Trouble In The Air - Marketplace Sends

[Rob]

Boeing Boy, I'm not going to fault your CASM calculations; I think you're doing the best you can with the numbers US makes available. When I tried to derive CASM components, I could not come close to the official number given in the 10-Q or -K. Other airlines do not make it so difficult - in fact, they list precisely what their CASM components are.

US's financial reports make little attempt to portray the company's financial position in a way that makes analysis and comparison easy. This has to be deliberate.


-Edited to correct grammar.

 

[gso-crew]

Here's what the CWA came out with for 2Q.

Airline / CASM (in cents)
Independence Air / 19.90
Northwest / 10.61
Delta / 10.58
United / 9.83
AMR / 9.57
Continental / 9.42
USAirways / 9.40
Frontier / 8.48
Air Tran / 8.46
Southwest / 8.09
America West / 7.72
Jet Blue* / 5.90 operating / 5.84 airline expense

* Jet Blue was the only carrier to break out CASM in operating expenses and airline expense, leading one to believe they have an actual CASM of 11.74

Airline / Profit/(Loss)
Independence Air / (27.1 Million)
Northwest / (182.0 Milliom)
Delta / (1.96 Billion)
United / (247.0 Million)
AMR / 6.0 Million
Continental / (17.0 Million)
USAirways / 34.5 Million
Frontier / 12.6 Million
Air Tran / 16.8 Million
Southwest / 113.0 Million
America West / 5.7 Million
Jet Blue / 21.5 Million

QUESTION: Do these numbers include fuel?

 

[funguy2]

WE REPORTED A PROFIT...HOW DOES THAT TRANSLATE INTO DYING???

PITBull:

A small profit during the peak quarter does not mean all is fixed.

If Toys R Us makes a small profit for the months of November and December and loses cash hand-over-fist for the other 10 months of the year, they will go out of business...

If US Airways makes a small profit for the peak 2Q and loses cash hand-over-fist for the other 3 quarters, they will go out of business...

Keep in mind the following profit/loss figures
($177mil) - 1Q Net Loss
$34mil - 2Q Net Profit
($143mil) - Year to date Loss

Since management is forecasting losses for 3Q and 4Q, its safe to say that US Airways annual loss will be at least $143mil, and is likely to me much higher (maybe close to $500mil).

Yes, US Airways loses $500mil this year, and has yet to produce an annual profit in the last several years, even after major cost reductions inside and outside of bankruptcy... Everything here is just rosy

 

[BoeingBoy]

Rob,

You are absolutely correct about the murkiness of the financial reports. I have never been able to duplicate U's reported CASM either. My assumption is that it has something to do with Express costs not being completely included in "capacity purchases", the various divisions (leasing/sales, financing, MDA), or both.

WN does make it easy by showing CASM for each catagory of expenses, and I can replicate their numbers precisely (well, when rounded to 1 decimal place as they report them).

Jim

 

[funguy2]

gso-crew:

yes, profit/loss/CASM figures include fuel.

but your JBlue assumption is wrong... The "operating" CASM includes the expenses associated with the LiveTV subsiderary... The "airline" CASM, excludes that... So, LiveTV subsiderary costs 0.06 cents CASM...

But since their RASM is 6.87 cents, there is no way they could make money at CASM of 11+ cents...

Operating Profit(Loss) per ASM=RASM-CASM

Operating Profit(Loss) per ASM=6.87-5.90

Operating Profit(Loss) per ASM=0.93cents

Operating Total Profit = Profit per ASM * ASM

Total Operating Profit = 0.93cents * 4.6Bil ASM

Total Operating Profit = $42.7mil

Actual Reported Operating Profit = $45mil I am a little off due to rounding...

Clearly, JetBlue would have had a loss at 11+cents CASM.

 

[BoeingBoy]

funguy2 and gso-crew,

At least one of the numbers from CWA don't include fuel - ours. I'd have to check, but 9.40 cents definitely excludes fuel and may exclude unusual items. Our "all inclusive" mainline CASM was up around 11.70-11.80.

Jim

 

[Cfm56]

Interesting reading
Bob Lavender is a Federal Express pilot and a former Continental striking pilot.
GC



Learning to Compete Wisely

(A Primer in Creating Natural Unity)

Robert J. Lavender ©2004



Loyalty to petrified opinion never yet broke a chain or freed a human soul.

Mark Twain



The January 2004 issue of the Air Line Pilot magazine contained the most important article to grace it’s pages since 1978 (“Dare Mighty Things,â€￾ pg. 15). In it, three ALPA national committee chairman explain that pilots see the airline industry much differently than airline managers. While the pilots still think of themselves as working for individual companies, management sees “the entire airline system as a single network. They view each of the separate companies as a combined whole, able to move…flying opportunities…across a vast global network.â€￾ Meanwhile, “Pilots…have no ability to shift to either the vagaries of the market or management’s whims [because]…we are trapped in our individual silos.â€￾ This article may be the foundation for change that is long overdue.



On its face, “Dare Mighty Thingsâ€￾ is about Scope and about management’s ability to cause pilots “to compete with each other and work for less.â€￾ In broader terms, the chairmen are affirming the need of the piloting profession to strategically adapt to the competitiveness of the de-regulated environment. It is this simple: Pilots are relying on “old thinkingâ€￾ and they have not learned to compete wisely. On the other hand, airline managers are using new thinking to survive by forging strategic economic alliances—a concept that was unknown prior to passage of the Airline Deregulation Act of 1978. The result is that, to an increasing extent, airline companies are no longer competing with each other, they are competing with forces such as “labor.â€￾ In the quest for survival they have become economically more unified than labor and they are leveraging that unity. Indeed, airline companies have learned to cooperate among themselves and so must pilots if they wish to unite rather than compete with each other.



Pilots have lost the competitive advantage in dealing with their newly-networked companies because, unlike the airlines, pilots continue to adhere to a “regulatedâ€￾ and anachronistic form of business with each other. Their reliance on tradition not only prevents pilots from negotiating optimally but denies them access to free-market principles that could otherwise be employed to their benefit. The way to fix it is to first understand it.



The Compensatory Benchmark: Junior Pilots Rule



Pilots are at a strategic disadvantage in the bargaining process because they benchmark the relative value of services rendered far differently than airline managers. While pilots use seniority and the captain’s hourly rate of pay as the references for relative value among pilots, managers to a significant extent use the lowest-paid, similarly skilled pilot to determine the standard for value or, “who will work for how much.â€￾



The reason for this distinction is that in the pre-1978 regulated economic environment, references for wages and tariffs were routinely established according to the high-cost leader in the market and were disassociated from the law of supply and demand. For instance, if labor costs rose at Delta, the company would routinely apply for and receive government approval to raise tariffs to protect their profit margin. As employees at other companies demanded and received comparable wages, their companies would, in turn, do the same. The government controlled almost every economic facet of doing business, even down to the kind of meals that were served on flights. There was simply no incentive to be the low-cost “leaderâ€￾ and, in fact, it was the high-cost leader that drove the market.



In this “macroâ€￾ economic airline setting a “microâ€￾ wage environment quite naturally evolved. Among pilots, the high-cost leader was the captain’s position, and this became the benchmark for technically constructing wage differentials among pilots. Not only did the captain’s position become the physical connection for wages (i.e., other crewmembers get a percentage of captain’s pay) but it became an almost sacred standard by which to determine who deserves what. Unfortunately, in the competitive environment the benchmark for wages and tariffs is generally determined according to the low-cost leader, with the consumer ultimately determining the relative value of services. And while the airline companies, themselves, have learned over the last 26 years to factor this free-market function into their tariffs, the pilots have ignored its application in the waging process.



The incontrovertible fact is that in the “free market,â€￾ with other things being equal, it is the lowest paid, similarly-skilled competitor or provider of services that drives the market. By not acting on the fact that they too are now part of a competitive “pilot marketplace,â€￾ pilots ensure themselves of over-focusing on the wrong end of the seniority spectrum in their quest to improve things. Just like customers, pilots will seek ultimately seek out the best deal regardless of where it comes from. As long as there are available skilled pilots in the same marketplace (i.e., furloughed pilots, commuter pilots, even “juniorâ€￾ pilots on the same seniority list) who are working for far less money and/or under less desirable conditions, managers know that they can always stimulate competitive pressure and disunity within that marketplace. This is not corrupt, it is simply the way the company has learned to do business with its external customers and competitors, and it is the way they now do business internally as well.



In short, pilots have arrived at a point where managers can actually make a better offer to so-called junior pilots than the pilots themselves can or will. It is the implicit threat of this occurring that has reduced pilot bargaining strength in recent years. Incredibly, pilots have not made one substantive change in the way they do business with each other in spite of the huge economic changes that have occurred in their external operating environment. The sooner they figure this out the sooner they will be able break away from the constraints of the non-competitive economic environment and begin to establish new standards for unity and negotiation.



Membership and Unity: The Shallow Relationship



Pilot assumptions about membership and unity are rooted in the stability of the regulated (pre-1978) airline marketplace. In those days, tight government control over the industry ensured that there was little competition either between companies or between employees. This lack of competition, in turn, ensured that the airline employee career path was far more stable than it is today and, for pilots, astonishingly predictable. A pilot was hired almost exclusively between the ages of 23 and 30, and, though one might suffer through periods of furlough, it was realistically expected that one would move through the ranks at one company and retire at age 60.



Working conditions were negotiated on the basis of this demographic predictability. Vacation accrual, for instance, fit with the idea that you started young and as you aged and needed more vacation, you got it. Likewise, salary structures evolved such that as your family and your expenses grew, you were moving up the ladder and able to earn more pay. Even if these compensatory issues were not consciously negotiated to achieve these specific results, they fit the situation and became part and parcel of the “systemâ€￾ of compensation for pilots. It could be said that there was a match between crewmember demographics and economics.



In this stable, non-competitive, and non-invasive environment, the pilot sense of unity came to be. Since pilots shared a consistent and virtually unalterable view of the career path, they came to share remarkably similar views on how to enhance it. Not only did pilots “seeâ€￾ things the same way as other pilots at their own companies, they saw things the same way as pilots at other companies, a fact that was reflected in the uniformity of demands and agreements throughout the industry. This common perspective was a product of the economic times and it culminated in a superficial but practical form of unity among pilots industry-wide.



Subsequent to 1978, the effects of Airline Deregulation Act began to appear and competitive pressures began to affect not only airline companies but pilots as well. As older pilots were turned out of jobs because of strikes and corporate failures they had to look for employment. Lamentably, the uniform system of compensation that worked satisfactorily under stable and non-competitive conditions did not serve them well in the free market. Many pilots were in their forties and fifties with families and kids in college. They often lost not only their wages but their retirement funds as well. They then faced the prospect of going to work at starting salaries devised in a completely different economic setting. Frequently, they could not afford to work for “new-hireâ€￾ wages and, when given the opportunity, some crossed picket lines to take non-union positions that paid more than what was available under “industry standardâ€￾ contracts.



A poignant example of this occurred during the Continental strike where approximately 450 unemployed former Braniff pilots crossed the picket line and helped keep the airline flying.[1] Their choices were to: 1. Try and start another career; 2. Start anew at another airline for thirteen hundred dollars per month; or, 3. Go to work as captains at Continental for forty-three thousand per year—peanuts!—but much better than they could achieve at an “industry standardâ€￾ company. These were the alternatives offered up to them by our “regulatedâ€￾ compensatory system…alternatives that created true competitors of former union “brothers.â€￾[2] This twenty year old lesson is about to be learned again as pilots from USAir, United, and other airlines face exactly the same scenario. This time, however, instead of 1000 pilots on the street looking for work, there are now approximately 8000, with more likely to come. By virtue of their inaction, pilots have enabled internal competition so paralyzing that it will forever “dilute [their] bargaining strengthâ€￾ unless something is done (the “Dareâ€￾ article was right on target). Pilots should know that creating unity is no longer a matter of rhetoric and encouragement; it is an economic process that must be followed.

The Process of Unity



Whereas, in the old days, membership and a common perspective on career advancement were the basis for unity, this is no longer true. Turmoil and turnover in the airline industry along with pilot-induced factors such as multi-tiered pay levels (i.e., “A, B, and C scalesâ€￾) now ensure conflicting perspectives and priorities within both the profession and individual pilot groups. It is the steep variance in perspectives that causes disunity and belies what otherwise appears to be a solid membership. Experienced pilots know that what seems to be reliable under peacetime conditions will appear much different under conditions of stress when individual self-preservation begins to emerge. A pilot who has been economically “damagedâ€￾ in the past as the result of a strike, lengthy furlough, pay reduction, etc., may well support union objectives but may well not view a work stoppage as a viable personal option. Since a mounting number of pilots fall into this category these days, multiple viewpoints and reduced bargaining leverage is assured.



Disunity among pilots exists largely because the wage differential (“gapâ€￾) across the seniority spectrum is too great and cannot be justified on the basis of “supply and demandâ€￾—a concept unimportant to pilots prior to 1978. Unlike the old days, today’s “juniorâ€￾ pilots are often seasoned veterans of military, commuter, and major airline background. Their experience and history must be factored into the compensation equation if natural economic unity is to be established. If the wage gap among equally talented employees grows too wide, a company can and, ultimately, will court junior employees with sometimes valid promises of improved compensation…if they will but replace their senior counterparts.[3] Companies, acting as “customers,â€￾ will determine the relative value of pilot services and gravitate to the lowest bidder. Again, this is not unethical; it is simply the competitive process at work and it is already evident in many companies as they eliminate higher paid “seniorâ€￾ employees in favor of lower paid “new-hires.â€￾ Pilots would do well to take charge of their internal processes if they wish to reduce this form of competition. [4]



As stated earlier, while airline companies have modified their business systems and relationships to accommodate the effects of competition, pilots have not. Therefore, the technical subcomponents of compensation (i.e., cash, retirement, vacation, working conditions, longevity, etc.) which drive the human “processâ€￾ of unity have not properly evolved. As the “Dareâ€￾ article recognized, the profession is internally competitive. Pilots see things very differently depending on seniority position and personal history, and they can be readily divided by management through overtures to “special interestâ€￾ groups or segments of the seniority list. The result is that pilots now have to rely on “crisisâ€￾ unity rather than “naturalâ€￾ economic unity to achieve their goals.



Crisis vs. Natural Unity



Crisis unity is generally defined as an “alliance of individuals or parties for which there may be little prevailing or natural affinity.â€￾ It occurs when disparate parties perceive a common threat and act in unison to resist. This is the type of unity that has been the mainstay of the piloting profession for years now and seems to be in a perpetual state of evolution with diminishing effect. Crisis unity serves a purpose in some circumstances but has important deficiencies: It is generally short-term, it is reactive, and it requires tremendous emotional energy to create and maintain. Most importantly, its success is largely dependent on the actions of the external threat. Thus, a discerning management may “end the crisisâ€￾ and diffuse the threat by making attractive proposals and offers to limited segments of the workforce. A prime example of this occurred when companies offered up the “A, B, and C scalesâ€￾ to pilot groups, effectively “buying offâ€￾ a limited segment of the seniority list and destroying any possibility of natural economic unity for years to come. This is how the “race to the bottomâ€￾ (pg. 15) works. Unfortunately, the piloting profession has been especially vulnerable to this kind of tactic.



Unlike crisis unity, “naturalâ€￾ economic unity does not occur in response to an outside threat. Rather, it is a result of an internally negotiated “systemâ€￾ of compensation that naturally leads to shared perspectives on the issues. This, in turn, leads to the establishment of common priorities and the universal “willâ€￾ that creates bargaining leverage. Just as in the pre-1978 era, natural unity occurs when pilots “seeâ€￾ things the same way. Nowadays, however, they cannot rely on superficial, government-induced unity, they need to get serious and create it for themselves.



While many pilots may be surprised to hear that they have little economic “affinityâ€￾ for each other, this is frequently the situation. It is caused by the wide gaps that exist across the spectrum of the seniority list in terms of compensation, personal history, and quality-of-life. While the magnitude of these gaps vary between groups, the principle is not difficult to comprehend. When pilots prepare to negotiate on scheduling issues, for instance, they must consider the needs of the constituency. But who is that? Is it the pilot that flies afternoon out-and-backs ten days a month, or is the pilot that flies four legs in the middle of the night all month with minimum days off? Is it the pilot with five weeks of vacation or the pilot with two weeks? Such questions presented far less of a dilemma for negotiators in the pre-competitive world, but the problem is very real when the constituency no longer fits the traditional demographic model mentioned earlier in this article. Older but highly experienced new-hire pilots will become competitors if their needs, their history, and their skills go unappreciated.



The “workload gapâ€￾ problem has been complicated by other serious matters such as the “retirement gap.â€￾ For instance, it is now a very real fact that many pilots who planned on retiring with adequate funds will not be able to do so. It is likely that these “gapâ€￾ issues will continue to weaken the pilots’ collective will unless there is a change in course. Allusions to attaining negotiating-quality unity under these conditions are hype, and if pilots do not fill the gaps, management will. They will do it with calculated free-market overtures to impressionable segments of the pilot marketplace that will create the illusion (and, at times, the reality) of improvement for those willing to abide. This is textbook market behavior and it works with any workforce (or other market entity) that exposes itself.



The Fixes



The real hope for creating true or “naturalâ€￾ unity among pilots lies in the modification of compensatory components that currently induce internal competition. Stronger and more reliable membership will follow. The examples cited of salary, retirement, vacation, and scheduling “gapsâ€￾ are among those components. And each negotiated issue has a meaningful effect on how a pilot sees his or her situation relative to others. If pilots desire unity that is widespread and self-sustaining, they must systematically create it. Otherwise, a self-interest mentality will continue to dominate their condition and open it to further exploitation. This article focuses on two gap issues: “Age 60 Retirementâ€￾ and “Other Compensation.â€￾



Fix #1: The Age 60 Rule



The Age 60 retirement rule is the most egregious and obvious example of pilot failure to adapt to the modern age. It is literally a monument to “old thinking,â€￾ having arisen 45 years ago and remaining unchanged since. It ignores improvements to longevity and lifestyle occurring over the past five decades as well as the fact that implementation of the rule was probably a political rather than health-related matter in the first place.



The Age 60 rule was of little significance when pilots worked at the same company for 30 years, built up a reasonable retirement fund, then retired. It simply does not work in the competitive environment where employees are frequently turned over. Whereas, companies may fail, reinvent themselves, and continue selling their product at average tariff levels, pilots do not enjoy the same economic luxury. Their “systemâ€￾ still assumes that pilots who lose their jobs can repeatedly start over at new-hire wages and somehow retire at 60 with adequate funds. For many (if not most) pilots this is a strikingly false assumption.



Compulsory retirement at age 60 also does not fit in the global context. “Retirementâ€￾ is now, in every sense, a matter of global competition,[5] and pilots in the United States reduce their global competitiveness (and that of the companies for whom they work) by adhering to the Age 60 tradition.[6] “Petrified opinionâ€￾ of this sort ignores the fact that every retirement plan in the airline industry (as well as other industries) is in jeopardy as the result of globalization. It may well induce corporate enthusiasm for outsourcing pilot jobs through such methods as license harmonization and cabotage. No company or crewforce is in its “own siloâ€￾ on this matter. Pilots need only decide if they are interested in breaking the chain of behavior that leads down this road.



An incentive for pilots to take control of the Age 60 issue is that if they do not, Congress and the force of the marketplace eventually will. Every social, economic, philosophical, and actuarial force in the universe is compelling it. It is economically and psychologically healthy for people to be productive for as long as possible. It is economically attractive for companies to retain experience and delay payouts for retirement and health benefits. And, significantly, it is good for the Social Security and Medicare systems which are now under intense pressure. Pilots would be challenged to name even one external force that favors preservation of the Age 60 rule as it now exists. Even the argument that modification to the Age 60 rule would bring an end to the coveted retirement “Bâ€￾ plans may be logically invalid. If the government can put Medicare and Social Security benefits on a sliding scale, it would reason that they can put “Bâ€￾ plans on an age-related sliding scale too.



Changing the Age 60 rule deserves immediate attention. It is arguably the simplest thing pilots can do to begin to align their perspectives and priorities, and progress on this issue could be a harbinger for future change. If pilots repair the retirement gap they will neutralize at least one factor associated with pilot competition. On a larger scale, they will demonstrate the adaptability required to prosper in the “networkedâ€￾ environment.

He lives in Provo, Utah.



19 July 2004



--------------------------------------------------------------------------------

[1] Many of these pilots justified crossing the CAL picket lines because they felt that the Eastern pilots had refused to integrate them into their seniority list when Eastern purchased some of the failing Braniff’s aircraft and South American route structure. True or not, this is a prime example of the internal competition created when pilots fail to “networkâ€￾ with each other in a manner similar to what the airlines are doing.

[2] This is not to justify crossing picket lines. It is to sensitize pilots to the realities of the “free market.â€￾

[3] In fact, the implicit threat of this happening has already effectively stopped pilots from doing anything that would give the company such an opportunity. This is exactly the scenario that occurred at Continental when furloughed pilots who felt that they had been betrayed by working pilots began crossing the picket lines to go back to work. The “crossing overâ€￾ was eventually dampened when the union agreed to pay furloughed pilots the same strike pay as all the other pilots—a perfect lesson in reducing pilot competition.

[4] See “Fee for Departure,â€￾ Capt. Duane Woerth, in Air Line Pilot, Feb., 2004, pg. 5: “Management…immediately began trying to replace its currently employed pilots with pilots willing to work for less.â€￾

[5] It was recently reported in the WSJ that General Motors has a retiree health care liability alone of approximately 60 billion dollars! Undoubtedly, companies will attempt to shed such liabilities through various means. Recall the McDonnell-Douglas shedding of medical benefits for 60,000 retirees.

[6] It is reported that more than 40 countries have already changed their rules to allow airline pilots to fly past 60, including the United Kingdom, Russia, Japan, Israel, Sweden, and Australia.

[7] Examples of this kind of tension can be seen in workforces with ESOP plans where some employees have been awarded significant shares of stock in their company and other employees almost nothing. Varying perspectives based on levels of ownership has resulted in disunity.

[8] The whole point behind reducing competition and increasing unity is to ultimately increase pilot leverage at the bargaining table. This is exactly how the carriers are responding to the free market. They are reducing competition, unifying, and gaining leverage that may be used competitively against labor and other market entities (vendors, creditors, etc.).

[9] For instance, should pilots reduce top-end vacation time and increase “juniorâ€￾ vacation time in order to accommodate newly-hired veteran pilots? Each compensatory component should be so evaluated.

[10] Longevity, on the other hand, is an economic concept with pay tied to experience. Even this concept, however, has been distorted and misused in some contracts to the point of being counterproductive.

 

[javaboy]

jetblue owns livetv which i believe accounts for the difference /breakout of numbers. their casm is sub .06.

 

[javaboy]

cost differences how about this...lccs granted landing slots to foster competition while legacy carriers paids as much as 1.0million per.

independence air ORD those were UAL slots, did they pay UAL for them? and will they be forced to cut flights by the faa like the legacies?

have a nice ride on SWA ,AIR TRAN, INDEPENDENCE , JBLU or insert your lcc here to oh say london, australia,hawaii,ect.....

imagine if UAL/DAL/CAL/AMR/UAIR/NWAC all ONLY went to the 60 destinations SWA goes to? congestion to the point SWA can no longer make 30min turns thus their costs rise, and what of the traveling public i can hear them now...what do you mean you don't go to HNL/LHR/on the flip side ABE/AVP/GRR/ect smaller cites get 0 service and destinations become limited
no the models aren't broken just marketed incorrectly

amr has lived with swa for 30years in their backyard it is possible to do the same now

 

[WorldTraveler]

You are right, Javaboy. The LCC will not provide the nationwide transportation system that the legacies provide. However, there likely will be an increase in the complexity of the LCC operations and a corresponding increase in their costs while the legacies will simplify operations and reduce costs. There won't be a meeting in the middle but the gap will dramatically narrow. The reality is that some legacy airlines simply won't be able to reduce costs and simplify their operations and will vanish. Those goals must be attained within the context of providing a service which people are willing to pay; thoroughly disgrunted employees will not save any company.