American Airlines CEO Tom Horton says the company is ready to explore merger options with all suitors now that the picture of AA’s health is more clear going forward. Likely part of this is driven by the half steps it’s gained in negotiations with the unions and its greater certainty of what court rulings might be.
I’ve pondered this development and announcement since yesterday and wonder if Tom Horton isn’t going to make a play for a merger with US Airways that sees AA as the dominant carrier going forward. The best defense is a good offense comes to mind.
Bloomberg Business Week says that American Airlines will be seeking an extension (90 days) to have an exclusive right to present a reorganization plan to the court. This would nominally prevent US Airways from making its own proposal in late September.
It’s quite likely that this extension will be granted given what has been going on with the Section 1113 hearings in that a ruling on abrogating the union contracts has been extended to August. The bankruptcy judge is likely to cooperate with American Airlines on this extension as it grants American the reasonable opportunity to put its plan together once it knows what its labor costs are likely to be.
Expect to see many unsecured creditors (unions in particular) object to this extension.
To a degree, this works in US Airways favor. It allows them to make their case stronger with unsecured creditors and point to AA’s inability to get its house in order.
I think this a mistake on AA’s part as it signals that it is now reacting to US Airways instead of its own problems. To creditors, directors on its board and others, this isn’t what you want to see in a bankruptcy.
Doug Parker of US Airways came to the DFW area with AA union leaders in tow to do media interviews in both Dallas and Fort Worth and make the case for a merger between US Airways and American Airlines. I have to believe that American Airlines executives would have liked to have arranged for his plane into DFW to be diverted.
So far, AA hasn’t reached any agreements with either the pilots or flight attendants. The pilots refused to send the last and best offer to its membership and we’re not surprised whatsoever. At the end of the day, even with the contracts abrogated, AA *still* has to come to terms with its unions and it’s doing a very poor job of that. Even the bankruptcy judge has pointed out that both parties will be stuck with each other.
There is a perception in these struggles that unions are always about more money. It is often portrayed as more, More, MORE on the part of airline unions and the thing is . . . it isn’t true. More money is rarely the true issue with employees.
We hear over and over again that more money doesn’t make for a more happy employee or a more productive employee. It’s quality of life that does so. The secret to Southwest’s success with its employees and productivity isn’t the high wages (although they are very high), it’s the cooperation that exists between company and unions that provides high quality of life.
Furthermore, employees really do want to see their companies succeed. Company success provides more stability than anything else for employees. So when American Airlines union leaders start talking about how they recognize that concessions will be fairly drastic no matter what the bankruptcy outcome and that their chief focus is now on company viability, don’t go thinking that is a smokescreen.
It isn’t. American’s biggest problem with its labor is not money. It’s a loss of confidence. That loss of confidence didn’t happen over night and it didn’t happen accidentally. There is little leadership at AA and that has been true since Gerard Arpey took over many years ago. AA executives are very, very good at managing certain aspects of an airline. They manage finances and fleets very well. They can apply the science in running an airline with the best of people out there.
What they haven’t been able to do is inspire employees and bring about both revolutionary and evolutionary change. They haven’t been able to get their labor to start marching together and working together to compete. That’s leadership and leadership isn’t accomplished by cutting management ranks and consolidating responsibilities. It’s about finding one Great CEO who then has to find many great managers to execute a vision and leadership.
Believe it or not, US Airways and Doug Parker do this. They do it despite big problems with their pilots and flight attendants. Despite the bickering that exists in those two labor groups alone, they still operate an airline that has improved its quality in every area and dramatically so. They get employees to cooperate and to excel at their jobs. Look at the fantastic job done in cleaning up the problems in Philadelphia, for instance.
AA unions see that and recognize what’s been lacking in their own company for a long time: leadership.
The APFA and its leader, Laura Glading, are pointing at greed on the part of American Airlines CEO Tom Horton for the reason a standalone exit from bankruptcy is being pursued. I generally find the APFA to be a bit over the top and militant in their communications and they tend to follow the model of making it personal with company executives.
But even a militant organization finds a valid argument now and then. Past CEOs of airlines exiting bankruptcy have seen huge rewards from the stock they hold. Both Doug Steenland and Glenn Tilton received tens of millions of dollars. So has Delta CEO Richard Anderson. It’s a lucrative position to be in.
APFA aren’t wrong that its to the benefit of Tom Horton and his executive team to see that kind of exit. The market valuation of AA is liable to raise their rewards dramatically. It might not be “greed” but there is a huge financial incentive.
And I do think that kind of financial rewards clouds the thinking of such teams when it comes to finding an appropriate exit from bankruptcy that BENEFITS SHAREHOLDERS.
A few weeks ago, American Airlines conceded publicly that it would examine all options for exiting bankruptcy rather than just the stand-alone approach it had been evangelizing up to that point. This was due primarily to the campaign for merger that US Airways has been engaged in and the unsecured creditors committee desire to see all options reviewed.
Since that time, there have been quite a few indicators that American Airlines simply paid lip service to the court of public opinion without actually engaging in the act of reviewing merger potential. PlaneBuzz made mention of an internal town hall put on with CEO Tom Horton and the view that Horton isn’t acknowledging that a merger decision or any decision on AA’s exit from bankruptcy lies really at the hands of the bankruptcy judge and the unsecured creditors committee. In short: Once you’re in the bankruptcy court, your control over your destiny is very limited.
In addition, AA has proceeded in its talks with unions with the clear intent to win its Section 1113 motions to abrogate the union contracts. What I mean is that they haven’t made progress with the unions although I’ll concede that they have so far managed to engage the pilots enough that they are returning to the negotiation table. However, they largely went through the motions with the unions by all accounts.
CEO Tom Horton was in Beijing for the IATA conference and was quoted by Bloomberg saying: “We’re very focused on restructuring independently,” Horton said. “That has to be our focus now and anything else for the time being is a distraction.”
The problem with these developments is that the UCC (Unsecured Creditors Committee) for this bankruptcy is the one that forced AA to publicly acknowledge that it will examine all options and statements and actions like those on Horton’s part speak loudly to so far ignoring the wishes of the UCC.
And it’s notable that a large part of the UCC is made up of AA unions. The bankruptcy judge has made it clear that even if union contracts are dissolved, American Airlines still has to do a deal with the unions and unions still have to get a new contract in place. His message is that the two parties better start figuring out how to make things work under the legal framework that will continue to exist or both sides are in trouble with respect to a successful outcome. US Airways having top level agreements in place with AA unions shows at least a willingness to get a deal done that hasn’t existed at AA in more than a decade.
I will note that American Airlines does seem to be trying hard to come to terms with others on the UCC to kick the legs out from underneath US Airways. They have managed to come to terms with HP over terminating HP’s development of AA’s new passengers service system that was to be called JetStream. New IT VP leader Maya Leibman has now indicated an AA preference for buying a new system off-the-shelf and adapting AA business practices to the system rather than building a one-off system to meet the business practices of AA. That isn’t exactly the wrong direction at this point. There is less risk involved and it at most brings AA at the level of Delta and United.
HP has plenty of horsepower to offer in passenger reservations anyway. It operates the SHARES system already, for instance, and that is the one that United adopted from Continental.
But how do other creditors view advantageous terms being agreed upon with key members of the UCC? What is a union response to another UCC member getting a quick resolution vs their own membership? And can AA pull off a similar deal with Boeing and Airbus that keeps those orders on the books and Boeing happy as a member of the UCC? Maybe. Then again, maybe US Airways waves a follow on order for more Boeing aircraft to replace aging Airbus equipment? You never know.
At the end of it all, one doesn’t sense that AA has done anything to explore other options that involve mergers. To the contrary, one senses that they have retrenched and gone about their own ideas of what to do without regard to the opinions and desires of creditors. When a big majority of your creditors are your own employees who are already angry at your actions against them, there comes a time to pay attention and I don’t think any leadership at AA is paying attention.
American Airlines and the Allied Pilots Association extended their mediated talks in bankruptcy court yesterday and that has made everyone perk up as to what is going. My bet is that these talks were extended at the encouragement of the judge overseeing them rather than either party being truly close to an agreement.
That said, if an agreement were to be reached, it would be a big blow to US Airway’s merger plans, I think.
Deal’s aren’t always all about numbers. Sometimes psychology plays a part and if AA were to get the APA on board with its plans, it would be a psychological blow to those advocating for a merger.
The Fort Worth Star Telegram’s Mitchell Schnurman has THIS POST on SkyTalk about companies keeping morale high to maintain profitability. It’s timely since it coincides with my own blog post about the labor cost that American Airlines is incurring with its battle over costs with the unions.
Profitability is about quite a few things in a major company such as an airline. It’s about keeping a strict eye on costs, certainly. It’s also about keeping a close eye on cash flow and cash holdings. One little storm can cost an airline tens of millions of dollars. It’s about maintaining strong metrics in ontime departures and arrivals and it’s about being smart enough to buy a fleet to do the job you have without overextending oneself.
Some airlines have been profitable with poor labor relations. Generally that has occurred at a “peak” in the airline industry curve and almost always when contracts are in place and not up for re-negotiation.
How an airline survives the downturn in the airline industry has a lot to do with employee morale. Employees with a strong, loyal morale tend to fight for their company. They realize that their jobs and their success are tied to their airline succeeding more often with more customers more of the time in those bad times.
Employee morale isn’t about high salaries. It really isn’t. Study after study has shown that employee morale can’t be maintained at a high level with just a high salary.
It’s about making employees a part of the business. Giving ownership of problem solving to employees who experience the problems. Providing a share in the profitability and providing benefits that allow them to feel secure with their families while they work. It’s also about employees perceiving “shared pain” on the part of their management team when things are bad. There is nothing worse than an executive earning a bonus while other employees are “sharing the pain”.
A workplace where treatment is both fair and just is also important. Valuing the inputs of a baggage handler should be just as important as valuing the financial analyst who monitors and sets pricing.
It isn’t just about your union employees delivering great service to customers either. It’s about being able to get agreements to cover your needs now and the future. A company that is doing right by its employees is better able to negotiate union contracts to cover new flying, new aircraft and new partnerships. The faster you can negotiate those contracts, the more competitive advantage an airline has.
It’s notable that Southwest and Delta airlines are working very hard with their union employees to put new contracts into place to cover opportunities for new business very quickly. It’s also notable that airlines such as American Airlines and United Airlines aren’t doing too well with their employees and aren’t executing new strategies to compete and, most importantly, earn sustaining profits.
Employee morale isn’t the only key factor to success. But it is one of the top 2 or 3 key factors and one that several airline CEOs seem to be ignoring more and more as time passes by. Historically, the airlines who have done well both in regulated and deregulated environments with respect to profitability are those that had genuine leaders as CEOs. Shareholders would be wise to pay more attention to leadership at the helm and a little less attention to quarterly profitability.
The bankruptcy proceedings of American Airlines are, to me, exceptionally interesting in the airline industry today with respect to labor. It’s been a while since we’ve seen such a breakdown between labor unions and airline management (since United Airlines in the late 1990s and early 2000s) and this breakdown of trust and communication inside American Airlines is particularly bad at this point.
When I look at American Airlines as a company, I ask myself just how such a reasonably well run entity got derailed so badly over the last decade. At the core, the airline industry is selling a service and within that industry, we have a marketplace that is fairly free market oriented in pricing. However, pricing is generally determined by who has the lowest costs on a particular route. When there are no or few barriers to entry on a route, the airline with the lowest costs will generally set the price for that route.
We often hear just how much price is the driver in a choice of airlines but I’ve never felt it was purely price and I believe that over the years, there is subtle but strong evidence to my belief. Everyone thinks Southwest Airlines wins on price and while that might have been true in the 1980s and earlier, it really hasn’t been true for the past 2 decades. They often do set the prices on routes but they’re generally matched by other airlines. When you speak to loyal Southwest Airline customers, it generally comes down to it being very convenient, very predictable and generally a more service oriented experience.
Curiously, convenience, predictability and service quality are a function of labor more than any other input. Labor is what makes those achievements possible. Also curious is that the most successful airlines generally are the ones who manage a good relationship with their employees. That doesn’t mean they give into labor demands over and over, it means they have a rapport, communicate well with each other and find common ground.
It’s notable that Southwest and Delta Airlines each have reasonably good relationships with their employees since these two airlines are the ones that are gaining more passengers, better revenues and consistent profits. That’s no accident.
When I look at American Airlines and the actions its taken over the past five years to come to new labor agreements, I have to give them a grade of “F” in labor management. Even if you strip away labor rhetoric, you find that AA really never did much to come to an agreement with their employees. They kept their company line but they never sought to find some common ground and their communications all too often struck me as “Times are tough, work harder, do more.” After a few years of that, the general response to that was “Times are tough for everyone, suck it up and find a way to make it more worth our while to work for you.
Since bankruptcy, AA has more often reminded me of a mafia strong man than a company trying to get its act together. The steps its taken to reduce labor costs and the magnitude of those labor costs reductions is striking. Again, even if you strip out the labor rhetoric in response to AA’s actions, the moves that American Airlines has made in the past 6 months just strike me as premeditated, heavy handed and stubborn. It smacks of accountants looking at financial numbers and never looking up from their desk to notice the human element involved here.
They can and likely will get what they want in court in terms of breaking labor agreements. They may impose severe cost cuts unilaterally and may even exit bankruptcy as stand-alone company. They may get exactly what they think they need from a financial perspective.
But how does that improve the revenue side? How do you win business customers with a service model that is delivered by demoralized and angry employees? How do you get productivity to improve when your labor hates your guts and just wants their paycheck and to be left alone?
AA’s labor hates American Airlines management. Hates them with a passion generally reserved for bad dictators. It’s a seething, lingering hate that isn’t easily resolved. And there is no movement to get it resolved.
If labor and AA management were a married couple, this would be relationship headed for divorce, not reconciliation. Reconciliation doesn’t occur when you take all you want (not need but want) and then act as if the other party should be grateful for winning . . . nothing.
There is real damage happening here. Enough that it calls into question whether or not AA can remain a viable company even with the labor cost reductions. Viable comes from providing something someone wants to buy and from the ability to sell that something to a great many people. How many people want to ride on Surly Airlines 2 years from now? They will if they have to but they won’t if they don’t.
That stuff gets fixed when leadership is shown. Leadership shouldn’t come from the unions. It should come from the executive management of the airline. I’ve tried hard to think of a real example of leadership that has happened over the past year at AA and I honestly can’t think of a single example of leadership being demonstrated. Not one.
If I were a shareholder, that would scare the hell out of me. I’d have a company exiting bankruptcy with the task of building new value and the inability to do so because no leadership exists. Delta CEO Richard Anderson says that its time for airlines to return a responsible profit on investment. I could not agree more. And that does mean that more productivity and lower costs are probably called for. But it never meant kick the employees into submission. And Delta never really has done so. It found common ground, got the deal made and ensured its employees were marching in the same direction.
Are we seeing that kind of leadership at American Airlines? If you were an objective investor and saw that kind of dysfunctional behavior, would you be encouraged to invest in that business? In any industry?
What’s the cost of angering and demoralizing your employees for the next 5 to 10 years?
American Airlines’ PR machine continues to beat the same drum on how they’ll succeed exiting bankruptcy as a standalone airline. The story is that they’ll fly considerably more international flights, do even more code sharing and partnering with existing Oneworld airlines and “right size” their flying with the new fleet they’ve ordered.
And everyone else keeps saying that ain’t gonna get it done.
Analysts don’t like the extremely aggressive growth being spoken in the plan because it reflects above industry average in growth when capacity restraint has shown that that is the pathway to reliable revenues. Growth may only come from one thing: Exiting bankruptcy with such superior labor costs that it can undercut other SuperLegacy airlines on price and start a fare war. That would anger just about everyone in the business.
Codeshares have been touted by AA for several years now but AA never seems to aggressively capitalize on these codeshares. It adds some incremental revenue here and there but the additions never seem that strategic and even its codeshare and interline partners seem inclined to poach on AA’s turf right now. There is, after all, a reason why both JetBlue and Delta Airlines have added flights between NYC and DFW: AA is vulnerable and, frankly, not doing a good job of keeping the interest of its business travelers.
International flying is more profitable and American Airlines has ordered the aircraft for increased international travel in the form of 777-300ERs and 787 aircraft. It has not managed to achieve a contract for those aircraft at all with the pilots union and seems to have forgotten that it couldn’t manage an acceptable agreement with the pilots to add a new route between Dallas and China a few years ago. What makes it think that pilots and other aircrew are going to agree to more flying internationally on these aircraft without some concessions? It’s a bargaining chip that the unions have and will use.
Finally, nothing in the business plan addresses what are fundamentally important issues for the airline presently. It performs much worse on the revenue side today because it has older, less pleasant airlines, a website that just angers more than serves its customers, service fees that seem hostile towards a customer and a service staff that seems intent on delivering a cynical and lackluster service product to its passengers.
Where is the plan to upgrade aircraft into a pleasant experience? Where is the plan to get employees happy again to serve their customers? Where is the website that, you know, allows you to prepay for a checked bag when checking in online? Where is the rational fee structure that makes sense and an implementation that doesn’t feel like extortion to the passenger?
You can beat the same drum hoping to get people dancing to the beat but if the beat is awkward and without rhythm, no one is going to join you on the dance floor.
Pinnacle Airlines, a regional airline providing contract services primarily to Delta but also United and US Airways, has filed for bankruptcy. We could talk about how they’ll be getting out of their Q400 flying for United in the NYC area. We could talk about how they’re walking away from some unprofitable flying for Delta on CRJ-900s. We could talk about a lot of things that Pinnacle is doing and will be doing to remain a viable regional airline.
I’d rather talk about the fact that one week before this bankruptcy filing, relatively new CEO Sean Menke and COO Spanjers both got huge raises. Menke went from a base salary of $425K to $675K and Spanjers $275K to $400K. Menke hasn’t been with Pinnacle for long at all, by the way. The argument is that Menke and Spanjers will be filling in for the departing CFO.
I call bullshit.
The board and Menke knew what was going to happen and raised the salaries prior to bankruptcy. They sure weren’t going to get approved for those kinds of massive raises after a bankruptcy filing.
It’s insulting to the staff of that airline, union or non-union, that their delivering themselves raises one week before a bankruptcy filing that will almost certainly find them going to those staff and asking for cost reductions.
Even American Airlines and Tom Horton didn’t have the guts to pull that stunt.
It’s notable that not a single analyst, commentator, blogger, newsman or businessman really is enamored of American Airlines’ plan for improving revenue. The plan, at the top level, is: Farm out more flying, try harder at our embattled hubs, rely on our Oneworld relationship.
What is continually pointed out is that working harder and doing more isn’t a plan. Relying on partner international airlines to provide feed isn’t very solid and where it has been deployed as a strategy, it hasn’t yielded the projected results. There are few new partnerships American can engage in at this point as well. They’ve done that work already.
American Airlines has a real problem in several of its hubs. JFK aka New York City is under assault by Delta and United and American is losing more and more traffic there. LAX really isn’t a hub and it too is under lots of competitive pressure. In Chicago, American is #2 against United at O’Hare airport and it is seeing its traffic decline there, too. Southwest is nipping at American from the bottom side by deploying routes out of Midway Airport that offer a real alternative to the businessman traveling to or from Chicago.
Yes, they have Dallas / Fort Worth. American is, by far, the dominant airline at DFW airport and it shows in the fares offered from DFW today. However, other airlines (Virgin America, JetBlue) smell blood and are entering the market place with a service product that is highly attractive to businessmen. Southwest Airlines will slip its leash at Love Field in about 2 years and then American really feels pressure from Southwest at two of its hubs. It’s also the hub with the most expenses. Labor is senior at that hub and recalcitrant at best. You can’t expect American Airlines to maintain its dominance there either. It will remain the major airline there but its share of the marketplace can be expected to decline rapidly over the next 2 years and then its routes will be under assault from all directions.
There is a reason why Delta put a large parcel of flights on the DFW-La Guardia route. They can compete on that route and American is limited in how it can respond. Creditors won’t be amused at American Airlines losing money on those routes to fight off competition.
American has other things against it as well. Its IT system is aging. Its service product is substandard even to LCC carriers. It’s fleet is old and while it will be renewed, much of that renewal doesn’t take place for several years yet. Its website is atrocious and can’t even let a person pre-pay a checked baggage online if a customer so desires. There is no ancillary revenue strategy (there are ancillary revenue products in place but no strategy to truly win passengers.) It’s an airline that, today, is designed to offend passengers and no one is talking about how that gets fixed.
That’s the reason everyone continues to contemplate a US Airways / American Airlines merger. The US Airways team has done all that despite being hamstrung with labor woes and inferior hubs. They know how to make it work and the competitive landscape makes American Airlines hubs in certain areas look much more attractive when someone else is running the game.
I think we’ll start to hear real talk of mergers with US Airways in about 2 months. It won’t take long for creditors to lose their patience at this point.
The relationships that American Airlines has with its unions has been pretty bad for quite some time. This really all kicked off with executive bonuses that were perceived to be out of line with airline performance both financially and operationally. What’s worse, unions weren’t rewarded when executives were and the criteria for reward was fuzzy at best.
The relationships have only gotten worse over time. In fact, I would attribute the rather militant direction of leadership for its flight attendants union, APFA, has been a direct result of American Airlines inability to establish any kind of rapport with that union in particular.
In short, there is no trust between the parties at all. It’s gone and it doesn’t appear that executive leadership wants to improve those relationships. The truth is that the executive team probably correctly realizes that that can’t be done in time to get the cost reductions it needs. So why try to make friends right now? It’s not an incorrect judgement.
These relationships are going to stink for a long, long time. The courts will impose new terms and those terms will likely be oriented more towards productivity than just a reduction in pay. American could get all it wants in the form of lower pay but the airline needs contracts that allow productivity to improve in order to be truly competitive with other national airlines in the United States. Other airlines have that (as a function of bankruptcy) and they don’t.
The exceptional shame of this all is that the unions won’t have much voice in the process. They’re not well funded (in comparison to American Airlines) and any giveback at this point means almost certain loss of office for leadership of these unions.
American needs action now so it can maintain some control over its destiny. Actually, it’s American Airlines executives who need action now to maintain some control over their destiny. Failure to get cost reductions and enumerate a plan for revenue growth will result in a merger or a change in leadership. The executive team has months, not year, to ensure their future.
The unions will fight. They will argue loudly on behalf of their membership. But there isn’t much to win here in court or out of court. There is plenty of established law and precedent that says they will see reductions pay and changes in work rules that will allow American Airlines to sit roughly on par with its main competitors.
And the relationships are so bad now, there isn’t any reason to just go to court and get it done. One way or another, there will be bad blood between management and unions and the sooner this is done, the sooner management can think about ways to repair the relationship in the future.
Just about everyone under the sun has offered an opinion on American Airlines’ top level explanation of how they intend to enhance revenue in their bankruptcy restructuring. The Cranky Flier has an interesting take on things as a function of what American offers in terms of a network. Jamie Baker of J.P. Morgan has critcized the ideas roundly. Even I offered extreme scepticism on the subject.
American’s idea is that through codeshares and a far higher percentage of flying being contracted out, they’ll gain more revenue.
Codeshares aren’t a network. They can add some incremental revenue but they are no substitute for having a strong network. American’s network was pretty good until about 5 years ago. Coincidentally, that’s when their profits nosedived. American Airlines has their “cornerstone” strategy of sending traffic through Los Angeles, Chicago, DFW, New York or Miami. Sadly, that leaves some gaps that other airlines don’t have. (And this is the foundation of the Cranky Flier analysis.)
For instance, Miami doesn’t serve the Southeast. It’s a gateway city for South America but it doesn’t act as a hub for the Southeast. Not like Atlanta or Charlotte do. There was a time when American tried using Raleigh, NC for this and it wasn’t a bad choice all in all but I would have contended that fighting US Airways for Charlotte would have been better.
Los Angeles doesn’t serve the West Coast. Again, it’s a gateway city for trans-Pacific flights but it isn’t a West Coast hub. Phoenix is a hub and Salt Lake City is a hub and even Denver is a hub but Los Angeles isn’t a hub. Now we have 2 significant portions of the United States being underserved by American in comparison to both United and Delta.
I even question the strength of New York City for a network. Again, New York city is primarily a gateway and a final destination. It’s not the best place to connect traffic to other domestic destinations. Now we have weakness number 3 in the equation. Codeshares won’t make up those deficits in those regions.
Contracting flying isn’t going to provide more opportunities to connect people from those underserved areas either. Whether the aircraft is 50 seats or 80 seats, no one in the Southeast is going to perceive the benefits of flying from, say, Birmingham, Alabama to DFW or Chicago to connect to a flight to New York City. Nor are they going to be thrilled about Miami as a connecting point. Now, Atlanta or Charlotte or Memphis doesn’t look too bad but American doesn’t have hubs in those cities. Delta does. US Airways does. Even Southwest does.
How did Southwest recognize the need for Atlanta in its system for serving the Southeast and American hasn’t yet seen a need for a true Southeast hub?
If you rely upon hubs and networks, you have to recognize that they come with some real inefficiencies. Those inefficiencies can make connecting flights look very, very unattractive unless they lie more or less directly in the path of getting from Point A to Point B via Hub C.
Will American merge to gain a better network? Well, I think the current management will not seriously consider those options. They see American as an airline great that should be the consumer, not the consumed. On the other hand, I think American’s creditors are already frustrated with American’s ideas in bankruptcy and they may well force a change in thinking on that end.
Who will it be? There is only one decent choice: US Airways. I like them for both their management team and their core strengths in the network just as Cranky Flier does. However, the only way that merger succeeds is if US Airways is the consumer of AA and not the other way around and not through a “merger of equals”.
Delta isn’t going to be the merger partner. Too many regulatory issues exist in that marriage for it to be practical. United isn’t going to be the merger partner because, again, too many regulatory issues exist. A smaller airline can’t consume American and American has a terrible track record in buying small airlines and truly getting the value they present. The only airline who has the gumption, team and, potentially, the money is US Airways.
My one issue w/ that merger is the huge labor issues that will exist. There needs to be a plan in place to resolve both AA and US Airways labor conflicts that exist today.
It was an interesting weekend in the American Airlines bankruptcy arena with AA pointing fingers at its unions with the message that they need to speed things up asap and the unions countering with AA isn’t bargaining in good faith. As with almost all things having to do with labor and airlines, the truth lies somewhere in between.
I think AA is making a calculated play that if they press hard enough and get nothing but pushback, a bankruptcy judge will throw out the agreements in place presently and dictate terms to the unions. Maybe. Maybe not. AA wants the deal that Delta, Northwest & United got which is basically getting the terms tossed and dictating new terms. Well, the law has changed some in that respect since those bankruptcies. The stakeholders all have a lot to lose and I don’t think the courts are going to just lay down and do what AA wants them to do.
Actually, I think the judge is going to make them bargain a while and he should.
As for the unions, I think their responses to the airline have been somewhat unrealistic in that preserving what you have at all costs for as many members as possible without making offers that truly do raise productivity significantly just makes you look stubborn and unwilling.
The way to win this battle is to put something real on the table and be the first to do it. Neither side has so far.
Not for nothing, AA’s grand plan calls for massive labor savings and massive cost savings in other areas such as aircraft and still offers little reality in how it is going to increase revenues. Stakeholders in this bankruptcy who are outside the AA family already know that that idea has flaws and I suspect that will get communicated in court with a massive reality check for the new management.
In short, I think that AA and its management is going to be made to get real with itself and I think the board is going to experience some of that reality very soon as well. I expect some board members to change and Chairman Horton is going to have to figure out how to really work a deal with labor while offering far more granularity on how he and his team will boost revenues. Absent that answer, I expect a takeover for the company to materialize and, no, it won’t be a “merger of equals” from US Airways. There won’t be any takeovers where there are equals. Someone will take AA over, shake it out and make it perform appropriately.
The bad news is that if the latter happens, I expect labor to do worse in that situation rather than better. That’s why I say it’s worthwhile for either side to get a real proposal on the table now and win rather than bicker at each other for an additional 6 months which likely results in a lot of that leadership looking for new jobs.
The only people who are going to come out of American Airlines’ bankruptcy with a nice profit is the lawyers and consultants. AA has hired a truckload of both to guide it through this bankruptcy although one would argue that, for the money, AA’s attorneys and consultants have provided much value thus far from what I can see.
The Allied Pilots Association, AA’s pilots union, has sent out a letter to its membership stating that they are now spending $500,000 per month on their own attorneys and consultants to represent their best interests during the bankruptcy. No doubt other unions are engaged similarly at this point.
I think people need help and good counsel in these times but given the stated goals by all parties (get draconian labor cost cuts or maintain the status quo), I suspect that all parties are going to suffer long and hard during this process. What each side needs is leadership willing to think outside the box. What each side has is leadership determined to suck up to its stakeholders.
American Airlines Chief Commercial Officer, Virasb Vahidi, has apparently been given the task of promoting the idea that American Airlines be allowed to farm out more flying to regional airline partners which is currently against the contract AA has with the Allied Pilots Union.
American wants the ability to send flying up to 88 seats out to regional partners using as much as 255 aircraft (50 to 70 seat flying is limited to just 47 aircraft right now) or 50% of the mainline fleet, whichever is greater.
Of course it does. Because this is what makes it competitive against airlines like Delta and United Airlines who already have the ability to access regional airlines for that kind of flying. The concept of right sizing aircraft to demand is perfectly sane and I would go so far as to say it is way overdue for many airlines. All too often, we’re seeing high frequencies of 50 seat (or less) jets to destinations that would be better served with 2 or 3 frequencies of a 70 seat jet.
But I have to ask a question: Am I the only one who sees the continued farming out flying to other entities as a stop gap measure? At the end of the day, it feels economically inefficient compared to simply being able to operate the aircraft you need to operate within a consolidated infrastructure at labor rates that make sense. When do pilots and other flight crew recognize that it really is no difference to fly an Embraer E-170 for a regional at a lower pay rate than it is to accept flying that same aircraft for a mainline airline? And, in fact, the ability to upgrade via the seniority system becomes easier, no?
Let me suggest something radical here for American Airlines and its unions: Bring it all under the AA roof and negotiate competitive pay rates for each class of aircraft based on seat count. Be smart and pay a living wage and consolidate the flying into something more rational than what exists today between other regional and mainline airlines. Be aggressive and find those savings in the forms of productivity, employee reward and using one infrastructure to win against the other SuperLegacy airlines.
Mind you, this requires unions such as the APA to concede that low pay rates are required for small, regional flying and productivity gains are necessary to beat the competition. This requires AA to recognize that it has to reward its employees for those productivity gains and for accepting those lower entry level pay rates. That’s pretty radical for both parties.
It seems to me that regional airlines all to often are killing themselves over contracts for flying using airliners that are just stupid to use in this economic climate. 40 seat Embraers are still being used simply because of scope clause contracts that leave airlines no other choice. It artifically raises the cost of tickets and leaves those same regional airlines stuck with aging equipment that has no value on the used market and which is unreliable for the flying its being asked to do today.
I’m suggesting sanity and I realize that suggesting that in the airline industry is foolhardy on many levels. But . . . airlines figured out capacity control. They figured out some revenue enhancements via a la carte pricing. Why can’t unions figure out how to grow jobs and provide more stability for its work force overall?
Consider the impacts to a regional airline pilot who is new to the business. Under the current systems, this guy may bounce around several times and each time he/she starts anew at a regional airline or mainline airline, they start at the bottom. Wouldn’t be nicer to enter into one seniority system, enjoy a relatively stable if fairly low income in a relatively stable base with an upgrade path that can span your career. Isn’t that worth giving more productivity and accepting the lower wage given the quality of life and quality of work improvements that come along with that?
I would suggest that if AA wants to really compete and by AA, I mean both management and labor, why not get radical and try something that takes competition to another level? If you do, you potentially cut down SuperLegacy airlines at the knees on the cost side and win more business which translates into potentially far greater profits. Imagine just how nervous Southwest Airlines gets with that kind of productive, rewarding system showing up in its own backyard?
First you have to show up at the negotiating table with an attitude of wanting to embrace a real change on both sides. Trust is needed and trust has to be given. This can’t be about who gets to screw who. It’s got to be about two parties coming together to save their asses against all others. That requires a bold move in these days.
First Spanair and now Hungary’s Malev airlines have shut down suddenly leaving passengers stranded and lessors contemplating more used aircraft sitting on the market. We all know what passengers go through when such a thing happens and we even know how crippling it can be to a small country when its main airline goes “poof”.
Europe and other parts of the world aren’t immune to the economic problems going on today in the airline industry. However, we often get surprised by these shutdowns elsewhere because there is often two things at play that we don’t see much in the United States: pride and a lack of transparency.
At the end of the day, it’s still quite the thing for a nation to have it’s own indigneous airline industry. Practically speaking, it’s often silly in the world we live in today but it remains a focus for leaders in countries around the world. There is a eason why Alitalia has survived as long as it has.
Furthermore, that pride leads countries and their airlines to hide financial problems rather than address them. It’s not entirely the airlines’ fault. Political pressure is brought to bear to keep airlines doing prideful things even when they make no economic sense. Even worse, in 2012 we still have countries financing their airlines.
Nations keep making huge sums of money available to their national airlines to continue operating. Money, to an airline, is oxygen and very hard to refuse. But when here is no ultimate consequence for poor decisions, the airlines become very dependent on that kind of oxygen and never enforce self discipline in their operations.
This is two small airlines in Europe. What needs to be considered is that there are quite a few larger ones in Europe that get both direct and indirect state support that are not only not financially solvent but aren’t being forced to consider the world they actually operate in.
This is true for several parts of the world and I’ll wager that we’ll see both large and small, old and new airlines fail in the next few years. Some will fail because countries can no longer afford to inject hundreds of millions of dollars into them and some will fail because of pride. Still others will fail because, at the end of the day, they are a shell game. (Lion Air and Kingfisher come to mind with respect to the latter.)
Regional airlines actually operate in a more competitive environment today than legacy carriers and the differences in their labor and capital costs can be quite significant. What’s worse, many of those airlines are stuck holding on to 1st generation 50 seat airliners that don’t make economic sense against today’s cost of fuel.
Some regional airlines that were (or are) associated with legacy carriers such as American Eagle and Comair have now taken on labor rates that are closer to today’s legacy carrier labor rates with a labor force that is significantly more senior than was ever planned for. In addition, these airlines are most often flying the least cost effective aircraft today.
Other regional airlines such as Republic Airways and Pinnacle have massive debt from acquisitions that can’t be serviced very well in light of what they’re able to earn from serving legacy carriers. All of these airlines face bankruptcy or worse in the next 2 years.
The regional airline world could use some consolidation and while it’s seen some, more would help both rationalize their fleets as well as reduce competition to get those legacy airline routes.
However, the real problem these regional airlines have is the same problem others till have. Scope clauses. These scope clauses that exist today are choking off flying at legacy carriers and forcing these same legacy carriers to continue unprofitable flying through regional airlines. Regional airlines who hold on to these 50 seat jet fleets have aging equipment that can’t be replaced with more fuel efficient airliners and at the same time also have no real substantial value in the used market.
I expect we’ll see some regionals go into bankruptcy reorganization and others to aggressively consolidate their businesses. Regional airlines will need to capture some negotiating power with legacy airlines in order to restore some assured profitability to their business. Frankly, I expect we’ll see some move to show a more disciplined approach to soliciting and maintaining business with legacy airlines and it will be similar to the capacity discipline that we’re currently seeing from legacy airlines.
I’ve often wondered if tomorrow’s legacy airline might look like an airline serving many masters on the same route. In other words, imagine a regional airline servicing two (or more) legacy airlines on the same route with the same aircraft but with each “owning” a portion of the seats available on the airline. It would end the brand consistency that legacy airlines enjoy on regional routes, yes, but I’m not sure there was much consistency in the first place. Why wouldn’t it be better and more efficient for that regional airline to fly one Embraer 175 into a city and fill it with passengers for a number of airlines rather than just one? In a sense, Alaska Airlines already serves this purpose in its agreements with a number of legacy airlines and it works well.
It’s been revealed that American Airlines had been engaged in preparations for bankruptcy weeks in advance having engaged Rothchild’s as a financial advisor in the process. AA is now asking its bankruptcy judge to retroactively approve Rothchild’s services for the course of its reorganization.
Some may think this shows a darker side to what led up to the bankruptcy but it really comes as no surprise to me. The mere fact that American did file for bankruptcy was proof they were preparing for it as it is no trivial process and requires answering a lot of “what ifs” if you plan to do it right.
American Airlines would likely need financial advice during the process and having a heavyweight like Rothchild’s on its side makes for a smoother discussion with a variety of creditors. The judge will approve Rothchild’s and Rothchild’s will earn its money over the course of reorganization.
However, the success of the reorganization remains in the hands of the executive team at American Airlines and that’s as it should be.
