After a week of allowing the fallout from the US Airways agreements with American Airlines’ unions to settle, the question of what it will take to see an actual merger between the two airlines comes to mind.

It’s not just the union agreements that gets this deal done.  To the contrary, there are several issues that will have to see deals made.

Aircraft manufacturers:  Boeing wants to see an independent AA because AA is fundamentally a Boeing customer not withstanding the Airbus order made last summer.  Boeing is going to need reassurance that it remains viable in future aircraft orders and that existing orders won’t be cancelled.  US Airways can make those assurances with confidence.

Hewlett Packard:  Hewlett Packard sits on the creditors committee because of all the IT work it has done to date to bring AA into the future.  A lot is left undone and some reportedly isn’t really ready for prime time.   Currently, US Airways uses SHARES and American Airlines uses SABRE.  However, SHARES, originally developed by EDS, is now owned by HP.  Do you see where I’m going here?  A deal can be made to put both airlines on the new system being developed called JETSTREAM.

AA Executive Team / Board of Directors:  This is a sticky area.  Who wants a team or board that allowed the status quo to exist that long?   It’s possible we might see someone like Tom Horton retained as non-executive Chairman (a la Glenn Tilton) and a few of the existing AA team retained but that would be it.  The board has to go and its tenure is so high in average age, it has an incentive to fight this.  Solving these two problems is possible and these two stakeholders have the least power in making decisions in many respects.

The when is the next question.  US Airways is clearly getting good advice and it is clearly motivated to make a deal.  I would guess that their intent is to use their own cash holdings and AA’s cash holdings to make a deal that creditors can’t refuse.  I think that deal will happen between now and the end of June.

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Boeing CEO James McNerney expressed his and Boeing’s viewpoint that they support American Airlines having an opportunity to exit their bankruptcy as a stand alone company.  McNerney acknowledges that US Airways hasn’t bought Boeing in a some time and sees AA as a loyal Boeing customer as well.

Is this support for AA an attempt to preserve the AA orders for Boeing 737MAX aircraft?  At least a little bit, yes.  In addition, Boeing has and continues to support AA’s purchases for aircraft in a variety of ways.  They’re a good customer.  Is that support founded on sheer love for the airline?  I suspect not.

In fact, any worry about the 737MAX is kind of silly.  The merged airline would, upon conclusion, have far more Boeing aircraft and far more resources to service and operate Boeing aircraft than Airbus aircraft.  Furthermore, both airlines have orders for Airbus A320NEO aircraft already.  Airlines of that size can no longer afford to be an exclusive customer of one manufacturer or another.  Their size (and the size of several competitors) demand manufacturing positions that can’t be serviced exclusively by one manufacturer.

I suspect that if Doug Parker is able to re-assure Boeing over its existing AA orders, Boeing will go neutral or even supportive of such a merger.  At the end of the day, it’s about having a customer and earning money.  Furthermore, it even gives Boeing an “in” with the US Airways executive team that it has not had for some time.

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There was lots of noise in the airline airwaves last week but one item that bears notice is Southwest Airlines.  The short version is that despite warnings to the contrary, they earned a profit of $98 million due to fuel hedging augmenting their income.  Excluding one time gains, the airline has an $18 million loss.  Should we be concerned?  No, we shouldn’t.  The fuel hedge gains are legitimate and an area where Southwest excels.  Furthermore, they will earn more profits as they consolidate the Airtran operations into their own.

Also notable is their decision to contract with Amadeus for international reservations with the expectation of being able to handle international reservations by 2014.  I think this is good news.   I think there are big opportunities for Southwest when it comes to international flying and especially so from the US to Canada and Mexico and it continuing the Airtran flights to the Caribbean.

But this points out the fact that, once again, a revamp of the reservations systems and, in particular, the ability to codeshare is going to be deferred again in favor of the international priority.   The truth is, this whole system should be revamped by now.  It’s shameful that it isn’t and it put a very real strategic partnership with WestJet into the toilet because of these complications.  Furthermore, Southwest doesn’t realize much gain in its relationship with Volaris as a result.

I and many others would be a lot happier to see Southwest contracting with a real reservations system to accommodate real needs across the board.  The idea that Southwest can remain “independent” in its reservations system as an airline with 702 aircraft and 97 destinations.  There is a time and a place to be independent and then there is a time to have a an infrastructure that matches your operations.  It’s notable that Southwest continues to grind on with their 40 year old Braniff system (originally named Cowboy) that they’ve “improved” over the last few decades.  It’s notable that this is a system that my own father was involved in when he was a vice president at Braniff.  My father hasn’t been with Braniff since 1981.

It’s time for Southwest to get a modern reservations system and the sooner, the better.  Make the investment now as there is one thing for sure:  Reservations systems aren’t going to get cheaper and they will get more difficult to build yourself.

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Since Friday’s announcement that US Airways has the support of American Airlines’ three largest unions for a merger between the two airlines, quite a few people have weighed in on the prospect.  Those objecting are just about every political leader in Texas.  Senators, Representatives, mayors and even chambers of commerce are all voicing their preference that American Airlines exit bankruptcy and *then* engage in a merger if it is so desired.  So, what’s the objection?

Like virtually everything else, money.  Each of those constituent parties benefits a great deal politically and financially from American Airlines.  American Airlines knows how to spread the money around to get what they want in this state and nationally.  There is a reason why it took years to rid the DFW metroplex of the Wright Amendment restrictions and even when they were struck, they were done on a timeline that benefited American Airlines, not Southwest Airlines.  Even then, Southwest Airlines is forever constrained to use Love Field because if it takes a gate at DFW Airport, it has to give up a gate at Love Field.

US Airways is a political unknown to Texas and the politicians know that if a merger between the two is consummated today, it’s US Airways leadership who will control the airline and whoever controls the airline, controls the dollars.

The problem is, US Airways has already laid out a fairly compelling case for the merger.  It has support from labor and it has identified the key problem that market analysts have been worried about with respect to American Airlines’ cornerstone strategy that it continues to cling to.  Half or more of AA’s problems are on the revenue side, not labor cost side and the strategy to improve the revenue side seems to involve flying more and charging less (as a function of draconian labor cost cuts) to get more market share.  We saw how that works in the US airline industry for 30 years.  We’ve also seen how capacity discipline can really work well even in a market that is heavily impacted by a bad economy.

In addition to making a compelling case, I have to wonder what anyone is afraid of here?  Fewer job cuts, more synergies, more revenue, a more diverse fleet and a company that stays in Texas and maintains a massive hub at DFW airport.  There is no reason to argue against that unless it potentially means you don’t get what you’ve been getting.

Furthermore, the executive leadership at AA is plugged into the community.  It’s hard to advocate on behalf of a merger that fundamentally sees your friends lose their jobs.

The preference expressed by these political entities is that AA gets through bankruptcy and especially benefits from huge labor cost cuts that enables it to be the consumer rather than be consumed.  How does that happen?  Let’s not forget that AA sits on massive cash holdings that if it preserves them well, they suddenly have positive cash flow, profits and cash holdings to buy an airline instead of being bought.

The problem with that scenario is that there is only one constituent group that really believes that AA comes out of bankruptcy strong enough to compete against Delta and United with positive cash flow:   The American Airlines executive team.  The rest of us see AA coming out of bankruptcy able to maintain the status quo for several years longer because until you fix the revenue side of the business, you are fighting a holding action against Delta and United at best.

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Pinnacle Airlines has announced that Sean Menke will resign as CEO effective June 1st and I think this got missed in the noise of the AA / US Airways announcements coming on Friday.

Like most announcement of this nature, this is being characterized as Sean Menke having done his job and leaving it in a position for someone to lead forward in a new marketplace.

I think something else happened.  Just weeks ago, Menke’s salary (along with current COO and now soon to be permanent CEO John Spanjers) a very significant amount.  A week later, Pinnacle filed for bankruptcy and now suddenly Menke is leaving in another month or so.

What is going on is pure speculation at this point.  Menke is a valuable leader and I personally felt Pinnacle wasn’t the best fit for a man of his talent.  Pinnacle doesn’t need his marketing acumen.  One wonders if Menke is positioning himself for a new job at a new airline in the near future.

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American Airlines’ response to the announcement of a merger support agreement between US Airways and AA unions is, to say the least, lackluster.  If anything, I actually read a hint of bully in the announcement.  It says:

“American Airlines is moving steadily through the Court supervised restructuring process and the Court has granted American the exclusive right to create its plan of reorganization at least until September 28, 2012. We are making substantial progress in our efforts to return American to industry leadership, profitability and growth and maximize its value for all of its stakeholders.”Our immediate next step is to pursue vital modifications to our collective bargaining agreements through the 1113 process that begins on Monday, April 23rd. We believe statements of non-binding support from union leaders for alternative proposals are no coincidence given the timing of the 1113 process. These statements do not in any way alter the company’s commitment to pursue our business plan or our focus on moving steadily through the court supervised restructuring process to create a profitable, growing industry leader.

“For American’s outstanding employees and loyal customers, business continues on track, as we continue to provide the safe, reliable travel experience our customers expect.”

This, I believe, is non-productive when having to deal not only with your 3 largest unions but unions who have a significant amount of input on your unsecured creditors committee.  It also demonstrates that you don’t “get it” when it comes to your labor and the need to lead them through this bankruptcy.

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US Airways has gained the support of the three leading unions of American Airlines for a merger between US Airways and American Airlines.  The Allied Pilots Association, Association of Professional Flight Attendants and Transport Workers Union have made a joint announcement supporting US Airways in its announced pursuit of a merger with American Airlines.

That cracking sound you hear is Tom Horton & Company’s headaches which just got much worse.

It’s not a merger announcement.  It is, however, US Airways going public with its pursuit and doing so in a very credible manner.  The concerns for American Airlines over this are that gaining this support in such a public manner and aligning it with the desires of Wall Street make for a lot of momentum.

There will be criticisms of the merger idea between the two airlines.  As with all mergers, there are pros and cons.  In this case, I think the pros certainly outweigh the cons.

The American Airlines board of directors will now be feeling quite a bit of heat.  In order to preserve the positions of the stakeholders they represent, it may become necessary for them to find some enthusiasm for a merger versus going it alone.   The truth is, the board and the executive team can express their wishes all they want.  Complete control over their destiny was lost the day they filed for reorganization.  I suspect that not only the unions but many other creditors are going to prefer the merger over a “stand alone” vision as time passes.

The cornerstone strategy and alliance strategy promoted by American Airlines just lacked real credibility in the face of the market.  Furthermore, the growth strategy for those cornerstone cities really alarmed many people who watch this industry as it held the promise of losing capacity discipline in the industry.  AA essentially said it was going after market share.

A few things I’m not entirely keen on in these announcements.  The keeping of the American Airlines name *might* be a good idea but I’m not sure I would entirely commit to that at this point.  The marketing image of AA is very staid and old.  A fresher name and/or approach is in order.   I would urge the players in this to clean house in the executive suite at headquarters, finally they hired maid from mythicalmaids.com chinatown home cleaners. AA has many valuable assets and many valuable people but the leadership needs to go and the sooner the better.

It suddenly has gotten very interesting for American Airlines and I would imagine that we may well see some announcements from AA over the next few days or even “leaks” that try to strongly discredit this merger idea.  Let’s face it, getting consumed by US Airways, even if the name and HQ are kept, isn’t exactly easy to swallow for many who lead AA.

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I’ve had a few people asking about why American Airlines unions would be interested in US Airways at all.  It’s a fair question and one that I touched upon last week.   There is a simple answer:

Seniority

American Airlines’ unions and, specifically, the APA, APFA and TWU who are on the unsecured creditors committee of AA’s bankruptcy all are made up of very senior people.  Senior even for the airline industry.  Way, way senior.

Their perception is that in a merger, more of their membership will survive a seniority integration against members of similar unions representing US Airways East and US Airways West employees.  In fact, it’s the former America West aka US Airways West employees who likely fare the worst in such a merger.  Oddly enough, they’re also the most “successful” and “productive” of the three potential groups.

Furthermore, allowing US Airways merger talk to continue in the media keeps the heat on American Airlines management during the bankruptcy.  It’s leverage, plain and simple.   From the perspective of the AA unions, they have really nothing to lose at this point in exercising that leverage.

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The Indian government has committed $5.85 Billion through 2020 to Air India to keep the airline afloat.  Much of the initial infusion of cash will towards settling debts with oil companies that are  threatening the airline.  This deal is termed a restructuring and it does see some employees being spun off into other companies but this is hardly a solution to an airline for which there is no practical answer.

Air India is a mess.  It’s a political and operational mess.  It’s the flag airline and therefore is subsidized in ways that few airlines see today.  It is a jobs program that keeps hundreds of people employed who have no real contribution to make to the company.  And this restructuring doesn’t really fix that.

Politically, no one is going to force Air India to lay-off thousands of employees.  It simply won’t happen.  Flights to international destinations won’t be rationalized as those flights are viewed as status symbols far more than as revenue earners.

And it won’t get done because the airline is government owned.  A privately owned company would have made these changes 5 years ago and, perhaps, might be seeing daylight by today.

Until market forces are permitted to move and influence the needs of India in the airline industry, I think we’ll see failing airlines who are unable to compete with a fully subsidized state airline despite serving a country of 1 Billion people.  There is absolutely no sign whatsoever that India is prepared to deal with this as well as other economic issues.  The country is to politicized to make such hard decisions.

If anything, I would, at this point, predict that we’ll see waning traffic to and from India, low yields on flights that do exist and no airline alliances with any of Indian airlines in the foreseeable future.

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Respected airline consultant and research engineer Bill Swelbar has recently taken a swipe at the idea of a merger between US Airways and American Airlines in a blog post.  Swelbar suggests there may be more benefits to a full integration between AA and JetBlue and Alaska Airlines who just as adequately (if not more adequately) cover areas where American is weak (the West and East Coasts).

Swelbar is factual and correct about AA’s weaknesses in these areas with respect to its network and market shares.  He’s also correct in that those two smaller airlines do operate in the weakest portions of American’s network.

I see significant problems for that kind of approach.  First, Alaska Airlines is increasingly under the influence of Delta Airlines these days and enough so that I do not think it can afford to ignore Delta’s desires entirely and Delta would like competition to go away.  Second, JetBlue already has some agreements in place with American Airlines that do bring a benefit but it also has little incentive to cooperate with American Airlines as AA doesn’t bring much to the table for JetBlue.

Both Alaska and JetBlue are working hard to be all things to all carriers in the form of interlining, codeshares and alliance agreements and that works for both airlines very, very well.  Alaska works at this from a domestic perspective and JetBlue plays more on the international side of things but they’re both pursuing the same strategy and it’s a strategy that works well for both.  Why give up success for the risk of fully integrating with AA and under AA’s management?  If I’m a shareholder for either airline, I don’t like the idea.

Furthermore, at this point, this isn’t about what AA leadership wants.  It is already rapidly becoming much more about what AA’s creditors want and what their shareholders want.  And what they want is performance.

A marriage with US Airways can be disrespected over and over but there are two exceptionally important things to be mindful of.  US Airways knows how to run an airline well and earn money despite labor issues.  They also know American’s business pretty well and they’ve got an established track record that didn’t exist in the same form back when they made a bid for Delta.  Creditors will listen to them carefully today.

US Airways also has the strengths that are complimentary to AA’s network.  They aren’t the most optimal strengths but they are one hell of a lot better than American Airlines standing alone.  Philadelphia, Phoenix and Charlotte are very complimentary to AA’s strengths.  No, there isn’t much overlap that would result in “synergies”.  I would argue that the so called “synergies” of reducing capacity via a merger are harder to obtain than generally appreciated, overvalued and largely non-existent today as a result of consolidation and capacity restraint that has gone on for the past 4 years.

New mergers will benefit from scale and operational expertise.  They’ll benefit from having a more diverse fleet that permits “right size” flying on routes.  They’ll benefit from international alliances.

There is a great example for that last part.  US Airways is now the awkward partner in the Star Alliance with United filling that role on a far greater scale within the United States than US Airways does.  US Airways could benefit a great deal more from Oneworld than it does Star at this point and a merger with American makes Oneworld very competitive in the United States again.  A great reason for Oneworld partners to stand aside and look at these issues with less emotion and more reason.

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There is an internal letter from within American Airlines being circulated on various news sites written by John Hale, American Airlines chief pilot.  This letter casts doubt that AA pilots would support the idea of a merger between American Airlines and US Airways.

First and foremost, I don’t know how much credibility I can give the characterizations in the letter since it does, after all, come from the one pilot in American Airlines with a strong incentive to calm concerns coming from the American Airlines executive team.  He is answerable to them much more than his fellow pilots in the job he holds.

Second, I don’t think pilots like any mergers really.  The seniority issues are very stressing.  But in this case, I don’t know that AA pilots have quite as much to fear as in many mergers.  AA pilots are much more senior than US Airways pilots in general.  Furthermore, US Airways pilots don’t have seniority integration and new contract.  But if there were a merger, the pilots who are divided at US Airways are vastly outnumbered by AA pilots in sheer quantities.  With quantity comes power.

Third, I think executives and other parties are quite afraid of Doug Parker.  It’s obvious that the AA executive team would prefer to be the leads in any merger.  It’s also obvious that they aren’t in a good position to make that demand.  Doug Parker and his team make a very strong operational team and that alone speaks to opportunity from such a merger.  They should be afraid of him:  He knows how to run an airline in today’s environment.

And the AA executive team should be afraid of US Airways.  They’ve learned from other mistakes, they have cash and they have a track record for running an airline that is disadvantaged compared to other legacy airlines and with a fractured labor group.  US Airways makes money *despite* having two pilots groups and two flight attendant groups.  They can manage new parties in that mix.

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American Airlines complained recently that in 2014 28 of its prime routes in which its the dominant carrier will be subject to attack by Southwest Airlines once the Wright Amendment is lifted for domestic flights in the United States.   Those 28 non-stop routes out of DFW account for $800 million in revenue most recently.

Mostly this is about American Airlines making an over-arching argument for why it needs relief on costs.  New competition will assault them even more just as they expect to come out of bankruptcy.  Laying that foundation for the courts and labor unions should be expected.

What I wonder is why no one has taken the opportunity to point out that when American Airlines exits bankruptcy, Southwest Airlines will have the highest labor costs of the legacy airlines in the United States and, yet, American still views them as the treacherous competition.

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Spirit Airlines has announced new routes from DFW to San Diego, Detroit and Toluca/Mexico City to start on June 21st.  I’m pleased about the competition but I still remain uninterested in flying on Spirit myself.  The ULCC carrier clearly sees opportunity in the DFW marketplace and I think they are right.

Spirit isn’t going to kill American Airlines on those routes although its notable that American is the dominant carrier on all three.  It’s likely to siphon off extremely low value passengers from AA and perhaps even a few from Southwest Airlines.

I like the competition showing up because I think some pressure could be applied to American Airlines on many of its routes.

I suspect we’ll see other LCC carriers such as Virgin America and JetBlue make more overtures to DFW with more routes over time.  The airport has the space and let’s not forget that American will almost certainly shrink at the airport in terms of terminal space and will remain very limited in its response to this competition for the next 12+ months.

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US Airways (East and West) flight attendants have turned down a contract offer made by US Airways by a margin of as much as 75%.  Both unions think the airline needs to reward their sacrifices made during earlier bankruptcies more.

It’s a contentious problem and one that US Airways needs to start getting addressed.  They continue to have two unions each for both the Flight Attendants and Pilots of the airline more than 5 years after the America West / US Airways merger.  Addressing dual leadership on contracts is a risky move and they need to see the unions, well, unify and show consolidated leadership as well as come to an agreement on a seniority list merge.

Seniority lists that aren’t merged are going to focus the labor of each former airline on what they can get and what they’ve given up.  They won’t speak with one voice and they realize that a new contract may reward some much more than others if the seniority lists aren’t merged fairly.

These unions have, if anything, demonstrated their inability to get on the same page.  To a large degree, this has been to the advantage of US Airways but it’s time to get it solved.  Getting it solved isn’t going to happen by standing on the sidelines and waiting for these parties to make nice with each other.  The airline needs to offer some financial incentives to get the unions merged together and on one seniority list.  Incentives that diminish over time and that reward fast action.

US Airways needs to show that it can manage its labor harmoniously as well as every other area of its operations.  Especially so if it wants to be considered a viable merger partner for American Airlines.

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Pinnacle Airlines, a regional airline providing contract services primarily to Delta but also United and US Airways, has filed for bankruptcy. We could talk about how they’ll be getting out of their Q400 flying for United in the NYC area.  We could talk about how they’re walking away from some unprofitable flying for Delta on CRJ-900s.  We could talk about a lot of things that Pinnacle is doing and will be doing to remain a viable regional airline.

I’d rather talk about the fact that one week before this bankruptcy filing, relatively new CEO Sean Menke and COO Spanjers both got huge raises.  Menke went from a base salary of $425K to $675K and Spanjers $275K to $400K.  Menke hasn’t been with Pinnacle for long at all, by the way.  The argument is that Menke and Spanjers will be filling in for the departing CFO.

I call bullshit.

The board and Menke knew what was going to happen and raised the salaries prior to bankruptcy.   They sure weren’t going to get approved for those kinds of massive raises after a bankruptcy filing.

It’s insulting to the staff of that airline, union or non-union, that their delivering themselves raises one week before a bankruptcy filing that will almost certainly find them going to those staff and asking for cost reductions.

Even American Airlines and Tom Horton didn’t have the guts to pull that stunt.

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A JetBlue Captain began acting erratically on a flight from New York City to Las Vegas.  When the captain left the cockpit, the co-pilot locked the door and passengers ultimately restrained the man.   The captain began speaking about threats from Afghanistan, Iraq and other places.  No doubt he’s suffering from a break and there is nothing funny about that.

The worst part?  The aircraft diverted to Amarillo.
I’m pretty sure there were no convenient JetBlue aircraft in the area to fly out there and take over.

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It’s notable that not a single analyst, commentator, blogger, newsman or businessman really is enamored of American Airlines’ plan for improving revenue.  The plan, at the top level, is:  Farm out more flying, try harder at our embattled hubs, rely on our Oneworld relationship.

What is continually pointed out is that working harder and doing more isn’t a plan.  Relying on partner international airlines to provide feed isn’t very solid and where it has been deployed as a strategy, it hasn’t yielded the projected results.  There are few new partnerships American can engage in at this point as well.  They’ve done that work already.

American Airlines has a real problem in several of its hubs.  JFK aka New York City is under assault by Delta and United and American is losing more and more traffic there.  LAX really isn’t a hub and it too is under lots of competitive pressure.   In Chicago, American is #2 against United at O’Hare airport and it is seeing its traffic decline there, too.  Southwest is nipping at American from the bottom side by deploying routes out of Midway Airport that offer a real alternative to the businessman traveling to or from Chicago.

Yes, they have Dallas / Fort Worth.  American is, by far, the dominant airline at DFW airport and it shows in the fares offered from DFW today.  However, other airlines (Virgin America, JetBlue) smell blood and are entering the market place with a service product that is highly attractive to businessmen.  Southwest Airlines will slip its leash at Love Field in about 2 years and then American really feels pressure from Southwest at two of its hubs.   It’s also the hub with the most expenses.  Labor is senior at that hub and recalcitrant at best.  You can’t expect American Airlines to maintain its dominance there either.  It will remain the major airline there but its share of the marketplace can be expected to decline rapidly over the next 2 years and then its routes will be under assault from all directions.

There is a reason why Delta put a large parcel of flights on the DFW-La Guardia route.  They can compete on that route and American is limited in how it can respond.  Creditors won’t be amused at American Airlines losing money on those routes to fight off competition.

American has other things against it as well.  Its IT system is aging.  Its service product is substandard even to LCC carriers.  It’s fleet is old and while it will be renewed, much of that renewal doesn’t take place for several years yet.  Its website is atrocious and can’t even let a person pre-pay a checked baggage online if a customer so desires.  There is no ancillary revenue strategy (there are ancillary revenue products in place but no strategy to truly win passengers.)  It’s an airline that, today, is designed to offend passengers and no one is talking about how that gets fixed.

That’s the reason everyone continues to contemplate a US Airways / American Airlines merger.  The US Airways team has done all that despite being hamstrung with labor woes and inferior hubs.  They know how to make it work and the competitive landscape makes American Airlines hubs in certain areas look much more attractive when someone else is running the game.

I think we’ll start to hear real talk of mergers with US Airways in about 2 months.  It won’t take long for creditors to lose their patience at this point.

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The relationships that American Airlines has with its unions has been pretty bad for quite some time.  This really all kicked off with executive bonuses that were perceived to be out of line with airline performance both financially and operationally.  What’s worse, unions weren’t rewarded when executives were and the criteria for reward was fuzzy at best.

The relationships have only gotten worse over time.  In fact, I would attribute the rather militant direction of leadership for its flight attendants union, APFA, has been a direct result of American Airlines inability to establish any kind of rapport with that union in particular.

In short, there is no trust between the parties at all.  It’s gone and it doesn’t appear that executive leadership wants to improve those relationships.  The truth is that the executive team probably correctly realizes that that can’t be done in time to get the cost reductions it needs.  So why try to make friends right now?  It’s not an incorrect judgement.

These relationships are going to stink for a long, long time.  The courts will impose new terms and those terms will likely be oriented more towards productivity than just a reduction in pay.  American could get all it wants in the form of lower pay but the airline needs contracts that allow productivity to improve in order to be truly competitive with other national airlines in the United  States.  Other airlines have that (as a function of bankruptcy) and they don’t.

The exceptional shame of this all is that the unions won’t have much voice in the process.  They’re not well funded (in comparison to American Airlines) and any giveback at this point means almost certain loss of office for leadership of these unions.

American needs action now so it can maintain some control over its destiny.  Actually, it’s American Airlines executives who need action now to maintain some control over their destiny.  Failure to get cost reductions and enumerate a plan for revenue growth will result in a merger or a change in leadership.  The executive team has months, not year, to ensure their future.

The unions will fight.  They will argue loudly on behalf of their membership.  But there isn’t much to win here in court or out of court.  There is plenty of established law and precedent that says they will see reductions pay and changes in work rules that will allow American Airlines to sit roughly on par with its main competitors.

And the relationships are so bad now, there isn’t any reason to just go to court and get it done.  One way or another, there will be bad blood between management and unions and the sooner this is done, the sooner management can think about ways to repair the relationship in the future.

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The global airlines of the Middle East such as Etihad, Emirates and Qatar have been the focus of a lot of attention for the past several years.  Primarily because of their massive orders for aircraft and the size of the aircraft ordered.  Anticipated double digit growth that is implied in these orders as well as the competition that legacy airlines from the US, Europe and even Asia are experiencing has brought real competitive concerns to the discussion of the global airline industry.

Bill Swelbar writes about some of these competitive issues in a blog entry of his HERE.

The Swelbar blog is a great read for me because it looks at our industry with more objectivity than one often finds among airline blogs including my own.  His analysis of the evolving nature of competition and the next direction it appears to be taking particularly with respect to Etihad, Emirates and Qatar is dead on.  I do, however, think that rather than accept the competitive world, many governments will seek to protect their airline industries from this competition for far longer than might be suggested by Swelbar.

The inevitability of change is almost certainly true.  The pace of that change is what I question.  I also question the outcomes of that change.

Governments, even the US government, get fairly protective of airline industries because they serve not just a business need but a strategic need as well.   Airlines based in those countries and which must answer to those governments are viewed as necessary.  Those governments do not want a foreign owned domestic airline saying “no” to them in times of strategic needs.  Whether or not this is practical or even necessary anymore is another question.  I would actually argue that it is somewhat necessary but it could also be accomodated with new laws or even through the use of existing laws and still permit foreign ownership of airlines.

I also think that legacy airlines may be underestimated.  New airliners are going to make these airlines more competitive and allow them to offer more point to point services that remove the need for the interim hub connection to travel ultra long distances.  We’re already seeing this occur with the 777, 787 and A380.   Next generation 777s will strip away that need even more.  And as services go to a more “point to point” model, I think we’ll see less demand for the A380 over the next 10 years rather than more.   Sadly, I don’t think the 747-8i fits very well into this picture. More to the point, a 777-9x likely fills the 747 role better than even the latest model.

I also think that legacy airlines are, to a point, “getting it” when it comes to creating a business that is sustainable.  The capacity restraint shown over the past 4 years alone has been remarkable in the US airline industry and all airlines show no sign of losing that discipline.  This business seems to have finally understood the need for sustainability and profitability.

The one factor that, in my opinion, continues to be the wild card is the expectations of the financial markets on these airlines.  Airlines have an exceptionally bad reputation as an investment and those markets look for profits every quarter.  The nature of the airline business and the impact that the global markets can have on its profitability cause me to believe that airline profitability should, perhaps, be measured over a period of 3 years rather than a single financial quarter.

If in any 3 years an airline can demonstrate a profit, I would argue it is a healthy business.

I say this because I was struck by how much news it made when Southwest Airlines’ CFO predicted a loss for the 1st quarter of 2012 for that airline.  Once again, pundits immediately began speculating on whether or not Southwest was a sustainable airline anymore.  We’re talking about an airline that has had decades of annual profits in an industry where that is essentially unheard of.  A bad quarter does not make a bad airline.

I think that airlines such as Emirates, Qatar and Etihad may be driving the markets and competitive threat but I also think they may well influence world legacy airlines to get their acts in order even more.  It’s quite likely that we’ll see a few of those airlines fail.  It’s even more likely that we’ll see the bulk of them re-tool, evolve and compete successfully.  That’s good for the industry and that’s good for the consumer.

Filed under: Airline News by ajax
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United Airlines performed its cut-over to the Continental based IT systems for reservations and frequent flier programs nearly 2 weeks ago.  By all accounts, this was probably about as smooth as it could have gone for merging two legacy airline systems.  That doesn’t mean there were no problems, it means it was better than most.  There was problems, some complaints and some frequent fliers saw accounts with incorrect mileage and other passengers found it difficult to get their seat assignments.

At present, there are a few who are still experiencing problems and United is still responding to larger than normal call volumes but here is the good news:  flights are flying and people are getting on those flights and arriving at their destinations.  There are issues that remain to be fixed.

There are, however, quite a vocal minority complaining loudly and I see media picking up on this and describing United’s transition as being far worse than any real appearance gives.  In USA Today’s Today in the Sky Blog, we see customer’s such as ultra elite frequent fliers making complaints about United (not Continental) agents being unfamiliar with Continental’s SHARES system still or having trouble making a seat assignment at a kiosk.   There are others from frequent flier enthusiast websites complaining that United changed the miles accrued for routes.  How much did they change?  In most cases by less than 20 miles.

I have message for those people:  Grow up and act like adults.

If someone is missing a flight due to incompetence or is unable to book a frequent flier award due to incompetence, I’m willing to hear your complaint.  If something is taking you 500% longer to accomplish than previously, I might even be willing to listen.   But, seriously, do we really want to be complaining about whether or not a gate agent knows the SHARES system completely yet?   Do you really want to moan about the fact that San Francisco-Hong Kong flight went from accruing 6921 miles to  6909 miles?  That’s a difference of 12 route miles or 0.17% change in mileage.  Not 17 percent but 0.17 percent.

Complaints like that give credence to my belief that the customer is absolutely NOT always right.  A principle that I will point out is in violent agreement with a former industry leader named Gordon Bethune.

Filed under: Airline News by ajax
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