In The Eye Of The Storm

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U.S. Airline Future: In the Eye of the Storm
By Anthony L. Velocci, Jr.
02/29/2004 11:25:47 PM

IN THE EYE OF THE STORM

When Aviation Week & Space Technology last took the collective pulse of the U.S.' six legacy hub-and-spoke airlines in November 2002, their vital signs were weak. All of the operators were suffering from high labor and fuel costs, a recession, the lingering aftermath of the 2001 terrorist attacks, grinding competition from low-fare rivals and, except for one or two of the companies, weak management. Most of the conditions over which carriers have little or no control have improved or don't exist now, and demand for travel is rebounding. Still, the industry's health remains fragile and airlines face an uncertain future. In the following update on the state of the traditional majors, their challenges and prospects are explored.

For the six largest U.S. legacy airlines, the maelstrom is over--for now.

But the calm won't last. The day of reckoning has only been postponed, thanks mainly to a strengthening domestic economy and a gradual recovery in air travel demand.

In the 15 months since Aviation Week & Space Technology published its special report on the U.S. airline industry's precarious financial state (Nov. 18, 2002, pp. 52-69), there's no denying that the majors as a group have made progress.

They've reduced expenses, due in some cases to lower labor costs and higher productivity. While revenues are still depressed from the pre-Sept. 11, 2001, doldrums, ticket sales are increasing. Near-term liquidity and operating margins have improved. The carriers no longer are piling up unsustainable losses, though they're still swimming in red ink. Net losses totaled $5.3 billion in 2003--most of it in the first half of the year--versus $7.4 billion in 2002. Furthermore, some carriers may actually break even or post a slim profit in 2004.

American Airlines, which barely escaped Chapter 11 filing last summer, and United Airlines, which has operated under bankruptcy protection since December 2002, have come the farthest. Embattled US Airways, which exited Chapter 11 in April 2003, is again teetering on the brink, while Delta Air Lines and Northwest Airlines are lagging. Continental Airlines is doing a respectable job but was recently overtaken by American as the lowest cost operator among the legacy hub-and-spoke carriers.

The airline crisis of 2001-03 is over, and there is unlikely to be any more Chapter 11 filings anytime soon, declared Philip Roberts, vice president and managing partner of Unisys R2A, a transportation management consulting firm. That's how UBS Warburg analyst Samuel Buttrick sizes up the sector too. Barring a serious shock to the U.S. air transportation system, he thinks the most recent cyclical downturn is unlikely to force any more major airlines into Chapter 11. "They will muddle through," he said. That's if they're lucky.

Despite the majors' current and near-term momentum, J.P. Morgan bond analyst Mark Streeter pointed out they face numerous long-term problems. Roberts put it more bluntly: "Although the short-term results suggest the worst is over, the picture is still very ugly." Analyst Philip Baggaley, managing director at Standard & Poor's, offered a similar assessment: "They're coming out of the downturn alive but crippled." (S&P, like Aviation Week, is a unit of The McGraw-Hill Companies.)

The cost of labor is still too high in relation to operators' revenues and overall cost structure, according to many of the 14 industry observers interviewed by Aviation Week for this special report. The price of fuel remains stubbornly high and shows no signs of easing in the foreseeable future. Thus far, the majors are taking only baby steps toward true restructuring of their expensive hub-and-spoke business models. In addition, low-cost competitors--such as AirTran, JetBlue Airways and Southwest Airlines--are continuing to take market share away.

"They must dig out of such a deep hole that even meaningful progress in any one quarter will bring them only part of the way up the side of this incredibly deep pit," Baggaley said. Even if they became respectfully profitable tomorrow--most operators have never earned their cost of capital--they would still be carrying a substantially heavier financial burden than they have historically, he added. "It is very unlikely they will ever prosper or get on a solid financial footing, and it is very likely we'll have an airline sector in which the participants will be weak and vulnerable for the next decade. Who survives and how much market share they give up will depend on geopolitics and how skilled their management teams are."

Of course, one of the six existing majors could fail and have to liquidate its assets, reducing total industry capacity. Even then, Baggaley thinks the remaining survivors would get only short- to intermediate-term relief. Still remaining would be the vexing problem of how to effectively counter low-cost competitors. The latter almost certainly would snatch a sizable amount of whatever capacity came up for grabs. The rate at which they are gaining domestic market share may slow, but the basic trend probably is irreversible. In time, low-cost operators are expected to dominate 40-50% of the U.S. market, up from 7-8% 10 years ago and about 20% now.

Waiting in the wings are embryonic groups that aspire to be the next JetBlue success story. "There are a lot of people who are trying to launch a low-cost carrier," said Ray Neidl, an analyst at Blaylock & Partners. "Most won't get off the ground, but you can't dismiss the possibility that someone will have the same winning formula--a good concept, good management and plenty of capital."

There was a time when traditional hub-and-spoke airlines gave little or no credence to the low-costs. "Now majors are more worried about low-cost competition and less about terrorism," Baggaley said.

They have good reason to worry, of course, but it's US Airways whose survival is most at risk.

This spring, Southwest plans to invade US Airways' fortress hub in Philadelphia, which generates about 17% of the latter carrier's total system revenues. US Airways already faces stiff competition from other low-cost airlines in the six markets Southwest will serve initially. As a result, the immediate impact may not be as dramatic as many observers expect.

But in the longer run, Southwest is expected to make mincemeat of US Airways because its operating costs are so much lower (7.7 cents per available seat mile versus US Airways' 11.7 cents in the fourth quarter of 2003). The likely outcome of this competitive mismatch is that US Airways' viability as a network carrier may well come to an end forever. To make matters worse, JetBlue has also successfully penetrated some US Airways markets on the East Coast.

Buttrick shares Neidl's somber outlook. "It's extremely difficult to be optimistic about US Airways' long-term future," he said. "As the carrier is now configured, it will be almost impossible for them to make it."

Still, even the most troubled airlines have demonstrated a remarkable ability to hang on in the face of seemingly impossible odds. There's no better example than Trans World Airlines, which practically was on life support for 10 years. In the case of US Airways, Buttrick pointed out that it posted respectable profits several years in the mid-to-late 1990s. There is nothing to preclude a bout of profitability in the future as demand for travel continues to improve, although its long-term outlook is extremely poor, he said.

"Not everyone will survive--only those who are nimble enough to respond to market demands," outgoing Continental Chairman and CEO Gordon Bethune said. He ought to know. In 1994, Continental was on the verge of Chapter 11 for the third time, and Bethune was able to inspire all of the carrier's stakeholders to pull together and adopt a more business-like approach. But steering clear of Chapter 11 and doing well is not all about forcing wage cuts on an otherwise dedicated workforce, he said. "It's also about how you run your company. You've got to listen to your customers."

Could the majors actually be in control of their own fate? One would never know it, judging from how rare it is for executives running major airlines to be called to task--despite the billions of dollars of wealth they have destroyed through the years relative to their compensation packages. Management's role is a subject everyone seems to tiptoe around, as opposed to the subject of labor, which is usually pilloried as the principal cause of the airlines' troubles. But as one industry analyst put it, "Who's supposed to be running the show?"

While all of the legacy airlines currently in operation won't survive, Bethune also noted they aren't all going to disappear in mass either. The question is how many, if any, will ever become truly healthy and resilient, as Southwest is, regardless of business cycles. Some industry observers believe none will achieve such success until there is sweeping change in executive suites as managers are brought in, probably from outside the industry. "These companies aren't going to get where they need to go through incremental change," one observer said.

No such transformation appears in sight, although one never knows. Former Delta Chairman and CEO Leo Mullin recently stepped down, and Bethune--the last Big Six CEO who dates from Sept. 11, 2001--plans to retire at the end of this year. Both companies could settle for only minor adjustments to their business models--or seize the opportunity to implement real structural change. But if past is prologue, don't count on it.

As the majors' market share continues to erode, Edmund S. Greenslet, head of ESG Aviation Services, expects to see their numbers also drop. It's impossible to predict the stages this "forced consolidation" will go through, he said, but it's likely to span a combination of possibilities. These include at least one failure, a merger or two and code-sharing agreements that stop just short of a full merger. "There is room for four or five, but not all six," he said.

Assuming the U.S. economy continues to improve in 2004, Greenslet expects the industry to move into the black either this year or next. Whether the profits will be sufficient to sustain them is another matter, but he feels certain that profits will be substantially less than they were in the late 1990s. Consequently, legacy majors will remain "extraordinarily vulnerable to economic twists and turns." He suspects it will be some combination of these events that will cause the group to lurch toward the next round of consolidation.

The shortest route to the scrap heap will be following a business-as-usual approach, which has been the historical pattern of the majors, said Thomas Hanson, who heads the airline consulting practice at Booz Allen Hamilton. "As it is, all of them suffer from corporate cultures that have blinded them to the fact that it's a new world," he said, "and that culture is fundamentally incompatible with the new paradigm."

That thought was echoed in a recent edition of Unisys R2A Scorecard: "The salvation of the legacy carriers does not lie in external events--waiting for Southwest to lose control of its costs, for example, or fuel prices to return to 40 cents a gallon, or government intervention. Rather, it lies within the grasp of each airline that is willing to seize control of its own destiny and make the hard choices--based on a realistic analysis of the world as it is, not as one would like it to be--necessary for success."
 
Personally, I have to agree with this article in that the companies will always look for the easiest buck. If the weakest link is the union then that is were they will head. If they believe the unions won't give then they will start trying to change their business plans and look elsewhere. Once a company gets the taste of blood they will come back and back again. They will stay focused on the weak instead of trying to fix their business model, ruining both the company and it's employees. Just my opinion. Later
 
Actually this mess was caused by the AFL-CIO supported President JIMMY CARTER who allowed the airlines to be deregulated. This started a feeding frenzy on airline employees, particularly the mechanics. It allowed union busters like FRANK LORENZO,CARL ICAHN, BOB CRANDALL+TWU, to wreck our pay and benefits! This was done so "BUBBA" could fly from coast to coast roundtrip for $99.00!
 
The AFL-CIO bears some of the blame. They have sat idly by since Reagan fired the air traffic controllers. They sat by idly when Eastern Airlines mechanics struck.
 
Hard choices? The unions at AA made a concious choice, that choice was not favored by the miniority. Unlike Usair or United we made the decission to contol our destiny. No matter how painful. I for one did not want to go by the way of Eastern.

You few individuals are attempting to take us down a road to self destructions. I for one am glad the majority see you for what you are! Me only attitudes!

I believe choices have been made based on the changing industry. Many companies and employees have a choice. With the loss of 148,000 thousand positions lost in the Industry I believe we choose the better path!
 
James C. Little

Administrative Vice President, Air Transport Division

Transport Workers Union of America, AFL-CIO

1791 Hurstview Dr.

Hurst, Texas 76054





Re: Summary of the 2003 Contract changes



This will confirm our understanding reached during the negotiations leading up to the agreement signed on (DOS), 2003. During these negotiations, we discussed many changes intended to achieve sustained long-term financial relief from the current provisions of the TWU labor agreements. This letter is intended to recap the majority of the agreed upon changes. Changes are listed by Title groups: I (Mechanics and Related), II (Facilities, Automotive, Cabin Cleaners, Utility and Building Cleaners), III (Fleet Service), IV (Fuelers), V (Stock Clerks), T/S (Technical Specials), Disp (Dispatch), Metro (Meteorologists), Sim Techs (Simulator Technicians) and Instrs (Ground School and Pilot Instructors).



Pay Related

Effective May 1, 2003:

§ Base wage pay reduction, varying percentages (all groups)

§ Elimination of all longevity pay(I & II)

§ Modified longevity pay, start after 17 years, current rates (III, IV, V,T/S)

§ Reduced Sim Tech Coordinator premium by $.75/hour

§ Reduced Sim Tech Skill pay to $.10/hour

§ Reduced Pilot Simulator Instructors premium to $10.00/month

§ Reduced Ground School/Pilot Simulator Instructors standardization coordinator pay to $150.00/month

§ Reduced Pilot/Simulator Instructors work unit experience premium

§ Modified shift differential to $.01, $.02, $.03 (I, II, III, V, T/S, Sim Techs)

§ Elimination of weekend differential (I, II, V, at AFW, TUL, MCI)

§ Elimination of midnight skill retention premium (Sim Techs)

§ Training pay at straight time for off shift and day off (I, II)

§ Elimination of penalty lunch payment (I, II, III, IV, V)

§ Elimination of OT meal allowance (I, II, III, IV, V, T/S)

§ Penalty hours pay for actual time worked @ 1.5x (I, II, III, IV, V, T/S)

§ Reduce OT rate from 2x to 1.5x (I, II, III, IV, V)

§ Work 40 hrs to reach OT rate for day off overtime (III, V)

§ Elimination of debrief pay (T/S)

§ Elimination of Stock Clerk driver premium

§ Elimination of AMT premiums when displacing OSM employee

§ Elimination of Early Call-In guarantees (I, II, III, IV)

§ Elimination of short turn penalty due to shift bids (Art 21 d) (III, IV)

§ Elimination of CC premium when not working as CC (III,V)







Work Rules/ Other changes and effective dates:

Effective April 15, 2003:

§ Combine Systems/Structures into Generals (Title I)

§ Added 7 day labor loan provision (Bases only)

§ Increased AMT productivity through multiple work assignments/training

§ Holidays reduced from 10 to 5. The five (5) observed holidays will be: New Year’s Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (all groups)

o Holidays- 5 days with roll @ 1.5x (I, II, III, IV, V, T/S, Sim Techs)

o Holidays- 5 days (no roll) @ 1.5x (Disp, Metro, Instrs)



Effective May 1, 2003


§ Reduce annual SK accrual to 5 days @ 100% (all except I & II)

§ Reduce annual SK accrual to 5 days, 1st two at 50% (I & II)



Effective May 3, 2003

§ 4/10s at Overhaul docks/TUL, duration of agreement

Effective within sixty (60) days of ratification:

§ Outsource RON/Ultraclean (II/III)

§ One time System protection credit for headcount reductions realized from work rule changes (all groups except Metro)



Effective thirty (30) days from ratification:



§ Reduce uniform provisioning and eliminate laundering (I, II, III, IV, V)

§ Outsource stores function at HDQ (6 Stock Clerks)

§ Relocate 4 Stock Clerks at ORD/GEM to ORD/M & E hanger



Effective as soon as practicable after DOS:

§ Change work schedule to 5 on, 2 off (T/S)

§ Reduced VC accrual one week (all groups)

§ Modify Crew Chief ratios:

AMT- 1:11.5

FSC- 1:9

Fuelers- eliminated ratio

Stores- 1:12

Benefits:

§ Medical & Dental plan modifications (all groups) Effective 1/1/04



§ SLOA Benefit Coverage reduced from 24 to12 months (all groups)

Effective 5/01/03



§ Eliminate STD Plan (all groups) Effective 1/1/04



§ Discontinue subsidized medical benefits RIF’d employees (all groups)

Effective 4/15/03





§ Modify IOD to 10 days (all groups) Effective 5/01/03 with the following transition:



o If the injury was incurred prior to 4/15/03, remaining applicable salary continuation through the end of the month up to the current 80 days

o If the injury is incurred on 4/15/03 or before 4/30/03, salary continuation for 10 days up to the current 80 days

o If the injury is incurred after 5/01/03, salary continuation for 10 days



Sincerely,





James B. Weel

Managing Director

Employee Relations



Agreed to this date:



________________________________

James C Little

Transport Workers Union, AFL-CIO
 
PRINCESS KIDAGAKASH said:
Actually this mess was caused by the AFL-CIO supported President JIMMY CARTER who allowed the airlines to be deregulated. This started a feeding frenzy on airline employees, particularly the mechanics. It allowed union busters like FRANK LORENZO,CARL ICAHN, BOB CRANDALL+TWU, to wreck our pay and benefits! This was done so "BUBBA" could fly from coast to coast roundtrip for $99.00!
Not really. Following deregulation in 1978 airline workers did not suffer cuts in pay. It was not until Reagan fired PATCO and Reagan's Judges allowed Lorenzo to use Bankruptcy as a means of abrogating contracts that airline workers saw their wages head in a tailspin. However the AFL-CIO and the Democrats did nothing to help us either. Look at the graph, you can pinpoint the start of our downturn to 1983. Five years after Deregulation went into full effect and three years into Reagans first term.

President Bush boasted of his relationship with "his friend" Frank Lorenzo as he refused to step into the EAL fiasco. Frank Lorenzos demands were by any standard unreasonable, however Bush the first said let the free market rule, despite what ever inconvienences it would cause, it did, EAL went out of business.

Ten years later when free market conditions favored the workers however Bush the II issued PEBs in rapid succession saying that the workers demands , which were no more unreasonable than Lorenzos, were excessive and that he would not allow airline workers to inconvience "the working people of America" by going on strike. A year later he didnt seem to care about inconviencing those same people when he indicated that if airline workers dont agree to long term concessions he would allow the industry to collapse. His cabinet wrote the ATSA which dictated that we must agree to permanent concessions in order to qualify for loans.

I also heard that AA also provided Bush II with a brand new 737 to fly around on.

At an IRRA Conference in Washington DC (also attended by AMFA) I personally heard a Mr Bonilla, who represented the White House Administration state that this administration wants cheap airfares and cheap airfares could not support high wages and this administation would support efforts to get the airlines low wages. He was joined by Sue Oliver who spoke of the "unrealistic expectations" of airline employees.

Over and over again it was made clear that low fares AND profits was the goal and that Labor was going to be the enity that ensured both.

How about if we stick to the issue of AMFA vs the TWU?
 
Checking it Out said:
Hard choices? The unions at AA made a concious choice, that choice was not favored by the miniority. Unlike Usair or United we made the decission to contol our destiny. No matter how painful. I for one did not want to go by the way of Eastern.

You few individuals are attempting to take us down a road to self destructions. I for one am glad the majority see you for what you are! Me only attitudes!

I believe choices have been made based on the changing industry. Many companies and employees have a choice. With the loss of 148,000 thousand positions lost in the Industry I believe we choose the better path!
Hard choices?

Lets cut the members benifits so we can keep our company checks along with the union check?

Lets cut as deep as possible where it does not cut into our dues revenue.

Hard for whom? The member who lost 17% of his hourly pay, plus Holiday, shift, sick time, vacation, IOD and all sorts of other benifits or the TWU Official who only lost 17% of his AA pay while keeping 100% of his even greater union pay?

The fact is that the leaders of the TWU offered no real option to the members. They presented no plan of action for rejection. They completely failed the membership to line their own pockets.
 
The Concept of “Craft or Classâ€￾

This is Federal Legal concept “Craft or Classâ€￾

In accordance with the Railway Labor Act, the Federal Government has decided that certain work groups have a mutuality of interest at the bargaining table and in advancing worker related issues, and that groups outside of that particular craft or class should have no participation in how the union is run or at least in the initial decision as to who represents that work group. And so Pilots vote with Pilots, and Flight Attendants as matter of law are prohibited from voting with the Pilots. And in turn, the Pilots are prohibited by law from voting with the Flight Attendants because they are considered to be in different Craft or Classes by the National Mediation Board. And Mechanic and Related Workers within the Airline Industry are entitled by law to vote just amongst themselves.

Supporters of the Aircraft Mechanics Fraternal Association (AMFA) believe that it comprises our mission to remain associated within a union structure with other crafts or classes that according to Federal Government do NOT share our mutuality of interest. The mission is further compromised when we remain associated with other crafts or classes within the union structure of “majority ruleâ€￾ and our particular craft or class is the minority in size. The Aircraft Mechanics Fraternal Association (AMFA) is the only union in this current debate at American Airlines that says “We will forbid ourselvesâ€￾, it will be unconstitutional for us to go and represent baggage handlers, flight attendants, or passenger service clerks, and we will not let ourselves do that because this would compromise our mission. We wish the baggage handlers and other crafts or classes on the property the very best, but they cannot pick our pockets, we wish them to get the very best on their own, but they should no longer be allowed to ride on our backs. In other words, it is time for the airline industry to decouple the mechanic vs. baggage handler pay and benefit structure. It is suffice to say that since deregulation of the airline industry which since enactment has created enormous competition and pressure on airline ticket pricing, and that has resulted in the craft or class of mechanic and related workers suffering in economic buying power, and especially when compared to the Pilots and Flight Attendants who at American belong to craft specific unions. In the mid 1970’s, the Flight Attendants of American Airlines were also represented by the Transport Workers Union of American (TWU), and just as the mechanics today seek a change to a craft specific union, they also left the TWU in favor of the independent Association of Professional Flight Attendants (APFA) The craft or class of Mechanic and Related at American Airlines can no longer afford to remain in an organization that advocates a linking of different work groups that according to law do not share a mutuality of interest.

Regardless of good or bad economic times, and regardless of whether the union is negotiating concessions to prevent a bankruptcy filing or negotiating from economic growth with corporate profits, the formula by which the economic pie is divided amongst the union membership is a union decision. The recent concessions are a clear case in point, because American Airlines was demanding $620 Million in concessions from the TWU, but how those give backs were divided up was a union decision, not a company decision. And the facts are clear, that the craft or class of Mechanic and Related at American took more than our fair share of that amount, and it is also clear this was a union decision.


AMFA IS THE RIGHT CHOICE FOR SKILLED TECHNICIANS
 
Continental Airlines is doing a respectable job but was recently overtaken by American as the lowest cost operator among the legacy hub-and-spoke carriers.

Arent you proud to be the cheapest workers around?

Hard choices? The unions at AA made a concious choice, that choice was not favored by the miniority. Unlike Usair or United we made the decission to contol our destiny. No matter how painful. I for one did not want to go by the way of Eastern.


Yea. "Lets keep our company paychecks as well as our Union paychecks" Double dipping at its finest! By the way USAIR voted for concessions, it didnt help did it.? Although those that are still working are doing a lot better than us. As far as EAL, didnt the company even admit that C-7 was not on the horizon, wasnt that Jim Littles illusion?

You few individuals are attempting to take us down a road to self destructions. I for one am glad the majority see you for what you are! Me only attitudes!

Which few? The 9000 who have signed cards or the thousands that voted no despite all the TWUs doom and gloom? THe majority? Do you mean the 25 guys who show up at your union meetings? Check your numbers again to see who is in the minority.

I believe choices have been made based on the changing industry. Many companies and employees have a choice. With the loss of 148,000 thousand positions lost in the Industry I believe we choose the better path!

You sound like management. Would concessions like we gave have saved all those jobs? Is the number of workers needed tied to the number of flights or the wage? Are you saying that if everyone in the industry cut their pay by another 20%+ that employment would rise by 20% or more even if the customers did not return? This is the exact same type of rhetoric that employers have been spewing on workers since the beginning of the industrial revolution. Its one of the reasons why workers got unions.