Mexicana Airlines ceased all operations after spending a few weeks trying to restructure and begin to figure a way out of bankruptcy. It doesn’t really come as a giant surprise that one of the world’s oldest airlines stopped operating. Unexplicably, Mexicana had stopped selling seats on their flights but kept operating them which left quite a few of us baffled.
Mexicana’s management blames high oil prices, labor and the swine flu outbreak and certainly all three contributed to the problems the airline had. However, oil isn’t so high and swine flu really stopped being an issue on most people’s minds by late last year. Labor is the real problem.
I often wonder why it is so hard for labor unions, particularly the kind that Mexicana has had to endure, really don’t seem to be able to grasp that even though an airline made your paycheck for several years, labor costs like that are unsustainable by anyone at the end. Airlines can often wheeze through such things for years but there is always a reckoning and it always seems to shock unions when it results in a shutdown. In fact, they always appear to refuse to believe it in some respects.
The maneuverings we saw around Mexicana for the last few weeks were somewhat pathetic to me. New investors thought they saw an opportunity and moved in but, like many who do so, I think they suddenly learned just how cash intensive an airline is and wisely decided to put a stop to the burn quickly.
Will we see this airline rise again? I sincerely doubt that Mexicana or its subsidiary companies will raise their wings again in their current form. It’s possible someone will buy the brand and start an airline under the Mexicana name but it won’t be the Mexicana that just crashed and burned.
It won’t be a foreign carrier coming to save them. Mexico’s ownership laws forbid foreign ownership of their carriers above 25% and I think that’s a shame. Someone like LAN or Avianca-TACA might have been willing to come in and invest, restructure and operate a viable entity. Sadly, Mexico is more archaic than many Latin American countries these days when it comes to aviation and I sincerely doubt that Mexico’s government is going to move quickly to liberalize their ownership laws.
So, I think this is goodbye to Mexicana. At least to this Mexicana. To me, it’s a shame. I’ve always liked their image and aircraft and kind of thought of them as the Braniff of Mexico. Their colorful 727’s of the 70’s and 80’s were second only to Braniff’s and I simply also feel fond towards an airline that has a history dating back to the 1920’s and which was once connected to Juan Trippe and Pan Am.
The Southwest Airlines Flight Attendants say that they don’t want to obstruct SWA from getting a larger 737 at all in response to speculation that this internal debate at SWA went public in order to force the hands of the Flight Attendants union.
Instead, they simply point out that adding another aircraft, according to their current agreement, opens that same agreement up to renegotiation on issues such as pay and working conditions.
Huh?
I don’t see any reassurances that they are for or against this still. Instead, I see language that I would interpret to mean that they see an opportunity to renegotiate their contract earlier than the first date it becomes amendable. It would appear that this remains a potential obstruction, to me anyway. At the least, it appears opportunistic.
One thing to come out last year during SWA’s attempt to purchase Frontier as well as during its controversy on codeshares with WestJet and Volaris was that SWA employees wanted to see more flying ( and more employment opportunities as a result of that additional flying) on their metal, not another company’s.
This addition to the fleet of the 737-800 does just that for the Flight Attendants with absolutely no change in their working conditions on a per person basis.
That would lead me to believe that SWA Flight Attendants do, in fact, present a possible obstacle to the addition of a new 737 type to their fleet. And until they speak more clearly on their intent, I think they continue to present the most risk to this decision.
Southwest Airlines admits it is considering adding a bigger 737 to its fleet and its the 737-800 that it is interested in. The 737-800 would give the airline more revenue opportunity used in and out of airports that have slot restrictions such as La Guardia or on routes with ever increasing density but where frequency isn’t justified.
Current SWA aircraft, the 737-300 and 737-700 carry 137 passengers and a 737-800 would probably carry about 175 people in a Southwest configuration. That’s an additional a potential increase of 38 passengers for those critical routes with costs that wouldn’t be all that much more than their current costs. A little bit more fuel and an additional flight attendant is all that is really required. That spells more profit.
And I like the idea. Frankly, I think Southwest could stand to add all 3 models of 737 to their fleet and I think they ought to seriously examine the potential of Hawaii and trans-continental flights. But, then, I also think they could stand to look at smaller aircraft for regional routes with high frequency too. It’s going to be the only way they can continue growth in the future.
However, don’t go thinking you’re going to see a 737-800 in SWA colours next year either. Southwest likes to mull decisions like this for quite a while and it would require negotiating amendments to their union contracts with the pilots and flight attendants at minimum.
Take note here, SWA pilots and FA’s, here is your chance to be industry game changers again. Pilots, you shouldn’t ask for a dime more to fly these aircraft. They require no extra effort on your part and it keeps the flying in your house, not SWA codeshare partners’. Flight Attendants, the same goes for you. The passenger count per flight attendant actually *drops* by two passengers with these aircraft. Be game players and make this happen. It costs neither union anything to make this work and most likely will add profitability to the company as well as future stability to your jobs.
This really is win-win. Get greedy and it is the beginning of a long end to SWA.
If SWA does adopt this idea, expect aircraft in the fleet 12 to 24 months after the decision is announced.
The union for British Airways’ cabin crew, Unite, has produced this video to argue their case in the public. While emotional appeals have little value to me, I will say that I think that US unions could take a cue from this video in their approach. This video (titled Brutish Airways) is more “real” yet subtle and I think something like this would work very well in the United States.
The National Mediation Board (responsible for governing union relationships with respect to airlines and railways) has issued a new ruling that could affect airlines and their union relationships dramatically. In the past, a campaign for unionization had to claim a majority of votes from the entire pool of laborers. By simply not voting, it was presumed that your vote was against unionization. Now the majority need only be of those who actually voted.
Will it affect airlines? In the short run, yes, I think so. I thinkt here will be a strong push to organize unrepresented labor groups at a number of airlines including Delta, jetBlue and Airtran among others. However, I also think that this will mean that union members will simply vote instead of choosing to abstain in the long run. I do think we’ll see some new unions at airlines.
Is it fair to airlines? Not in my opinion. These rules have become too onerous and one-sided in the airline business. I also think this will harm labor groups at the airlines. I believe that this development will also lead to the NMB requiring longer and longer labor negotiations before permitting a strike. Some groups are in negotiations for as much as 4 years now and the problem with that is circumstances in the airline business can dramatically change in just months. Imagine how different the landscape becomes over 4 years?
New rules are probably in order but the structuring of those rules should give each side opportunities and risks for coming to agreement. I suspect that one thing that led to this rule change is the rash of mergers we’ve had over the past 10 years. Legislators see airlines growing bigger and bigger which gives the impression that they also have more and more market power among labor. That couldn’t be farther from the truth.
If anything, this industry needs more deregulation with respect to labor rather than more. Airlines should be less constrained by seniority and have access to at least a semi-free market for meeting their labor needs. Likewise, labor groups should have access to timely negotiations and contract renewals.
All in all, I see more barriers (as a result of this rule) to acting in an agile manner to quickly changing markets and that will be bad for both sides.
USA Today/AP has THIS story about Frontier mechanics who are represented by the Teamsters union going to court to enforce a contract. Republic wants to move maintenance to Milwaukee (home of the other branded airline they purchased, Midwest) and it has offered to move mechanics from Denver to Milwaukee to do this maintenance. The mechanics and their union claim their contract specifies the maintenance will be done in Denver and they’ve gone to court to see who is right.
The worst part of this isn’t the move in my opinion. The worst part is that Republic has apparently told the mechanics that anyone who moves to Milwaukee won’t be in the union. Why is this bad? Well, for one, even the courts aren’t fond of union busting via mergers and bankruptcies. Another is that Milwaukee is, itself, a very unionized city still. I’m not sure you want to get a reputation for being anti-union in such a city where you’re still attempting to court customers as the “home town” airline.
Republic may even get away with this move but it also attracts the attention of unions and they may now face unionizing attempts at their “core” airline unit(s). While unionizing attempts aren’t nearly as successful as they once were, they continue to be a bit more successful in the airline world which is heavily unionized and where those belonging to a union almost universally do better with respect to pay and benefits. Yes, Delta is somewhat the exception here but I fully expect them to become much more unionized in the future as well.
Are unions inherently bad? No, they aren’t. Bad union contracts are bad. Antagonistic relationships with unions is generally bad. And in the political and economic climate that many workers exist in today, unions really don’t look so bad anymore.
A couple more moves like this and I’ll move Republic onto my death watch.
Anyone who follows this industry is well aware of labor problems at many US and European airlines. There have been at least three major strikes I can think of in the last month in Europe (BA, Lufthansa and Olympic). American Airlines seems to have had almost its entire operations labor force at the negotiating table for the past 4 years and not a one of them seem to be acting like a deal is soon to be had with several threatening to ask for release from negotiations to begin a 30 day cooling period and one (the TWU) who has asked for such a release.
Even Southwest Airlines has had a couple of snags in the past year with its pilots union and their TWU local. Delta’s flight attendants are making noise about trying to unionize again and this time they may have the votes for it when you consider that Northwest’s flight attendants were rabidly unionized. Frontier employees haven’t rebelled yet but I kind of wonder if that isn’t closer to happening than many realize given Republic Airways’ direction.
US Airways has problems with its pilots’ unions not being able to get along well enough to come to a consensus on whether or not the sun rose in the east. I do wonder how long it will be before we see the unions at United Airlines begin to overheat much like American Airlines’ already are.
Sure, there are some airlines who are managing to get along with their operations employees pretty well. That includes Southwest Airlines, Continental and even Frontier (for the moment.) However, a pretty vast number of airline employees seem to be simmering just before the boil over point and I’ve begun to wonder if there doesn’t need to be a better industry solution to collective bargaining than what they’ve got now. With the way things seem to be headed, particularly at legacy airlines but certainly not limited to them, there could be a truly momumental perfect storm of labor actions in the US.
I won’t argue who is paid well, paid poorly or over-paid. I certainly won’t argue who is or isn’t over worked either. Frankly, if you think being an airline employee in operations is a cush job, you really don’t have visibility into just what those jobs entail and just how many hours a day they consume. But if there is this much job dis-satisfaction among these ranks, clearly change is called for and I really don’t think this is all about money.
I think this is about job satisfaction. Yes, the union leadership (such as it is and that ain’t much) expresses the grievances in monetary terms but I really don’t think it’s all about the paycheck. I think it’s about feeling job satisfaction and feeling some meaningful reward from the job which, yes, includes salary levels. For airlines, I think this about a need to have greater flexibilty and ways to improve productivity that aren’t constrained by decades old rules.
Who is going to find a better way in this system which is largely based on 1930’s law and habits? I really wonder if there is any industry leadership who has the ability to find a better way.
American Airlines has pursued a strategy of semi-engagement and delay with most of their employee union groups for several years now. It wasn’t a completely ineffective strategy for the past few years in that salaries remained the same and with the current economic climate most employee groups haven’t been in the mood to push things.
The problem is, most of those employee groups gave up significant wages to prevent a bankruptcy filing and are now approaching 8 years without a raise. Now the Flight Attendant’s union and the TWU (representing several groups such as mechanics and bag handlers) are pretty much at the end of their patience. While the economy hasn’t recovered, nor has the employee’s quality of life. If anything, I would suspect most employees’ have suffered significant degradation of their quality of life. Particularly in the past 2 years.
Accordingly, these employees groups have reached a point where there is little to lose from strike. To the outsider looking in, it would appear that they have their jobs to lose (via bankruptcy and downsizing) but that isn’t necessarily true. While AA has suffered large losses over the past 2 years, it also holds a great deal of cash. Those employees are looking at that cash. What’s more, to expect employees to simply sit without a new contract and, more importantly, some certainty for the future is rather naive at this point.
Both the flight attendants and the TWU have asked that they be released from negotations soon and be allowed to start the first steps towards a strike. Unfortunately for AA, they’ve got a bit of a good argument for this now. TWU employees have been negotating since 200 5/2006. Flight attendants just a tad shorter than that. It paints the picture that none of these negotiations are going anywhere and the common party to all is AA’s management. At some point, they will be released from these negotiations to start a 30 day cooling off period.
What’s worse is that AA is faced, potentially, with three very strident labor groups asking for release all about the same time and, at this point, with some justification. It puts them in a bad position to negotiate with any one group and in a position to not be able to operate at all if any of these groups cooperate with each other. Ordinarily, I wouldn’t expect them to but this time . . . maybe.
Both airlines and unions need a better way to negotiate. It is unfair to the employee groups to be stuck in negotiations for more than 1 to 2 years. It’s bad for the airline to have incentive to maintain the status quo by delaying and it’s bad for parties’ morale.
Pilots and flight attendants are perceived as having jobs that are easy and financially secure. This is largely due to the fact that flight crews commonly have several days in a row off each month where they are able to enjoy a different schedule and life. Flight crews, in fact, have just as much stress, fatigue and constraints as any other job.
Many in the flight crew start out augmenting their income with 2nd and even 3rd jobs they work during their off-duty hours because they earn so little money at the start of their careers. A fully trained and qualified pilot starting out on his career can expect to make as little as $20,000 / year and flight attendants often earn less than $16,000 / year to start. So in order to pay their rent and other living expenses, they take on flexible 2nd and 3rd jobs. Later, when they are earning living wages, they tend to keep those jobs because their needs and wants have continued to grow in proportion to their total income. In other words, they become a bit financially addicted to the supplemental income those 2nd and 3rd jobs provide.
Airlines pay so little to start because the lifetime costs to employ that flight crew members can be very expensive when they enter the last half of their career. Unions have negotiated contracts that are first and foremost dependent on date of hire seniority and flight crew turnover is therefore very small compared to other industries. There is no incentive to look for another job with another airline unless your present employer goes through a significant contraction or bankruptcy and has to lay you off. Even then a flight crew member may well have incentives to earn supplemental income and wait for a callback rather than seek employment with a new airline.
But it is airline management that has created this problem because they’ve failed to redefine the job positions to fit a new economic reality. They exacerbate their situation by treating their employees (and unions) as hostile entities to be fought at every turn rather than finding new, more efficient ways to employee people.
Airline management needs to first realize that the lifetime earnings of flight crew are unlikely to go significantly down or up. But there is a way to distribute that income during the flight crew career in a way that provides better job security, more productivity and in a way that provides the stability employees want.
First, stop paying flight crews horribly low salaries in their early years. These people are trained and qualified professionals and deserve to be paid a wage that is more commensurate with the job skills they must possess to perform in those roles. In other words, it’s time to pay a living wage right from the beginning. Pilot’s should earn from $40K to $50K to start, for instance, And pilots should recognize that in return for a living wage right from the start, they have to offer more flexibility in work rules. They need to be willing to work on a more daily basis but for fewer hours per day so that airlines can begin scheduling them in a more rational manner.
Second, airlines should pay salaries that are roughly equivalent to engineers. A senior engineer (not manager but engineer) can earn as much as $100K / year at the zenith of their career but not $300K. For that kind of wage, an engineer must enter management and exhibit performance that justifies that wage. Pilots should have retirement plans that are also commensurate with engineers. Not pensions that pay out by the years of service but, rather, modern investment plans such as 401k plans that allow them to manage their futures and have some opportunity for portability. Pensions are tied to seniority. 401k retirement investment plans are tied to the person and smart choices.
Why is such a system better for a pilot? For one, it reduces their dependency on one airline. They are far less tied to the fortunes of their employers and have more opportunity to leave a badly managed airline in favor of a better managed airline. Let’s face it, who wouldn’t want to work for a better managed airline in favor or a badly managed one? Making that possible industry wide would provide more opportunity for pilots to manage their stress and the demands their job makes on their personal lives.
Unions should focus less on maximizing wages and more on improving the quality of life for their members. Unions have the power to negotiate better work rules that alleviate horrific fatigue and stress and which provide a more humane way of living. Happiness really doesn’t come from a top wage. It comes from a living wage and having a real life. Unions should seek more security for their members by negotiating flexible work rules that might allow flight crews to fly part time or job share with someone else. That kind of flexibility would allow airlines to schedule flights more rationally and earn more profit and be better positioned to offer wage increases more regularly rather than fight them at every contract negotiation.
Airline management must recognize that the largest variable controlling their financial success is their flight crew. Flight crew represents the largest part of their costs and the biggest factor in determining the service product they offer. Treat them humanely and pay them a living wage and airlines can begin to experience more profit which will only make their investors happy.
Unions have to recognize that the work rules in place now were only fitting for airline up to the late 1970’s. It’s time for them to define how to best serve their members by identifying all the variables involved in a prosperous career rather than simply wages. They should push for company financed training, better scheduling and work rules that permit both parties to profit from extra effort put forth serving a flight.
The go! Airlines pilots mentioned in yesterday’s post were fatigued because they were flying 8 leg segments for multiple days in a row. Why? Because under the present system of compensation and work rules, airlines must schedule pilots intensively in order to get the most for each dollar spent. Airlines would actually be more flexible with hours worked if pilot’s earned a salary and had a negotiated minimum and maximum of hours to be worked each month.
Under a new system such as I described above, pilots (and other flight crew) would no longer feel tied to working for an airline that punished them with a grueling schedule week after week. They could seek better employment elsewhere without necessarily taking an enormous pay cut to do so. Airlines would have more predictable labor costs, greater productivity and an incentive to take better care of their crew.
It would also solve another looming problem for airlines. A shortage of pilots. Presently, the barriers to entering a career as a pilot are huge. Airlines require new hires to obtain their minimum qualifications for hire at the employees expense and then pay them near poverty level salaries for the first several years of employment. Fewer and fewer people can afford the $100K to $150K price tag to obtain those initial qualifications and certainly find the idea of earning a poverty wage after being hired unappealing.
Under a new system of training the pilots and paying a living wage initially, airlines can attract new people to the jobs and ensure a steady, well trained and stable work force that wants to come to work and offer an efficient service product. Potential pilots (and other flight crew) have better opportunities to enter the profession and a career that is more stable in the early years and entirely profitable throughout the lifetime of the employee.
USA Today’s Today In The Sky Blog is reporting this morning that Delta CEO Richard Anderson and Delta President Ed Bastian have been rewarded handsomely for achieving the Delta / Northwest Merger. Anderson will receive more than $13 Million in stock awards and Bastian receives just over $5 Million in stock awards. Both men aren’t fully vested in the compensation until 2011.
While I think it appropriate to compensate two men who obviously worked very hard at making this merger happen, I do think this news comes out at the wrong time and I do think the reward is perhaps premature. The unions involved in this merger, particularly the IAM, will no doubt bristle at this news despite the fact that Delta / Northwest employees will be receiving stock in the new company. About 5% for the pilots and 4% for most other employees.
It would have been better to tie this award to milestones for achieving all of the merger. First, award some percentage, perhaps 50%, for bringing the two companies under one corporate structure. Second, set milestones based on the full integration of the company such as pilot seniority lists being fully merged, flight attendant senior lists merged, both sides of the company operating under the same certificate, etc. There isn’t anything wrong with rewarding accomplishments but I feel this job is only half done at best and there should be some strong incentives to complete the work before granting the prize.
The US Justice Department approved the merger between Delta Airlines and Northwest Airlines today. The two companies will now begin to work on executing the combination as quickly as possible and it should culminate with a combined operating certificate in 1 to 2 years.
In the meantime, Delta and Northwest have already made a great deal of progress towards completing the merger. The executive team has been selected, agreements with pilots have been obtained and each company has been working pretty hard towards merging the culture of each airline together. While no doubt there are bumps in the road still to be encountered, this particular merger shows great signs of being accomplished with relatively little strife.
Flight Attendants are targeted for being a trouble area. Delta’s flight attendants are non-union and while there have been a few votes over the years to unionize, all have failed pretty soundly. Northwest’s flight attendants are unionized and have been characterized as even miitant. Delta’s CEO, Richard Anderson, has urged that everyone work together and while his stated preference is for no further unionization (and he has backed that up by being very willing to negotiate differences), he also has said that he and the rest of the executive team will abide by whatever vote there is. It is likely that the flight attendants will have a vote after the merger is officially executed and it is likely that it will be in favor of unionization since a combination of Northwest’s flight attendants with the minority of Delta flight attendants in favor of a union would win any vote.
While both CEOs of each airline have professed that such a diverse fleet of aircraft will permit them to “right size” aircraft to a particular route, it is highly likely that the fleet will be pared down over time. Northwest’s youngest aircraft are manufactured by Airbus and Delta’s fleet is comprised entirely of Boeing products. Certainly both major aircraft manufacturers will see an opportunity with this merger and both will be pitching their mainstay aircraft lines, the Airbus A320 series and the Boeing 737 series. With an gentleman’s agreement in place between Delta and Boeing that gives Delta preferential delivery slots, this is Boeing’s opportunity to lose.
A good guess is that, initially, the Douglas DC-9 fleet will continue to be eliminated and bases for the Airbus A320 and Boeing 737 fleets will be established at selected hubs. It is possible that the Airbus A330 fleet will be phased out in favor of more Boeing products such as the new 787 of which Northwest already has a significant order on. The 747 fleet will most likely be phased out over time in favor of the 777-300 and which Delta already owns in the 200ER/LR version.
The combination of these two airlines will form the world’s largest airline both by revenue and traffic. This will even dwarf American Airlines by a significant degree. However, because of industry contraction and the obvious economies and advantages to be gained by constraining capacity in markets that the new Delta will be dominant in, it is likely that the airline will actually contract both its fleet and, to some degree, its employees. However, major layoffs of any significant numbers are very unlikely and most contraction is likely to be done through natural attrition.
I would love to speak to a group of pilots from a legacy carrier. Particularly from American Airlines. I want to ask them just exactly what *their* vision is for their airline. What aircraft would it fly, how would *all* the employees would be compensated and what work rules would they want if it was the pilots running the show.
A fair fare would probably be identified by most people as an air fare that accounts for the true costs of flying from point A to point B non-stop using the right aircraft to supply the capacity. As a matter of fact, that was what the Civil Aeronautics Board tried to adjudicate when setting fares.
Now, such a model might sound familiar. It sounds like what LCC carriers such as Southwest Airlines and Airtran do. In many sense, yes it is. Legacy carriers, focused on hubs, hurt themselves with those hubs every time they carry a connecting passenger. The hub and spoke system demands that they carry more passengers a farther distance using more resources and economies of scale no longer allow them to make a profit doing so.
Let’s use as an example travel from Midland / Odessa to Albuquerque. You have 3 basic choices for travel in this scenario. You can fly Southwest Airlines non-stop for about $260 round trip or you can choose another carrier for a non-direct, connecting route that starts at about $550 round trip. Another carrier might be American Airlines, Continental Airlines or Delta Airlines.
If you choose American Airlines, you’ll fly EAST to DFW and then WEST again to ABQ and it will take . . . wait for it . . . from 4.5 to 6.5 hours to complete your travel. Since you are connecting via DFW, you’ll be making two take-offs and two landings and one of those landings (remember, part of an airline’s cost is a landing fee) will be at a major hub airport. Take offs are expensive too. They are the part of the flight that consumes the most fuel so two take-offs is bad.
If you fly Continental Airlines, you’ll connect through IAH (Houston) and the economics are the same but the distance flown is even greater. If you fly Delta, you’ll first fly to Houston and then to Dallas and then to ABQ and your price will be in excess of $1000 round trip. By the way, your total travel time using Delta will be over 10 hours.
Now, if American Airlines or Continental Airlines (let’s just leave Delta out of this because such a scenario is absurd) want to compete for the passengers traveling from Odessa to Albuquerque, they have to offer a fare that is somewhat competitive. If they do, they’ll come at least close to matching Southwest’s fare of about $300 and that means that their costs are higher and they make less profit or no profit. Since Southwest has the lowest costs, they get to set the price.
Now, some people such as Robert Crandall advocate re-regulation of fares in some form. In a speech to the Wings Club in June 2008, Mr. Crandall offered that this might take the form of mandating a “minimum fare” that is the sum of “locals”. What he suggests is that a fare between two cities that connects via a hub should be the sum of the fare(s) between Point A to Point B (a hub) and Point B (a hub still) to Point C (the final destination. In the alternative, he suggests that flights that connect via a hub be required to have a “connection” charge. His goal is to remove any incentives airlines might have at present for operating a hub. It becomes officially un-economic to fly that route via a hub.
Quite honestly, I find that a poor solution since he proposes to disrupt the systems of the very airlines that his solution purports to help in the long term. It disrupts a 30 year institution among legacy carriers and assumes the staff and leadership who have operated in such a manner to be able to adjust to a new model that they have no experience with. It is, at best, a very awkward solution to the problem and only addresses revenues (once again) instead of the whole equation. Even more important, it is hard to imagine the political will required for such a change.
No doubt the adjustments have to be made and I would suggest that might need to take the form of actually allowing a large legacy carrier to go out of business (which then removes some barriers to entry for other, more efficient carriers) or you have to find a way to reasonably deregulate costs so that airlines no longer must use hubs to fight for their very existence. Those costs are principally labor. The latter solution is better (both in the short and long terms) because it doesn’t necessarily involve massive unemployment or relocation for employees.
An airline needs to be able to efficiently locate staff at various “base” cities in a way in which costs are not concentrated in one particular city because it is merely a popular place to live. You don’t want all of your high cost employees (i.e. the senior staff) to locate themselves in Miami where much of your traffic might be low yield leisure travel. Second, an airline needs to be able to competitively bid for staff on an open market. A seniority system as used by airline unions ties staff to one airline and forces the airline to “wait out” their term of employment (as much as 40 years) until they can hire new, lower cost staff to fill a particular position. Further, it denies them access to qualified personnel for expansion because staff won’t leave another airline for a new job because they don’t want to start out at the bottom of the seniority list.
If we deregulated (by legislation) the seniority system in airlines as a first start, airlines could suddenly re-allocate labor and gain more productivity and reduce their costs on routes where necessary. For a first round, you could even leave in a seniority system for earning pay and determining furloughs but just remove the seniority system as it pertains to bidding for line routes and it would allow the airline to locate their labor (by cost) where they most needed it and gain more productivity. That change alone might well serve to offer legacy carriers a legitimate opportunity to earn a profit regularly (with all other things being operated effectively). It would at least be a good first step in trying to solve the problem.
Almost all airlines in the United States operate from hubs. Going from West to East, they are (in no specific order), Phoenix, Salt Lake City, Denver, Dallas / Fort Worth, Houston, Minneapolis / St. Paul, Chicago, Detroit, Cincinatti, Memphis, Atlanta, Cleveland, Philadelphia, and NYC. There are a few other cities that some might argue are hubs but which I think are more “focus” cities than the above cities.
One way airlines have reorganized themselves to meet the cost pressures of non-deregulation on the costs side of the airline industry is to simply start “connection” and/or “feeder” airlines or to contract with those airlines. Some examples are American Eagle, Mesa Airlines, Comair, Compass and Express Jet. There are others too. These airlines fly regional aircraft (regional jets and turbo-prop aircraft) on behalf of the mainline airlines. Unions permitted these airlines by getting “scope” clauses in the contracts that limit the size of the aircraft to be operated.
Often those scope clauses originally limited airlines to flying regional aircraft that had 50-odd seats or less. What they didn’t do was limit the kind of flying such aircraft might be asked to do. As things evolved post-1978 deregulation, airlines began to establish large hubs with multiple banks of flights each day. They did so in order to “concentrate” their operations and take advantage of economies of scale. Over time, mainline aircraft departing from a hub either went to other hubs or to larger 1st and 2nd tier cities. Mainline aircraft stopped serving the smaller third tier cities (for example Des Moines or Jackson, MS.) It never occured to unions to limit both scope and distance in those contracts because originally it was assumed that regional aircraft couldn’t serve route sectors of much more than 200 to 300 nm.
Instead, mainline airlines used their feeder airlines to pick up traffic in those cities and carry it to a hub where the passenger then transferred to a mainline aircraft or another regional flight to get to their final destination. For instance, a passenger might fly American Eagle from Des Moines to Chicago, transfer to an American Airlines flight using mainline aircraft and continue on to a final destination such as Los Angeles.
Prior to 1978 deregulation, American Airlines might have flown a route from Chicago to Los Angeles with intermediate stops in Des Moines and, say, Salt Lake City. Remember this is a hypothetical example. While hubs were beginning to develop or had developed, those entities really resembled what we call focus cities today. It was a concentration of traffic and opportunity to rotate aircraft through maintenance facilities but it wasn’t a fortress hub that we see in places such as DFW or MSP today.
Over time, new aircraft such as regional jets that had greater capacity and speed than original “feeder” aircraft such as the EMB Brasilias or SAAB 340 aircraft were introduced. These regional jets were capable of mainline aircraft speeds and altitudes and were capable of flying route segments in excess of 400 nautical miles. Since the cost structure for such aircraft was an order of magnitude less than that for mainline service, airlines began to realize that they could use these aircraft to serve routes that contained a lot of O&D traffic for more point to point flying.
Suddenly, American Eagle wasn’t just serving cities from DFW that were in Texas and surrounding states. With regional jets, it began serving medium haul, thin traffic routes from DFW. One example is the one I gave yesterday: DFW to MKE. That route has a lot of O&D traffic (Origin and Destination) but very little connecting traffic. What that means is that people flying from MKE to DFW were terminating their trip at DFW instead of necessarily continuing on to another destination and vice versa. If a MKE passenger wanted to get to Denver, they would fly either to Chicago or MSP to connect or possibly direct on a United Airlines “connection airline”.
The feeder/connection airlines evolved into the “point to point” service provider for small to medium markets. The reason is that airlines can only afford the flight crew labor costs for routes where the yield (profit from revenue) justified those costs. The only way to find that yield is to concentrate flights through hubs. One example, again, is DFW. American Airlines “feeds” traffic from all over its network (including American Eagle’s network) into DFW where they “concentrate” that traffic and redistribute it to other routes. This means that those routes load factors remain very high for each flight.
On the surface, that sounds efficient. However, there are some underlying factors that reveal it to be inefficient to operate such hubs. First, it means that you have to schedule your traffic in banks of flights. You want your flights to arrive at about the same time and then take off again at about the same time. In order to manage that, your departure times at outlying stations may have to be excessively inconvenient to passengers. Your airport service staff tends to work in concentrations with excessive idle time in between banks of flights. You still have to pay them and they remain there because you service large banks of flights at one time. An airline must have that staff in place over the full duty period to accomodate those peak periods.
Such hubs also tend demand fleets that are largely homogenized. American Airlines, for instance, standardized on the MD-80 for these flights (and now is doing so on the B737-800) and therefore has to find routes that fit the aircraft instead of aircraft that fit the routes. Because they must fill so many seats on mainline routes to make a profit, it drives them to feed more and more traffic into the hubs.
Hubs also can cause system wide service disruptions. A bad weather day in Chicago can wreck two major legacy carriers systems (United and American Airlines) for multiple days because any disruption ripples outward through the whole system. Since all flights go to or depart from the hub, there is no flexibility to “route around” the problem city.
All of those issues inhibit a legacy carrier from earning long term profits and they haven’t earned reliably for over 20 years now.
The best example of how best to operate in today’s airline market is, no surprise, Southwest Airlines. While they do have several cities that look and feel like hubs, they really aren’t when compared to other airlines. They are focus cities. Those focus cities permit some concentration but they really exist to provide some operational flexibility and maintenance.
Southwest Airlines focuses on flying point to point routes and high frequency commuter flights. If you try to get from one city to another on Southwest’s system, you are very likely to fly there direct and in many cases non-stop. The percentage of traffic on flights from focus cities that is “connecting” is relatively small compared to legacy airlines.
When a flight from Southwest Airlines departs DAL (Dallas Love Field) for ABQ (Albuquerque), it isn’t coming back that day most likely. Instead, it will continue on to, perhaps, Phoenix and then to Portland where it will turn and head to Los Angeles and then, maybe, to Denver. The plane goes through 3 focus cities but at all times it is carrying O&D traffic primarily.
That point to point system with focus cities permits them to offer highly convenient flights that fly direct (in other words, a passenger doesn’t have to get off the plane and board another one) and they get a higher utilization rate out of both the aircraft and crew because they aren’t sitting at hub for 1 to 2 hours waiting for their flight to depart again. Instead, Southwest crews do fast turnarounds at focus cities (20 to 40 minutes) and depart for still another city. Southwest not only gets high utilization from their aircraft but they also get high utilization from their flight crews.
Southwest Airlines’ crews are paid competively and even generously but the airline also gets far more productivity from them in a given duty period. Ironically, Southwest crews also fly less fatiguing schedules overall and spend more nights at home than most other aircrews. Southwest captains earn as much or more than any other Boeing 737 captain but because they negotiate not just raises but flexibility in their contracts, their standard of living is quite a bit higher than it would be at most legacy carriers. They offer more productivity in return for working an easier duty period at a competitive salary.
They also don’t fly small commuter aircraft and they don’t avoid flying to 3rd tier markets. Southwest flies B737 equipment to cities such as Indianapolis, Odessa, Corpus Christi and Brimingham. Every other airline serves those markets with primarily regional jets and Southwest manages to earn more profit flying to those same cities using mainline aircraft that is more than 100% larger. Not because their crews are “cheaper” but because their crews (and their unions) bargain for more than just money. It’s a competitive negotiation with real give and take and, as a result, Southwest gets high productivity without working their crews longer hours, bad morale or high turnover.
Next we’ll look at why seemingly “fair” fares can’t earn real profits for most US carriers.
Deregulation in 1978 was never full deregulation. It was, instead, deregulation of the revenue side of the equation. Airlines were suddenly free to fly routes and set fares as they wanted. The barriers to entry on a route were no longer regulatory but, rather, business cost. My father phrased the start of a route as “starting a new business” and I must say that that is true. Airlines have to invest in infrastructure, new employees and market their services when entering a new city or route. The airline is essentially starting a new business.
What never got deregulated was the labor cost side of the equation. Flight crews were fully unionized (with the notable exception of Delta’s Flight Attendants) and the union approach to wages and work rules was and always has been to negotiate for more each contract. When the game changed with regulation, the airlines were still inhibited from negotiating freely for their labor on an open market because the unions had 30 years of precedent and enormous political power. God help the airline who had pilots striking against it because it denied *any* revenue to the company and airlines are cash intensive businesses. They go out of business very quickly if that cash stream is interrupted.
Using pilots as example, take a look at their negotiating power in 1978. First, the barriers to entry in a career as a pilot were (and to some degree remain so) very high. A typical pilot spent 7 to 9 years in the military flying multi-engined aircraft and when they exited, they got their ATP license and went hunting a type certificate to fly for an airline. Once in an airline, they entered a seniority system that made it very difficult to leave because every airline had the same system. If you started at one airline, made captain on an aircraft type and then wanted to leave, you had to start over again. The union(s) set a contract and work rules in place that essentially made each airline a fiefdom.
The airline union is the lord and the pilots are the serfs. Well paid serfs in their later years but serfs nonetheless. Not only is there no incentive to seek work elsewhere, there were strong incentives to stay and play the game no matter what. Even when an airline is by all measures about to fail.
This situation remains true for most airline unions to some degree or another. What the government never did was deregulate labor so that airlines could compete for qualified people to fill their staffing needs. One interesting by-product of this is that airline pilots work terrible schedules today. They do so because it is enormously expensive to have a pilot sitting on the ground doing nothing. Airlines fly pilots on different schedules than their flight attendants (at least at most airlines) and they do so because they want to extract all possible value from them because the cost is so high. Ironically, a more ratioinally paid airline pilot would work an *easier* and more rational schedule that impacted their lives (both personally and professionally) far less if their pay were more in line with a free market competition. Mind you, they wouldn’t be underpaid, just paid more in line with the demands of their job.
My father thinks that a free market salary for a pilot would be about $70,000 / year and there would be far less range between entry level and an experienced level. I personally believe that number would be higher. About $100K to $120K. I think so because the costs to become a qualified airline pilot and the skill required still make for a rather rare person today. The pilot still has to become qualified under FAA rules by getting time first on single engine aircraft, then multi-engine aircraft and turbine engined aircraft. Flying also takes talent. Being an commercial pilot also means having a great understanding of engineering (many pilots gets undergraduate degrees in engineering for just this reason.)
What the airlines needed was an opportunity to negotiate for new labor under new rules. It would have been impractical and politically difficult to “break” the existing unions. It would have been better to set new rules for airline unions and airline flight crew going forward. For instance, eliminating the seniority system but making one’s qualifications and types fully transportable between airlines for the same pay would have made it more fair to both sides. A pilot who was “captain” qualified on a Boeing 737 would be able to take those qualifications and fly at any airline for market pay.
Suddenly a pilot would not be married to just one airline and have to deal with fear of furloughs and bankruptcy multiple times in their career that could reset them back to “zero” in their career. Instead, they would be able to seek positions at other airlines for a commensurate career salary. The same could be true for any flight crew. It would even have the benefit of further “harmonizing” best practices among various airlines.
Over the years, some airlines have made some attempts to re-negotiate this situation. American Airlines introduced the A/B pay scales in the 1980s. That worked very well for many years but the advantage was lost because the “B” scale employees still worked for the original union and the “A” scale employees had a vested interest in raising all salaries for everyone.
There is nothing wrong with unions existing in the workplace. However, when a union’s sole focus is on raising salaries to everyone else’s detriment, it begins to lose value. Unions can and should enforce good work rules, good working conditions and even qualification standards and salaries. They should not, however, distort their own labor market or their airline goes down.
Another way airlines have gotten around this is by starting commuter feeder airlines. American Airlines has American Eagle for instance. These “new” airlines have employees who are hired at “market” rates and who remain employed by unions. Now the airlines use these airlines to fly mainline routes at higher frequencies because it is more cost effective than flying the route with less frequency but greater capacity using mainline equipment.
A great example of this is American Airlines and how they served the DFW – MKE (Milwaukee) route a couple of years ago. They used 50 seat ERJ-145 aircraft in their American Eagle subsidiary and flew as many as 5 cycles a day. What’s worse, they frequently turned away people or re-routed them through Chicago because their aircraft were either capacity limited or load limited. The aircraft had average load factors far in excess of 85%. The better solution would have been to fly either mainline MD-80 or Boeing 737 aircraft 2 to 3 times a day. That would have offered better service (more reliable and not load limited), more comfortable seating and slightly shorter flights. But they couldn’t because AA MD-80/B737 pilots for such routes would cost 4 times more than American Eagle pilots.
The demand was there. The fares actually offered great revenue opportunities (when compared to average DFW – ORD fares) but the expenses were still too great on the labor side. So people were offered a cramped ERJ with all coach service that, by the way, eventually lost passenger traffic to Midwest Express (who flies more comfortable MD-80s and B717 aircraft) and to other mainline airlines who would service Dallas via Chicago or Minneapolis-St. Paul.
Regional Jets were never built for serving such markets and they do so very inefficiently. Regional aircraft should never be serving route sectors greater than 400 nautical miles and certainly should never be serving mainline city pairs such as MKE-DFW. They should fly from Odessa to Dallas or Cedar Rapids to Milwaukee.
Could labor be less regulated in the airline world today? I don’t know. It would require great political will and I frankly don’t see that on the horizon. It would require the airline industry to be both realistic and cooperative with each other and it would require unions to recognize that not every contract means “more” but maybe it means different and more accomodating instead. It should also offer some job security and certainty too.
In the next part, we’ll take a look at how the lack of full deregulation has distored air travel in the United States and caused inefficiencies.
