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.
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.
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.
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.
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.
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.
One comment from travelers that constantly defeats my imagination is the comment about an experience on an airline that was terrible and that they therefore will never travel that airline again. I inevitably ask when this experience occurred and I inevitably find out it was 10 or more years ago. In one case, a woman I met admitted she stopped flying Continental as a result of such a bad experience back in 1993. She said so in 2010.
Airlines change. In the case of the Continental Woman, had she tried Continental just 3 years later, she would have been pleasantly surprised. Furthermore, stories of bad experiences become anecdotal folklore out there and particularly so over the past 10 years. The world wide web and social media have not only spread anecdotal stories but have encouraged them to flower and provided them with staying power that would have been unimaginable in the 1990s.
You can’t judge an airline based on a single experience. In fact, I would argue that you have to try the airline at least 3 times to start making a judgement. Things happen on every airline.
You also can’t judge an airline entirely on experiences based in one hub. I find American Airlines flight attendants to be old, surly and unpleasant out of DFW but I also know that they’re much better out of New York City bases. The hub has an effect. One can expect a higher number of problems from hubs such as Atlanta, Chicago or New York City than one can from hubs in Denver, DFW or Salt Lake City.
But even if you have had a few bad experiences on an airline, if its been 10 years, you’re experiences are likely out of date and you’re hurting yourself. I myself expended a lot of effort to not fly US Airways (America West) as recently as 2008. It’s 4 years later and I would heartily recommend them to travelers at this point. In fact, I would strongly recommend them over airlines such as American Airlines and Delta. Your chances of a good experience would be higher on US Airways.
Airlines change over time and its worth looking around for current comments before ruling them out as a choice. You may not only save money but experience less impact to your schedule and arrive in a happier state of mind.
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.
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.
American Airlines has fired flight attendant Gailen David for his satirical videos about his company. David has worked for American Airlines for 25 years. American says that David was fired for his website being against the company interest and not the videos. The APFA has said it will file a termination grievance on David’s behalf and has expressed their support for him.
Gailen David operates the website The Sky Steward and I’ve often heard him on the podcast, The Crew Lounge. He’s fairly witty and offers excellent advice to travelers.
There is no doubt that his satire is difficult to face in light of American’s present situation. It’s tough for managers and it’s tough for the company. Is it harm? Actually, I think not. Satire has the effect of causing people to see genuine issues that mere introspection doesn’t reveal. That discomfort felt is better resolved by solving the problems rather than attacking the mirror that reveals them.
Gailen, you have the support of this blog and I hope you win your job back if you so choose.
American Airlines unions are now asking for binding arbitration in their negotiations with American Airlines management as a pathway that they think will yield more satisfying results than a court order from bankruptcy. In theory, this is quite likely the case. However, that’s in theory.
I’m not sure arbitration works for the unions. Yes, it does force both sides to accept things they don’t want and both sides get some of what they do want. However, arbitrators also have to consider the real facts surrounding what the business can support and the airline is far better positioned to press its case in this area. Unions, on the other hand, aren’t.
Furthermore, an agreement out of arbitration is still an agreement that the airline can get tossed out in court if the right argument is made. The trick is in getting an arbitrated agreement that both parties can actually survive with and that a judge will find sensible and equitable.
Moreover, another issue that arbitration doesn’t address, at least for AA’s management, is the need for quick resolution to labor. American can hardly afford to spend months pleading its case, waiting many more months for an answer and then making a business plan. It needs some certainty on the labor front in order to go forward with a business plan that addresses successful exit from bankruptcy.
I expect we will see AA resist arbitration, press its case on the publicity front with its unions and start action with the courts to change the labor agreements that way.
Just about everyone under the sun has offered an opinion on American Airlines’ top level explanation of how they intend to enhance revenue in their bankruptcy restructuring. The Cranky Flier has an interesting take on things as a function of what American offers in terms of a network. Jamie Baker of J.P. Morgan has critcized the ideas roundly. Even I offered extreme scepticism on the subject.
American’s idea is that through codeshares and a far higher percentage of flying being contracted out, they’ll gain more revenue.
Codeshares aren’t a network. They can add some incremental revenue but they are no substitute for having a strong network. American’s network was pretty good until about 5 years ago. Coincidentally, that’s when their profits nosedived. American Airlines has their “cornerstone” strategy of sending traffic through Los Angeles, Chicago, DFW, New York or Miami. Sadly, that leaves some gaps that other airlines don’t have. (And this is the foundation of the Cranky Flier analysis.)
For instance, Miami doesn’t serve the Southeast. It’s a gateway city for South America but it doesn’t act as a hub for the Southeast. Not like Atlanta or Charlotte do. There was a time when American tried using Raleigh, NC for this and it wasn’t a bad choice all in all but I would have contended that fighting US Airways for Charlotte would have been better.
Los Angeles doesn’t serve the West Coast. Again, it’s a gateway city for trans-Pacific flights but it isn’t a West Coast hub. Phoenix is a hub and Salt Lake City is a hub and even Denver is a hub but Los Angeles isn’t a hub. Now we have 2 significant portions of the United States being underserved by American in comparison to both United and Delta.
I even question the strength of New York City for a network. Again, New York city is primarily a gateway and a final destination. It’s not the best place to connect traffic to other domestic destinations. Now we have weakness number 3 in the equation. Codeshares won’t make up those deficits in those regions.
Contracting flying isn’t going to provide more opportunities to connect people from those underserved areas either. Whether the aircraft is 50 seats or 80 seats, no one in the Southeast is going to perceive the benefits of flying from, say, Birmingham, Alabama to DFW or Chicago to connect to a flight to New York City. Nor are they going to be thrilled about Miami as a connecting point. Now, Atlanta or Charlotte or Memphis doesn’t look too bad but American doesn’t have hubs in those cities. Delta does. US Airways does. Even Southwest does.
How did Southwest recognize the need for Atlanta in its system for serving the Southeast and American hasn’t yet seen a need for a true Southeast hub?
If you rely upon hubs and networks, you have to recognize that they come with some real inefficiencies. Those inefficiencies can make connecting flights look very, very unattractive unless they lie more or less directly in the path of getting from Point A to Point B via Hub C.
Will American merge to gain a better network? Well, I think the current management will not seriously consider those options. They see American as an airline great that should be the consumer, not the consumed. On the other hand, I think American’s creditors are already frustrated with American’s ideas in bankruptcy and they may well force a change in thinking on that end.
Who will it be? There is only one decent choice: US Airways. I like them for both their management team and their core strengths in the network just as Cranky Flier does. However, the only way that merger succeeds is if US Airways is the consumer of AA and not the other way around and not through a “merger of equals”.
Delta isn’t going to be the merger partner. Too many regulatory issues exist in that marriage for it to be practical. United isn’t going to be the merger partner because, again, too many regulatory issues exist. A smaller airline can’t consume American and American has a terrible track record in buying small airlines and truly getting the value they present. The only airline who has the gumption, team and, potentially, the money is US Airways.
My one issue w/ that merger is the huge labor issues that will exist. There needs to be a plan in place to resolve both AA and US Airways labor conflicts that exist today.
Last Friday, an American Airlines flight attendant on a Dallas / Fort Worth to Chicago flight kind of “lost it” prior to actual departure. This flight attendant, seated in the rear of the flight, used the PA to insist the aircraft wasn’t safe and did so for several minutes. Flight attendants in the front first tried to use the PA to assure passengers and then went to the rear to address the flight attendant with the help of passengers. Ultimately, it was determined that this was medical issue, not a security one.
Was the flight at risk? No. Passengers were at risk of being inconvenience as a result of the aircraft returning to the gate but there is actually little to nothing that a flight attendant could do to put an aircraft at risk either on the ground or in the air.
There is no secret button to open doors, for instance. If they won’t open for passengers, they won’t open for flight attendants.
It’s unfortunate for this woman to have suffered this break and no doubt she’s likely feeling mortified by today over what happened. But it isn’t a reflection on American Airlines or the woman that this happened.
And for those of you on the flight running off to the media and claiming you were in fear for your lives: grow up and act like an adult.
It was an interesting weekend in the American Airlines bankruptcy arena with AA pointing fingers at its unions with the message that they need to speed things up asap and the unions countering with AA isn’t bargaining in good faith. As with almost all things having to do with labor and airlines, the truth lies somewhere in between.
I think AA is making a calculated play that if they press hard enough and get nothing but pushback, a bankruptcy judge will throw out the agreements in place presently and dictate terms to the unions. Maybe. Maybe not. AA wants the deal that Delta, Northwest & United got which is basically getting the terms tossed and dictating new terms. Well, the law has changed some in that respect since those bankruptcies. The stakeholders all have a lot to lose and I don’t think the courts are going to just lay down and do what AA wants them to do.
Actually, I think the judge is going to make them bargain a while and he should.
As for the unions, I think their responses to the airline have been somewhat unrealistic in that preserving what you have at all costs for as many members as possible without making offers that truly do raise productivity significantly just makes you look stubborn and unwilling.
The way to win this battle is to put something real on the table and be the first to do it. Neither side has so far.
Not for nothing, AA’s grand plan calls for massive labor savings and massive cost savings in other areas such as aircraft and still offers little reality in how it is going to increase revenues. Stakeholders in this bankruptcy who are outside the AA family already know that that idea has flaws and I suspect that will get communicated in court with a massive reality check for the new management.
In short, I think that AA and its management is going to be made to get real with itself and I think the board is going to experience some of that reality very soon as well. I expect some board members to change and Chairman Horton is going to have to figure out how to really work a deal with labor while offering far more granularity on how he and his team will boost revenues. Absent that answer, I expect a takeover for the company to materialize and, no, it won’t be a “merger of equals” from US Airways. There won’t be any takeovers where there are equals. Someone will take AA over, shake it out and make it perform appropriately.
The bad news is that if the latter happens, I expect labor to do worse in that situation rather than better. That’s why I say it’s worthwhile for either side to get a real proposal on the table now and win rather than bicker at each other for an additional 6 months which likely results in a lot of that leadership looking for new jobs.
The only people who are going to come out of American Airlines’ bankruptcy with a nice profit is the lawyers and consultants. AA has hired a truckload of both to guide it through this bankruptcy although one would argue that, for the money, AA’s attorneys and consultants have provided much value thus far from what I can see.
The Allied Pilots Association, AA’s pilots union, has sent out a letter to its membership stating that they are now spending $500,000 per month on their own attorneys and consultants to represent their best interests during the bankruptcy. No doubt other unions are engaged similarly at this point.
I think people need help and good counsel in these times but given the stated goals by all parties (get draconian labor cost cuts or maintain the status quo), I suspect that all parties are going to suffer long and hard during this process. What each side needs is leadership willing to think outside the box. What each side has is leadership determined to suck up to its stakeholders.
American Airlines Chief Commercial Officer, Virasb Vahidi, has apparently been given the task of promoting the idea that American Airlines be allowed to farm out more flying to regional airline partners which is currently against the contract AA has with the Allied Pilots Union.
American wants the ability to send flying up to 88 seats out to regional partners using as much as 255 aircraft (50 to 70 seat flying is limited to just 47 aircraft right now) or 50% of the mainline fleet, whichever is greater.
Of course it does. Because this is what makes it competitive against airlines like Delta and United Airlines who already have the ability to access regional airlines for that kind of flying. The concept of right sizing aircraft to demand is perfectly sane and I would go so far as to say it is way overdue for many airlines. All too often, we’re seeing high frequencies of 50 seat (or less) jets to destinations that would be better served with 2 or 3 frequencies of a 70 seat jet.
But I have to ask a question: Am I the only one who sees the continued farming out flying to other entities as a stop gap measure? At the end of the day, it feels economically inefficient compared to simply being able to operate the aircraft you need to operate within a consolidated infrastructure at labor rates that make sense. When do pilots and other flight crew recognize that it really is no difference to fly an Embraer E-170 for a regional at a lower pay rate than it is to accept flying that same aircraft for a mainline airline? And, in fact, the ability to upgrade via the seniority system becomes easier, no?
Let me suggest something radical here for American Airlines and its unions: Bring it all under the AA roof and negotiate competitive pay rates for each class of aircraft based on seat count. Be smart and pay a living wage and consolidate the flying into something more rational than what exists today between other regional and mainline airlines. Be aggressive and find those savings in the forms of productivity, employee reward and using one infrastructure to win against the other SuperLegacy airlines.
Mind you, this requires unions such as the APA to concede that low pay rates are required for small, regional flying and productivity gains are necessary to beat the competition. This requires AA to recognize that it has to reward its employees for those productivity gains and for accepting those lower entry level pay rates. That’s pretty radical for both parties.
It seems to me that regional airlines all to often are killing themselves over contracts for flying using airliners that are just stupid to use in this economic climate. 40 seat Embraers are still being used simply because of scope clause contracts that leave airlines no other choice. It artifically raises the cost of tickets and leaves those same regional airlines stuck with aging equipment that has no value on the used market and which is unreliable for the flying its being asked to do today.
I’m suggesting sanity and I realize that suggesting that in the airline industry is foolhardy on many levels. But . . . airlines figured out capacity control. They figured out some revenue enhancements via a la carte pricing. Why can’t unions figure out how to grow jobs and provide more stability for its work force overall?
Consider the impacts to a regional airline pilot who is new to the business. Under the current systems, this guy may bounce around several times and each time he/she starts anew at a regional airline or mainline airline, they start at the bottom. Wouldn’t be nicer to enter into one seniority system, enjoy a relatively stable if fairly low income in a relatively stable base with an upgrade path that can span your career. Isn’t that worth giving more productivity and accepting the lower wage given the quality of life and quality of work improvements that come along with that?
I would suggest that if AA wants to really compete and by AA, I mean both management and labor, why not get radical and try something that takes competition to another level? If you do, you potentially cut down SuperLegacy airlines at the knees on the cost side and win more business which translates into potentially far greater profits. Imagine just how nervous Southwest Airlines gets with that kind of productive, rewarding system showing up in its own backyard?
First you have to show up at the negotiating table with an attitude of wanting to embrace a real change on both sides. Trust is needed and trust has to be given. This can’t be about who gets to screw who. It’s got to be about two parties coming together to save their asses against all others. That requires a bold move in these days.
AMR / American Airlines CEO, Tom Horton, has outlined “the plan” for American Airlines to restructure and succeed in today’s airlines markets. That plan is really a set of goals and rather than dissect every one immediately, let’s take a look at some key points I think are weak.
1) Increase revenues by $1 Billion through network and fleet optimizations and product improvements.
This is vague. And combined with the intended path to stick with the cornerstone markets strategy, I fail to see how these improvements come about since AA is under attack in most of those cornerstone markets and will be under attack by several airlines for the next few years. I think they may well lose more revenue than gain if they adhere to the idea that their longstanding mainstay hubs are what brings it all home.
2) Costs savings of $2 Billion a year through restructuring labor agreements, debt, leases and through improving agreements with third party vendors.
Maybe but I think everyone at the table is smart enough to know that the vast majority of that will be expected to be realized from labor. That’s a tough uphill battle with the unions. They can get there but can it be done without thoroughly trashing the morale of the company which leads to a worse service product, not better? I doubt it if we’re talking about the current management team.
There really isn’t much to the plan in terms of concrete pathways to success. There are goals and promises but those plus $3.98 buys you a Starbucks cappucino. Clearly American plans to make real gains by getting rid of bad and expensive leases, old aircraft, etc. And that will help considerably. But what gets ignored is just how much hide has to be taken out of a fairly angry labor pool. Furthermore, American has had an increasing problem with revenue and I think it is primarily deriving from their insistence on the cornerstone market strategy. That strategy is more or less “Let’s build even stronger hubs!”
The problem is, airlines such as Delta and United are already looking for revenue opportunities in many more different ways and some of those opportunities are coming at AA’s expense already. I refer the reader to what is going on in the New York City area as well as Los Angeles. And AA is already up against a much more competitive airline in the form of both United and Southwest Airlines in Chicago. DFW is now getting attacked by several LCC carriers as well as Delta. This doesn’t bode well.
I would maintain that evolution won’t get AA where it needs to be. Revolution will and we won’t see revolution until the board of directors has changed.
The Pension Benefit Guaranty Corp has been particularly visible since American Airlines filed for bankruptcy reorganization. Nothing scares PBGC more than an airline in bankruptcy. Why? Because that’s how airlines have dumped their pension obligations. PBGC now holds those liabilities and it really doesn’t want any more coming their way.
American Airlines’ obligations scare PBGC (who is already underfunded) and so PBGC has been shrill in its warnings to AA in the media that they should keep their obligations and work things out with employees. AA almost seems to be toying with them when it made a token payment into its pensions after bankruptcy filing. The truth is, I feel almost certain that AA will dump its obligations. I think they’ll find any argument necessary to justify this and I think PBGC sees the writing on the wall.
AA has been rather disingenuous with its own PR on the subject. For instance, their claim is that “most” employees would see no loss of benefits. That turned out not to be quite true. In fact, about 13% of the work force at AA would see a loss of benefits and the group that takes the substantial hit are the pilots. Truth be told, I’m kind of on the pilots side on this issue.
Why? Because the seniority system force them to put all their eggs in one basket when it comes to retirement. Because of that system, they have no backup plan and a significant reduction in benefits really does hurt them when compared to the investment they’ve made in making a career at the company. But its those pilots pensions that AA wants out from under the most.
As much as I do feel for labor groups who would lose if AA dropped the pensions and as much as I wish for it to not happen, I think it will. In fact, I think we’ll see that move in a very short time now.
At this point, we hear of Delta, TPG and US Airways all doing their work on investigating an acquisition and/or merger of American Airlines. While many think Delta is credible with significant carve outs of the AA system, I do not. It isn’t just about competition on routes, it’s about size becoming so much larger that pricing power comes along with it in the markets. A realistic combination of Delta and AA would realize a company that is 1.5 times larger than the next largest airline and massively larger than virtually any other airline in the world. That kind of dominance can influence much more than just the price on a particular route and I don’t think the US government or the EU is interested in seeing that kind of pricing power.
As for TPG, I think they’ll play things very close to the vest and keep their intentions unknown until the last possible moment. I do think we’ll see them look for partners in such an acquisition. I also think that TPG might do what’s best for the company in the sense that they’ll oust management and directors who have long term tenure and who aren’t advocating for change and new leadership. American needs more revolution than evolution and I think TPG knows that.
US Airways has the best management team for American Airlines, in my opinion. That team knows how to fix things operationally and knows how to extract profits and revenue from sub-par conditions. That said, I think the prospect of merging those two companies given the labor problems on both sides is a bit daunting. Such an integration needs to be able to take full benefit from all the synergies a merger offers and having not one, not two but three pilot groups at odds with each other would not be healthy. The same would be true for flight attendants. I struggle to imagine how even the US Airways team makes that work well.
At the end of the day, I think every party will move slowly and wait to see how things develop with American Airlines. What they win in terms of concessions in bankruptcy will determine just how attractive an acquisiton they may be. Right now, I continue to think that the most likely outcome is American Airlines as a stand-alone company. Why? The cash holdings they have allow everyone to maintain the status quo at this moment. AA has no need to go to anyone hat in hand to ask for DIP financing.
