Labour rates could prove disastrous in US


“In the future, continued volatility in labour prices could prove disastrous because there are no other areas on the income statement that can cross-subsidise labour costs above what the market will bear,” MIT International Centre for Air Transportation Research Engineer Bill Swelbar told executives at the Regional Airline Association meeting in Washington DC recently.

He indicated that without changing its bargaining strategy, pilots will only force more abandonment of routes to regionals who will then become the major providers of domestic airline services, just as it has in the past.

However, he gave pilots developing a new strategy during the current round of negotiations about a 5% chance. He called labour contentions that they own routes because they were flown by mainline pilots in the past, antiquated thinking. “That does not entitle a pilot group to route ownership in perpetuity,” he said. “In a deregulated world, no one owns domestic route rights nor should any domestic flying be governed by a labour agreement that prohibits a market from working freely.”

Mr Swelbar painted a future picture of regionals that may see the domestic feed model restricted by scope as less lucrative to the point they may develop greener pastures abroad, already being done by Jazz and SkyWest, in which the regional brand becomes the standard embraced by alliances. Indeed, there are plenty of opportunities in developing markets such as Paraguay and Vietnam and Brazil where Jazz and Skywest are now working, respectively.

The labor analyst predicted that labor/management relationships are at a critical juncture that must provide a new way forward that takes into account the current economic environment rather than the old way of negotiating wage and pay rates. He also said that the new management coming in at Air Line Pilots Association -- Delta’s Captain Lee Moak -- understands the new reality which could help in changing things.

As expected, he cited scope as the critical issue the industry faces today, even as the United/Continental pilots have made it the line in the sand as the two carriers go through merger.

“There can’t be an honest disussion on labor in the US airline industry without talking about scope.” he said. “I believe 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.”

He said the current scope agreements were developed under “a seat-of-the-pants” approach - based on emotion rather than economics - which jury rigged the uneasy relationship between mainline and regional pilots.

“This approach to scope is what makes it so difficult for so many to build out the most efficient fleet,” he told the small assembly of executives. “If not for bankrutpcy we would not be seeing mainline carrier’s regional partners flying aircraft 70 seats and greater in the numbers we are. So if today’s architecture was drawn with outdated tools, then tomorrow’s architecture will likely require computer-aided design software. From my perspective this next round of pilot negotiations could also be the tipping point for scope -- the critical juncture in an evolving situation that leads to a new and potentially irreversible development.”

Swelbar described the normal labor practice of treating scope relaxation as a trading currency to make improvements in the mainline agreement, adding it would likely result in ceding more domestic flying to regionals. Nor would it continue to help management which has, historically, over-estimated the value of scope in the bargaining process.

“To be sure there is value in the shift of flying from mainline to regional,” he concluded. “But the difference in labor rates between mainline and regional are less than they were before the industry restructuring.”

Compounding the situation is the impact of rising costs faced by regionals as the result of regulatory activity, especially the developing flight-and-duty-time rulemaking, he said, noting that mainlines are only largely ordering replacement narrowbodies meaning the thousands now on furlough are unluckly to return to work.

“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,” he said. “That challenge must acknowledge the fact that the industry has changed forever. It can no longer support the labor costs it did 10 years ago largely because it does not have the pricing power it did then. If the regional industry has been used as currency to cross-susidize pilots at the mainline as it has -- and assuming that the trading currency is not what it was as we engage in this round of bargaining, and it has not -- then something has to give.”

Pilots can trade scope for increases in wages and benefits as they have in the past or they can embrace the changes in the airlines industry that have evolved into a model requiring lower wage and benefit rates especially for domestic flying.

“Either presents conunundrum for labor,” he said, suggesting the new labor currency could be the wage differentials between mainline and regional pilots pointing to the elimination of b-scale as paving the way for regional flying in the first place. “When it was decided that the b-scale concept was not internally healthy, mainline pilot labor made the regional industry the new vehicle to cross-subsidize mainline pilot costs.”

As usual, Swelbar criticized labor’s past practices, saying it has not working to pilot benefits. Carrying additional headcount to cover work rules is no longer tenable today nor will it be in the future. The new flight/duty rules will force additional headcount as it raises costs. “For labor to be successful, unions can no longer be in the business of keeping themselves in business by maximizing dues income,” he concluded. “It has to be about meaningful change which must include understanding new economic realities.”

That reality means the new objective should be security great jobs for fewer workers. “To survive the US airline industry must be positioned to compete for the long term,” he said. “I see a day when regional carriers will increasingly become a larger and larger face of the domestic market but an increasing amount of that flying will be done at risk. If I’m right and this round of negotiations ‘scopes out’ the regional sector for flying more 76+ seaters and does not permit the flying of bigger aircraft, there needs to be an exit strategy from the tentacles of the mainline restrictions on what and how much flying can be done by partner airlines.”

Regional predictions

Saying the US regional industry has been asked to adapt and evolve about once a decade which it has successfully done becoming increasingly relevant even as they face another round of evolutionary adaptations. Swelbar noted the consolidation occuring with SkyWest’s acquisition of ExpressJet and the acquisitions of Mesaba and Compass by Pinnacle and TransStates, respectively, as well as Republic’s entrance into the low-cost carrier business with Frontier which will hep mitigate the cost increases facing the industry.

Swelbar outlined several scenarios and assigned a likelihood they will come to pass. “Scope will be relaxed to premit regional partners to fly 76+ seat aircraft in this round of negotiations,” he said. “That has a 5% chance. Given the cost increases expected from regulation, certain small communities will be disenfranchised from air transportation over the next five years. There is a 95% chance of that. Where scope limits the mainline to less than competitive levels of 76-seat-and-less flying, there will be relaxation to permit an increased number of said units of flying. I give that 65% chance. All of the 50-seat flying scheduled to come off lease between now and 2016 will be replaced. There is no chance of that. The mainline pilots will make the necessary concessions in this round of bargaining attractive enough for mainline to bring the flying back in house. That has about 10% chance. The leadership change at ALPA will lead to a more pragmatic approach regarding scope issues and the small jet’s place inside the network architecture. I give that 90%.

Finally, he suggested commercial services at the current 450 airports in the lower 48 will be replaced by commercial service only at the 200 airports that already serve 97% of passengers. “A lot of airport catchment areas encompass not one or two other airports but five or six,” he said. “We need to move to regionalization model but someone has to play God and tell those airports that they will no longer have access to the national air transportation system.”

Swelbar also predicted many more financial partnerships between regionals and communities to maintain that access. “They have to realize subsidy is needed to keep people connected to the transportation grid and that is worthy of economic investment. They will have to open their check books. We simply have too many airports.”

He also sees the changing economics will make hubs less valuable. Swelbar said he sees regional carriers as buyers of mainline domestic hubs because restrictive scope will lessen the value of hubs by changing the economics. “Feed supports mainline departures at the hub,” he said. “Absent the feed, hubs may not be as profitable as they are today and may become unprofitable.”

He also suggested that despite predictions of major pilot shortages beginning in 2013 would not transpire in the US but would in the rest of the world and wage rates at regionals will have to change -- imposing further cost increases -- to create a resurgence in interest in becoming a commercial pilot. “The new 1500 limit imposed by Congress requiring 1500 hours minimum for commercial pilots will make it difficult, particularly for regionals,” he said.

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