AirlineFinancials.Com founder Robert Herbst made a point in a story line here about American Airlines that I think is, perhaps, the most salient yet made. 

Among the SuperLegacy Airlines, there is now as much as a $2Billion gap in profitability between them and American Airlines.   That’s a big gap. 

Controlling costs alone don’t close that gap and waiting for United and Delta to move upwards on their labor costs isn’t exactly a good, near term strategy. 

Herbst thinks they’ll have to declare bankruptcy in 2 to 4 more quarters.  That might be the smart thing to do in the sense of preserving enough cash to exit bankruptcy and continue on as a viable airline.

American Airlines has some of the most saavy financial people in the airline industry and there is a lot of ego in that group when it comes to managing money.  They do it better than virtually any other airline.  I don’t see them admitting defeat and entering bankruptcy that quickly, myself.

That said, ego and $3.98 will buy you a fine cappucino at Starbucks.

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One result of the consolidation that has gone on in the US airline market is that we have 3 SuperLegacy airlines with each roughly the equivalent of each other in size and revenues.  Each of those SuperLegacy airlines has both fortress hubs as well as hubs in extremely competitive markets.  I speculated that the result of these mergers would actually be more competition rather than less in major markets because that’s where the money is.

American Airlines has a plan that involves channeling 98 to 99 percent of its traffic through one or more of five “cornerstone” markets:  Dallas, Miami, Los Angeles, Chicago and New York.  There are just two fortress hubs in that mix today:  Dallas and Miami.  Los Angeles and New York are highly competitive markets for all airlines and Chicago is a major hub for both AA and United as well as being a strong focus city for Southwest Airlines. 

Delta Airlines retains its strength in Minneapolis (fortress hub), Detroit (fortress hub), Atlanta (fortress hub + LCC carrier encroachment), Salt Lake City (fortress hub) and competes aggressively in New York and Los Angeles.

United Airlines has its focus on Houston (fortress hub), Chicago (major hub with AA and Southwest), Washington DC Dulles (fortress hub), Denver (fortress hub + LCC),  San Francisco (hub) and competes strongly in the New York City and Los Angeles markets.

It’s not hard to see who the loser is here.  American Airlines has the highest costs and suffers more competition in more of its focus cities.  Even in Dallas, a fortress hub if there ever was one, American Airlines gets to face increasing competition from LCC carriers at DFW who’ve identified exceptionally high fares on cities they can serve and they face increasing competition from Southwest Airlines at Love Field particularly in 2014 when the Wright Amendment essentially goes away.  Miami is strong revenue wise but will never serve as a convenient hub for the rest of the United States.

The only way these airlines continue to grow is to make inroads in these competitive major markets.  Their established dominance leaves little low hanging fruit to explore.  If one were feeling predatory, an airline such as Delta would begin to focus on cities such as New York City, Los Angeles and Dallas.   So far, Delta has engaged with the competition in the first two cities.  Why do this?  Because American Airlines can no longer afford to fight sustained battles on its home turf on price and its service product is at least a generation behind the other two SuperLegacy airlines. 

In fact, I would maintain that engaging American Airlines in the DFW area could yield great success over 2 or 3 years.   American cannot fight that kind of engagement off on price alone.  It doesn’t have the service product it once had and its regional airline is one of the worst in the country at this point.  There is a reason why Virgin America and Spirit Airlines have shown up there.  There is a reason why Lufthansa is doing well with flights to Germany there and there is a reason why Emirates smells an opportunity there too. 

The weak animal in the forest is American Airlines.   If Delta and/or United can work up a sufficient warchest, competing for AA customers in its cornerstone markets can provide growth.  But they aren’t immune to encroachment themselves.

Both airlines suffer competition from LCC carriers and, in particular, Southwest Airlines.  Look at where SWA is now a viable and cost effective alternative to the SuperLegacy airlines.  Los Angeles, San Francisco, Phoenix, Denver, Dallas, Houston, Chicago, Washington D.C., Atlanta and New York City (3 airports currently).  Southwest can provide price competitive fares, an equal or better economy service product, an equal or better ontime record and flights that are just as convenient if not more convenient at the end of the day. 

Southwest achieves that while also serving what I would describe as 2nd and 3rd tier cities.  Cities such as Kansas City, St. Louis, Nashville, Salt Lake City, Las Vegas, Lubbock, Little Rock, Indianapolis, Pittsburgh. Albany, Buffalo, Norfolk, Seattle. . . you get the idea.  And they serve these cities with a better offering than most SuperLegacy airlines.  In fact, Southwest tends to not just get the most frugal passengers but also the most value oriented passengers.

What’s different between those two?  Frugal flies the cheapest flights . . . period.  Value oriented passengers pay for the most bang for the buck.  A value oriented passenger pays a premium price for a fare that lets them travel efficiently, comfortably and without fees.   He or she doesn’t buy the cheapest fare.  They buy the SWA business class fare because it is hundreds of dollars less than SuperLegacy fares, doesn’t nickel and dime them and provides convenience they can no longer get from other airlines. 

They do well with those passengers in their focus cities but they do really well with those passengers in those 2nd and 3rd tier cities.  Do the math:  Fly on AA from Little Rock on an MD-80 or regional jet in cramped quarters to a hub or fly on Southwest on a more comfortable, newer 737 and direct to your destination. 

Those cornerstone strategies used by SuperLegacy airlines are heavy weights hung around their necks.  First they’ll survive at each other’s expense and then they’ll all suffer at the hands of the more convenient LCC carriers.

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There is a bit of hot talk again about more consolidation among US airlines as a result of American Airlines (AMR) President Tom Horton responding to a question about whether or not they included in such a consolidation.  He replied “Yes, it could.”

Does it mean they’re actively seeking a partner?  No, it does not.

I suspect that Horton’s response was more off the cuff than anything and simply not closing doors on the idea.  I do not think the current management team is seeking that kind of consolidation simply because it really does mean that many of them must go. 

Does it mean US Airways is a suitor to American Airlines?  No, it does not.  Even Doug Parker realizes that American Airlines tends to simply buy companies to shut them down from competing with AA.  He knows that the management isn’t about to give up the reins in a merger of equals and he knows that they are the one airline that has far bigger problems than US Airways.

Mind you, I continue to think that AA could stand a dose of US Airways management.  But a merger doesn’t begin to look attractive until there is a deal with the various labor groups and one can see what the financial impact is of those deals. 

In short, I don’t think there will be anymore consolidation in the near term (12 to 18 months).

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American Airlines parent company AMR has announced losses again.  This time, despite an arguably very strong industry third quarter, AMR has losses of about $162 million.  $50 million of that resulting from hedging and foreign currency devaluations. 

There is no surprise here. 

Even when CEO Gerard Arpey responds that the carrier is “. . . taking aggressive actions to improve the company’s performance and strengthen its foundation for long-term success.”  He also says:

“We have put in place many of the critical building blocks for a successful future, including a strong network and alliance partnerships, accelerated fleet renewal plans and innovative products and services to enhance our customers’ experience.”

The problem is the stark contrast between AMR and other major legacy airlines’ performance.  In addition, it’s clear that AA’s competitors are not permitting their costs, especially labor costs, to rise and lessen the differences between them and AA.

The other problem is the perception that AA may have waited to long to get aggressive on responding to its problems.  They have allowed labor contracts to fester.  When other airlines dumped fuel hogs, AA waited 2 more years before getting aggressive on fleet renewal.  Other airlines continue to be more aggressive on capacity management.  American hasn’t engaged in developing its international flying aggressively in stark contrast to airlines such as Delta and United. 

I think analysts see a a “perfect storm” of consequences gathering on the horizon.  The only thing that keeps them from howling about it too much is the rather large cash holdings AA still has.  Unfortunately, those just eroded another $163 million which isn’t a trivial sum of money.

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When I think about various labor negotiations going on in the airline industry, I become fairly sure that the issues are fairly close to the same for everyone.   If you ask most people what they want from their job, they’ll generally respond with a desire for their work to be valued more now than 10 years ago, an opportunity to play a role  in their destiny, job security or even just the opportunity to not look over the shoulders for a while.

The order of priority is different for each person, of course, but at the end of the day, it’s about their role being valued.  I could spend days writing about how an airline such as Southwest injects this into their culture but they really are the exception to the rule.

American Airlines is negotiating furiously with its pilots this weekend and I wonder how that has gone for both sides.  I would imagine that for the pilots, the goals are better wages, a retirement that has some security to it, opportunities to rise within the seniority system and leadership. 

For the company, I would imagine the goals are better productivity, fewer obligations to a pension system that is unsustainable in the long run and the opportunity to introduce change quicker in response to a market that changes weekly in this era. 

Ironically, I suspect they are not far apart in their goals but how each perceives a win is probably very, very different.  American Airlines “wins” by being able to announce an agreement that offers them greater flexibility and predictable costs that are now worse than the industry average.  The company must show shareholders, investors and the financial world in general that they have a sustainable operating model for the future or the leadership involved will be asked to leave.

Pilots achieve a “win” very differently.  At AA, the pilots are a very senior group and when you reach a certain age, you want life to be just a little bit easier, not more difficult.  They’ll want better wages, a high degree of certainty when it comes to their retirement and schedules that aren’t so bruising. 

One of the biggest obstacles in this scenario is seniority.  The seniority systems closely ties pilots to the airline and makes it very damaging for a senior pilot to leave the company at any time before retirement.  Those who have tens of years invested in it don’t want to see it gone. 

Seniority systems also tie pilots to flying that they often do not like.  Pilots are humans and some enjoy doing just a few long but punishing international flights and some would actually prefer to spend 2 or 3 or 4 days doing domestic turns but sleeping in their beds more often. 

Even if you didn’t get rid of the seniority system, it would be helpful if pilots weren’t paid by the size of aircraft they fly but, rather, purely on seniority at the company.  The work involved with flying a 777 or an MD-80 is actually really not much different.  It isn’t more work to fly a twin aisle vs a single aisle airliner.  Sometimes it is different work but it isn’t “more”. 

Frankly, it would be to the advantage of safety if we could get more grey hairs flying those domstic single aisle airliner flights.   They’ve been there and done that in more circumstances and know the pitfalls better than any junior pilot does. 

Wouldn’t it be more interesting if a pilot were able to choose his destiny without having to take  a penalty because he or she doesn’t enjoy flying 777s to India and actualy prefers flying from Dallas to New York City and back more often? 

A win here would be to decouple seniority with aircraft type.  Let pilots choose what they want to fly without penalty.  Let them match their preferences to a situation where they feel they have a strength rather than be tightly bound to a style of flying they hate. 

Stop forcing them to upgrade to new aircraft and even from First Officer to Captain.  Does it really matter if a man prefers to stay a senior FO to becoming a junior Captain?  It really doesn’t. 

My suggestion here is that it would be better for both parties to quit trying to hammer square pegs into round holes.  Find ways to let pilots do the kind of work that best fits them without financial penalty.  Instead, ask for more productivity within that work and build schedules that allow pilots to achieve their monthly hours without having to be away from home for 15 to 20 days per month.  Offer incentives for those pilots to live inside their base. 

Make it possible for pilots to live a productive and rewarding life.  The happier and more rested they are from a schedule that does work for them, the more productive, safe and agreeable your workforce will be. 

It would be great to see both unions and airlines think outside of the box on these issues.  Find a way that makes both sides happier with their circumstances.  Refuse to give into inflexibility.  Be fair and trade a happier life for more productivity.  Ask for opportunities for “fence off” a portion of flying to test different work models and find those that do work for both.  Experimentation is what both sides need and it will offer the chance for both sides to try something new without having to commit to a change for years and years. 

Identify styles of flying and group them into schedule groups that pilots can bid into.  Pay pilots a wage based on seniority but not on aircraft size.  Pay pilots a bonus for living at their base instead of commuting.  Pay another bonus for taking on productive schedules.   Offer the opportunity to go fly the same aircraft in a very different setting for a limited period of time so that pilots can explore what works for them without having to make decisions that could affect them and their families for years. 

Find a way to make your people happy and you’ll find that the “costs” involved with that are far less than the costs that come from cranky pilots who are forced into demanding more money just because they feel so trespassed on by being made to fly schedules and aircraft they do not enjoy.

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Just when you think that nothing will move at American Airlines except at a glacial pace, there is a hint of movement.  American Airlines and its pilots union, APA are engaged in intensive meetings and AA has expressed a desire to the Allied Pilots Association to conclude negotiations this week. 

No, you didn’t read that wrong.

The desire is a good thing.  However, temper that with the fact that we don’t really know how good the lines of communication are between AA and the APA.  Just because desire exists doesn’t mean that one side or the other is prepared to be satisfied with what is offered.  But it’s nice to hear it expressed.

The APA has called a board meeting for this weekend in order to be ready to respond to anything arising out of the negotiations. 

Of course, as soon as APA President David Bates communicated with the membership, the dysfunctional portion of the APA got itself fired up immediately by speculating that several board members would refuse to attend the board meeting to deny a quorum.  Others insisted that the APA and AA are miles apart in any deal. 

I criticize AA quite often for not concluding new deals with its labor.  I’ll continue that criticism until its lethargic pace changes.  However, I’ll also criticize the Allied Pilots Association for acting like a pack of sophomore girls in high school.  It’s distressing to see the sabotage that takes place from time to time by the “hard liners” who firmly believe the best pilot’s salary is what the CEO makes + $1.   Sabotage in the form of insulting the people at ALPA who have made their resources available to assist negotiations.  Sabotage in the form of open and insulting criticism of its (somewhat) newly elected leadership.  Sabotage in the form of not attending board meetings to deny action on items. 

That doesn’t gain you what you want.  Actually, it works in the company’s favor as it simply delays an increase in salaries and/or benefits that would result from a new agreement.

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With the heat up on American Airlines’ financial situation as well as the strict scrutiny its share price has gone through, the old dog called merger has started to pop up again. 

The truth is, financial analysts and investors want to see something more happening at American Airlines.  Something that goes beyond “we’ll stay the course with our fixed strategy and hope other airline’s costs rise to ours before our money runs out.”   That really is what has been communicated thus far. 

There is a new culture at some airlines.  It’s a culture of fiscal responsibility that is fostered by airlines leaders such as Richard Anderson (CEO of Delta) and Jeff Smisek (CEO of United).  It’s the idea that a stready return on investment is necessary for airlines going forward.  It is refreshing and it does seem to help as a basis for decision making at airlines.  Enough so that they’re starting to convince me that capacity discipline really will continue in the United States.

On the surface, it would appear that American has the right executive leadership to execute that strategy.  It’s an airline that has a strong reputation for financial management and one would expect that they would lead on this subject.

However, as much as I do think the strategy has value, it ignores the human element of airlines.  We all too often talk about the capital requirements for airlines and the huge amount of cash flow necessary to keep operating and even the huge labor component.  What we don’t talk about is the people.

At the end of the day, airlines are made up of people.  It is a labor intensive business and it requires many different kinds of people and it continues to be an industry that generally grabs you and holds onto you once you work for an airline. 

To drive those tens of thousands of people into the same direction and achieve success requires a bit more than being a good numbers man.  It requires a certain vision, a certain charisma and the ability to get people to follow you. 

American Airlines hasn’t got that.  It’s got a clinical, almost detached view on its labor and leadership that continues to ignore the human component to their success.  

What investors and analysts want to see is some revolution, not evolution.  Steady is the course has simply seen debt rise, cash holdings drop and angrier employees.  Those who know airlines, know that that is the precursor to a long, ever quickening drop into failure. 

You can manage those pennies all you want but if you can’t get your people to turn an aircraft quicker or your pilots to work more productively or get your staff to treat customers better, you’ll still fail.  Even analysts know that. 

American won’t engage in a merger with its current leadership.  However, CEO Gerard Arpey won’t stave off a coup with his present course either.  There will come a time when the board will decide new leadership is necessary.  It will happen rapidly and it will be a result of a sudden consensus view by the board that they’ll be held responsible for further failure.  I would argue that that set of circumstances may be closer than Arpey & Co thinks.

While I don’t think a merger is on the horizon, I do continue to wonder what the executive team at US Airways could do with American Airlines.  They’ve worked wonders with enormous challenges and a disadvantage to virtually every other legacy airline.  They’re reponsible to providing a return on investment and they seem to have figured out how to please customers better every place improvement was called for.

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American Airlines will outsource heavy maintenance on (4) 757 aircraft to TIMCO in North Carolina within the next month.  You might imaginge that American’s Tulsa maintenance union thinks that is just an awful idea.

American says it needs to do this because of a backlog of maintenance at its Tulsa center and the local TWU says that American knew about this maintenance more than a year ago and failed to do anything about it including considering the union’s proposal to keep the maintenance in Tulsa.

Making decisions like this at an airline always involves more variables than most can consider.  Do you pay overtime to get the work done internally?  Do you have the space to do the work internally?  Is your labor force fatigued and unable to keep pace?  Is the costs to do it in house higher than outsourcing?   Do you want to try outsourcing to see if pursuing a long term outsourcing strategy is worthwhile on a grander scale?

Is this a move by AA to pursue outsourcing?  Actually, I kind of doubt it.  AA’s maintenance facilities have done their work not just cost effectively but in concert with the unions and the results have shown.  Right down to its labor force finding additional cost savings both in time and money as well as showing that AA could save more money by doing certain small items like “tuning” the engines more frequently for more fuel savings. 

I think that AA just also recognizes that having a backlog of maintenance on aircraft could cost them flights and those flights represent revenue.  On the other hand, the unions have to make noise about it because they are unions, they want to protect jobs and they want to keep their jobs. 

The real failure here is in not simply reaching an agreement with the unions over this issue quietly.  It sets up the perception that executive leadership isn’t listening and why reinforce that perception among its labor force?

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Over the past several days, we have seen quite a ride for American Airlines’ share price.  There has been rampant speculation that the decline in share prices were due to the higher than average number of retirements at the end of September.   Some think the pilots “know something” and are sure there is going to be a bankruptcy.

I am by no means high on American Airlines.  To the contrary, I think they continue to act as if their problems are being fixed or are not that severe and I think the executive leadership is approaching irresponsible in certain areas. 

That said, we’re also talking about a company that has enough unrestricted cash to live unconstrained for another 4 years.  That doesn’t spell bankruptcy.  The pilots don’t know anything special and, frankly, they probably know less than many. 

But I do think this reflects the frustration and negative emotion that many feel about this company.  I think there is a sense that there are growing missed opportunities to come out alive and healthy.  I think many people have looked for a reason to dump their shareholdings and they finally found one that works for them. 

But I also think that I’m tempted to buy up AA stock right now because not only do I think they survive in the near term and not only do I think they won’t enter into bankruptcy, I think their share price will climb considerably over the next year from where it is today.   Because everyone likes a deal and right now AA stock is a pretty good deal.

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Emirates Airlines is going to launch non-stop service between Dallas / Fort Worth and Dubai February 2nd of 2012 using Boeing 777 aircraft and I’m a bit surprised. 

While this fits in with Emirates strategy to be a carrier for the world, I question whether or not the power of American Airlines has been fully considered.  Yes, Emirates has had quite a bit of success competing against other Oneworld alliance customers.  Yes, Emirates offers a world class service product.  No, Emirates is not a part of an alliance and the DFW area is a network hub for the entire region.

How do you compete against American Airlines who possesses a world class network in this region when you have no alliances or codeshares to provide feed from that same region at that same airport?  Furthermore, how do you compete against an airline with arguably one of the strongest frequent flyer programs known and in a city where the entire frequent flyer concept was invented?

I don’t think American Airlines will necessarily respond to this flight with flights of their own to that region.  They don’t need to.  Travelers from this area can get to any point they want in the world via American Airlines either non-stop or through connections as good or better than what Emirates can offer with the possible exception of the Middle East itself.

DFW isn’t really an oil region.  Yes, we have ExxonMobil here with their headquarters and even Halliburton.  Those are headquarters and not operations.  The ties that DFW has to the Middle East are tenuous at best.  The ties that DFW has to Africa are almost non-existent. 

Perhaps Emirates can succeed with a single flight per day.  However, that flight isn’t a real threat to AA or Oneworld.  for areas that do have ties to the DFW region, there are already better, direct flights on American or Oneworld partners.  Europe is well served.  India is well served.  The Far East is well served.  And you can fly QANTAS direct to Australia.

When Emirates started service to Houston, that made sense to me.  There are strong ties to areas between Houston and what Middle Eastern and African regions Emirates serves.  This one doesn’t have a very good argument on its behalf. 

Regardless, it will be fun to go to DFW airport and photograph an Emirates 777 landing.

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There has been lots of speculation about American Airlines filing for bankruptcy over the past 2 weeks.  Partially because of Moody’s downgrading their outlook on AA and partially because AA’s own labor is opening asking the question.

Are they looking at bankruptcy in the next 12 months?  No, absolutely not. 

In 18 months?  Probably not. 

But the speculation highlights my favorite pet peeves about American Airlines.  They aren’t realizing the Wonderful Synergies they projected from relationships with BA/IB over the Atlantic nor with JAL over the Pacific.  And they’re acknowledging that at this point.  Those immunity agreements didn’t enable a torrent of new cash.

They continue to have severe labor issues and they are severely hamstrung with labor agreements that do not provide for any increased productivity.  On the current path, labor will eventually win the right to strike and I have no doubt that they will.  If and when that happens, it’s the end of AA as we know it.

Despite their aircraft orders, there doesn’t appear to be much impetus to rationalize their capacity and match aircraft to demand.  Notice that all the aircraft ordered essentially upscale their routes and provide lower seat costs as a function of having more seats.  The problem with that strategy is that YOU HAVE TO FILL THE SEATS.

And American isn’t filling seats nearly as much as it should and this surprises me not at all given that they aren’t a very nice airline to fly.   Who wants to pay a premium to fly on airline that provides less of a service experience?  Their competition offers a better aircraft, competitive routes and more flight attendants that smile. 

Those new aircraft don’t really being to change the fuel equation for several more years either.  They are late into this fleet by at least 5 years at this point and other airlines have got a fair advantage over AA in comparable aircraft. 

American won’t be going bankrupt any time soon but that doesn’t mean people shouldn’t question American.  There is no coherent plan to bootstrap this company back to realistic profitability.  Right now, the plan hinges on failing joint operating agreements across two oceans and a new(er) fleet arriving . . . someday.  AA hasn’t communicated any more intentions than that and they have no shown no aggression towards solving their fundamental cost problems.  That should alarm quite a few people at this point.  It’s not bankruptcy but it’s an alarmingly familiar pathway to it that we’ve seen in a number of other legacy airlines.

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Virgin America seems to be led by a young, vibrant and, most importantly, industry outsider team, right?

Question:  What do Virgin America and American Airlines have in common?

The answer after the fold: (more…)

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Virgin America started flights between DFW and LOS/SFO all the way back in December and experienced a fair bit of success while American Airlines simply matched fares and maintained their status quo.  Over the past several months, VA has learned that if they can get people to try their flights out, they can win the all important business customer.  With that in mind, VA launched a new initiative in the Dallas / Fort Worth area offering 2 for 1 purchases and inviting people to give up their old airline.

It’s a fairly agressive campaign and one that promises to really dent AA’s traffic.  So, in response, AA is offering $99 fares to LA and San Francisco (although not matching the 2 for 1 deal) and fighting back with communications to their customers with email blasts. 

It’s been a while since we’ve seen things heat up like this.  The problem for American Airlines is that at the prices being offered, it becomes kind of a no-brainer to try Virgin America.  And once you try Virgin America, you realize that, no, not all flights have to be staffed with mean people and not all flights have to be endured on crowded 737-800s.  The newest AA aircraft are no match for the experience Virgin America offers.

Who wins?  Everyone in the Dallas Fort Worth area, for sure.

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The Dallas Morning News Aviation Blog has a story about a memo from American Airlines’ TWU leadership warning its membership to not engage in any stealth work slowdowns.   Specifically, TWU representative Robert Gless says:

“Remember: anyone who participates in a job action would more likely be playing the role of someone who weakens TWU rather than supports it. DO NOT participate in any job action; instead participate in supporting your union. We strongly urge you to continue to work in your usual way and not to engage in any refusal to work overtime or D1 or any slowdown.”

The subtext of this is likely something along the lines of “We’re getting somewhere so don’t go and screw it up with shennanigans.”  I’m also sure the TWU is fully aware of the kind of court action that could be brought against it for such actions and the penalties that could result.

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The National Mediation Board is stepping away from talks between American Airlines and the Transport Workers Union and this is going to hurt both parties.  In addition, I think this is an indication of just where talks may go between American Airlines and its other unions.

The NMB said that “the amount of time expended in these mediated sessions, insufficient progress and insufficient hope for progress, the NMB could not justify scheduling future mediated sessions at this time. “

This could describe progress in union talks involving American Airlines across the board. 

Sadly, I think AA and its unions will continue to argue that its the other side instead of recognizing that failure to come to an agreement is badly damaging both parties.  American Airlines is hurt by the clear inability to bring a new wage and benefits structure to its operating model and employees are hurt by working under agreements that are diminished in value every year they go unmodified. 

I put the problem on American, however.  It’s the company’s duty to provide leadership to its employees whether they are represented by unions or not.  Ultimately, the buck stops with executive leadership and executive leadership isn’t finding any new ways to engage and lead their staff.

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It is standard for airlines to have inflight magazines  and many are actually quite good.  Can you name the airlines associated with these magazine names:

Domestic:

1. Spirit
2. Sky
3. American Way
4. Hemispheres

Foreign:

1. High Life
2. Discovery
3. Morning Calm
4. Holland Herald
5. enRoute

The answers after the fold: (more…)

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AMR, Inc., the parent company of American Airlines and American Eagle is doing everything it can to make the American Eagle Spin-Off successful.  More details are percolating to the surface and now we see that in addition to AMR taking on American Eagle’s debt and leasing aircraft at a nominal fee to American Eagle, it’s giving American Eagle a 9 year contract for flying that tapers off during that duration.

Right now, American Eagle performs about 90% of all regional flying for American Airlines in areas as diverse as the Caribbean, Canada and throughout the United States.   That will slowly end as American also gets the right to withdraw flying by aircraft type over the length of the contract.  In theory, this lets both parties have an orderly transition and it doesn’t preclude American Eagle from winning that flying back in a competitive bid for the contract.

Regardless, it’s hard for me to imagine American Eagle flying off with success.  The airline is burdened with aircraft ill suited to competitive flying against other regional airlines and its labor contracts are some of the most generous around.  Furthermore, just how far AMR is going to divest itself from American Eagle is an indication of just how difficult it is to sell the airline and if no one wants it, there is a reason for that.

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AMR, holding company for American Airlines and American Eagle, is saying that it might keep the more than $2 Billion in debt that is associated with American Eagle in order to give them a good send off in the attempted spin-off of the airline.  In addition, they’re considering leasing the existing aircraft to American Eagle at a token rate to give them an additional boost.

Why?  Because it’s damn hard to sell a regional airline that primarily is stocked with 1st generation 50 seat regional jets.  No one wants a company laden with old equipment.  Furthermore, American Eagle is already overburdened with higher labor costs than many regional airlines.   There is a reason why Delta couldn’t find a buyer for the similar COMAIR regional airline. 

That means that AMR is willing to take on additional debt risk just to find a way to enjoy the lower costs of other regional airlines servicing their routes.  That willingness makes me wonder just how far out of line their labor costs are with other regional airlines.

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The Allied Pilots Association, union of pilots with American Airlines, has never been very well organized but now they’re out to give USAPA (US Airways Allied Pilots Association) a run for their money in the stupid department.

Chairmen of certain bases in the North East and who are on the APA board of directors went rogue by writing and then sharing email that heavily criticized ALPA and ALPA’s providing services to APA in the negotiations with American Airlines.  The short version is that ALPA decides to pick up its toys and go home by terminating its services to APA after the email was circulated, commented on and not refuted by anyone at APA except the APA President and his team.  If you want the full details, read THIS and THIS  entry from the Dallas Morning News Aviation Blog.

I do not blame ALPA and its leader, Lee Moak, one tiny bit.  No good deed goes unpunished when dealing with APA and ALPA was merely the latest victim.  Why engage when the organization your servicing has a board populated by people who all think they’re in charge and they’re vision of leadership is the right one?  It’s a no win situation.

This is highly representative of the behaviour that APA President David Bates has tried to abate.  It was his promise when campaigning for the job that dysfunctional behaviour would be addressed.  Bates & his team have actually worked hard at this and everyone agrees that negotiations between APA and American Airlines were finally moving along productively.

Now APA is faced with having to regroup and find someone else to negotiate on their behalf and has to prove to American Airlines and the National Mediation Board that it can manage itself.  Right now, I don’t think they can do that.  So these rogue base leaders have shot themselves in the foot . . . again.

Which is why I now compare them to USAPA.  The self harm being done in both organizations is astounding.

Ironically, ALPA has some of the best leadership going for itself these days and Lee Moak is the guy who understands the issues that unions face with today’s airlines.  APA, under its current structure, will never get what it wants because it resembles a farce and nothing more. 

The very best thing that could happen is for the silent majority to start reorganizing pilots to be under ALPA and rid themselves of the non-leadership that APA provides.  Call it a coup.  Trying to work with rogue base chiefs is never going to yield success.

Filed under: Airline News by ajax
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The one thing that analysts and industry watchers have wanted to see in American Airlines is something better than the incremental strategy of holding the line and hoping other competitors costs rise.  They want to see something transformational instead.

To the outside, the big aircraft order announced by American Airlines was transformational and it certainly obscured the bad news of the 2nd quarter financial results.  American had lost millions while its chief competitors earned millions. 

The aircraft order really wasn’t transformational.  If anything, it reflects AA’s incremental approach to its problems.  Those aircraft aren’t arriving next year.  In fact, they’re not arriving for 2 more years and even then they’ll be arriving over roughly a 10 year period with the re-engine aircraft not arriving until 2017 (Airbus) and 2018 (Boeing). 

In the meantime, American has to deal with American today in 2011.  It’s increased numbers of newer, more efficient aircraft don’t start until 2013.   So what does it have on its plate today?

First, my favorite bone to pick:  it has not gotten labor agreements with its unions and what is worse, they appear not only to be far away from these agreements.  In many cases, talks have been largely on hold or barely running for the past year.  This has had two effects.   The markets don’t like the uncertainty in this area and rightfully so.  It indicates that the airline isn’t taking its costs seriously enough and the same is true for its service product.  In addition, it (AA) has created a serious morale problem among its employees.

Second, how long can a huge airline continue to operate with losses that approach $1 Billion per year?  You can mortgage your assets for more cash all you want but at the end of the day $1 Billion per year is one hell of a loss to sustain over and over again.  The truth is, airlines can operate for years with losses because of the cash flow they produce.  However, they are never too big to fail. 

In addition, there is always a day of reckoning that arrives when problems aren’t dealt with .  Again, in the airline industry, you can put this off for years but that day of reckoning has a way of arriving that surprises everyone when it does come.  The perfect storm of bad conditions for an airline finally coalesces and we start reading that the airline is in such a dire situation it can’t make its payroll much less its fuel bill.

American’s board of directors and, more specifically, its executive leadership in the form of Gerard Arpey, Bella Goren, Tom Horton and Dan Garton seem intent on preserving current shareholder value as opposed to leading an airline into the next decade.  This team resembles the wealthy guy that never seems to have problems who we one day discover is living in a beautiful house with no furniture because he had to sell it all to maintain his image. 

There is no question that having astute financial managers is critical for airlines today.  There is equally no question that no airline succeeds and earns a profit without being innovative and market leading and paying attention to the customer. 

Look at every airline earning a substantial profit (relative to their revenues).  Every last one of them is being led by a team that is focused on its customers and its service model.  They are open with their employees, focused on making their customers happy and investing constantly for the future.  When they have problems, they dig into them and find real solutions.   And they make no lame apologies for poor performance when that happens.

American Airlines is the antithesis of this.  And lest you believe this exists only in American Airlines, I would point you to jetBlue who, since David Neeleman’s departure, has been focused on the status quo as well.  They aren’t earning and they certainly aren’t enjoying real growth.   And take a look at failed airlines of the past such as Pan Am, TWA and Eastern Airlines.  The resemblence to American Airlines behavior is shocking.  Each of those airlines engaged in a similar pattern of behaviour for a long time and suddenly found themselves in the middle of that perfect storm that led to their demise (arguably TWA had righted itself but, unfortunately, this was done about 2 years too late.) 

And take a look at the airlines who turned themselves around.  The most popular story told is that of Continental Airlines.  Any airline that has had to recover itself has done so with transformational behaviour, not with incremental steps.  That transformational behaviour has always focused first on improving employee relations and, second, improving customer experiences.  It’s never been about floating more debt to survive.

Transformational behaviour comes from leaders, not managers.  They are different animals.  Great leaders hire great managers but they lead from the front rather than hiding behind a telephone conference call with analysts every quarter.  They get out there and work like crazy to communicate and set good examples and to connect with customers.  They lead and their employees follow that leadership.

Yes, economic times are very tough today and many companies have real problems.  For many businesses, this is an era of survival and I get that regrouping is sometimes necessary.  But even the other industries that were in far worse shape than the airline industry are engaged in transformational change.  GM is suddenly producing cars that by any measure are the equal of Toyota’s and they’re earning real profits.  Ford got exactly the right guy for leading their company through such an intense crisis in the car manufacturing business and he managed to avoid bankruptcy where the other two didn’t. 

And we have American Airlines relying on partnerships with other, healthier airlines who, in many cases, are engaged in transformational behaviour and, at the least, who are led by people who are leaders rather than managers.  The intent of these partnerships, in AA’s view, is to add incremental revenue.  AA has signaled its intent on letting its partners be transformational and hopes that it can skim the benefits wherever possible. 

But AA doesn’t take a hint from these other airlines and it isn’t taking risks and it isn’t being transformational.  How long before its own partners begin to doubt the value of being aligned with American Airlines?

I don’t know why anyone would buy one share of stock in AA today.  The current leadership team has been in place more or less for 10+ years.  In that time, its fought battles with the intent of maintaining the status quo rather than winning.  There is absolutely no evidence, none whatsoever, that this team wants to lead.  What value is there in investing in a company that isn’t being honest with itself?  Invest in Southwest Airlines or even United Airlines.  Invest in Costco or J.P. Morgan Chase.  Invest in companies that are acting honestly and addressing their own issues honestly (successfully or not).  Invest in companies that show leadership rather than mere deft cash management.

Filed under: Airline News by ajax
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