The Fort Worth Star Telegram’s Sky Talk blog has a story about how Maxim Group analyst Ray Neidl sees a similarity in the behavior of American Airlines pilots and how Eastern Airlines pilots managed to drive their own company into the ground 20+ years ago.

While I agree with Neidl seeing similar behaviors that are similarly irrational, I don’t necessarily agree that the same outcome is likely.  Eastern Airlines pilots did what they did, in part, because it was very hard for airline labor not to believe that an airline such as Eastern would be allowed to go bankrupt and effectively liquidate itself.  This, despite seeing Braniff vanish just a few years before.  There was a belief, at that time, that management would cave in to labor or that Congress would intervene.  Neither happened.

Today, I think that AA pilots know a little better.  That said, things are already getting out of hand.  What pilots don’t appreciate is that their small individual actions have a massive combined effect.  The press on this issue is already exposing just how far this has gone and just how little room there is for it to go further.  Furthermore, I think we would have to see a greater indicator of irrational behavior on the part of the APA board and leadership before determining that the risk is realized and the threat of demise imminent.

I will, however, reserve my right to change my opinion based on union behaviors over the next few weeks.  If we see union leadership fail to reign in these behaviors, I’ll fully acknowledge the likelihood that the airline starts a downward spiral financially.

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It’s no surprise to anyone who lives in the Dallas / Fort Worth area that the local newspapers are awfully friendly towards its local airlines.  Both the Dallas Morning News and the Fort Worth Star Telegram tend to be very forgiving of American Airlines in particular but even Southwest Airlines gets a pass on occasion.   The area is dependent upon this industry in many ways and, to some degree, it’s OK.

One local reporter working for the Dallas Observer, Jim Schutze, is a man I respect quite a bit.  He worked for the Dallas Times Herald when it was in operation and then moved on to working as the Dallas bureau chief of the Houston Chronicle and writes for the Dallas Observer as well.  Schutze is a liberal and, in this town, liberals don’t get much play.  Balance between liberal and conservative viewpoints in the DFW area is a myth.  That said, Schutze is first and foremost a balanced reporter who exemplifies what journalism once was and rarely is today.

Schutze wrote THIS entry on his Dallas Observer blog regarding American Airlines and, curiously enough, Mitch Schnurman, a reporter for the Dallas Morning News and, until recently, the Fort Worth Star Telegram.  It was Schnurman who wrote scathing attacks on American Airlines management through the summer for the Star Telegram and caught national attention.

Schutze takes issue with the fact that in a recent Dallas Morning News column Schnurman took pilots to task this time for the AA operational slowdown without taking note that the pilot’s deed have resulted in a new development:  AA wants to go back to the bargaining table with the pilots.  He’s not wrong:  that is news.

Both are right.  The greater news was that AA is taking a beating and needs to come to a better agreement with its pilots.  But the pilots are, in fact, driving their company to the wall and that can only happen for so long before real and permanent damage gets done.

As I keep pointing out:  The pilots didn’t get their attitude today because they were treated appropriately by management.  Management didn’t lead them well at all.  However, you can only beat your own company up so long before not only does the board and creditors lose faith in the management, the public will lose faith in the airline.  When the public loses faith in the airline, that is a very, very dangerous thing.

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American Airlines has made a formal request of the Allied Pilots Association to return to the negotiating table.  We believe this is entirely due to the “work to rules” action that pilots are engaging in over the past few weeks at American Airlines.  Hey, when your on-time record plunges more than 20 percentage points in a month’s time, you’ve got to do something.

Frankly, I’m ambivalent about this.  On the one hand, it’s rewarding atrocious behavior designed to directly impact customers and thereby directly impact a company that continues to issue paychecks to these same pilots.

On the other hand, I  would point a finger at American Airlines and point out that while the company did try to make a deal, it wasn’t done out of sheer anger.  No one at AA understands that the rage among labor needs to be cooled.  This is a mistake that gets repeated over and over and over again in the airline world and I do not understand it.

Both parties have done very badly for their constituents and both need to clean up their behavior.  Neither will.

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Over the weekend, I was contacted by several people about the American Airlines “pilot strike”.  Yes, everyone was talking about the pilot “strike”.  No, I’m not kidding.

There is no pilot strike.  There is no APA union sanctionized work action going on right now.

But . . . there does appear to be an informal “work to rules” campaign going on right now if anecdotal reports are to be believed.   It appears to be focused on maintenance items and most particularly oriented towards equipment that nominally can be “MEL’d” (Minimum Equipment List) for continuing a flight.

It would appear that the mechanics are cooperating as well.  By that I mean the mechanics are dutifully investigating and writing up problems in a meticulous manner.  All of this is resulting in big delays within the American Airlines network and it appears to include American Eagle labor as well.

While it may not be organized by the union, I would expect AA to go to court and ask for a court order to the union to stop these actions.  US Airways suffered similar actions in Charlotte and Philadelphia about a year ago when US Airways (EAST) pilots decided to throw a temper tantrum at that airline.  US Airways went to court and got a court order issued to the union to stop that behavior.

In other news, another American Eagle flight was delayed for 4 hours when two flight attendants decided to have a public spat with each other and the captain of that flight decided the two couldn’t work together.  Whether or not the pilot was smiling as it all went on, we do not know.   It appears that one flight attendant called for their colleague to stop using their phone during taxi and everything went down hill from there.

This stuff is going to get worse, much worse, before it gets better.  Expect American Airlines to suffer increasing delays and cancelled flights over the next 2 to 3 months at the least.  Labor is unhappy and labor is making its unhappiness known in very troublesome ways.

This isn’t just because of bankruptcy or reduced benefits, it has much more to do with the open loathing labor has for AA executive staff with CEO Tom Horton being at the top of that list.  The hostility is raw and angry and unlikely to fade any time soon.

And I repeat again:  This is why I do not believe that American Airlines has its revenue problem solved for exiting bankruptcy.  All the corner strategies and alliances in the world cannot stop labor from sabotaging the company’s reputation.

Customers are getting angrier by the day and voicing that anger in very public ways.  I think we will see traffic erode on American Airlines over the next 3 to 4 months at minimum and possibly longer.  Once you lose those customers, it will be very, very hard to convince them to come back.  They are already abandoning AA as a travel option wherever possible according to anecdotal reports.

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Scott McCartney, Wall Street Journal blogger, is now advising readers to book away from American Airlines citing the fact that their operations are in a shambles and can’t be trusted.  American Airlines is reducing its schedule voluntarily for the next 2 months because pilots are retiring in higher than expected numbers and others are calling in sick at higher than expected rates.

Is there a sickout going on?  I suspect not.  I don’t even think there is a “work to rules” effort going on right now.  I think that pilots are just kind of *done* with their employer right now.  There is no reason to make the extra effort for their job at this point.  If someone feels like they may be about to get a cold, I think they’re just calling in sick as opposed to hoping for the best and making the flight anyway.

I think other pilots see the writing on the wall and realize that their retirement is going to be improved by hanging around this airline.  If they’re eligible, they’re leaving in many cases.

This is what I meant by American Airlines still having many, many problems with their service and operations in light of the rather hostile actions that have gone on between the company and its unions.  You can force the issues, fight in the court room and win the battles during bankruptcy but . . .

What do you have to succeed with even upon bankruptcy exit?  Not much.  Hostile workforces don’t help retain existing customers and attract new ones.   This is the revenue side many have spoken about and I continue to question AA’s premise that it can operate successfully on the revenue side upon bankruptcy exit.

All of the employees who are directly involved in serving AA customers are now royally pissed off at the company and its management and do not feel motivated to do anything to help this company succeed.  And I can’t say that that attitude is undeserved.

This isn’t all about what American Airlines has done over the past 10 months either.  It’s about how American has treated its employees for as many as 7 years.  It hasn’t negotiated in good faith and it hasn’t really tried to achieve equitable contracts and if it had, quite frankly, I’m not sure we would see American Airlines in bankruptcy today.

Yes, I think the unions have, over the years, made unrealistic demands and have even been led by contentious people but leadership starts at the executive level, not at the union leadership level.  It’s an executive team’s job to make that side of the company work and to preserve a harmonious and productive relationship with its work force.  That just hasn’t happened at all.

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American Airlines’ bankrtupcy judge has decided that AA can abrogate its agreement with its pilots and impose terms upon them.  Based on what I’ve read, AA could choose to impose its original Section 1113 terms or better terms, if it so chooses.  At this point, the pilots are left to the whims of American Airlines.  American Airlines has said it will announce its intentions in the near future.

On a related note, a spokesperson for the unsecured creditors committee has said that the creditors see it as absolutely necessary to have a long term pilot agreement in place to exit bankruptcy.  This makes things tricky for AA since it means that simply imposing terms and moving on isn’t satisfactory to the creditors.  A real, negotiated agreement is necessary.  AA doesn’t have much maneuvering room with its pilot union since they’ve rejected the last, best offer.

In addition, the pilots have strongly indicated that they simply do not wish to do a deal with the AA executive team at all.  Their vote on the last, best offer made that clear.  Enter US Airways.

US Airways probably can get an agreement in place in short order.   At least enough of an agreement to satisfy creditors.  Once again, US Airways is in a strong(er) position to negotiate a merger ultimately.  I think the only way the pilots will agree to something is if the company’s exit from bankruptcy doesn’t see CEO Tom Horton and his team in charge.

Why?  Because these pilots gave up 13.5% of the equity stake available in the reorganized company to make their disapproval vocally known.  That equity stake was a big deal politically and financially.  We’re also talking about a group of people who, in many respects, can afford to draw this out to AA’s disadvantage.

American Airlines can’t afford to be delayed in anything. It needs deals in place and a firm plan drawn up in order to exit bankruptcy.  It doesn’t have all the deals it needs and therefore can’t offer a firm plan either.

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The APA and American Airlines are facing off in bankruptcy court in New York City today.  The APA contends that the last, best final offer should be the baseline of the Section 1113 terms whereas AA thinks that the judge already addressed everything but 2 terms that are being revisited.

The judge did acknowledge that AA needed its savings in his last ruling and did seem to indicate that if AA fixed two minor issues, he would rule in their favor for Section 1113 terms.  Smart money says that AA will get what it wants this time.

But I am not so sure.  This judge hasn’t been inclined to be punitive in his rulings thus far and worked extra hard to see if AA could come to an agreement with all its unions.  If anything, he’s bent over backward trying to see to it that agreements with unions are in place and reasonable for both parties.

No doubt he may have been annoyed at the APA voting down the last, best offer but annoyance doesn’t have a place in the courtroom when it comes to judges and this judge seems to avoid it quite a bit.

The bankruptcy judge is also there to see to it that creditors are protected.  Reasonable union agreements protect creditors when an airline exits bankruptcy.  Unreasonable union agreements offer the potential for labor strife that adds risk to the exit.

I think there is a chance that the judge may try to see to it that the baseline of the pilot Section 1113 terms is, in fact, the last best offer.  Or something closely approximating that.

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Since behaving like responsible adults and taking their own best interests into account was too difficult, the Allied Pilots Association has now decided to stamp its feet and shakes its fists.

The APA has taken steps, very publicly, to get a strike vote against American Airlines.  The APA board has taken a vote to authorize that steps be taken to make “. . . necessary preparations to conduct a strike vote of the membership and to initiate balloting upon the first action of AMR to impose any of the negative term sheet provisions.”

The problem is, the National Mediation Board has to give the APA permission to take this kind of action and even when it does, it imposes a 30 day cooling off period first.  Not only has the NMB traditionally been very, very reluctant to release parties from negotiations, in the past decade it has shown no inclination to even hear a union out fully on its desire to strike.

Furthermore, once an airline exits bankruptcy, the NMB will be inclined to keep parties at the table for a long, long time.

So, lacking any influence on the bankruptcy for AA in the form of having a promised 13.5% equity stake in the airline or an influential seat at the unsecured creditors committee, the APA decided to fire its rational voice (David Bates) and act like a union from the old school days in making noise in the press about its desire to strike.

Well, there will be no legal strike over the next several years at American Airlines.

When the pilots stop throwing temper tantrums, I’m afraid their going to discover that they have sent themselves backwards 10 years or more both in compensation and quality of life.  All because the membership making it personal.

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Lest one believe that the APFA was going to meekly accept its contract and go forward quietly . . .

Surprise.  They aren’t.  APFA President Laura Glading has communicated that: “Now we need to work together to get rid of American Airlines management.”  Glading says that the goal of the contract was to provide a mechanism to support a merger between US Airways and American Airlines with US Airways management taking over.

There is no doubt that APFA leadership does want that merger to happen.  They’re angry and they want to show it to the current AA management, who, in fairness, has earned the enmity.  But I’m not sure that rank and file saw it as quite the same purpose.  The APFA membership are tired, beat up and fairly miserable.  Yes, they’re angry too but the chatter I saw out there prior to the vote seem to indicate a certain inevitableness to the process.

The APA is now demanding information from AA to back up its filing for Section 1113 terms.  This amuses me since their contention is that the contract was worth less savings than the Section 1113 terms are.  So . . . why the hell didn’t you vote for the contract?

Because your membership is angry as hell and likely wouldn’t vote for any deal ever proposed by AA management.

I think that the APA is now officially irrelevant in most of the bankruptcy process.  It denied itself a seat at the table by voting their contract down and trying to get that leverage back by challenging AA in court is a somewhat desperate move.  The bankruptcy judge essentially agreed with American’s terms except in two relatively minor areas and where he did disagree, he provided a roadmap to AA to refile its motion and win.

This is going to be painful to watch the APA relegated to the sidelines and with a terrible contract to boot.

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JetBlue CEO David Barger says that not only have they not received a non-disclosure agreement from American Airlines nor any contact regarding a merger, JetBlue does not want to merge with American Airlines.

Under any circumstances.  Barger says that JetBlue sees its future as a successful independent and not bringing any value to the table in a merger with an airline such as American.

I agree.  Purchase of JetBlue is an asset purchase, primarily, where American Airlines would suddenly be free to try to operate JetBlue routes with a cost structure exceptionally higher than JetBlue’s.  Even after a successful, stand-alone bankruptcy exit, AA is unlikely to be able to operate at the same cost level of JetBlue or even close to it.  So how does it win with JetBlue routes?

I like JetBlue still but I do think the airline has stagnated considerably since the departure of David Neeleman.  In fact, I think that JetBlue has missed opportunities just preceeding and after American Airlines’ bankruptcy filing.  Opportunities that I think Neeleman would have gambled on and won.  That said, the airline is profitable, successful and operating in its niche acceptably.  Barger isn’t wrong about not adding value to an airline such as AA.

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The Association of Professional Flight Attendants (APFA) of American Airlines has voted to accept the last and best final offer from American Airlines.  This will please the bankruptcy court at the minimum.

American Airlines executives may choose to crow about this but I wouldn’t.  The APFA doesn’t appear to have done this with enthusiasm or even belief in the idea that AA can thrive.  They seemed to have done it out of exhaustion and the fact that the alternative gave them no hope for any improvement whatsoever for many, many years.  It wasn’t the wrong choice but it wasn’t an enthusiastic endorsement of AA either.

In a couple of weeks, we’ll find out just how bad it will be for pilots at American Airlines when the bankruptcy judge rules to impose Section 1113 terms on the pilots.  Make no mistake, this will hurt the pilots today, hurt them tomorrow and hurt them 5 years from now.  Rather than position themselves to have a voice in their future and their airline, they are now positioned to sit and eat crow year after year.  If any pilot believes the NMB will grant them the right to strike in the next 5 years, they’re kidding themselves like no one else out there.  They may negotiate, that doesn’t mean they will be one step further along in pay or benefits than they will be two weeks from now.

Investors and creditors take note.  This is a bad development for American Airlines.  Even if they achieve their costs targets, this is the equivalent of winning the battle and losing the war.  Costs may be low enough to survive but the costs are and will remain so, only half of the equation.

The other half is the somewhat more nebulous revenue side.  The only way AA improves revenue is by marketing a better service to customers.  It’s not enough to be the price winner in this environment.  The other guys can match you fare for fare in the marketplace.  It’s not enough to have the vaunted Cornerstone Strategy which, at best, concentrates business in hotly contested markets.

You have to have a product that someone wants to buy.  American doesn’t have that today.  An airlines employees are a massive factor in delivering service that brings customers back.  Other airlines have proven this true over and over again.

American has a badly bruised and very angry workforce that will come in contact with every one of those passengers.  That will have severe consequences for American Airlines over the next several years.

Let me ask you this:  Where is American Airlines Cornerstone Strategy for improving employee morale and service product?  That’s the cornerstone strategy that I would like to see talked about.  Today, it doesn’t exist.

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Bankruptcy Judge Sean Lane did not impose Section 1113 terms per American Airlines’ request on pilots yesterday but don’t think that that was a win for the pilots.  Judge Lane found two small areas where he disagreed with need.  The first was unlimited codeshares and the second was an overly large number of furloughs.

American Airlines will revise its proposed terms and hand them back to the court in days and something will be decided.  The pilots can crow victory for labor all they want, this wasn’t a win for them on any level.  American Airlines is going to get fundamentally what they want and the judge signaled that, so far, he sees nothing out of line with the forming business plan despite the specious arguments made by pilots that it was unsustainable.

The business plan isn’t pie in the sky.  I honestly don’t think they have made a strong business case for a long term view either.  The continued focus on costs ignores the revenue problem which, despite AA PR, remains pretty bad.  Costs are much easier to quantify and therefore generally remain in focus during bankruptcy.  Revenue is based on a plan and projections that fundamentally rely on business conditions that are assumed and the ability to execute the plan.

My reservations about American Airlines are based on two fundamental observations.  First, the executive team in place today is in no way fundamentally different than the one in place for the past decade.  Over that past decade, the executive team has not shown itself capable of executing a plan to success.  As a result, the company has lost more than $10 Billion over 10 years.  That is not a company proving itself.

Second, business conditions in the industry are too volatile for making sound projections.  Delta Airlines exited bankruptcy with a business plan based on $80 / barrel oil prices.  Within months they were faced with $130 / barrel oil prices.  The airline industry is subject to strong influences from a variety sources that are entirely outside of the airline industry’s control.  The sum of American Airlines’ plan for revenues is “the other guys are doing this and we therefore think that with reduced costs, we can do that or better.”

The problem with that is you only know how the other guys are doing today, not how they’ll be doing tomorrow.  The other guys have other issues to cope with that aren’t always the same issues that AA is presented with.  Delta fixed many of its issues with a merger and built an unparalleled network as a result.  Then they doubled down and did a deal to capture the NYC market.  United did its merger in the reality that to compete with Delta, it needed scale and it remains to be seen that the ContiUnited merger is a true success.  There is evidence that they’ll succeed, we can’t declare it a success quite yet.

My problem with American is that, so far, the business plan seems to ignore weaknesses that are inherent in the system today.  In part, the Cornerstone Strategy relies upon capturing market share in very competitive markets.  Anyone who follows this industry knows that in light of the capacity restraints that airlines have shown, American Airlines has been the least effective in this and hasn’t shown much restraint.  Furthermore, to gain that market share means getting it on price (which sets off an industry war on fares) or on service.  American Airlines continues to do virtually nothing to improve service and demonstrate that it has a handle on service issues and can get its employees to assist in raising the customer experience level.

I think American Airlines needs a team that can execute a revenue and service plan.  That team sits at US Airways, not American Airlines.

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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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American Airlines, as a part of its commitment to investigate merger partners during their bankruptcy, has sent out its Non-Disclosure Agreement to all parties interested and confirms that US Airways is one of those parties.  The NDA was crafted by American Airlines and, supposedly, in consultation with creditors.

It’s the last part that has me wondering if US Airways CEO Doug Parker knew something about the NDA coming his way before it showed up.  Parker seemed to qualify what he thought US Airways support would be for the AA bankruptcy process based on what US Airways perceived the merger process to be at AA.  Parker indicated that he thought the NDA would be an indicator of just how “real” and fair AA would approach a merger.

And the fact that he was spinning that NDA 2 weeks ago makes me think that some parties on the unsecured creditors committee leaked details of that NDA to US Airways.  Details that might indicate that the merger process at AA is window dressing rather than real.

I suspect that there might be some kind of gag written into that NDA that prohibits anyone from talking about AA in any way.  and I’m not certain that that is going to fly with US Airways or anyone else for that matter.

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Tom Horton is now going even farther than claiming credit for the idea of an AA/US Airways merger.  In addition to all of that, Tom Horton is also bashing US Airways as the airline who needs a merger more desperately than American Airlines.  It is his contention that US Airways is desperate, has always been desperate and that he’ll be in charge of any merger decisions at American Airlines.

This is getting personal real fast.

US Airways isn’t wrong when it contends that its a viable airline without a merger.  They’ve proved that over and over again over the past 4 years. They earn money, they earn a lot of profit relative to their revenues and they do it consistently.  American Airlines hasn’t earned profits, hasn’t even mitigated their losses very well relative to their revenues and has lost roughly $11 Billion over the past decade.

US Airways has been pretty smart in seeking merger partners.  Even if it hasn’t been able to engage in one since the America West / US Airways merger, it has pushed industry consolidation very hard.  Over and over again, US Airways has been the catalyst for mergers.  And each merger has benefited US Airways with industry consolidation.

The thing that I find arrogant (again) is Tom Horton’s statements about who’ll be in charge of deciding mergers at American Airlines.  Increasingly, his public comments remind me of a certain Secretary of State for Ronald Reagan in 1981.   It’s notable that that man was ultimately asked to leave government.

I’m also finding the political intrigue going on at AA to be distressing.  Instead of engaging in a real merger examination process, the executive leadership and its attorneys are running around trying to find ways to derail that examination while publicly appearing to embrace it.  Not good.  It begs the question:  What are you so damn afraid of if you think you are so damn good at your jobs.

Members of the UCC and the bankruptcy court judge should consider having a frank discussion with the executive leadership to level set expectations and, perhaps, indicate that egos needed to get put away for now.

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There is a report floating around that CEO Tom Horton was actually the first one to suggest a US Airways / AA merger and that he made the pitch to US Airways CEO Doug Parker last September.   It’s entirely possible that a union was discussed in September between Parker and Horton.  I will suggest that US Airways has been aggressively evaluating merger partners and options for industry consolidation since 2006.  You can bet that AA has always been a part of those discussions.  I will point out that even US Airways didn’t really find the AA option that attractive but did find both the United and Continental options very attractive as well as the opportunity to buy Delta out of bankruptcy.   In short:  I guarantee you that US Airways knows much more about mergers and has done real homework on the subject of American Airlines.  The same is not true from the perspective of AA and Tom Horton.

AA has announced new aircraft and seating for transcontinental flights.  It will use its A321 aircraft order to replace existing (and very old) 767-200 aircraft on these flights.  Curiously, AA is promising things like seat back video and lie flat seating for business and first class.  It’s also notable that all the other airlines have not gone that far in their product and have not seen revenue consequences for that decision.  I have a feeling that this AA on a PR campaign which will see *some* of these options realized.  Also notable is that these domestic trans-con 767 have about 168 seats and the new A321 aircraft will have 102 seats.  That’s a drastic reduction in capacity for routes that are robust earners for all classes of seating.  Either AA will boost frequencies which is somewhat challenging given that some of those trans-continental flights depend on slots at restricted East Coast airports or AA is hoping that just serving business and first class customers will result in a better revenue and profit yield.  This is what people are referring to when they say that AA has as much of a revenue problem as a cost problem.   The scenario of great reduce capacity on these routes doesn’t coincide with how  the industry is executing on those same routes and earning money.

Finally, US Airways gets to crow about record quarterly profits.  It’s a timely endorsement of the US Airways management and I have no doubt that American Airlines executives reached into their desk drawers for their roll of Rolaids upon learning of US Airways success.

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American Airlines’ CEO Tom Horton is now playing the PR game in the media making it sound, at first glance, that AA is being responsible in its consideration of merger partners.   The big sound bite from last week is Horton declaring that American Airlines merger fate won’t be dictated by others.

Problem is, it will be dictated by others, in large part.  I have a problem with American Airlines acting as if it has complete control over its destiny today.  It ignores creditors and the financial markets entirely and, frankly, this is part of the problem AA has in general.   When analyst Jamie Baker asked Gerard Arpey if that was all he had during quarterly financial results a few years ago, it spoke volumes.  It still does today.

No case is being made for how American Airlines will conduct itself upon exit from bankruptcy.  There have been no giant changes in leadership at AA.  Yes, some leadership has been let go but that which remains is still the legacy management.  the same philosophies and practices exist today.

So why should anyone believe that AA will do better given what AA has achieved today?

I’ve admired Delta CEO Richard Anderson’s attitude since his return to the airline business which is that an airline he runs will be run with an eye to returning an appropriate profit in both good times and bad.  He’s largely succeeded in that goal.  Anderson recognized that the old models of business were done and that it was time to make change happen in ways that made financial sense as well as sense for employees.

American has been desperate to be able to point to other airlines and recognize that labor costs and productivity would rise to AA’s level in short time.  The problem is that that hasn’t happened and there is nothing pointing to that happening any time soon.  Even AA’s neighbor, Southwest, is aggressively addressing its costs in order to remain competitive while engaging in practices to grow revenue to support sustained profitability.

And when it comes to revenue growth, neither of those two airlines are doing it by grabbing market share at any price.  Both are continually evaluating all their routes and where they do not make sustainable financial sense, they’re being cut.  New opportunities are being sought over and over again and many of those new opportunities are coming at the expense of AA.

Both external and internal forces are shaping AA’s merger options as we speak.  Ignoring those forces and continually declaring that Things Will Be Better is foolhardy.  Playing a PR game that clearly indicates interests on the part of AA management reside in being the dominant merger partner to reap rewards is foolish as well.  Those who have influence, aren’t so stupid as to not notice that play.

And acting as if Alaska Airlines, JetBlue, Frontier or Virgin America are solutions to your problems is just insulting those who understand the industry.

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US Airways announced that they had bought a small amount of American Airlines holding company AMR’s debt.  They purchased $1 million in debt for $600,000.  This enables US Airways to have status as a creditor of AMR in court and, potentially, gain more insight into AA’s bankruptcy strategy.

It gives US Airways a seat at the table in a more formal sense and is enough to be taken seriously without being so much as to alarm the markets.

But AMR couldn’t resist speaking out against it.  American Airline’s spokesman told the Dallas Morning News that it was a publicity stunt and nothing more.  I would suggest that American Airlines play that publicity game very, very carefully.  Ridiculing a suitor and the only viable suitor for a merger and while you are under bankruptcy protection with creditors who already aren’t sure you’re acting in their interests or your own, seems foolish.

Acting snide can have the effect of making the financial markets and creditors think you’re behaving above your position in this bankruptcy.  While it is a company who is in bankruptcy and it is other companies who are the creditors (with the exception of large labor groups), the people participating in this process are all human beings.  Human beings are capable of being offended or annoyed and those human beings control the destiny of American Airlines in large part.

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It is being reported that American Airlines is now considering 5 merger partners and they are US Airways Group Inc., JetBlue Airways Corp, Alaska Air Group, Republic Airways’ Frontier Airlines, and Virgin America.   There  are interesting choices here but at the same time one can see a less than enthusiastic theme here.

Alaska Airlines is a great airline and has a great operation on the West Coast of the United States.  That said, be 100% sure that Delta isn’t about to let Alaska Airlines get away without a fight.  I would rate this opportunity rather low.

JetBlue is another interesting option in that it would bolster American Airlines in its cornerstone market strategy as it applies to New York City with its operations centered on JFK.  I think that JetBlue is rather stagnant and while it offers market share, there is nothing else here to be gained and given AA’s history of buying airlines and then not knowing exactly what to do with them. . . this merger could happen but it adds little value to AA overall and certainly doesn’t bring American Airlines back into United and Delta’s scale.  All it does is leave existing AA management in control of AA.

Frontier and/or Virgin America?  No value added here.  There is no great complementary system found here, the management of either airline isn’t doing very well and the most that happens is that AA eliminates a tiny bit of competition on some profitable mainline routes.   These are red herrings in my opinion and I think there is very little probability of a real merger with either of these airlines.

US Airways:  Enough said already.  There are complementary systems, there are good executives who know how to make money and there is enough scale to compete effectively with United and Delta.   It’s interesting to me that US Airways’ Doug Parker says that he still hasn’t been contacted by anyone with American Airlines.  This is the least attractive merger path for AA executives and, yet, the one that makes the most sense.

I think the intent in leaking these potential merger partners to the press is to appear to be doing something about examining all options while focusing all the real effort and work on a stand-alone emergence from bankruptcy.  While that gives people like Tom Horton a chance to realize extremely beneficial financial rewards and an opportunity to keep their jobs, I’m not sure that it means that US Airways can’t be the dominant merger partner.

AA is almost certainly going to emerge with a higher market capitalization than US Airways presently has.  However, that doesn’t mean that they have very much maneuvering room against US Airways who has been building cash holdings and operating their business both profitably and sensibly.  AA’s current cash holdings are almost certainly going to be reduced in this bankruptcy and will be needed to finance both operations as well as aircraft purchases.   Furthermore, creditors and shareholders aren’t likely to be amused at the notion of using those cash holdings for a purchase of US Airways.

I would like to see a conversation about AA’s ability to be a dominant merger partner today.  This is an airline that has essentially dismantled every purchase and just made it go away.  Reno Air, TWA and Air California all were airlines purchased by American and removed from the competitive landscape without adding any real value from the purchase with the exception of some aircraft.  They were, for all intent and purpose, minor asset purchases.

Is that what creditors and shareholders want to see out of the next merger?  My guess is that won’t fly with anyone.

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