The flight attendant unions of American Airlines have decided to make love, not war, again.  There is a deal in place for the APFA (Association of Professional Flight Attendants) to represent the flight attendants of the merged airlines of US Airways and American Airlines.  The Association of Flight Attendants (US Airways) is leading its members to the APFA to get a new “industry leading” contract in place.

The AFA (US) gets to have some voice in their destiny in the process.

It’s great that they want to move forward and I have no doubt that working in unity would yield a better outcome than otherwise expected.

But I’m not sure these groups are really going to get along well.  It remains to be seen and I would love to hear from a US Airways flight attendant about their views on working together with the APFA and Laura Glading.

On the one hand, the APFA does very well in marshaling their membership to speak with one voice.  But they do tend to keep talking about 20 years ago and restoring things to the way they once were.

If I were in either union, I would want a union leadership that got me a good deal for today’s conditions in airlines.  And that doesn’t mean a bad deal or a concessionary deal.  It means a deal structured around how the airline industry is working today.  If I were a leader, I would make these my goals:

1. Workplace flexibility:  The ability to work my job, earn my salary at a living wage and still be able to cope with a modern set of challenges in my family.  How about flight scheduling that is a win-win for both the airline (in terms of productivity) and the flight attendant.
2. A salary rate based the hours I work rather than the size of aircraft I fly or the distance I fly.   Re-think how salaries should be paid so that the actual effort expended is in sync with the pay earned.
3. The ability to actually take charge and deliver great customer service to my passengers without fear of retribution for daring to use my mind.
4. Managers who empower rather than punish.  This is very, very important.  Give the flight attendants a chance to show what they can bring to the company and its financial performance.  They might possibly be the most important part to a turnaround.
5. A retirement plan based on a modern model (401K) designed to minimize risk to my retirement but also reward my service time.  AA has some of the best financial managers in the world, ask them to go to work at finding a way for my union to experience real growth in my retirement.

And it’s time to realize for everyone, management, all unions and all other employees are all One Team.

Live by each others efforts and die by each other efforts.  Anyone who wants to go to “us vs them” should be sidelined.  This isn’t about just making the airline successful someday.  This is about making the airline successful as fast as possible and sharing the rewards of that success among all the members of the company.  The faster a real, consistent profit is earned, the faster everyone can start sharing in that.

I would want to get to that point quickly because earning more money in 2015 is a whole lot better than earning more money in 2018.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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The Teamsters are trying to gain the right to represent mechanics at both American Airlines and US Airways in separate campaigns. Today, they’ve presented signatures of, supposedly, more than 50% of the mechanics at American Airlines.

Meanwhile, the TWU and the IAM are agreeging to jointly love each other and represent groundworkers at the new merged airlines. But they’re both denouncing the Teamsters move to represent the mechanics.

American Airlines’ mechanics are currently represented by the TWU who are, according to some, perceived as not having done enough to preserve jobs.

It’s also notable that the Teamsters have taken some heavy losses in union elections of late.

What’s it all mean? It means that unions cannot actually get together and do a good job of both representing their membership, preserving jobs and working with an airline.

The impact will not be to American Airlines. It will come at the expense of union members. What union members are failing to realize is that they have limited amount of power and they are completely replaceable.

I would refer the mechanics to the mechanics of Northwest Airlines and their strike in 2005/2006.  Northwest Airlines was able to fly through the strike and while it was somewhat impacted, the airline survived nicely and got a settlement with the strikers that worked to their advantage.  At no time did the striking mechanics affect the airline in such a way that it became critical.

Some might dispute that.  I would point out that that strike lasted 15 months.  American Airlines (and US Airways) can find plenty of people to service their aircraft should the need arise.

The best thing that the TWU did for mechanics and others at American Airlines was that they did preserve jobs.  Far more than I would imagine possible.  They got their members a stake in the new company which will bring significant value to the table and they struck a deal that could be re-negotiated for better terms (and was) if someone else got a better deal.

If you can’t celebrate that and prefer shooting yourself in the foot, you deserve to be out of a job.

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A couple of days ago, US Airways CEO Doug Parker and US Airways EVP Elise Eberwein went to go talk to a join meeting of the Allied Pilots Association (AA pilots) and US Allied Pilots Association (US Airways pilots).  They attempted to address concerns and foster a new relationship that would see a smoother merger get executed.

Let’s take a moment and think about this.  The soon to be CEO of American Airlines Group and a trusted US Airways executive in charge of People traveled to answer questions and address concerns to unions that will be involved with the new company.

Do you think that move would have been made by an American Airlines team?  For instance, do you think anyone bothered to go talk to TWA unions when AA bought them as an asset sale?  Do you suppose that Don Carty went and talked to the Reno Air people when they got bought?

You didn’t even see these kind of overtures being made when American Airlines needed a deal to stay out of bankruptcy just  a little over a year ago.  I would imagine that the pilots from American Airlines may have had a slightly stunned look on their face.

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I found a blog being maintained by an American Airlines pilot yesterday that was quite the experience.  Unlike most, this pilot was an ardent defender of Tom Horton and credits him with moving the airline forward through the large aircraft orders made and for making a case to grow the business to the board of directors all prior to Gerard Arpey’s resignation.   This blogger also contends that a merger will merely bring the America West / US Airways cat fight over seniority into the Allied Pilots Association and that stand alone is a better thing for pilots.  There is more there but we’ll leave it alone now.

I have a few specific and general thoughts here.

First, crediting Tom Horton with the aircraft order strikes me as overly generous.  More so the financing as being innovative.  To be true, things were negotiated in these orders that have the manufacturers generally providing financing for these purchases and I’m entirely unsurprised at this since the order was largely a historic one and getting a piece of it required the manufacturers to make an attractive deal.  But if we’re to credit Tom Horton for this order, let’s also credit him for the company devolving into bankruptcy as well.  We tend to pin that on Arpey alone and the truth is that Tom Horton was as much a right hand man in the operation of the airline (often to the exclusion of many other capable executives such as Dan Garton) and if we’re handing out credit, let’s hand out all the credit.

As for being the man to grow the airline, I would also point out that Tom Horton has possessed enough influence at the company pre & post Gerard Arpey to have already brought a great deal of influence into this direction.  He did have Gerard Arpey’s ear and let’s not portray the relationship that existed between the two as fundamentally different.  It just wasn’t.  Again, if Tom Horton was a visionary, his vision appears to have been ignored entirely until Arpey’s departure and we know that that just isn’t true.

Let’s also note that Tom Horton served as CFO for AT&T until it was purchased by SBC (Southwestern Bell).  During his time there, he essentially presided over AT&T not succeeding and needing a merger to survive and hence the merger/acquisition by SBC.  It has long been said that Horton realized he wasn’t going to replace the CEO and that current CEO of SBC, Randall Stephenson, had the inside track.  This in fact turned out to be true when Stephenson replaced former SBC/AT&T CEO Ed Whiteacre.

Enough of that.  The truth is that as I think of the conversation as it surrounds this merger between US Airways and American Airlines, it always boils down to arguments about seniority amongst labor.  I agree that integration of work forces is an important element in this merger and any other mergers among airlines.  The idea that a smooth integration is the norm of a successful merger is not correct, however.

We tend to look at the Delta/Northwest merger as the way it ought to always be done.  In truth, I wish it were that way but that was a very, very special case and even in that one the pilots nearly did the merger in but for the leadership of Lee Moak in that process.

In reality, mergers between airlines are almost always messy.  Integration is always difficult.  Successful airline mergers shouldn’t be measured in those terms.  In fact, I would argue that if the merger grew the airline, its revenues and its profits after a 5 year period, it was successful.  Messy or not.  (You’ve still got time United but the clock is ticking.)

The labor issues always revolve around seniority and a system of union representation that dates back more than 50 years.  The union system and its focus on seniority has made life exceptionally difficult for those employees for decades.  Today, among almost all legacy airlines, there is no job portability.  A pilot who merely finds dissatisfaction with his employer cannot leave and go to another airline without starting literally at the bottom-most rung again.  This is a major barrier to portability.

And if those same employees had some portability, I think that we would discover that airlines wouldn’t be in such a bad financial position in terms of labor costs and airline employees would actually be able to “vote with their feet” when an airline management treated them poorly.

Mind you, I’m not arguing against unions.  They’re the choice of the labor force.  I’m arguing against the idea that seniority and job security should be the overwhelming issue in representing their interests.  At the end of the day and in light of the furloughs and layoffs and ever increasingly slowed advancement that exists at an airline, is seniority really providing job security anymore?  And how about job satisfaction?

At the end of the day, airline employees love their inherent jobs but they’re also inherently disssatisfied with their management, their wages and their quality of life.  The roadblock to fixing those dissatisfactions is seniority.  This makes me wonder when someone is going try to come up with a better model for the future.

Wouldn’t it be great if an airline Captain with Airline A could quit a bad job and go to work for Airline B and be compensated on the basis of his experience and qualifications immediately instead of having to sit at the bottom of a seniority list and forever be “beneath” his peers who started at Airline B at the beginning of their careers?

And wouldn’t it be interesting to see airlines compete for airline pilots on the basis of that experience?  Remember that a desirable airline pilot isn’t just one with 10 or more years of experience.  It’s a person who has shown good judgement, safe judgement, efficiency and a can do attitude.  If I’m starting an airline, that’s who I want.  And an airline startup can’t really get those guys.  They’re stuck with the airlines they work for by and large.

Seniority imposes too much pain on both the employee and the employer at this stage in the game.  It is hurting competitiveness among airlines and impacting employees/labor in a very negative way over the long term.

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As the clock ticks towards the end of the year, more and more people are weighing in on the potential American Airlines / US Airways merger that’s been cooking for a few months now.  I have a few thoughts on this:

1)  It is curious to me that Tom Horton continues to describe himself as neutral on the merger idea on the one hand but also argues for a post bankruptcy merger any time the door is theoretically closed at a meeting.

2)  The fact that the pilots have been engaged on this leads me to believe that an offer is imminent.

3)  If an offer is imminent, someone has found a way to let Tom Horton exit gracefully.  I’m guessing the plan here is something similar to what Glenn Tilton got in the ContiUnited merger.  I’m also guessing that Tom reckons that if Doug Parker blows things, he may yet be able to step into the CEO role again.

4)  Not all pilots are eager for this.  There is a new blog started by about 35 AA pilots, mostly captains and mostly from the DFW base.  The fact that most are captains from the DFW base leads me to believe that these are fairly senior captains who may feel a touch threatened with respect to retaining their seniority against similar US Air (EAST) pilots.

Seniority is going to be a touchy issue for pilots and other crew.  It won’t be Delta like in the integration largely because rational thought isn’t in place for either union involved (APA or USAPA).  If this were an ALPA/ALPA integration, the odds for a smoother integration would go up.

You know what?  Smooth or unsmooth, it doesn’t really matter.  US Airways has already proved it knows how to run a split operation.  Furthermore, there is now federal law that will govern a seniority integration in this case and that should prevent a USAPA-like embroglio.

Some pilots from both unions point to Doug Parker and US Airways not being able to integrate their employees in the previous merger and that’s not quite true.  There was an arbitrated decision that very senior US Air (EAST) pilots threw a temper tantrum over and tossed out by electing a new union organization.  Parker & company couldn’t even be sure who to negotiate with for the last several years much less solve a problem.

Parker & company keep making offers to US Airways flight attendants and they keep voting them down asking for more.  And who wins in those situations?  Parker & company.  Because the NLRB won’t let the crews strike and does keep the new agreements coming which proves that progress can be made and that therefore justifies not letting the unions strike.  Meanwhile, US Airways keeps paying the old rates.

At some point, you need to make the deal you can get, not the deal you want.  US Airways crews haven’t been able to get their act together to realize that much less make it happen.

I rate a merger announcement as 80% probable at this point but I’m not sure that I agree that it will happen before the end of the year.  I can see this deal getting announced in the 2nd week of January, however.

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Two respected analysts (William Swelbar and Aaron Gellman) in the airline industry have come out swinging at the AMR – US Airways merger in small but significant ways.  Each questions the value of such a merger to American Airlines in terms of synergies.

Synergies of a merger are important and should be talked about with respect to a merger in this industry but they aren’t everything about a merger.  They are, in short, the talking point that the world understands.

In the case of American Airlines and US Airways, many scoff because of US Airways exceptionally weak position in international markets.  That’s where the sexy and fairly profitable flying is today.  But the day to day bread and butter of a US airline remains in the domestic markets.

The domestic synergies between the two airlines amount to a savings in costs with respect to a combined infrastructure to serve such an airline (less labor needed to serve the two combined entities, less overhead since one reservations system is used, etc.) and they amount to opportunities generated with a larger network.  Curiously, no one ever seems to talk much about how US Airways has two hubs that slot into areas of the country where AA is at its weakest.

Not only are those areas where AA is at its weakest (the West Coast and Southeast), but they are where US Airways actually performs really well.  That ain’t nothing.

Furthermore, despite AA’s Corners Strategy, American Airlines is now far from a dominant Northeast airline in New York City or Washington D.C.  US Airways plays very well there.  They have their shuttle operation and excellent position in Washington DC.  While US Airways gave up market share in NYC to Delta in exchange for its position in Washington DC, if you combine US Airways operations in NYC with AA’s, it started to look good and respectable again.  That ain’t nothing either.

Swelbar talks about the labor conflicts at such a merged entity.  I would like to make an observation:  A conflict free merger with respect to labor is bar far the exception to the norm.  Delta and Northwest got it and that’s nice.  Southwest and Airtran are doing OK but that was a different situation really.  ContiUnited hasn’t had it so good.  Few airlines ever did have it very good with labor in a merger.  It’s a fact of life.  So, how, then, is it much of a disadvantage? US Airways has actually proved that a profitable airline can be run despite unions biting at each other left and right.  If anything, its been an advantage for US Airways.

But there is a benefit to such a merger and particularly so to American Airlines that gets ignored by both these academic analysts:  US Airways management takes over.  It is pretty much agreed that the American Airlines management and board of directors is dysfunctional and even in this merger they have not taken full advantage of the opportunity to come out the other side a lean, competitive company.  With the roadmaps for doing so set in the examples of Delta, Northwest, US Airways,  America West and United Airlines, you would think that there had been more slash and burn than there has been.

Finally, there is room for more consolidation and the ugly truth is that both these airlines need each other.  There is nobody else left to work with and there is, perhaps, just one opportunity to pull this off and save both airlines.  They need each other and the sad fact is that they need each other equally but for different reasons.  That’s OK but it’s time to acknowledge the elephant in the corner.

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Curiously, American Eagle has managed to get deals with all its unions on terms that seem to work very well for its labor and without nearly the muss and fuss that AA has experienced.

I think this has to do with a combination of factors:

1) Dan Garton, President & CEO of American Eagle, sees his destiny with American Eagle and sees the destiny of American Eagle going far past what business it can capture from American Airlines.  In short, he knows deals have got to be done.

2) Labor at American Eagle knows it has to have agreements in order to survive.  Regional airlines can be liquidated as they are not too big to fail.

3) American Eagle as a company knows that to survive, it must have in place agreements that permit it to compete with other regional airlines for business.

4)  American Airlines threw a warning out when it signed a deal with Skywest for flying in Los Angeles.

It is both surprising and pleasing to see just how non-contentious the negotiations have been in the American Eagle camp and makes me wonder if Dan Garton isn’t the person to be leading American Airlines.

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

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

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

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

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

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

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

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

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Change or divorce in marriages is a traumatic time for all sides.  The relationship between AA pilots and AA management has been a classic co-dependent and hostile relationship for a pretty long time now.  Both sides have been doing the same thing over and over again expecting a different result.

What’s a good deal look like to AA pilots?

I think it’s divorce.  Right or wrong, I think the pilots see a relationship with their management that is so toxic that they just simply want out.  Since there is more of them than there are management, the pilots want management gone.  They want a fresh slate with someone new.

Its not entirely unreasonable for them to want this.  It has been a toxic relationship but . . . change doesn’t mean things get better either.  The desire to see someone, anyone else in leadership at AA could lead to driving change that is worse.

It seems to me that the leadership at the AA pilots union, the Allied Pilots Association, needs as much restructuring and change as the executive leadership at AA.

Frankly, not only am I not a fan of AA executive leadership, I’m in violent agreement that it needs to change.  It’s mediocre at best and pretty awful at its worst.

But it got there, in part, with help.  Unions at American Airlines drive their points with a baseline from the 1980s.  Sadly, the airline industry doesn’t operate in the 1980s and, frankly, the 1980s were not a healthy time for airlines anyway.

We think that everyone just wants more money.  I suspect that that isn’t entirely true.  For instance, I suspect that AA pilots would like to see less stagnancy in their positions at the airline.  I think they would like to see a better quality of life that allows them to work hard but also experience a life outside AA.  I think they would like to experience some new challenges and get to expand their world view as much as anyone else.

But it won’t happen without  a fundamental change in the leadership at the union.  That leadership has been so focused on taking power and using it to ding the AA executive leadership that it has lost sight of what is truly good for its membership.  There are no self-examining conversations about how to work in a change industry and achieve job satisfaction and reward.  I think David Bates, former APA President, tried to start that conversation but I think the structure of leadership at the APA made it impossible to do.  There was and is more reward for the Board of Directors to second guess and undermine the president of that union.

This isn’t just true for the APA.  I believe the APFA needs a similar change in structure and a similar conversation about how to achieve more job satisfaction and reward in a changed industry.

Until those conversations happen, it’s unlikely that anyone is going to be happy with any of the choices in leadership for AA at this point.

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

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

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

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

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

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

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

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

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Terry Maxon at the Dallas Morning News has THIS blog entry on why we might have not heard much from the APA on a US Airways merger lately.  The short version is that the APA board issued orders that APA President David Bates not speak about this after his appearance with Doug Parker in Washington earlier last month.  Color me unsurprised.

The Allied Pilots Association Board is very dysfunctional.  It’s comprised of Captains elected from pilot bases who each are sure they know one hell of a lot more about an airline than any other person.  As a result, they run their union a little bit like the Mafia runs New York.   They’re unified but only to a point and damn anyone who gets in the way of their opinions.

This means that unions officers such as the president, vice-president, etc really don’t get much power to execute in their offices.  I think we now know why David Bates was asked to resign:  He had already upset the board who wants its opinions to be public, not his.

No good deed goes  unpunished and David Bates was punished.

This also speaks a lot on why the APA voted down its last offer:  there was one set of voices advocating for the contract and entire board arguing against it in the background.  No pilot wants to piss off his local union representative either.

What does it all mean?  Simply this:  Expect much more dysfunctional behavior on the part of the APA in the coming months.  Do not be surprised if they appear to back away from US Airways as the APA board is going to want to be in charge of such a merger when it comes to the various pilots unions and it will want to use its power in endorsing a merger to get satisfactory terms.  To do that, it first has to go silent on Doug Parker.

The problem is . . . by voting down that contract, Parker can’t use them nearly as much as he could have.  He now has to work with other unions and bondholders and other members of the unsecured creditors committee.  By allowing ego to get in the way of strategy, the APA has nearly completely removed its voice from the process.

But, hey, they sure smacked David Bates and Tom Horton around, didn’t they? (insert sarcastic tone)

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Now that the APA has thrown its temper tantrum, let’s take a guess at where things go for American Airlines for a while.   I think that the APFA will see their membership vote no to their contract because, at the end of the day, having a similar temper tantrum will feel more satisfying.  This won’t matter because I think the bankruptcy court is going to give AA exactly what it wants:  imposed terms on both the APA and APFA.

It’s possible the court will wait for the APFA vote and the judge has shown previous interest in seeing rational agreements happen but . . . the APA vote is a signal to the court and judges are able to be emotional as well.  I think AA gets terms imposed and I think Tom Horton gets to chuckle at the unions.  He provoked them and got what he wants.

(Update:  The court did delay its ruling on the APFA contract.  I expect the APFA will also turn down its last offer.)

US Airways and Doug Parker now have a much more difficult uphill battle to pursue a merger.  The pilots just damaged his credibility badly and markets will take notice.  He won’t have influence through the unions because they are giving up a voice at the table as creditors.  They’ve lost some credibility in the PR wars going on and Tom Horton wins this round.  It isn’t good.

A merger still is quite possible and still the most sensible thing to do.  In some ways, it’s even smarter to do it in bankruptcy as opposed to after AA’s exit.  There are decisions that can be made that are easier to execute in bankruptcy as opposed to out of bankruptcy.  Creditors (future shareholders) are more willing to accept those decisions in bankruptcy than outside of it.   A merged company before bankruptcy exit probably sees a little less shareholder value at the exit but probably sees much more value created for shareholders after 3 to 5 years.  If (potential) shareholders are willing to see the long term, this deal makes sense.

But Doug Parker & company now have to go to work hard on bondholders and influential members of the unsecured creditors committee.  They have to present a sterling and realistic business case.  All their ducks need to be lined up perfectly and even with that, one more thing has to happen:

The current AA executive team has to make a mistake.  It doesn’t have to be a very big one but it needs to be enough to cause some to question their ability to deliver on a stand-alone plan.   Another quarterly loss could do it.  Possibly declining revenues might as well.  Delta and United could do US Airways a favor and engage in predatory behavior against AA in its cornerstone markets and that would certainly do it.

A US Airways / AA merger makes huge sense when it comes to competing with UA and Delta.  Those two have proven that their scale is helping them in ways that AA can’t experience.  It is crystal clear that both airlines need each other in the future.

And if you don’t think this fight is about who runs the company, you are kidding yourself.  It really does boil down to that and, in a way, you want that kind of discussion to happen.  Doug Parker is seen as having “failed” at 3 attempts to merge with Delta, UA and Continental.  I would argue that he didn’t “fail” but that marriages with those airlines were a bit less optimal than they would have been with AA.  The real truth is that if anyone is the “ugly chick” in the airline world for the past 5 years, it’s been AA, not US Airways.

After all, it’s AA that has lost $10 Billion in 10 years, not US Airways.  It’s AA that has refused to address its costs and revenues, not US Airways.   It is AA who has an atrocious relationship with its unions, not US Airways.  US Airways’ union problems are a product of the unions, not management.  And the circumstances under which those problems occurred can’t happen again because of new federal laws.

I’ll point out that US Airways not only didn’t like AA for a merger partner for 6 years, it went to the very best prospects over and over again.  That wasn’t dumb, that was smart.  They didn’t lose because they were bad ideas, they lost those merger attempts because their counterparts wanted to remain in charge at those airlines.

You see, those executives didn’t fear US Airways.  They feared Doug Parker and the reason they fear Doug Parker and his team is that they are aggressive, smart and overperform.  There is firm, consistent evidence of that.  Parker & company can make quite a few other executive teams look stupid and no one wants to look stupid.

So, I think Parker will go radio silent for the next few weeks, await some outcomes in bankruptcy court and spend their time quietly working with bondholders and lenders to firm their business case for creditors and shareholders.  Tom Horton isn’t dumb but if I had to choose between him and Doug Parker to run a modern airline against the likes of Jeff Smisek and Richard Anderson, I’d choose Parker.  Parker is aggressive, hungry and willing to think outside the box when it comes to an airline.  Horton hasn’t shown any inclination at adopting new behaviors in light of a changed industry.

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I’ve been on vacation since last week and while I was away, I had a peculiar urge to not blog on the airline industry.  It’s time to change that.

American Airlines’ three big unions have had votes on last best and final offers taking place with results in from 2 of them.  The TWU wisely chose to accept their offers and did so without fanfair.  The APFA still has a vote going on that will go past the bankruptcy court deadline as it stands today although the APFA remains confident that they’ll be given more time to conduct their vote.  I’m not so sure about that after the results of the APA vote.

The Allied Pilots Association has voted down their contract and this brings a flood of thoughts to my mind.  Their vote should have been about remaining unemotional.  Emotion dictated offering a big “screw you” to any contract but that wasn’t the wise choice in this vote.  Accepting the contract offers flexibility in negotiating in the future and a firm role in the bankruptcy reorganization.  With the APA holding 13.5% of the equity in the reorganized company, they had a voice that could bark.  Without it, they are relegated to the sidelines.  An emotional vote wasn’t the way you wanted to go in this.

The APA will be without voice in this process.  The bankruptcy court will impose AA terms on the APA.  The NLRB will not release the APA to take industrial action against American Airlines for years more now.  They’ll insist on more negotiations and even arbitration but they won’t let the APA strike.  AA now has zero incentive to do a new deal upon exit from bankruptcy and zero incentive to cooperate in negotiations as the longer they have their terms in place, the better the costs.  My best guess?  The APA has screwed itself for at least 5 years from the date of bankruptcy exit.  They will not be getting a contract that has parity with United and Delta for a long, long, long time.  They will have little influence on a merger, if any.  The AA executive team no longer need even pay much lip service to the APA.  In short, they not only shot themselves in the foot, they shot themselves in the head.

Am I surprised?  Actually I was.  Why?  I cannot say.  The truth is that the APA is not a rational organization and it has been mad and throwing temper tantrums for years.  When former APA President Lloyd Hill was in charge, nothing got done but pilots got to complain loudly and throw temper tantrums and that felt satisfying.  Then David Bates was elected and elected on a platform of approaching negotiations with AA rationally.  More surprising was that David Bates and his fellow officers actually did approach their jobs in the union rationally.

So rationally that I forgot about the overall APA membership.  Oh, there were hints from time to time.  Board members from various pilots’ bases would from time to time throw wrenches into the carefully plotted course charted by Bates but Bates seemed to manage this pretty well and keep some forward progress going.  So well that I started to not pay attention to those renegade board members.  Bates has done an excellent job of putting smart before emotional.  Sadly, pilots don’t want smart.  They want emotion.

So Captain David Bates has resigned as President of the APA.  The vote against the contract really was a vote of no confidence towards him and his fellow leaders.  Bates did the right thing because going forward, he wasn’t going to be an effective leader.  Why remain in office as an ineffective leader?

Pilots are weird creatures and their unions are stranger.  They will, at almost every chance, cut off their nose to spite their face.  They believe themselves smarter than anyone else at the airline and always believe that if the airline would just do what they, the pilots, thought best for running an airline, the airline would thrive.

The problem is that no pilot has ever proved themselves to be an effective airline executive in modern times.  To the contrary, most have failed miserably.  You can’t “control” an airline.  You can manage one, lead one but you can’t control it like you do an aircraft.  The airline will provide violent feedback and eject the person trying to control it.  It’s not an inanimate object designed for steering inputs.  It’s living creature with a mind made up of all of those a part of the organization.  It has to be persuaded to do things, not mandated.

The arrogance of airline pilots is nothing new in this area.  The greed isn’t either.  I am reminded of when Braniff International went to its pilots for temporary cost reductions to keep flying.  My father was the man who approached them.  At that time, senior Braniff captains were earning as much as 5 times more than my father, one of two executive vice presidents.  When asked for reductions to keep cash flow positive, the pilots refused and then offered to just loan the money to the airline via the union and at interest rates above market.  Obviously more loans weren’t the solution, Braniff management walked away shaking their collective heads and eventually filed bankruptcy.  And never flew again.

All the pilots lost their jobs, had to start fresh at new airlines and at entry level salaries.  When the bankruptcy occurred, I remember many pilots stating private (and some publicly) that they never thought the airline would actually stop flying and cease to exist.  They believed they were calling a bluff on the part of Braniff management.  Many deny it now but that wasn’t true at the time.

AA pilots are a very similar breed.  These men and women are going to eliminate their jobs to spite CEO Tom Horton and other AA executives.  The thing is, those people will find other jobs and they’ll go on to succeed elsewhere and earn great salaries in industries that pay far better than airlines do.  (Airlines are notorious for underpaying executives relative to businesses with similar revenues.)  But the pilots are going to end up earning an industry low or moving on to new jobs at new airlines at entry level salaries.   That 15 year MD-80 first officer is going to go back to earning $40K a year at some new airline.  So is that 20 year 767 captain.  And they’ll be bitter people until their retirement.

So, I’ll say this to David Bates:  You did well.  You presented facts and dealt with reality.  You can’t help people who don’t want help and your membership is intent on throwing a temper tantrum  at exactly the wrong moment.  No good deed goes unpunished and I feel for you because I think you really did work towards productive and rewarding change among your membership.

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A number of people have found a disconnect in the idea that American Airlines unions would encourage their membership to vote for the recently negotiated terms as a result of bankruptcy court mediation.  Particularly so after signing agreements with US Airways in support of a merger.

The answer is that it is a calculated bet on the part of the unions.  The terms are better than the term sheets offered by AA to the court for imposing upon the unions.  They increase AA’s costs although the terms are less than what is being offered by US Airways.  This boxes in AA when it comes to making its case for a stand-alone exit strategy.  Once those costs are fixed by a vote, US Airways can better those terms and advance its own business case.

This is why AA and Tom Horton are working so furiously to push away US Airways.  It is putting pressure on them to make a better and better business case and that means they have to find an argument for the revenue side of their business.  Unfortunately, that argument is increasingly not a very compelling one.

Bondholders have formed an ad hoc committee to try to gain more leverage in the bankruptcy process and US Airways CEO is reportedly directly negotiating with bondholders and offering a better deal.

The walls are closing in on AA management.  To succeed in a stand-alone strategy, they must:

• Make a cost savings argument that supports a viable business plan going forward.  Their costs are now being forced upon them by unions and US Airways which doesn’t make creditors feel like the management has control of the situation.
• Make a revenue argument based on the Corners Strategy.  This argument is becoming more and more difficult to make since American Airlines still cannot point to revenue improvements that impress anyone.  No financial analyst feels confident about AA’s revenue strategy and many are expressing that lack of confidence very publicly.  US Airways, on the other hand, is able to point to its own revenue strategies and their unequivocal success:   US Airways is earning signficant profits and growing its revenue very successfully despite the inherent weaknesses of its own network.  This shows that US Airways management knows how to run an airline today and puts pressure on AA executives again.
• AA must convince its creditors that their fortunes are better in a stand-alone strategy than a merger.  The argument here is that an exit from bankruptcy will result in those creditors owning shares of a company that is thought to be worth about $6 Billion upon exit.  Unfortunately, US Airways is forcing cuts into that pie for creditors outside the company by maneuvering AA into offering pilots a very, very significant portion of that pie.

And that’s why the fight is on.  We’ve seem a significant ramp up in PR activities by both airlines and already AA appears to be lashing out wildly in hopes of gaining maneuvering room.  Doug Parker and US Airways is applying pressure both externally and internally and has maneuvering room as a function of their financial results.

I expect this fight to get increasingly dirty.  AA’s disadvantage in this fight is that AA unions aren’t particularly fond of their executive management and just aren’t interested in supporting them.  The DFW area has not, so far, really put forth any strong movement to keep American Airlines a stand-alone company.  Why should they?  US Airways made the guarantee that the merged airlines would retain both the name and headquarters location in the DFW area.

American has lost public support in its Corners Strategy markets of Chicago where it has to contend with the fact that both United and Southwest Airlines are competing with it.  The New York market is being dominated by Delta and United Airlines.  There is no groundswell of public support for American’s current management.

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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.

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US Airways CEO Doug Parker made a more detailed case for the US Airways / American Airlines merger they are pursuing at the annual US Airways shareholders meeting. Parker is in the position of having to denigrate the airline he wants to merge with somewhat in that he has to make a case that the stand-alone approach doesn’t bring profitability while the merger approach does.

Parker argues that the two airlines together can compete globally whereas the without US Airways, American Airlines doesn’t quite get there. The problem with that viewpoint is that he’s arguing scale at various point while also saying that US Airways doesn’t *need* a merger partner to continue its profitability. So why can’t American Airlines survive without US Airways?

The answer is that the two airlines both face long term profitability risk when facing Delta and United in the marketplace. US Airways *does* need a merger partner just as badly as American Airlines does. US Airways brings an executive team, a profitable operation and network that is complementary to American Airlines. AA brings scale to the table.

The labor issues still linger out there and while they aren’t as rosy as Parker makes them out to be for such a combined airline, they also aren’t as bad as some make them out to be as well. One thing US Airways has proven is that you can run a profitable airline with a fractured labor force. They’ve done it.

Labor unions, particularly pilots and flight attendants, have got to realize that their ability to survive is predicated on accepting new models of flying at the airlines. Preserving jobs is one mandate and that’s understandable. But all unions are going to have to accept the idea that preserving those jobs may require flying on smaller aircraft at vastly lower pay scales.

AA may do US Airways a favor in getting the labor contracts thrown out in court. If a merger goes through, a new contract could take several years to get negotiated into place while new, lower terms are imposed upon the unions which save the airlines money until that new contract is agreed upon. If the unions wants to realize salary improvements, they’ll have to cede some ground on productivity, health benefits and retirement funding. The sooner they do so, the sooner they realize real gains in overall compensation and particularly so on the US Airways side.

On a related note, the USAPA (US Airways pilots union) is now expressing moderated concern about a merger from their point of view. This isn’t surprising since AA pilots would dominate a combined airline from both a seniority and numbers perspective.

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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.

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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.

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It’s not a catchy name, in that form.

Last Friday, AMR/American Airlines capitulated a bit in publicly stating it would engage in examining the possibility of a merger with some other airline.   This after beating a drum for 2 weeks that it was fine, there was nothing to see here and American Airlines was a better airline if it exited bankruptcy as a stand alone enterprise first.

The thing is, an airline in bankruptcy is answerable to many parties.  It must answer to the courts and creditors and it must justify its decisions, particularly those related to bankruptcy, at every turn.  There isn’t nearly as much maneuvering room to do what one wants to do in those conditions and I’ve often wondered over the past few months if that wasn’t the prime driver for Gerard Arpey’s decision to leave the company.

Is this a merger?  Nope, not yet.  But US Airways has played this very, very well so far.  They’ve got the public support of unions and have managed to make themselves look more and more attractive to interested parties who aren’t tied to AA through employment or as a major creditor.   The next steps will be to win over Boeing by reaffirming the aircraft orders made last year and to win over HP by reaffirming a desire to go forward with the new reservations systems.  Not hard to do as any merged entity will need both the new aircraft as well as the new reservations systems.

My prediction is that we’ll see some sort of understanding between the two airlines some time in June.  It will be about brotherhood and great synergies and that no one need to worry about their jobs.  Worst case scenario sees Tom Horton elevated to non-executive chairman (and I doubt that that happens) with a small handful of American executives retained.  More practically, Tom Horton leaves for a different industry and maybe 1 or 2 executives are retained for the new company.

The best part will be seeing the new livery for such a company.

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American Airlines’ response to the announcement of a merger support agreement between US Airways and AA unions is, to say the least, lackluster.  If anything, I actually read a hint of bully in the announcement.  It says:

“American Airlines is moving steadily through the Court supervised restructuring process and the Court has granted American the exclusive right to create its plan of reorganization at least until September 28, 2012. We are making substantial progress in our efforts to return American to industry leadership, profitability and growth and maximize its value for all of its stakeholders.”Our immediate next step is to pursue vital modifications to our collective bargaining agreements through the 1113 process that begins on Monday, April 23rd. We believe statements of non-binding support from union leaders for alternative proposals are no coincidence given the timing of the 1113 process. These statements do not in any way alter the company’s commitment to pursue our business plan or our focus on moving steadily through the court supervised restructuring process to create a profitable, growing industry leader.

“For American’s outstanding employees and loyal customers, business continues on track, as we continue to provide the safe, reliable travel experience our customers expect.”

This, I believe, is non-productive when having to deal not only with your 3 largest unions but unions who have a significant amount of input on your unsecured creditors committee.  It also demonstrates that you don’t “get it” when it comes to your labor and the need to lead them through this bankruptcy.

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