3p work and casms

[Bob Owens]

This past week I sat through a presentation by the company. They focused on our labor cost per available seat mile. It seems that the company and the union have accepted CASMs as the tell all metric on how competative we are.

Why CASMS? Why not RASMs?

Because CASMs puts us in a less favorable light, thats why.

Whats really despicable though is the fact that 3p work is actually used against us. Thats right, the more 3p work we do the more it makes our labor costs appear way out of line with the industry, sure we generate revenue but revenue isnt part of the metric. (Dont look behind that curtain, just look at what we tell you to look at")

We derive zero benifit when it comes to CASMS by doing 3p work, in fact 3p work inflates our CASMs and artifically makes our labor costs appear high, it hurts us when we consider CASMs when baragaining. So as we went out and busted our buts to bring in more revenue to help the company by doing 3p work they decided to use the labor expense that generates all that additional revenue (which we are to ignore) to artifically inflate their CASMs and make us believe that our labor costs were way out of line.

When we do 3p work, every dollar they spend paying us to do checks, make repairs , load planes, unload planes and servcing customer carriers drives up AAs labor costs and none of those labor dollars generates any ASMs for AA, it generates revenue but thats not counted, but the cost gets added to our CASMS!

Lets say airline A spends $1billion to produce 10 billion ASMs and they generate $1 billion in revenue though tickets sales, their CASMs would be 10 cents and their Rasms would be 10 cents.

Now lets say airline B spends $1.5 billion to produce 10 billion ASMs and they generate $1 billion in ticket sales plus $1 billion in 3p revenue, their CASMs would be 15 cents but their RASMs would be 20 cents

Now if we just compare Airline A and B by their CASMs it would appear that Airline B is at a huge competitive cost disadvantage, however RASMs tells a different story, when we look as RASMs airline B generates almost double the amount of revenue. Two different figures paint a completely different picture of the competative position of these two airlines. CASMS is in reality a useless figure, RASMs is flawed as well but its certainly a better figure than CASMs.

The disclosure of the disparity caused by using CASMs as a measure of competetiveness also helps shed more light on why, despite our much lower wages, our labor costs are higher, remember we are talking only about costs here, not revenue.

So will management at AA lie to and mislead us? You bet they would, they have and they will.

 

[TWU informer]

Way to go "The Union". Why is it that we most always discuss "the company and the union" as one?

I thought the "working together" process led to "open books" and this would be exposed long ago in negotiations. Do you mean it is just now being brought to light? And here in this forum? Say it isnt so and that are negotiatiors have in fact brought this up long ago in the mediation process.

Aren't you one of the negotiators Bob?

 

[Bob Owens]

Way to go "The Union". Why is it that we most always discuss "the company and the union" as one?

I thought the "working together" process led to "open books" and this would be exposed long ago in negotiations. Do you mean it is just now being brought to light? And here in this forum? Say it isnt so and that are negotiatiors have in fact brought this up long ago in the mediation process.

Aren't you one of the negotiators Bob?

I am, one of 20 on the committee, and a minority in that I question what the company throws at us, but I'm a mechanic not an economist and sometimes it takes me a little longer to figure these things out. I never claimed to be quick, my wife may disagree, but sometimes it takes a while for me to sift through to the truth.

Most people just sit there and let the company throw numbers at them, I try to dig a little deeper. Admittedly in that forum I'm outgunned, I would prefer that we refuse to entertain those propaganda sideshows, they dont tell us anything that we cant find on the 10Ks, but I would rather go if everyone else is going so I can at least challenge them on some points. In reality we should have an Economist dig through their figures and sort out such favorable details but we dont. Instead we sit there and let them cherry pick what info they want to show us and accept it as fact, later on the International will repeat those figures to the committee. Of course all of it says we cant pay you what we are paying you now, let alone pay you more. Like I said before, all the company spoke about was CASMs, not RASMs. They implied that our labor costs was what was driving their unsustainable losses but as I've shown CASMs is not a reliable figure when you use your labor to produce 3P revenue along with ASMs. Some of the airlines they compared us to do zero 3p work and sub out the majority of their own work (which is really cost shifting, not necissarily cost savings). They pay their workers more yet their Labor costs would be very low compared to ours, its not a fair comparasion but the International doesnt challenge them. Instead the company would try to cite pension costs as the factor that drives our numbers up despite our lower wages. If I recall they said they owed half a billion to the pension, sure thats a big number but its only 2% of the revenue and the only reason why its that big is because they lobbied to reduce their contributions years ago, they have to make up for unrealistically high assumptions and not funding it responsibly in the past. If AA had a 401K like SWA they would have contributed a lot more to our pensions than they do, have or will but they would have done it at the rate of hours worked instead of having it surge and ebb along with the stock market.

I suspect the International has this info, but they dont share it with us and whenever I bring it up the International gets visably annoyed and condescending then counters with the companys position, usually followed by a few additional comments by their lackeys. Like I've said many times before all we get from the International are details that are meant to lower our expectations. Nearly every time we meet they bring up that AA may go bankrupt, or how much fuel went up, we are always told how AA has the highest labor costs and how much they have to contribute to the pension etc etc. When we bring up that our wages lag SWA by a wide margin we are told "They dont have OH". Thats from our International, not the company.

Its an uphill battle and unfortunately not just the International but the majority of the people that were chosen to be there are more sympathetic to the companys problems than they are to the workers. When several representatives from the high cost areas brought up that we have members going bankrupt and becoming homeless the only response was "If things are that bad then $40/week wont make much of a difference". Then they pulled GEO off the table. That just showed me that our Union brothers had zero concern for those of us in the high cost areas. United Invincible, yea, OK. More like "I got mine".

 

[The Goose]

... snip

So will management at AA lie to and mislead us? You bet they would, they have and they will.

... as will the dues collecting branch of the company, the TWU, and will continue to do so at every possible opportunity.

 

[upsilon]

I find the comparisons presented in Post #1 to be intriguing. I can easily see that if the AA 3P Mx labor costs are included in the overall CASM, the ratio is distorted when compared to RASM, no matter where the 3P Mx revenue is posted. 3P Mx revenue is not comparable to Fare and Ancillary revenue.

Thus I can see the mismatch of comparing the AA all in-house OH Mx CASM and AA RASM ratio with OA who do no in-house OH Mx.

His post is another of the very few instances over the past years I have agreed with Bob Owens. If I have erred in my evaluation, I am sure others who regularly challenge him will add to the discussion.

 

[eolesen]

Do you know for a fact that 3P is being included in the CASM numbers, Bob? There's probably some overhead costs which never get broken out, but from firsthand experience, AA's one of the more experienced at breaking out their operating costs from the servicing costs on third party contracts.

When we were doing management services for CP, I had to break all those hours out separately to different cost centers and/or account lines. Likewise with ramp & passenger staffing for ground handling services (including places where AA handles Eagle) -- we had to report those separately from that used to support AA ops.

 

[Bob Owens]

Do you know for a fact that 3P is being included in the CASM numbers, Bob? There's probably some overhead costs which never get broken out, but from firsthand experience, AA's one of the more experienced at breaking out their operating costs from the servicing costs on third party contracts.

When we were doing management services for CP, I had to break all those hours out separately to different cost centers and/or account lines. Likewise with ramp & passenger staffing for ground handling services (including places where AA handles Eagle) -- we had to report those separately from that used to support AA ops.

I only know what the company representative said, he said that the figure included everything, all groups,that means management, pensions (and bonuses) as well. A breakdown was requested but he did not have it with him.

AA and some of its supporters distort the facts to make it look like their labor costs put them at a disadvantage, it doesnt, the fact is that our(mechanics) compensation lags much of the industry by a wide margin, we do more work in house, that artifically inflates the number if we use it to compare, we do third party work, that artifically inflates the number, and our management gets bonuses which also inflates the number.

 

[FWAAA]

Looks to me like Bob is right about third party maint costs being included in the CASM figures presented to the employees. I assume that Bob is talking about slides 22 and 23 of this:

http://aanegotiations.com/documents/Financ...Website_000.pdf

The comparisons suffer from several deficiencies, IMO.

First, the numbers are adjusted for stage length and density, which distorts reality. As Robert Herbst says about such manipulation:

This report does not use any adjusted stage lengths or seat densities to equate “could beâ€￾ scenarios. The actual unit costs and revenues, due to each airlines unique operation make adjusting these metrics useless for legitimate airline-to-airline comparisons.

http://www.airlinefinancials.com/Airline_Data_Analysis_.php

I agree with Herbst; fantasy "what if" numbers obscure the reality when trying to compare AA's numbers to those of DL, UA and CO. Don't really care about US' numbers - they aren't a serious competitor to AA.

Delta is honest enough to say this in its earnings releases:

Delta excludes from mainline unit costs expenses for aircraft maintenance and staffing services which it provides to third parties because these expenses are not related to the generation of a seat mile. Similarly, Delta excludes from passenger unit revenues, and includes in other revenue, revenues received for providing aircraft maintenance, and staffing services to third parties, freighter operations and MLT. Management believes these classifications provide a more consistent and comparable reflection of Delta’s
mainline operations.

Delta is the largest airline provider of MRO - much larger than AA. In the third quarter, DL reported $200 million in MRO income. How much revenue did AA bring in? AA doesn't disclose it anywhere. Besides Allegiant, which other airlines are MRO customers of AA? The reality is that very little AA labor is employed just for the third party work. Primarily, AA tried to attract 3p work (and has largely failed at it) to fill in the slow periods and gaps at TUL, MCI and AFW, not to employ lots of mechanics full time.

The second (and bigger) problem with comparing AA's labor CASM to the OAL is that none of the others have 5,000 overhaul employees like AA, which makes AA's labor expenses appear much larger than other airlines' when viewed per ASM (even without the stage length and density adjustments). A better comparison would be to add all the outside maintenance expense to the labor expenses for DL, CO and UA. That would get closer to an apples to apples comparison.

Dunno why the AA managemt chooses to provide the misleading data - maybe they're evil or maybe they're stupid. A third option is that someone got lazy and didn't think it through as thoroughly as Bob did. No matter the reason, it's a poor showing by management.

 

[Bob Owens]

Looks to me like Bob is right about third party maint costs being included in the CASM figures presented to the employees. I assume that Bob is talking about slides 22 and 23 of this:

The comparisons suffer from several deficiencies, IMO.


I agree with Herbst; fantasy "what if" numbers obscure the reality when trying to compare AA's numbers to those of DL, UA and CO. Don't really care about US' numbers - they aren't a serious competitor to AA.


The bigger problem with comparing AA's labor CASM is that none of the other airlines have 5,000 overhaul employees like AA, which makes AA's labor expenses appear much larger than other airlines' when viewed per ASM (even without the stage length and density adjustments). A better comparison would be to add all the outside maintenance expense to the labor expenses for DL, CO and UA.

You are leaving out that our ramp guys also service other carrriers, they too bring in revenue and the hours paid to them get added to our CASMs. They probably generate more hours and more revenue than Aircraft Maint because they do it every day. At JFK we do 3p work for North Americam and whoever else shows up at the hangar. Over in LHR and Europe they do a huge amount of 3p work, in fact I think they do more than all of US line operations combines.

 

[eolesen]

If it's going into CASM, so be it. DL's approach makes a lot more sense, though, and there's no doubt AA's got the ability to exclude the non-flight costs & revenue.

If the revenue from ground handling, 3P, etc. is also going into the RASM calculations, perhaps you're onto something, Bob.

If you focus on the gap between RASM and CASM, just remember that CASM is far more controllable, and that RASM is subject to outside influences.

 

[Bob Owens]

If it's going into CASM, so be it. DL's approach makes a lot more sense, though, and there's no doubt AA's got the ability to exclude the non-flight costs & revenue.

If the revenue from ground handling, 3P, etc. is also going into the RASM calculations, perhaps you're onto something, Bob.

If you focus on the gap between RASM and CASM, just remember that CASM is far more controllable, and that RASM is subject to outside influences.

The point is that for the purpose of comparing workers labor costs as a portion of CASMs is completetly useless, there are too many variables between airline business models, the only real way to compare them with any degree of certainty is Compensation per employee.

 

[The Goose]

The point is that for the purpose of comparing workers labor costs as a portion of CASMs is completetly useless, there are too many variables between airline business models, the only real way to compare them with any degree of certainty is Compensation per employee.

Gee Bob - are you saying the company picked the least flattering method of accounting to present to the employees when it comes contract time AND the TWU, which collects dues from us (via what has become nothing more than an old fashioned organized crime protection racket) allows this to continue without challenge?

How much does the company pay Little (and others) to allow this?

How much will the continuing silence of TWU officers re: this issue cost the International each month in extra pay for "special assignments" (outright bribes) given them by Little Jimmy?

 

[FWAAA]

If I recall they said they owed half a billion to the pension, sure thats a big number but its only 2% of the revenue and the only reason why its that big is because they lobbied to reduce their contributions years ago, they have to make up for unrealistically high assumptions and not funding it responsibly in the past.

No, the bolded portion is not correct.

At the end of 2007, the pensions were funded to 96%. The steep stock market decline from late 2007 (when the Dow was almost 14,000) to this spring when the Dow hit a low of 6,440 caused the pension asset values to decline. At the end of 2008, the funding was only 70%.

The lobbying to reduce the contributions was so that AA (and other airlines) would have more time to make up such deficiencies, but that is not why the pension funding went from 96% to 70%. The increased time to make up the shortfalls was in response to the near-zero percent interest rates that followed the terrorist attacks and left UA and US unable to make up their shortfalls and terminate their plans. When interest rates fell to almost zero, that caused reduced the assumed earnings, making all plans underfunded. AA contributed more than $2 billion to its plans between 2002 and 2008, and in the process, raised the funding to 96%.

Yes, AA will have to make minimum contributions of over $500 million next year, and that's directly attributable to the market declines. Here's a chart illustrating the market decline over the past two years:

http://finance.yahoo.com/q/bc?s=%5EDJI&t=2y

Not funding it responsibly in the past? As to AA, there's no basis in fact for that groundless assertion.

 

[Thomas Paine]

FWAAA;
You said that AA put in almost $2 billion since 2002. That comes out to less than 1.4% of total revenue when you add up what they brought in 2002-08, around $140 billion.

That doesnt seem like much. How do other companies like Southwest or Continental compare?

 

[Bob Owens]

Not funding it responsibly in the past? As to AA, there's no basis in fact for that groundless assertion.

This is from their most recent SEC filing.

Pension Funding Obligation

The Company is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act (ERISA), the Pension Funding Equity Act of 2004 and the Pension Protection Act of 2006. The Company is not required to make any 2009 contributions to its defined benefit pension plans under the provisions of these acts, but based on current funding levels of the plans, the Company expects that the amount of the required contributions will be substantial in 2010 and future years. The Company estimates its 2010 required contribution to its defined benefit pension plans to be approximately $525 million.

Minimum contributions, that means they could make more, they didnt contribute this year so, because the market didnt, or isnt expected to perform they have to put in $525 million next year, maybe.