30 September 2005

Gordon's Solution.

I was surfing aroud today and came across an article in Time written by Gordon Bethune, our former and elustrious chairmen of the board. The article is his take on the mess the airline industry is in, and the cure to fix it. Gordon lays the main part of the industry's problems at the government's feet. His solution is for the government and manufacturers (GE Capital) to stop bailing out weaker airlines, and letting the market decide who will survive and who will fail. And that reform in government laws would allow airlines to merge and offer better competition. Gordon also believes the airline industry is saddled with too many taxes, at current count airlines pay 14 seperate taxes to various governmental entities. Usually quite often, taxes the airlines can't pass on to consumers due to increased competition from low cost carriers. Gordon also wants the government to stop the 'pork' spending in bills and pour that money into our nations aviation infrastructure, i.e. upgraded ATC system, upgraded airports.

It's an interesting article. Gordon is known for "telling it like it is" instead of sugar coating his words. People either love him or hate him. I have mixed feelings for him, he came to Continental from Boeing when Continental was under dire financial hardship and many thought the airline would fail or be bought out, instead he turned it around to one of the most admired airlines in the United States. But, he left Continental in almost the same situation. While we're losing money, we're not losing as much as the rest of the industry. We are fully leveraged though, with approximately 21-22 billion dollars in debt. I'm sure our on corporate board is eying Delta & Northwest and the benefits that bankruptcy offers. The ability to discard labor contracts, the oppurtunity to dump an underfunded pension on the government and the possibility of returning our most unprofitable aircraft ( the boeing 737-500) to lessors.

So while I agree with his assement that the government needs some serious reform in it's laws and taxation of passenger airlines in the states, I don't think it's the full solution. It seems to me that these corporate boards of all the legacy carriers; United, Delta, American, Northwest, Continental, need to sit down and re-evaluate the whole business model. It seems that they are still hoping for a return of the business traveller, of lower oil prices, as the main means to profitability. I don't see this happening. Personally, I think we should all accept this reality, and work towards and develop a business model that accounts for this basic shift in flight travel and fare pricing that has occured in this industry, along with less government intervention (taxation, regulation, etc)

Though Gordon is right in one aspect, the airline industry is the most heavily regulated un-regulated industry.

Fares Raised, Airports Razed

With record high prices for Jet A, the comany had decided to raise fares. $10 on one way tickets, and $20 on round trip tickets, for domestic flights in the continental 48 states, including Alaska and Hawaii. It remains to be seen if the rest of the industry matches the fare increases so that they will stick. I imagine Northwest will finally match a fare increase, since they are in bankruptcy as of now. Traditionally Northwest Airlines is the spoiler in the airline industry and does not match fare increases. Things may change with their bankruptcy.

We've also announced new service to Copenhagen Denmark begining in May 2006. While I love te expansion into new marketes and European cities. I still wonder if we're basing to much of our expectation on international markets. While international routes tend to be profitable. It just seems like we're abandoning the domestic market to low cost carriers. Quite often in international markets, the airline industry is nationalized and ran by the government. And people tend to partake in nationalistic pride and fly their national carriers.

If you listen to Larry Kellner, and the rest of the board, they continue to blame on fuel prices and a weak domestic fare enviroment, that we're taxed so highly... which is all true, but i'm tired of hearing what we can't do. We can't just complain and hope the price of fuel comes down, or that the government will lower/repeal taxes on the airline industry. I don't see it happening anytime soon.

I would rather see and talk about what we can do. Hedging out fuel supply would greatly help, though would be extrememly difficult for us to do now. Due to the economics of hedging. Hedging requires good credit, and right now our company's debt rating is at Junk status, along with the rest of the industry, with the exception of Southwest. Technically the only reason Southwest is profitable at the moment is that they have their fuel supply hedged over the next three years. It's the main reason they can continue to off low fares and set pricing for the entire domestic side of the industry. So how do we compete with that?

That's the big question, start hedging our fuel supply definately. Until the playing field is level we will continue to see distorted pricing by the low cost carriers vs. the legacy carriers. Maybe pressure the government into providing 'loan guarentees' so that the airlines can hedge their fuel supply? I don't know. There is only so much money the airlines can take from labor, before employees start leaving in massive droves, only to be replaces at low wage earners, a la Wal-Mart.

We still have no concrete update on the status of the Lake Charles & Beaumont airports. As it stands right now we've cancelled service to Lake Charles untill 8 October, and to Beaumont untill 16 October. Both airports suffered major damage due to hurricane Rita. Colgan Air our partner airline that operates our Continental Connection service out of Houston is working with those two airports along with Continental to determine the extent of damages, assist in repairs, and return service to both. The company says that conditions at both airports are very fluid and that dates of when service will start back up is subject to change at any time. Hopefully soon, are key feeder markets for the Houston operations.

29 September 2005

My Fault, Your Fault, Our Fault

There has been much said about who and what is to blame in the airline industry in regards to their financial woes. While surfing around, i came across this article on CnnMoney discussing who's at fault. The article tries not to assign blame to either management or labor, though it has a slight slant in favor of the idea that labor is the one to blame. Here is the story Airline Woes. The theory being that back in the days of regulation when the major's had no competition to speak of, the unions would clamor for higher rates of pay during the good times, which mgmt would give into, and accept paycuts during the bad times, and that it is this culture of rape the company for money for profits during the good times, that has lead to our current state, along with labor unwilling to concede to concessions since the downturn in the economy.

while i think it has some merit, i don't think it's the 'smoking gun' when it comes to an airlines financial stability. Take Southwest Airlines. Profitable since it's inception, it is also one of the most highly unionized airlines in the country.

If you compare my positon and my rate of pay with the current rate of pay for the same position at Southwest, you would discover that Southwest pays more, approximately $5 dollars an hour more. The same is true in respect to most other positions that airlines share in comman, with mgmt and pilots being the exception. Currently Southwest's compensation for it's board of directors totals approximately $3 Million dollars for all directors, while Continental's compensation for it's board of directors nears $18 million. That's right. $18 Million Dollars. That's per year. Every year. It says a lot in the disparity between the biggest "low cost carrier" in the United States, and one of the most respected legacy airlines. To be fair, most of Southwest's compensation for it's board is in the form of stock options, which aren't booked in it's accounting department for the time being, untill new SEC accounting rules go into effect.

As for the pilot group, the last time I checked, a topped out pilot at Southwest was earning approximately $160 per flight hour versus the $220 per flight hour Continental pilots were making before wage concessions. which averages out about about $16,000 a year difference in the two pay scales. a far cry from the disparity of the two corporate boards.

The thing is though, if all things were being equal. Continental would outperform Southwest in all areas, revenue, profits, and even in what they pay their employees. we were doing it before the current recession and before the events of 11 Septermber 2001, when we were paying our employees a higher rate.. the main difference between now and then, is that Southwest has hedged their fuel throughout the next three years, while Continental has chosen not too.

That means, Southwest is paying for fuel, the equivalent of oil being $29 bbl while continental is paying closer to market price, along with the rest of the majors, since those in bankruptcy have to pay spot price and are not allowed to buy on contract.

28 September 2005

Fare Hikes or Fare Hype

There has been erroneous information reported in the media that Continental raised their fares the week preceding the arrival of hurricane Rita that made landfall along the Texas-Louisiana coast. It is a blatant falsehood. There was a technical glitch on our company website that showed pro-rated fares for interline itineraries for flights that were cancelled. Flights that no one could book. In actuality, the company offered discounted fares for many people who were trying to evacuate the greater Houston area.
It may seem callous but I wish we had raised fares. Before people start screaming that I am advocating price gouging, the reality is if we had raised fares, then prices would have actually been in accord with what it costs for us to actually fly a given route. And besides, it’s capitalism at it’s best. Supply and demand will balance out pricing with what the consumers are willing to pay for a given supply. In this case the limited number of seats that were actually available to the number of consumers who actually did not have the need to evacuate.

Coach Fares paid for travel for five days preceding hurricane Rita from IAH to the 48 contiguous United States

Fares Paid Each WayNumber of TicketsPercent of Tickets
Below $1003,93513.0%
Number of Paid Tickets25,59184.4%
Number of Free Tickets4,72015.6%
Total Tickets30,311100%

In other news, the price of jet fuel rose to a record high at the close of trading Tuesday afternoon to $111.97 a barrel. The company keeps telling us that for every 1 dollar increase in the price of a barrel of jet fuel, our annualized costs increase approximately 40 million for a year. Hence our companies call for wage reductions in all work groups, instead of passing that cost along to consumers.

While the company has promised that they won’t seek further wage reductions from the various work groups, I can’t see how they can keep that promise following the after-effects of hurricanes Katrina & Rita. As things stand now, there are 16 refineries closed in Texas due to Rita. It will take approximately a week to bring them back online, and that’s not counting the ones that are underwater still in the Beaumont area. Nor does it include the platforms in the gulf that were shuttered due to both hurricanes. So I’m expecting the price of oil and the price of jet A to remain at record levels for the near short-term.
In other news, The Wall Street Journal reported that the merger of America West and US Airways is official, though it will take approximately two years for both airlines to become fully integrated. They are both going to continue operating separate frequent flyer programs along with separate website, though America West’s frequent flyer program will be discontinued in the spring.

Employees at all the major airlines in this country should pay close attention to this merger. I'm curious to see what will become of America West's pension plan, since US Airways dumped their on the federal government. And since both Northwest and Delta are both in bankruptcy, it will be interesting to see if either airline dumps their pensions as well, or if either airline merges with one another or merges with a different airlines.

The pension thing is the big question mark in the world of aviation. Most of the major airlines have employees who have been working for them for years. With everyone holding on to the hope that they will receive the benefits they were promised. And with every major airline that is not in bankruptcy hurting financially, i'm sure their corporate boards are all looking at the benefit that bankruptcy protection offers along with the oppurtunity to dump their own pension benefits.

Flight Attendants Cause Bankruptcy

anonymous said...

Sounds like you are bitter and need to quit. There are plenty of people that would love your job. Failure to join all other employees that have already taken pay cuts will help push the company into bankruptcy. Sounds like you are bitter and need to quit.

i find this attitude among fellow employees quite discouraging. we're all at this company to not only earn a living, but to make the company profitable for the long term and thus ensuring out jobs and livelyhood. it reminds me very much of people who blindly take on faith what our government leaders tell us, no matter what the falsehood can be.

the flight attendants refusing to take pay cuts is not going to push this company into bankruptcy. poor planning and mismanagement is what is going to push this company into bankruptcy. right now the entire aviation industry is facing a weak fare enviroment, high fuel prices, large pension obligations (except for those airlines who in bankruptcy dumped their pensions on the taxpayer), excess ASM's throughout the entire industry, high lease costs associated with company fleets, flying unprofitable routes.

what it comes down to is that upper management expected oil to be below 35$ a barrel. that disount airlines such as jetBlue and AirTran Airways would be able to be priced out of business. in the normal course of a strong economy they would be able too, but with the price of Jet A being as high as it, the majors haven't been able to effectively compete with the discounters.

the question in my mind is why didn't my company hedge our fuel supplies 3 years ago when we had the money too, so that we would could compete fare-wise with the likes of the discount airlines. according to most of the company gossip i've heard, from those in upper management in downtown to those front line employees at the airport, that decision rested with Larry Kellner while he was CFO and Gordon was CEO. apparently Larry was under the belief that the price of oil would never reach current levels and that it would soon be back under 30$ a barrel, and that the approximately 150 million it would take to hedge our costs would be better spent.

unfortunately that is not what has happened. instead oil had climbed as high as 70$ a bbl, with trading right now around the 65-66 dollar range. our company also sold off one of our few profitable assets, i.e. Express Jet with a guarentee we would buy 110% of Express Jet's available seats regardless of whether we fill them & paying Express Jet's fuel cost above 68 cents a gallon of Jet A fuel.

combine that with the company's defined-benefit obligations, and the inability to push through fare increases that stick, the company has decided to turn a profit at the expense of labor.

in any other industry in this country it's completely opposite. if the cost of providing a service or product rises, it's passed on to the consumer. in the airline industry it's not. the prevailing mantra seems to be "match any fair by any discount airline, even if we turn a loss and loose market share."

as a shareholder i find it offensive, i want my company to be profitable so that i can attain a return on my investment. i would much rather have a smaller, more agile company that turns a profit, than to continue to buy aircraft that we can't really afford and operates new/more routes that don't turn a profit.

27 September 2005

On-Going Pay Cuts.

The latest discussion around the proverbial watercooler dealt with the ongoing wage reduction cuts that the company's flight attendants have yet to take. Currently the company and the flight attendants are in federal mediation to try and reach an amicable agreement that is fair to the company, to the flight attendants, and to the other work groups that have already taken pay cuts.

personally, i believe, that several high seniority flight attendants will either quit or retire once they are forced into taking the reduction. one of my co-workers asked me why i held such a belief, and i related how i have already had a few flight attendant friends who have quit already, due to the fact that the company even asked for pay reductions.

being a flight attendant is not as easy a job as most people tend to think. true, during the average course of a flight, the most they have to do is pass out drinks and stale sandwiches, but the hour to hour and a half they have to report to work and actually "work" they are unpaid. they also spend several days away from home, from friends and family. the question i ask myself, would i take a job where i'm away from my family for extended periods of time, in a position that if you have less than five years with the company i would make roughly 20,000 a year. it's not that appealing to me.

the few flight attendants i've talked with have given me various reasons for voting down the aggreement back in april.
  1. the company has 1.5 billion dollars in the bank. there is no need.
  2. i would rather our company be smaller and profitable, than larger and turning a loss
  3. the company-union reps will see a 50% raise in salary while i take a cut
  4. the company wants us to work an additional 10 flight hours a month (extra 3 days)

i understand their complaints and reasons for not taking the pay cuts, but it seems to me that with pay cuts coming there way as it is, you might as well take the best offer the company and union can agree too, or else look for an employer who will offer you the pay and benefits you want.

i noticed there was an aritcle in Business Week about airline/aviation stocks and how they've been outperforming the S&P 500 index these past 4 weeks. most of the information in it is old news. mainly saying that though the airline industry is still battling an uphill war to profitability that the majors have been able to push through some fare increases and make them stick. even with Delta Airlines and Northwest Airlines both entered into bankruptcy on the same day. though with both airlines in bankruptcy protection, i'm sure they will be furloughing thousands of employees, and forcing more pay cuts on their respective employees.

it appears that the 5 major airlines in this country are racing to the bottom to see who can offer the cheapest service and product, at the expense of the hard working employees who actually make these companies run. my biggest nightmare is that in the future all the employees will be making Wal-Mart wages, and the flying public will be the worse for it.