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Scope, Scope, Scope!

Old 03-11-2010, 06:28 AM
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The most important contract since deregulation.

US regional growth could hinge on major airline labor negotiations
Thursday March 11, 2010

The current round of pilot negotiations at US major network airlines "will be the most important since deregulation" and could determine the future growth path for the regional airline segment, according to William Swelbar, a research engineer at MIT's International Center for Air Transportation.

Speaking yesterday at the FAA Forecast Conference in Washington, Swelbar said that if unions representing mainline pilots agree to relax restrictions on the size and number of aircraft that may be operated by regionals in codeshare with majors, the pilots will become "irrelevant in the US domestic market 25 years from now." Currently, scope clause agreements typically limit the size of regional jets that may be operated under codeshare to 76 seats or fewer. But if, as some suggest, mainline pilots agree to raise the limit to up to 125 seats, regional airlines simply will assume most domestic flying.

Regionals already operate 53% of all US domestic departures and are the majority service providers at many major airports, Regional Airline Assn. President Roger Cohen noted. For example, they operate 52.3% of departures at Chicago O'Hare, 56.4% of Houston Intercontinental departures and 52.1% of New York LaGuardia departures.

Much of this transition occurred during the last major round of scope clause relaxation before and during airline bankruptcy restructurings. According to Swelbar, regional ASMs increased 178% between 2000 and 2009 while mainline domestic ASMs fell 27%. But much of this growth represented a bubble as US majors raced to dump capacity following 9/11 without shedding market presence rather than taking a realistic look at the revenue potential of the domestic market: "Does Jacksonville, N.C., really need nine flights per day when five or six would do?" he asked.

While they may be poised to resume growth after a brief hiatus, regionals face their own challenges. As independent analyst George Hamlin noted at the conference, regional airline profits are not as high as they once were owing to increasing pressure from major partners to accept lower fees under capacity purchase agreements. Furthermore, majors are expected to continue to dump 50-seat RJs from their regional partner fleets. Swelbar said 486 50-seat RJs are under expiring capacity purchase agreements through 2016 and could leave the fleet. "We are in a state of flux," Hamlin said.


From ATW.
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Old 03-11-2010, 06:45 AM
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Expanded commentary from Swelbar:

Swelblog / Swelbar on Airlines - Articles - Mainline Pilot Scope: Will Regional Carriers Be Permitted to Fly 90+ SeatAircraft?


Today I had the pleasure of participating on a panel at the 35th Annual FAA Aviation Forecast Conference, my second consecutive year taking part in one of the breakout sessions. I shared a dais with the President of the Regional Airline Association, Roger Cohen, and long-time industry consultant, historian and photographer George Hamlin on a panel titled: New Decade......Dawn or Dusk for Regional Carriers? I had the hotseat – responsible for discussing the reliably controversial subject of mainline pilot scope clauses.

It is my view that there can’t be an honest discussion on the shape or structure of the US domestic airline industry without talking about scope – the contractual clauses pilot unions negotiate to protect certain flying for their members. I believe that this round of contract negotiations at major carriers will be the most important since deregulation, and scope will play a pivotal role as the airlines take a hard look at economics. And mainline pilot scope agreements are all about economics.

Today’s industry architecture in which regional carriers fly large numbers of aircraft with 76 seats and less was drawn on the equivalent of vellum paper using compasses, triangles, French curves, triangular scales and protractors. The working structure did not come about easily. First, earlier era scope clauses were relaxed during the late 1990s and early 2000s to permit carriers to deploy 50-seat regional jets between hubs and markets that could no longer support the economics of a mainline jet. Delta and Continental had a significant head start on the rest of the industry in using these smaller aircraft because they had few limitations imposed through their pilot agreements.

Other mainline carriers: American, Northwest, United and US Airways, were late to the game. Scope-relaxed competitors were using the 50-seater to claim traffic that was traditionally the domain of the scope-constrained carriers still limited to feed markets within the turboprop drawn 400 mile radius around a hub. Now these little jets could overfly hubs, aggressively changing the competitive structure in the US domestic market.

So those carriers that needed the permission of pilots to compete on a level playing field recognized the need to relax restrictive scope clauses that limited what type of aircraft regional pilots could fly. And that made the scope clause important trading currency for pilot unions that agreed to relax scope protections only in return for improvements in other parts of the agreement. For example, when United pilots negotiated a new agreement in the Fall of 2000, the union leveraged scope relief to demand a weighted average 23 percent wage increase and two subsequent 4.7 percent increases, as well as a number of other contract enhancements that ultimately contributed to landing the carrier in bankruptcy.

I am convinced that, if not for bankruptcy, we would not be seeing mainline carrier’s regional partners flying aircraft 70 seats and greater in the numbers we are seeing today. So if today’s architecture was drawn with outdated tools, then tomorrow’s architecture will likely require Computer Aided Design (CAD) software. That, as old-school architects might say, is equivalent to replacing the pencil with a keyboard -- limiting in that the digital world requires exact inputs rather than the less precise nature of sketching. And that has real implications for pilots and the carriers that employ them.

Tipping Point

From my perspective this next round of pilot negotiations could be the tipping point for scope: the critical juncture in an evolving situation that leads to a new and irreversible development. What if mainline pilots again treat the relaxation of scope as trading currency to make improvements in the collective bargaining agreement? Wouldn’t they ultimately be ceding mainline narrowbody flying in the US domestic market? I think so.

This approach would be a mistake for management, too, because scope relief has historically been assigned too much value in bargaining. There is value in the shift of flying from the mainline to regional partners to be sure. But the differences in labor rates between the mainline and the regional are nowhere near what they were before the last round of industry restructuring. Domestic revenues continue to suffer, particularly compared to the revenue environment when values were last ascribed to scope relief. And with little growth expected in US domestic flying, airlines must question where they’ll find the arbitrage.

I make this projection for domestic flying based in part on a comparison to historic growth rates. Today, the travel spend as a percent of GDP produces $35+ billion dollars less in revenue than did the high water-market in 2001. Labor rate differentials between mainline and regional carriers are significantly smaller than they were in 2001. Regulatory oversight of the regional industry will add expense that is not yet known or understood. Negative media coverage could undermine passenger acceptance and willingness to fly regional carriers. Most mainline airlines are ordering narrowbody equipment to replace aircraft in their fleets, not expand their fleets. And there are still thousands of mainline pilots on furlough.

Does Scope Produce the Intended Outcome?

In the most simplistic terms, scope is the definition of work for the class and craft of employees governed by the provisions of a collective bargaining agreement. Its purpose is to provide job security for those employees. But it is safe to say that most scope clauses produced unintended consequences. Between 2000 – 2008, legacy carriers reduced the number of narrowbody aircraft they fly by 800, and more than 14,000 pilot jobs have disappeared.

So, one could argue that scope is just another example of protectionism that failed. As economist Henry George, a sharp critic of protectionist policies, once said: “Protectionism teaches us is to do to ourselves in times of peace what enemies seek to do to us in times of war.”

Scope negotiations have been divisive not only between labor and managements but just as much between the unions representing mainline pilots and those representing regional pilots. Ultimately airlines must determine whether the 90-125 seat flying of tomorrow should go to the mainline or be flown by their regional partners. To arrive at the right economic solution, it is time for organized pilot labor and management to stop putting a Band-aid on problems.

The Boyd Group International recently released an interesting fleet forecast that looks in part at new aircraft orders. So far, the only area of real growth is in the 75-125 seat category. Orders in other seat ranges are forecast simply as replacements from now until 2015.

Ironically, 2015 is when many regional contracts expire, primarily those for 50-seat flying. These expirations could eliminate nearly 500 existing airplanes currently under contract between now and 2016; with the lion’s share coming off contract in 2015. This is a conundrum for the regional industry for sure. There will be a thirst for new flying.

It Is All About the Economics

Perhaps a better way than scope for pilot unions to think about job protection is to find the economics that will employ the most pilots at the mainline. That challenge must acknowledge the fact that today’s industry is not the industry of yesteryear. If the regional industry has been used as currency to cross-subsidize pilots at the mainline; and assuming that the trading currency is not what is was as we engage in this round of bargaining, then something has to give.

There are two solutions as I see it: 1) relax scope in order to win bigger increases in wages, benefits and working conditions for pilots that remain at the mainline; or 2) embrace the absolute fact that contractual rates, work rules and benefits need to be lower for US domestic mainline flying. That type of carve out can be negotiated. Domestic market flying differentials can be the new trading currency used to adapt any pilot contract to the market realities of today. There is no way to “perfume the pig” here; the mainline did something similar in 1984 in order to average down labor costs to facilitate growth. When it was decided that the concept was not internally healthy, mainline pilot labor made the regional industry the new vehicle for cross-subsidization of mainline pilot terms of employment.

One trend is clear: the industry’s pricing structure cannot now support labor rates that keep pace with inflation. An unpopular message -- yes. But there needs to be a structure in place that recognizes the different conditions in the US domestic market versus international markets. This structure must recognize that not all flying is created equal, just as the airlines are coming to appreciate that a one size fits all operation is not financially sustainable. There is a tremendous opportunity to put in place something better – if only the players at the table can let go of the past and come to terms with a new era in the airline industry.

Where Do I Come Out?

I recently saw a piece by Lori Ranson on the Airline Business blog titled: “A New Line In the Sand” that cites comments by long-time Raymond James analyst Jim Parker on the future of scope: “As employee groups seek to regain some concessions made early last decade as a host of carriers spent time in Chapter 11, there could be some leeway in the size of jets flown by mainline regional partners,” according to the analysis. James sees the potential to renegotiate current scope clauses, moving the dial from 70-seats to 90-seats.

I am not one to be on the other side of Parker often, but on this one I am. I do not believe that the mainline pilot unions can afford to make another mistake. Their arrogance toward regional jet flying led to their current predicament. The economics of US domestic flying is simply much more difficult now for the legacy carriers. If labor can’t let go of their memories of what the industry was 20 years ago to focus instead on where it’s going over the next 20 years, then they will have no one to blame but themselves if they fail to help position airlines – and the pilots they represent – for success. John Kennedy once said: “Change is the law of life. And those who look only to the past or present are certain to miss the future.”

It won’t be easy for pilot union leaders to find a solution for a problem that they helped to create. Just as the US Airways East scope clause defines small, medium and large regional aircraft, it is time to define small, medium and large narrowbody equipment necessary to profitably serve the domestic market.

Once again, a call for pilot union leadership. My view is that management is indifferent as to which pilot group does the flying. I am thinking we are at that critical juncture in an evolving situation that leads to a new and irreversible development – mainline legacy carrier pilots performing narrowbody flying in the US domestic market 20 years from now – or NOT.
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Old 03-11-2010, 06:47 AM
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I duno I think older guys with 10-15yr left and management holds a big enough carrot why should they even care what becomes of the airlines in twenty years. Its a shame but i think scope is going away. Regionals will be the domestic airlines.
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Old 03-11-2010, 06:54 AM
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Thanks flyby.

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Old 03-11-2010, 06:57 AM
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Originally Posted by poor pilot View Post
I duno I think older guys with 10-15yr left and management holds a big enough carrot why should they even care what becomes of the airlines in twenty years. Its a shame but i think scope is going away. Regionals will be the domestic airlines.
Some people have a conscience that's why. Some care about there kids and there kids children. The author is over 10 yrs. late in writing this. Time to draw the line. I think your wrong about Regionals becoming the domestic airline.
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Old 03-11-2010, 07:01 AM
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Originally Posted by poor pilot View Post
I duno I think older guys with 10-15yr left and management holds a big enough carrot why should they even care what becomes of the airlines in twenty years. Its a shame but i think scope is going away. Regionals will be the domestic airlines.
Pilots at my company with that time remaining are either junior captains, wide-body FOs and some cases junior narrow body FOs. This would mean they would all stay were they are at for the remainder of their career.

No, the few greedy geezers at the top do not outweigh the majority.

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Old 03-11-2010, 07:06 AM
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Your right some people do. I'm not sure myself. From what I've seen over the years pilots can be down right selfish. I would hope they don't give up scope but you can't tell me if they are offered a 50% raise(what AA asked for in current contarct talks) and better work rules. Pilots that only do widebody international trips 10-15yrs untill retirement won't go for it.
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Old 03-11-2010, 07:07 AM
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Good point.
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Old 03-11-2010, 07:15 AM
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There’s three questions I have?

1. When regional airlines make a profit, that just means the “mainlines” are paying too much for the regionals. It is profit that the legacies could be making on domestic flying. Why are they outsourcing the profit? After all Southwest would disagree with the domestic market not being profitable.

2. If pilots were to keep strong on scope in exchange for current payscales, what is stopping management from filing bankruptcy just to cancel contracts and leave the door open for more outsourcing?

3. Although I feel scope is important, I feel domestic code sharing could be worse to the profession. What could you negotiate to stop domestic codesharing?

I’m not sure where this industry is going but I think it is going to be a shift away from outsourcing of domestic flying. A few regionals have looked at, or are currently doing their own branded flying because regional contracts are becoming few and far between now.
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Old 03-11-2010, 07:30 AM
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Originally Posted by wally24 View Post
3. Although I feel scope is important, I feel domestic code sharing could be worse to the profession. What could you negotiate to stop domestic codesharing?

I’m not sure where this industry is going but I think it is going to be a shift away from outsourcing of domestic flying. A few regionals have looked at, or are currently doing their own branded flying because regional contracts are becoming few and far between now.
I think your right. A good portion of the domestic flying at Delta is already done by Alaska via a codeshare that circumvents scope. I wonder when Delta will form a JV or codeshare deal with SkyWest? SkyWest is already testing the waters on this type of deal with Republic and the MidWest flying. How long till SkyWest is running an airline with 90-125 seat aircraft and codesharing with Delta and United?
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