Now that the APA has thrown its temper tantrum, let’s take a guess at where things go for American Airlines for a while.   I think that the APFA will see their membership vote no to their contract because, at the end of the day, having a similar temper tantrum will feel more satisfying.  This won’t matter because I think the bankruptcy court is going to give AA exactly what it wants:  imposed terms on both the APA and APFA.

It’s possible the court will wait for the APFA vote and the judge has shown previous interest in seeing rational agreements happen but . . . the APA vote is a signal to the court and judges are able to be emotional as well.  I think AA gets terms imposed and I think Tom Horton gets to chuckle at the unions.  He provoked them and got what he wants.

(Update:  The court did delay its ruling on the APFA contract.  I expect the APFA will also turn down its last offer.)

US Airways and Doug Parker now have a much more difficult uphill battle to pursue a merger.  The pilots just damaged his credibility badly and markets will take notice.  He won’t have influence through the unions because they are giving up a voice at the table as creditors.  They’ve lost some credibility in the PR wars going on and Tom Horton wins this round.  It isn’t good.

A merger still is quite possible and still the most sensible thing to do.  In some ways, it’s even smarter to do it in bankruptcy as opposed to after AA’s exit.  There are decisions that can be made that are easier to execute in bankruptcy as opposed to out of bankruptcy.  Creditors (future shareholders) are more willing to accept those decisions in bankruptcy than outside of it.   A merged company before bankruptcy exit probably sees a little less shareholder value at the exit but probably sees much more value created for shareholders after 3 to 5 years.  If (potential) shareholders are willing to see the long term, this deal makes sense.

But Doug Parker & company now have to go to work hard on bondholders and influential members of the unsecured creditors committee.  They have to present a sterling and realistic business case.  All their ducks need to be lined up perfectly and even with that, one more thing has to happen:

The current AA executive team has to make a mistake.  It doesn’t have to be a very big one but it needs to be enough to cause some to question their ability to deliver on a stand-alone plan.   Another quarterly loss could do it.  Possibly declining revenues might as well.  Delta and United could do US Airways a favor and engage in predatory behavior against AA in its cornerstone markets and that would certainly do it.

A US Airways / AA merger makes huge sense when it comes to competing with UA and Delta.  Those two have proven that their scale is helping them in ways that AA can’t experience.  It is crystal clear that both airlines need each other in the future.

And if you don’t think this fight is about who runs the company, you are kidding yourself.  It really does boil down to that and, in a way, you want that kind of discussion to happen.  Doug Parker is seen as having “failed” at 3 attempts to merge with Delta, UA and Continental.  I would argue that he didn’t “fail” but that marriages with those airlines were a bit less optimal than they would have been with AA.  The real truth is that if anyone is the “ugly chick” in the airline world for the past 5 years, it’s been AA, not US Airways.

After all, it’s AA that has lost $10 Billion in 10 years, not US Airways.  It’s AA that has refused to address its costs and revenues, not US Airways.   It is AA who has an atrocious relationship with its unions, not US Airways.  US Airways’ union problems are a product of the unions, not management.  And the circumstances under which those problems occurred can’t happen again because of new federal laws.

I’ll point out that US Airways not only didn’t like AA for a merger partner for 6 years, it went to the very best prospects over and over again.  That wasn’t dumb, that was smart.  They didn’t lose because they were bad ideas, they lost those merger attempts because their counterparts wanted to remain in charge at those airlines.

You see, those executives didn’t fear US Airways.  They feared Doug Parker and the reason they fear Doug Parker and his team is that they are aggressive, smart and overperform.  There is firm, consistent evidence of that.  Parker & company can make quite a few other executive teams look stupid and no one wants to look stupid.

So, I think Parker will go radio silent for the next few weeks, await some outcomes in bankruptcy court and spend their time quietly working with bondholders and lenders to firm their business case for creditors and shareholders.  Tom Horton isn’t dumb but if I had to choose between him and Doug Parker to run a modern airline against the likes of Jeff Smisek and Richard Anderson, I’d choose Parker.  Parker is aggressive, hungry and willing to think outside the box when it comes to an airline.  Horton hasn’t shown any inclination at adopting new behaviors in light of a changed industry.

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I’ve been on vacation since last week and while I was away, I had a peculiar urge to not blog on the airline industry.  It’s time to change that.

American Airlines’ three big unions have had votes on last best and final offers taking place with results in from 2 of them.  The TWU wisely chose to accept their offers and did so without fanfair.  The APFA still has a vote going on that will go past the bankruptcy court deadline as it stands today although the APFA remains confident that they’ll be given more time to conduct their vote.  I’m not so sure about that after the results of the APA vote.

The Allied Pilots Association has voted down their contract and this brings a flood of thoughts to my mind.  Their vote should have been about remaining unemotional.  Emotion dictated offering a big “screw you” to any contract but that wasn’t the wise choice in this vote.  Accepting the contract offers flexibility in negotiating in the future and a firm role in the bankruptcy reorganization.  With the APA holding 13.5% of the equity in the reorganized company, they had a voice that could bark.  Without it, they are relegated to the sidelines.  An emotional vote wasn’t the way you wanted to go in this.

The APA will be without voice in this process.  The bankruptcy court will impose AA terms on the APA.  The NLRB will not release the APA to take industrial action against American Airlines for years more now.  They’ll insist on more negotiations and even arbitration but they won’t let the APA strike.  AA now has zero incentive to do a new deal upon exit from bankruptcy and zero incentive to cooperate in negotiations as the longer they have their terms in place, the better the costs.  My best guess?  The APA has screwed itself for at least 5 years from the date of bankruptcy exit.  They will not be getting a contract that has parity with United and Delta for a long, long, long time.  They will have little influence on a merger, if any.  The AA executive team no longer need even pay much lip service to the APA.  In short, they not only shot themselves in the foot, they shot themselves in the head.

Am I surprised?  Actually I was.  Why?  I cannot say.  The truth is that the APA is not a rational organization and it has been mad and throwing temper tantrums for years.  When former APA President Lloyd Hill was in charge, nothing got done but pilots got to complain loudly and throw temper tantrums and that felt satisfying.  Then David Bates was elected and elected on a platform of approaching negotiations with AA rationally.  More surprising was that David Bates and his fellow officers actually did approach their jobs in the union rationally.

So rationally that I forgot about the overall APA membership.  Oh, there were hints from time to time.  Board members from various pilots’ bases would from time to time throw wrenches into the carefully plotted course charted by Bates but Bates seemed to manage this pretty well and keep some forward progress going.  So well that I started to not pay attention to those renegade board members.  Bates has done an excellent job of putting smart before emotional.  Sadly, pilots don’t want smart.  They want emotion.

So Captain David Bates has resigned as President of the APA.  The vote against the contract really was a vote of no confidence towards him and his fellow leaders.  Bates did the right thing because going forward, he wasn’t going to be an effective leader.  Why remain in office as an ineffective leader?

Pilots are weird creatures and their unions are stranger.  They will, at almost every chance, cut off their nose to spite their face.  They believe themselves smarter than anyone else at the airline and always believe that if the airline would just do what they, the pilots, thought best for running an airline, the airline would thrive.

The problem is that no pilot has ever proved themselves to be an effective airline executive in modern times.  To the contrary, most have failed miserably.  You can’t “control” an airline.  You can manage one, lead one but you can’t control it like you do an aircraft.  The airline will provide violent feedback and eject the person trying to control it.  It’s not an inanimate object designed for steering inputs.  It’s living creature with a mind made up of all of those a part of the organization.  It has to be persuaded to do things, not mandated.

The arrogance of airline pilots is nothing new in this area.  The greed isn’t either.  I am reminded of when Braniff International went to its pilots for temporary cost reductions to keep flying.  My father was the man who approached them.  At that time, senior Braniff captains were earning as much as 5 times more than my father, one of two executive vice presidents.  When asked for reductions to keep cash flow positive, the pilots refused and then offered to just loan the money to the airline via the union and at interest rates above market.  Obviously more loans weren’t the solution, Braniff management walked away shaking their collective heads and eventually filed bankruptcy.  And never flew again.

All the pilots lost their jobs, had to start fresh at new airlines and at entry level salaries.  When the bankruptcy occurred, I remember many pilots stating private (and some publicly) that they never thought the airline would actually stop flying and cease to exist.  They believed they were calling a bluff on the part of Braniff management.  Many deny it now but that wasn’t true at the time.

AA pilots are a very similar breed.  These men and women are going to eliminate their jobs to spite CEO Tom Horton and other AA executives.  The thing is, those people will find other jobs and they’ll go on to succeed elsewhere and earn great salaries in industries that pay far better than airlines do.  (Airlines are notorious for underpaying executives relative to businesses with similar revenues.)  But the pilots are going to end up earning an industry low or moving on to new jobs at new airlines at entry level salaries.   That 15 year MD-80 first officer is going to go back to earning $40K a year at some new airline.  So is that 20 year 767 captain.  And they’ll be bitter people until their retirement.

So, I’ll say this to David Bates:  You did well.  You presented facts and dealt with reality.  You can’t help people who don’t want help and your membership is intent on throwing a temper tantrum  at exactly the wrong moment.  No good deed goes unpunished and I feel for you because I think you really did work towards productive and rewarding change among your membership.

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Allegiant Airlines has announced that it will be acquiring up to 19 Airbus A319 aircraft via lease and/or purchase and it expects the first aircraft to enter the fleet in the 2nd quarter of 2013.  Allegiant presently operates a large fleet of very used MD-80 aircraft and recently began flying 757 aircraft as a small sub-fleet to support overwater, long distance routes.

The A319 will support growth initially and represent an aircraft that matches seat count for the MD-80 while offering far greater range.  Range will equate to growth opportunities at Allegiant.

Allegiant believes that the changing market for used A319 aircraft now matches what they originally found for the MD-80 as they began as an airline.   It’s true that the A319 has never been a very popular aircraft in general and is on a downward slide presently.  Major airlines prefer the A320 and A321 which offer vastly superior seat costs.  The 737-700, the A319’s competitor, is also seeing a downward slide in value although not nearly as great.

Rather than be alarmed at Allegiant’s adding a new aircraft type, I would suggest that this is good news all around.  Allegiant will benefit from far better seat economics and will be able to obtain aircraft much easier on an on-going basis.  I fully expect that they’ll look for other good deals on A319s to replace their MD-80 aircraft.

Rather than put them at a disadvantage, I expect that this will allow Allegiant to compete even more aggressively against Low Cost Carriers (Southwest, JetBlue) as well as Ultra Low Cost Carriers (Spirit who already uses the Airbus A319 and A320).

Don’t expect a more comfortable aircraft.  Allegiant will cram as a many seats possible onto this aircraft.  Expect roughly 150 seats and compare that to US Airways’ A319s which have 2 class seating for a total of 124 seats or United Airlines’ A319s which have 3 class seating for a total of 120 seats.  Allegiant notes that it might be able to fit more than 150 seats if an additional overwing exit is added.   Spirit’s A319s have 145 seats with a seat pitch of about 30″ so I expect that Allegiant is planning on a 29″ seat pitch and that is not a comfortable seat in the United States.

It’s a good purchase for Allegiant and signals the direction that residual lease values will have on both A319/A320 as well as 737-700/800 aircraft as the A320NEO series and 737MAX series get ordered by major legacy airlines.  This is exactly what lessors didn’t want to see happen to the aircraft they hold but it was largely unavoidable and particularly so when one sees major airlines upsizing their aircraft considerably.

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