Gnewt , 04-20-2012 03:14 PM
Gets Weekends Off
Part 1 of the latest APA communication from an AMR bud. Sorry about the formatting.
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AA-US Airways: Our Best Alternative
(Please note: APA Phone Watch has been activated. If you have any questions about today's news, call 817-302-3245. In addition, click here to visit the AA-US Airways Merger page on alliedpilots.org.)
Your APA leadership recently made the unanimous decision to sign a Conditional Labor Agreement (CLA) with US Airways management pledging to support its business plan for a merger of AMR and US Airways. The Association of Professional Flight Attendants and the Transport Workers Union also signed “agreements of support.” Each of the three agreements incorporates a term sheet with US Airways management that would become the basis for a new working agreement with that labor group should the merger be approved.
This decision by your APA leadership did not come without extensive discussions and consideration of a merger’s potential benefit to individual pilot careers, as well as its potential to produce a more viable and profitable American Airlines for the long term.
After extensive review by our legal and financial advisers and subject-matter experts, your APA leadership is confident that a merger between American Airlines and US Airways would be the best possible course of action for both our profession and for the future of our airline. There are three main reasons for this conclusion:
•The APA leadership and its professional advisers strongly believe that the merger plan represents the best available alternative to a Section 1113 abrogation of our collective bargaining agreement.
•Our advisers and industry analysts agree — American Airlines management’s stand-alone, post-bankruptcy business plan is wholly inadequate and will not fix the carrier’s revenue problem.
•A combined American Airlines and US Airways will eliminate the size gap compared to Delta and United, and the combined operation will also immediately create a comprehensive network that can compete with Delta and United. The combined carrier would provide more feed to trans-Atlantic business, it would become the No. 1 carrier (based on revenue share) on the East Coast and the Midwest, it would revitalize the Chicago cornerstone, it would increase its network and competitive presence in the western U.S. and it would strengthen the oneworld Alliance. The post-merger business plan is also more likely to be successful in directly addressing American Airlines’ serious revenue disparity relative to the competition.
We’ll examine each of these points in more detail below.
Management’s 1113(c) Proposal: The End of the Green Book As We Know It
It’s been clear since Feb. 1 when management presented APA with its term sheet that it would be a complete gutting of our contract. In fact, if management implemented their 1113 motion, the APA leadership and its advisers believe that APA pilots would have the worst labor contract in the U.S. airline industry.
If AMR management has their way, by early June the bankruptcy court will rule in their favor and terminate our contract. In the past 33 restructuring cases where management has sought abrogation of labor contracts, the courts have ruled in favor of management’s request every single time. Those are not good odds.
What does a court-ordered termination really mean? In our case, it would mean nullifying more than 50 years of collective bargaining history—more than a half-century of cumulative effort to establish the rules and conditions necessary to run a safe operation and to provide an appropriate way of life for professional airline pilots.
Management could decide to tailor our terms of employment based on the airline’s financial performance. While management’s initial changes to our contract would likely be based on their term sheet, they could return to court to ask for whatever changes they want—just use your imagination. They could pursue 90-plus hour schedules and fly you to FARs with no duty rigs or deadhead pay. They could pursue unlimited domestic and international codesharing and buy ever-larger jets for American Eagle. They could furlough at will. Without a contract, they could eliminate sick benefits, impose airport standby and change layover rules, fatigue policies and discipline procedures. Lineholders could face assignment of open time without seniority.
If the new business plan were to prove ineffective at turning around the airline’s financial performance, management could unilaterally implement pay cuts and further reductions in medical and retirement benefits.
Without a contract, we would basically be venturing into the unknown—not a good approach to operating a highly complex, customer service-oriented business.
In exchange for supporting a merger with US Airways, APA will have a negotiated framework in place for a contract that will be based on our Green Book, as opposed to a terminated contract followed by an imposed 1113 scenario. Ultimately, our new contract will more closely resemble an industry competitive contract, as opposed to American Airlines management’s draconian term sheet.
Management’s Business Plan: “Underwhelming”
For the past several years, we have all watched our once great airline decline to a level that has made it unrecognizable when compared to the innovative industry leader it once was. Over the years, the airline industry has changed, and AMR management failed to develop innovative strategies to improve the product and strengthen AA’s network. In many ways, American Airlines essentially stood still while the competition passed us by.
AMR management has pursued a strategy of “shrinking to profitability,” and is now focused on “outsourcing to profitability.” As a consequence, American Airlines is now a distant third in terms of domestic network and global reach when compared with Delta and United. Through increased marketplace presence, these two network-carrier competitors enjoy a revenue premium relative to American Airlines obtained by “poaching” high-yield business travelers with a superior product and network. This in turn has rendered the oneworld Alliance less competitive when compared with Sky Team and the Star Alliance. No amount of concessions by labor can solve this revenue and network disparity. Trying to remedy those problems solely through the labor cost reductions and organic growth that AMR management has proposed would be difficult at best.
Our consultants have reached the same conclusion as many Wall Street analysts—management’s business plan won’t fix American Airlines’ revenue and network problem. The business plan is essentially the same “Cornerstone” strategy that landed the airline in bankruptcy restructuring. It relies primarily on deep labor cuts to improve the bottom line, “doubling down” on American Eagle by buying hundreds of new small narrowbody jets, and outsourcing more American Airlines flying through unrestricted additional domestic codeshare partnerships. The plan neglects the serious revenue shortfall that American Airlines now suffers from relative to our network carrier competition.
Management’s stand-alone plan is premised on hopeful projections and assumptions, and does not account for volatile fuel prices and the ability of competitors with deep pockets and stronger networks to respond. Analysts universally agree that AA’s plans to grow in an uncertain economy in already saturated markets will erode the entire industry’s ability to rationally price its product, generate free cash flow and provide for a positive return on invested capital.
Simply put, the plan just doesn’t make good business sense, and carries with it a very high risk.
On the other hand, there has been no shortage of airline management, analysts and media comments regarding future airline consolidation involving American Airlines.
•Dahlman Rose, Helane Becker: “American’s cornerstone strategy (focusing on New York JFK, Miami, Chicago, Dallas/Ft. Worth, and Los Angeles) has not worked for the past five years, and frankly, we do not see how it works going forward. In our view, American has a revenue problem that will probably best be solved through a merger.”
•Rodman & Renshaw, Dan McKenzie: “From a network perspective, USAir/AA combined are much more powerful than either as a standalone airline. AMR is at risk of reporting weak profitability upon exiting Ch. 11. And it’s why we’re arguing AMR needs to merge sooner rather than later – in Ch. 11.”
•JP Morgan, Jamie Baker and Mark Streeter: “We are underwhelmed with AMR’s standalone restructuring plan, insofar as it fails to adequately address the decade-long marginalization of its domestic network, in our view. For this reason, we now ascribe a higher probability that AMR ultimately engages in industry consolidation – and whether or not this happens in court or post exit is likely dependent on whether the creditors’ committee (notably labor and the PBGC) can be won over by potential suitors. As an update to our early January piece, we believe the merits and regulatory challenges of an USAir-AMR combination warrant further consideration.”
A Combined AA-US Airways Makes Good Business Sense
After US Airways management approached APA to explore the possibilities of a merger, the APA leadership worked with APA Legal and the union’s professional advisers to thoroughly analyze the possibility and research each airline’s business facts.
US Airways has become an efficient, profitable carrier that is near industry-leading in operational performance. In 2010, the airline ranked first among the big five network carriers in the annual Airline Quality Rating (AQR) report, which benchmarks airline reliability and service. In the recently released 2011 AQR report, US Airways ranked No. 2 when compared to network carrier competitors.
US Airways management is primarily comprised of the former America West team. They’re lean and entrepreneurial in nature. US Airways is a proven survivor that has found a way to adapt and thrive in a very difficult competitive environment, in marked contrast to what has transpired at American Airlines under the current management team.
US Airways has a reported cash balance of $2.3 billion and in 2011, the airline had record year-over-year passenger revenue per available seat mile (RASM) and yield improvements in every month.
US Airways has successfully used revenue strategies to overcome external economic pressures. For example, in 2008, US Airways lost $856 million — in part because of a fuel cost increase of $1.3 billion. In 2011, the carrier had the same year-over-year increased fuel cost, but it recorded a $111 million profit – a $967 million turnaround.
Although it lacks a deep international network, the US Airways network has a substantial presence in the lucrative East Coast, along with a notable presence in the Midwest and Western U.S.
American Airlines, meanwhile, is currently a distant No. 3 in New York, and has minimal presence in the Northeast-Southeast region. AA is currently NOT No. 1 in three of five its cornerstones — a critical shortcoming.
Just a few short years ago, American Airlines commanded a unit revenue premium relative to competitors — that AA unit revenue premium is gone and the carrier is now trailing competitors. AA’s share of the high-yielding corporate travelers has also sharply declined as increasing numbers of corporate clients choose our competitors’ superior networks and product. AA’s network has clearly become a distant third to post-merger Delta and United. AA has completely withdrawn from markets that it previously dominated or capitulated when competitors showed signs of intrusion.
AA ranks as one of the worst airlines in America. In 2008, American Airlines ranked dead last in the industry for on-time performance and in 2009 when compared to network competitors, AA maintained its last-place ranking. Even over the last 12 months, when compared to our network competitors, AA continued its last-place ranking for on-time arrivals. This is in stark contrast to the days when AA’s advertising slogan was “The On-Time Machine.” (In comparison, in 2008 and 2009, US Airways’ network carrier on-time performance ranking was first and second place, respectively.)
Furthermore, for the years 2010 and 2011, AMR has racked up $33 million in Federal Aviation Administration fines for safety violations — compared to no fines for US Airways.
So how would an American Airlines/US Airways merger make for a stronger network?
•AA and US Airways networks are complementary — they are better together than they are apart. An American Airlines-US Airways merger would create a comprehensive network that could compete with both Delta and United.
•The combined carrier would be the No. 1 carrier in the key East Coast and central regions of the United States.
•The New York-Boston and New York-Washington, D.C. markets feature some of the country’s highest-yield traffic. US Airways has 50 percent of the shuttle seats in those two markets and captures 40 percent of the corporate business.
•The combined carrier can be a leader in not only large cities but also in small cities that complement each other.
•The combined carrier would close network gaps and create a competitive and comprehensive alternative to Delta and United.
•The combined carrier’s strong network will attract corporate customer and other travelers.
•The combined carrier would maintain existing hubs and reverse the marginalization of American that happened as a result of the Delta and United mergers.
•The combined carrier will more likely reverse American Airlines’ relative revenue decline and provide a deeper, more comprehensive network than a stand-alone AA.
The synergies of the two combined carriers are estimated to exceed $1.5 billion annually.
Our Window of Opportunity is Closing
Your APA leadership strongly believes that when it comes to the possibility of American Airlines merging with another carrier, it was always simply a question of not “if” but “when.” However, we also realize that our window of opportunity to reach a deal that would benefit our members the most is only open for a short time – during bankruptcy.
Our concerns would be the same whether a merger was completed after bankruptcy or prior. However, the ability to provide the highest level of benefit to the pilots is dramatically different under those two scenarios.
Prior to American Airlines exiting bankruptcy, we have the opportunity to craft an alternative to management’s 1113 contract termination – an opportunity to raise the bar to an industry competitive pilot contract.
Mr. Horton has said that any merger would be better addressed after exiting bankruptcy. There is a logical explanation for his position. Post-bankruptcy, any merger would be done on AA management’s terms, in an environment where we may be little more than a speed bump in the process.
After bankruptcy, management would remain in the driver’s seat, with a significant share of ownership in a newly reorganized company and with their positions protected by change of control clauses in the event of a merger. This would allow them to both dictate the terms of a merger and to potentially enrich themselves handsomely in the event of either a consensual consolidation or a hostile takeover.
There is an enormous financial incentive for senior management to resist merging while in bankruptcy, as their control over the corporation would be jeopardized by an agreement with US Airways, threatening their ability to “cash in” following American Airlines’ emergence from Chapter 11.
We can expect significant opposition to what your APA leadership believes to be the best course of action for our collective futures.
Click here to visit the AA-US Airways Merger page on alliedpilots.org, which features supporting analysis.