring guy, Tilton knew to hand over the operation of the company to others on the executive team, particularly  John Tague, Kathryn Mikells and Pete McDonald.

And the plan seems to be finally working.  United is starting to produce some good results.  There might be a lesson here for others in the industry, including the consideration of whether CEOs should delegate the day-to-day functions and concentrate on their role as the company’s chief strategist.  Just as pivotal, in United’s case at least, was Tilton’s decision to focus on tearing down the barriers to change – something all industry CEOs should consider in improving the financial prospects for a once proud industry relegated to underperformance, in part by the stakeholders who benefit from its inefficiency.

Tilton and Government

In one way or another, Tilton delivers the message that “no matter how well United or any U.S. carrier transforms its business, none of us will be as strong as we should be - much less in a position to compete in the emerging global aviation industry - if there's no change to the regulatory environment in which we operate.” Without a coherent U.S. aviation policy that “reverses the bias against airline size and removes the barriers that prevent us from constructive consolidation, U.S. carriers will be unable to compete on a global scale and we risk being marginalized,” Tilton said.

Among the questions for the industry, as Tilton outlined in a talk to the UK Aviation club, is what motivates the protectionists’ view of the industry.  “What is it that they are “protecting? A chronically underperforming industry?” he asked.

Concluding Thoughts

For what it’s worth, I focus on Tilton not because of his work at United but because of the message he delivers and its relevance to the rest of the industry.

As I predicted in my last post, February 2010 has been a significant month for airline news – some of it good and some of it bad like government’s call for slot divestitures in the USAirways – Delta slot swap.  It appears likely that oneworld will get permission to compete on an equal footing with the STAR and SkyTeam alliances.  This is the necessary next step to ensure inter-alliance competition as we think and talk about the industry’s structure going forward.   Tilton is a huge proponent of alliances who quickly recognized that one airline cannot be everything to everybody and that network scope and scale can be economically garnered through partnerships that leverage each member airline’s strengths.

Tilton also remains a proponent of consolidation.  His voice is growing increasingly louder on the subject of cross-border mergers and the flow of capital based his belief that the US and the European Union should move forward on Phase II of a transatlantic agreement and pave the way to permitting cross border commercial activity in the airline industry.  As Tilton noted in his UK speech, “capital is global and doesn't have sovereign inhibitions."

Like him or not, Tilton rarely shies away from stating his views, even at the risk of ruffling some stakeholder’s feathers.  For Tilton, too many people focus on the past rather than the future and what needs removed in order that the industry can continue to evolve. That evolution may continue to prove painful for some in the industry as Open Skies and re-shaped alliances bring new competition all the while presenting new opportunities for agile and nimble operators.

Tilton’s role, like that of the Anderson, Arpey, Smisek , Parker and other airline CEOs, is to serve as agents of that change and find a way to balance the demands and interests of labor, shareholders and other stakeholders that depend on a robust, profitable industry.

 

Note:  I hold stock and options in Hawaiian Holdings, Inc. as a result of my Board position.  I also hold stock in United Airlines accumulated at various points in time since the company emerged from bankruptcy.