Posted by Seth on February 2, 2012 under News | 
As part of yesterday’s announcement that American Airlines plans to lay off a whole bunch of employees they also issued new offer sheets to their main unions, stating their opening negotiating position for the collective bargaining contracts. The offer to flight attendants is open to the public for review and it makes for an interesting read. I’d be pretty upset as a flight attendant reading it over.
One of the most talked about bits I’ve seen is the termination of the international route pay scale. Those routes will still draw a minor additional pay bump ($1-3/hour) but not the fully separate pay scale like they do today. I can see this upsetting the FAs but I’m not so sure it is justified. The long-haul flights seem to be the better gigs, with less overall work and they’re easier to max out a monthly schedule without actually flying so many days. Those are real benefits of those trips; getting paid extra to work them seems way too favorable towards the FAs. But I can certainly see why they’re going to be upset with the change. The proposal also cuts the incremental pay that is normally accrued over 70 hours per month.
Beyond that, there are some significant changes to the work minimums that are more serious as I see it. In order to qualify for medical coverage and vacation accrual the flight attendants would be required to work 540 hours annually rather than the current 420. That’s a pretty big jump. It also increases the total minimum number of hours which must be worked annually to remain employed to 200.
The proposed rules would also significantly change the duty hours for flight attendants, making their work days longer, the number of potential hours per month higher and then guaranteed minimum time off between trips lower. Rather than being guaranteed five breaks of two days in a month they’ll get the same 10 days guaranteed, but only in one day increments. Again, all changes that are certainly going to upset the flight attendants.
The company also intends to change the staffing level assignment decisions and hotel choice policies. In both cases the policy will shift from "mutually acceptable" to company-mandated, with input from the union considered. Not a guarantee of downgrades here, but certainly there are some changes the company has in mind where there could be cuts.
Finally, the company plans to cut the pension plan, replacing it with a 401(k). They plan to cut healthcare for retirees over 65, replacing it with a Medicare supplement. The will cut life insurance for all retirees.
All these cuts and yet, when I review the term sheet, nothing in it actually seems all that unreasonable. Yes, the terms are worse than the current contract in many ways. Other than the profit sharing plan there actually isn’t really much in the way of improvements for the FAs in the offer. But it just doesn’t seem that unreasonable to me. Yeah, I know that there are many more hours worked beyond the block time. I understand commuting to the crew base. I get all of that. The numbers still just don’t seem that bad to me. Such is life, I suppose.
Related Posts:
Posted by Seth on February 1, 2012 under News |
In the weeks since American Airlines filed for bankruptcy protection they haven’t really done all that much. There were a few planes retired and that semi-awkward admission about the multi-million dollar housing in London. Oh, and plenty of bonus miles opportunities to keep customers from completely abandoning them. But not much in the way of announcements on what the restructuring would actually look like. That changed today.
Management finally met with the unions and announced their intentions: cuts of roughly 14,000 jobs across the company in hopes of saving about $2 billion annually, 60 percent of which they hope will come from employee costs. The cuts will come across all areas of the company, including 4,600 mechanics jobs, 4,200 ground service positions, 2,300 flight attendants, 400 pilots and 1,400 in management and support services.
Now comes the fun part for the airline and employees, negotiating the details of the actual cuts. Plus, they have to get the bankruptcy judge in New York to actually approve the plan. This was the primary focus of the original filing and now it is clear just how deep the cuts will be.
The real issue, aside from the potential customer service impact of the cuts, is whether trimming the labor force is actually enough to save the company. There are a number of folks who are not particularly convinced, and I’m one of them. Cutting costs is only part of the company’s problem, and it is the easy half to solve. They will dump the old planes, get newer, more fuel efficient ones and also get out of their pension liabilities. And fire a whole bunch of employees. The cost cuts will happen.
The much harder part will be continuing to provide a high level of service (or shifting to one, depending on how you see the service levels today) with 20% fewer front-line employees. It will be driving revenue levels higher on an ASM basis rather than constantly offering discounts and promotions to sell tickets. And it will be growing a route network, with or without partners, that can compete to capture the corporate contracts the airlines need to generate consistent revenue.
Achieving those goals will be just as important to the success of the carrier coming out of bankruptcy as the cost cutting is. And they’re much harder to actually plan and implement than just firing a bunch of employees. In the mean time, best of luck to the folks soon to be unemployed. It isn’t pretty out there, especially in the airline business.
Related Posts
Posted by Seth on January 27, 2012 under News |
Spanish regional airline Spanair is apparently ceasing operations effective immediately, shutting down their network of flights with virtually zero notice. The move comes as Qatar Airways has cut off talks with the carrier about becoming an investor and infusing cash to help keep the airline afloat. Additionally, the Catalan government has decided to cease providing additional loan funds to the carrier. Most reports from Spain suggest that the company will not be flying any more at all, though there are also a few updates trickling out which suggest there might be additional flights tomorrow. Most of the reports are in Spanish and I’m depending on Google Translate to get the gist of the situation but I’m guessing I’m not getting everything completely correct.
This move also cuts out a chunk of service for Spanair’s partners in Star Alliance. The carrier often had good inventory for awards and also generally a good regional network for connecting passengers on the Iberian peninsula. Then again, this is the same company which repeatedly sold codeshare inventory on US Airways metal at ridiculous discounts (or errors) to the point that US Airways cut off their codeshare agreement not too long ago.
Sad to see an airline fail and so many folks newly unemployed (estimates suggest ~4,000). Good luck with accommodation if you’ve got Spanair flights booked.
Posted by Seth on January 10, 2012 under Flying, frequent flyer, News |
As part of their bankruptcy reorganization efforts American Airlines has announced that they are cutting the longest route in their network, the flights between Chicago and Delhi, India. The flights are being terminated as of March 1, 2012. Live from a Lounge (a local on the India side) and One Mile at a Time (a quite vocal AAficionado) have both weighed in on the topic, mostly with disbelief. To me the surprise is really that it took the bAAnkruptcy to do the route in.
At least one analyst out there says the route was losing $40MM annually. And naturally you’re going to cut anything that isn’t profitable in a reorganization, right? The problem with that approach is that, at this point, nearly everything American touches is not profitable; they’ve got the inverse of the Midas touch. The real question should be whether a route can be profitable, not whether it is right now. And in the case of the Delhi flight, the answer is still no.
It is the longest route in their system, roughly 7500 miles in the air each way. That’s a whole lot of fuel that needs to be carried so the plane can make it to the destination, and that fuel has increased significantly in cost since the route was launched in 2005. It seems that even if the company could get the labor costs down, their stated goal in the bankruptcy process, the other fixed costs of the route are still too great.
The same analyst who asserts the $40MM annual losses also suggests that there are a few other routes which are hemorrhaging cash and which seem primed to be cut: New York-London, New York-California, Chicago to Delhi, Beijing and Shanghai and Miami to Buenos Aires. Seems unlikely to me that all those are going to be touched. The London routes gets the advantage now of ATI, something that was far too late in being granted by the authorities on both sides of the Atlantic. That should help significantly for margins on that service. The transcon market is an interesting one and I could see some changes come, but I doubt they’ll fully retreat. And the South America service seems to have way more potential than the Asia routes, putting it squarely in the "potentially could be successful" category.
Could the Beijing and Shanghai routes be on the out? Loads to China are down and the yields are likely following. At the same time, however, getting back into that market is incredibly challenging. Plus, there aren’t particularly great onward connections if you look to partners. It seems much more likely that the China routes could be profitable and that they’d stick around a least a bit longer.
The other consideration for American, more than individual routes, is the combined effect of cutting too much on the route map. Their international network was already somewhat anemic outside of Latin America and further cuts won’t help that. Even with partners and the ATI agreement, it is hard to market and sell flights to corporate contracts when you don’t actually have service to the destinations they need to serve. And a merger with US Airways, JetBlue or Alaska Airlines isn’t going to solve any of those problems.
Related Posts:
Posted by Seth on December 19, 2011 under Flying, News |
Millions of dollars have been spent to learn the answer to this question. Thus far, all indications are that it is not possible. But that doesn’t stop folks from trying. Apparently there is another billionaire out there looking to become a millionaire, because someone is apparently going to give it a another shot.
Odyssey Airlines is the supposed name of the upstart which is expected to launch operations between London‘s City Airport and New York City‘s JFK with a Bombardier CSeries jet in an all business class configuration. This service would compete directly with the twice daily service offered by British Airways on Airbus A318 jets, with the added advantage of not requiring the fuel stop in Ireland on the west-bound leg.
The operation would launch in 2014 or 2015, assuming the timeline for the aircraft deliveries doesn’t slip. Oh, and there is apparently no one out there who actually works for Odyssey Airlines, so none of these details can actually be confirmed, but that hasn’t stopped many from reporting on the potential.
Breaking into the aviation market is horribly difficult and expensive. Doing it on one of the most heavily trafficked routes – NYC-LON – where there are something like 30 daily frequencies split between at least 5 carriers is even more challenging. And doing it in an uncertain market where fuel costs are significantly higher than they were last time a couple upstarts tried to break in is almost certifiably crazy. On the plus side, the new aircraft will have lower operating costs, but that doesn’t come anywhere close to guaranteeing success.
Also of interest is that the company involved has supposedly ordered 10 aircraft. That’s way too many to operate only on the NYC route so it can be presumed that there might be other routes considered as well. I can think of a few others in the same range that would be likely candidates, but they are also heavily contested and there isn’t a whole lot of room on the margins to make it work.
Don’t get me wrong – I hope it actually launches and that I get a chance to fly on Odyssey. But, much like Maxjet, SilverJet and eos before them, I don’t expect that opportunity to last long.
Related posts:
Posted by Seth on December 13, 2011 under News |
One of the editorial columns in the New York Times this past Sunday was a piece titled The Unprofitable Skies, a commentary on the recent bankruptcy filing from American Airlines. More than just a jab at American, however, the editorial seems bent on offering up an assessment of the air travel industry as a whole. And their view is not particularly optimistic.
The company’s employees and pensioners are already bracing for job and benefit cuts. Yet the pain brought on by a big bankruptcy is unlikely to transform the industry into a profitable one.
Even more damning is the conclusion they draw:
The airline bankruptcies of the past decade were often followed by big mergers, including those of US Airways and America West, Delta and Northwest, and United and Continental. If American follows the recipe (some analysts have suggested US Airways as a partner), three big airlines would control 70 percent of the national market. Such concentration is unlikely to spur airlines to improve a dismal record on consumer satisfaction. The industry’s long-term lack of profitability is bad for consumers, employees and investors. But bankruptcy filings and megamergers may not fix the problem.
I tend to agree with this view to some extent, but not so far as they’ve taken it. Yes, less competition generally means higher fares and fewer choices for consumers. There is less motivation for the carriers to solve their systemic problems if there aren’t alternatives. At the same time, however, such a concentration of the market actually makes it easier for the smaller carriers to differentiate themselves and to show that there is value in the differences they offer. The question is whether or not customers care.
The NY Times piece seems to be convinced that the industry stands no chance of being profitable anyways and that the service is so bad no one will buy it. In reality, the vast majority of customers simply are buying whatever is cheapest without caring so much that the service can vary dramatically depending on the carrier chosen. There are some airlines who seem to be able to demand a marginal premium from their passengers but not enough to make a significant difference on the balance sheets. At least not yet.
But fewer competitors in the market and the commensurate higher prices likely mean that the airlines have a chance to swing towards profitability. At least for a little while. Yes, it will be at the expense of the employees who have or will lose part of their pension. And at the expense of the customers who will see fares increase (and in many cases the fares are already up recently).
The Times seems to believe that the industry can be profitable, provide tremendous customer service and do so without loss of choice for customers or higher fares. It isn’t quite clear what they’re basing that belief on. It doesn’t seem to be from any rational point of view.
Related Posts:
Posted by Seth on December 6, 2011 under News |
American Airlines has made reduction of costs the cornerstone of its bankruptcy reorganization plans. From the very beginning they’ve made it clear that they expect to cut costs pretty much across the board. This includes returning some aircraft to lessors and getting out of some real estate deals and also, hopefully, renegotiating labor contracts. That last part likely just got a lot harder.
A nine-member panel was appointed to represent unsecured creditors of the company and three of those seats are held by representatives of the company’s unionized workforce. The pilots, flight attendants and ground workers each received a seat on the panel, along with Boeing and other creditors. Having that strong a union voice in the courts as recommendations are heard is going to make it much more difficult for the company to pull a fast one on the employees, but that also seems to be their only plan for getting out of the bankruptcy so that could hinder those efforts.
In other bankruptcy news, some analysts are suggesting that American should scale back operations at Chicago, Los Angeles and New York City and focus on their fortress hubs in Miami and Dallas-Ft. Worth. Fortress hubs are great, I suppose, for the business. But when that’s all you have you’re horribly susceptible to competitors showing up and fighting. And that sort of fight isn’t what an already struggling company needs to be faced with.
Always interesting to see what’s next…
Posted by Seth on December 1, 2011 under Flying, News |
Common decency suggests you don’t kick a man while he’s down. That sort of policy doesn’t necessarily apply in business, however, and it definitely doesn’t apply for Spirit Airlines. Following on their $11 (plus a myriad of fees that no one can ever reasonably figure out) sale to celebrates American Airlines‘ filing for Chapter 11 bankruptcy protection earlier in the week, the Spirit announced a few new routes today focused on the troubled carrier’s fortress hub at Dallas Ft Worth.
Spirit announced this morning that they are launching four new destinations with once daily round-trip service this spring. The new destinations are LaGuardia airport in New York City, Atlanta, Boston and Orlando. The first three are big business markets where American will almost see an erosion of yields thanks to this move. That’s not going to help in their efforts to keep the revenue up. At least it is only once daily service compared to the AA frequencies on offer (BOS – 8, ATL – 12, LGA – 15, MCO – 11) so there is still going to be plenty of opportunities for AA to keep most of their business.
In other bAAnkruptcy-related news, AA has filed the paperwork to return 24 aircraft to lessors, starting the process of shedding some of their costs. Most of the planes are already grounded so it won’t affect capacity. Yet. They’ve also canceled two pilot recall classes, shifting those pilots back to furlough status.
Related Posts
Posted by Seth on November 29, 2011 under frequent flyer, News, points |
So American Airlines‘ parent company AMR has filed for Chapter 11 bankruptcy protection. They’re saying "business as usual" (no real surprise there) but what does the filing really mean? There have been plenty of major airline bankruptcy filings in the past couple decades and much can be learned from them. But this one is rather different than the others and there are some interesting things that might come out of it.
Miles & Tickets
Nothing is really going to change in the operations for the near future. The points aren’t going anywhere anytime soon and neither are the flight operations. At least not on most routes. There will be some additional schedule changes in the coming months but nothing that wasn’t already likely to happen. In short, there really is nothing to worry about as a customer, at least not yet.
As for the miles specifically, I did get a chuckle out of this bit in the email from AA today:
The AAdvantage miles that you’ve earned are yours and will stay yours, subject to usual policies…
The irony here is that the "usual policies" explicitly states, "Accrued mileage credit and award tickets do not constitute property of the member." Glad they cleared up that little confusion.
Big sales and promos
The past few Chapter 11 bankruptcies that have happened in the industry were accompanied by major sales and promotions to keep customers flying in the face of uncertainty. There are many suggesting that will happen again here. I’m not so convinced. Unlike most of those recent bankruptcies this one is not a debtor-in-possession filing. That means that there isn’t a major bank along for the ride pulling the purse strings. Yes, there are still major creditors anxious and working to make sure that they will get their cash, but there is no significant investment of new money right now from a party looking to insure that new investment. Plus the $4Bn+ in liquid assets offers a decent run rate for the company. In short, no need for a fire sale so one seems unlikely.
Breaking the union
Reading the quotes from the new CEO this morning it seems clear that this move is focused on breaking the unions. Management has decided that their cost structures are too high and they’re going to attack the one bit they have a way to force change on – labor. American does have some high labor costs, partly because they still have their pensions funded, but their total costs aren’t actually that far out of whack with their competitors from what I’ve seen on recent data. So even if they do manage to renegotiate the union contracts down they’re still in a pretty tough spot. There’s only so much you can cut on the cost side if you’re not actually generating revenue.
At the same time, a work slowdown or "work-to-rule" action by the unions could cause trouble. It will be interesting to see just how quickly the contract negotiations happen and how big the cuts are. That could significantly affect the passenger experience.
What about the planes?
American just placed an order for 460 new jets, a wholesale refresh of their narrow-body fleet and then some. And much of that purchase was predicated on leasing the aircraft. Leasing companies aren’t generally keen to do business with companies in bankruptcy, though at least the new aircraft will have a high enough residual value that the leaseholders will be somewhat covered. Still, this isn’t likely to make their interest rates any better.
As for the existing fleet, the company has made it clear that they reserve the right – as is granted to them under the law – to slow payments on the existing contracts as they look at renegotiating them. Reading the bankruptcy filing, however, it is not clear exactly how many of the aircraft are tied up in leases or what that liability is. These numbers are significant, but not horrible based on a reasonable revenue model:
As of September 30, 2011, maturities of long-term debt (including sinking fund requirements) for the next five years are: remainder of 2011 – $1.1 billion, 2012 – $1.7 billion, 2013 – $1.0 billion, 2014 – $1.5 billion, and 2015 – $778 million. Future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of a year as of September 30, 2011, were: remainder of 2011 – $309 million, 2012 – $1.1 billion, 2013 – $1.0 billion, 2014 – $861 million, 2015 – $703 million, and 2016 and beyond – $6.3 billion.
There will definitely be savings that come from working some of those contracts and likely from grounding some planes, but it is hard to see that making a sufficient difference to bring the company back from the edge. There is also nearly $1Bn locked up in landing slots and routes that is mortgaged to lien-holders, something that seems unlikely to be sold off anytime soon.
Prelude to merger?
The Delta/Northwest merger was prefaced by both carriers’ bankruptcy re-orgs. The US Airways/America West was also borne out of the US bankruptcy shortly prior to that deal being announced. Is that something we could see out of this filing? There are a number of folks already suggesting that the only way for US Airways and American to survive long-term is to combine their resources.
That would be a disaster.
Yes, it worked for DL/NW. It worked in large part because they were more or less in lock-step on the way out of their bankruptcies and were moving in the same direction anyways. Plus their route networks were incredibly complimentary. The US Airways and America West route networks were complimentary, but that’s where the benefits stopped for them. The results of that merger are a labor relations nightmare. It is something of a miracle that the carrier is still managing to operate and even eke out profits from time to time given that burden.
A merged AA/US would have the existing US labor issues as well as the AA labor issues that have been slowly smoldering and which appear likely to boil over into a full-blown fiasco depending on just how bad the cuts are on the contract front. Nothing like slashing $7 billion in pensions liabilities to make your work force feel respected and happy about their future participation in the company. There is the chance that a merger between the two could be seen as American acquiring US Airways and thus the AA union – with its much larger workforce – could absorb the US union and force down the rules upon them. But even that wouldn’t necessarily solve the labor relations issues.
Some other have suggested that Alaska Airlines might be a ripe partner. Or possibly JetBlue. Sure, it is possible, but seems unlikely as neither of those – both of which are profitable for the most part – gets much value of picking up the mess rather than cherry-picking bits as desired in the future.
What’s really going to happen?
If you’ve read this far and think I actually know what I’m talking about then I guess I’ve got you fooled. I actually believe the stuff I’ve written here but I have no idea if it’ll actually play out that way or not. I do know that I’m not worried about the operations or the miles, at least not yet. The company is likely to pull through well enough and has the cash to run long enough that I’ve got no immediate concerns. And any long-term actions will almost certainly protect the AAdvantage program anyways, so even that isn’t much concern.
It certainly does seem like those pilots who retired recently en masse and cashed in on their retirement plan might’ve made a smart move. Oh, and the fact that the CEO retires and joins up with former Continental Airlines CEO Larry Kellner in a private equity company is certainly an entertaining development.
Related Posts
Tags: Alaska Airlines, American Airlines, bankruptcy, Continental, Delta, frequent flyer, JetBlue, merger, NorthWest, points, United
Posted by Seth on November 29, 2011 under frequent flyer, News, points |
American Airlines parent AMR has filed for Chapter 11 bankruptcy protection today, ending the long waiting game of wondering just when that would happen. In addition, CEO Gerard Arpey is CEO no more; Thomas Horton has taken over the roles of Chairman, CEO and President of the company. The move is not much of a surprise, with the company’s stock price having decreased significantly in recent months (down ~75% in the past 6) and the topic of bankruptcy having been swirling for nearly as long. So what’s next?
Operations are expected to continue as normal, at least on paper. And that makes sense given the Chapter 11 filing. Flights will operate and the AAdvantage loyalty program is safe. At the same time, however, the company has made it clear that the main thrust of their efforts for the reorganization period will be to "address our cost structure, including labor costs, to enable us to capitalize on these foundational strengths and secure our future," according to Horton.
In other words, look for some upset flight crews in the coming weeks and months as their union contracts are tossed out and they are forced to negotiate new ones. "Work to rule" campaigns and other similar efforts would not be at all surprising. It could get ugly out there.
The company does have $4.1 billion in cash available which means they aren’t using debtor-in-possession financing, a good thing in general for the operation. Combined with the statements indicating that the company will honor all existing fuel and interline agreements, however, that only furthers the idea that this move is nearly entirely a union contract negotiations tactic.
Our very substantial cost disadvantage compared to our larger competitors, all of which restructured their costs and debt through Chapter 11, has become increasingly untenable given the accelerating impact of global economic uncertainty and resulting revenue instability, volatile and rising fuel prices, and intensifying competitive challenges.
This should be interesting to watch.
