Thursday, March 24, 2005

Two weeks ago I speculated about why the airline industry is currently so skewed. Afterwards I sought out a response from my uncle, who is pilot for one of the major airlines.

Here’s what he had to say:

Your post “Airline Reform” is on target but your cause and effect relations are skewed; not by your deductions but by the passage of time.

As little as 8 months to a year ago the discrepancy between the 'quality and cost' of one major airline's product and another's indeed had much to do with massive monoliths suffering a post 9/11 fiscal and organizational paralysis. Management teams, including ours to a huge extent, turned to CFO's, bean counting CEO's, and distracted boards who largely believed that huge cash reserves would be the saving grace, along with full frontal assaults on labor costs, mini assaults on productivity and management costs (which were completely off set by your mentioned executive pay schemes), and lip service to actual restructuring. They were wrong.

Well, they were mostly wrong. Labor costs were a major culprit, and the blood letting has been massive and continues … But, the hoarding and raising of cash reserves by hook and crook; fuel hedges that would be gold now being sold off; extremely short sighted cuts in essential maintenance areas that are now costing more to correct because of safety issues; subcontracting out, to the absolute lowest bidder, many of the frontline services; complete gutting of medical and pension plan funding, etc., etc.; all these only gave the appearance of management taking big action. Big on paper, but dead wrong on substance.

It was the same mistake many made during the early 90's recession/depression; instead of initiating the really hard and imaginative work of restructuring the core elements of moving machines from point A to point B (turn times, decentralize marketing, rework hub systems, flexible/floating maintenance teams, cross qualification of employees, information tech upgrading to improve real time feedback of essential scheduling information, on and on) these brilliant management teams decided to hunker down and hide behind cash reserves. It proved to be wrong then, they didn't learn, and it has bitten them again. Probably because all those that made the "easy" decisions, to a person, made themselves very wealthy while the monoliths gathered more dead weight. No penalty, no lesson learned it seems…The airline industry then, and until recently, was being managed by people who were unwilling to do the hard work they were being paid for.

Now with most on the brink of failure, some people are stepping up. This brings me to your Q&C issue. Your first hand experience (USAir vs. BA) wasn't so much 'monolith vs. company extraordinaire' as it was dead monolith reborn, but stripped to an unworkable core (3 different management teams made no core changes, made multimillions personally, and split) vs. partially subsidized, heavily government influenced company that did address core issues with the luxury of cash safety nets. The cores of the other US legacy airlines have been, finally, significantly reworked. Hard decisions have been made. The cost to everyone involved, including yours truly, has been huge. Not all decisions will turn out to be the right ones. The legacy carrier(s) that gets the domestic low cost vs. international/premium long-haul-cost balance right will survive. Your "skewed market" is now going to become an issue of just that; marketing.

Those that match a finely tuned core with the right marketing will make it. Marketing fiascos and absurdities have been a pet peeve of mine for a while. An obvious fix has been evident to me for quite sometime also; decentralize it! We sell a perishable good all over the globe that many others sell. Marketing has to know, real time, where to put that perishable product, at what price, and in what wrapping so you, the customer, knows what Quality vs. Cost factor you're about to get when you push the purchase button on your computer. And that means knowing each little nook and cranny of the globe we serve, day in, day out. Which convention center is hosting what convention? Which university/school system is on break this week? Where are today's festivals? Our marketing, heavily centralized in Atlanta, has failed again and again globally. Hopefully not too late, it has been finally recognized (I can only assume my 20 odd letters to management over the last couple years were being matched by many others and may have had some miniscule effect) and our marketing fiefdom has been toppled, bosses fired, people moved out. Fingers are now crossed…

You appropriately addressed pensions. They can be packaged with the larger issue of what our government is and is not paying attention to. Here people at large do need to be paying attention. The pension issue facing the airline industry will affect every industry in the US. If congress does not address the issue of reasonable funding relief for corporations and, along with the judicial branch, devise a conversion vehicle to individually protected pensions, all tax payers are starring at the largest tax dollar bailout of a failed system ever, dwarfing the Savings and Loan debacle of decades past that we are still paying off.

When you hear a politician say "let market forces do their thing" with respect to today's airline woes (and many are saying it) you're listening to someone who is not paying attention, who is not bothering to really research the issues; the pension plans, the transportation infrastructure, unlevel playing fields with respect to subsidized competition (foreign), and ever increasing costs of a homeland security system (topic for another day) running amok. And now fuel costs…

Where is the intelligent questioning of current energy costs? As you may be aware it's beginning to surface in the Europe -- the Tribune, Wall St. Journal, Financial Times, etc. Journalists are finally starting to get peeks into the fuel speculator's world. But, again, why aren't people paying attention? Easy answer in the US: a current regime that has no rational, intelligent energy policy beyond being very comfortable with oil industry giants making more profits than any corporations in history, literally. Until this very week Washington has been deafeningly quiet with respect to fuel speculators … These are pure and simple money makers doing an incredible job of using fear, skewed science, and speculation to reap incredible profits. Currently the European group is the most aggressive with daily attacks on fuel stability, as they reap the biggest benefit with the strong euro. Just today OPEC has made a statement saying what a few have realized (self included, and I'm by far not an expert -- which implies that experts have wanted to keep this quiet, else all would be aware): "We have lost control of oil pricing" ….

Finally, the rest of this year will see more big changes in the airline industry, no question. Not all expected. Current shifts include:

1) The honeymoon is over for the low cost carriers, the Jet Blues etc. Never called subsidies, the large cost breaks these carriers received around the country (Burlington is a great example, we tax payers paid for Jet Blue's terminal area/jetway) had their intended effect: low ticket prices exist everywhere now, matched buy all carriers, so giving cost breaks to anyone now makes no sense to those communities/cities/port authorities. Example: Jet Blue thought its cost for the very expensive (asbestos, in ground fuel contamination) planned overhaul of JFK's terminal 5 (a key to their expansion plans) was to be minimal with the port authority & New York helping out. NY recently said it's paying zero!

2) Big surprise, regional jets don't work. The real, losing cost of operating regional jets has been hidden by the blistering pace of expansion and the complexities of the parent company's economic woes. This realization is just now hitting home and hitting big. Companies operating and building the RJs are now also in severe trouble.

3) (Misguided) politicians are seriously considering “Cabotage” -- foreign carriers being allowed to operate unrestricted between US city pairs, without complete recipical rights for US carriers. This is incredibly absurd. Congress would wake up one day 5 years from now and wonder why the only premium travel within the US is available on Air France, Singapore, JAL, etc. Would this be called insourcing the outsourcing?

4) An irony is that those, if any, legacy carriers that do get it right and regain health will become the most attractive acquisitions seen in a long time. And once again our brilliant politicians are seriously considering a real helpful policy: allowing foreign majority ownership in US Airlines! In essence, allowing foreign control of an industry that, not the least of which, involves national security at its heart.

5) Fuel costs.

6) Fuel costs.

7) Fuel costs…

There you have today's ranting.


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