FULCRUM GLOBAL PARTNERS LLC
Morning Meeting Notes
July 27, 2004
4 of 13
LABOR NEGOTIATIONS:
Donofrio: Airlines are often accused of targeting labor costs, specifically those of union workers, first during financially challenging times. Do you think that this is the case at Delta?
Malone: Yes, I do. In the midst of Delta’s financial crisis last year, management approached the pilots immediately without first attempting to restructure its debt and other cost burdens. Even while the former management team was asking the pilots for concessions, it was setting up SERP plans for executives and requesting government relief.
Donofrio: Do you think that there are other, more obvious cost-cutting targets at Delta that should betackled first?
John Malone: Yes. Management should also have targeted our leases and our debt, not to mention vendor and airport authority contracts. At this point everything needs to be evaluated simultaneously. ALPA is participating on the committee of unsecured creditors in an effort to make that happen.
Donofrio: What about revenue enhancement initiatives? Do you think mgmt can do more?
Malone: We’re waiting to see the strategic plan that management has been working on since January.
Donofrio: And then as a reminder, will that be presented to the Board of Directors in August?
Malone: From what we’ve heard, it goes to senior management and the Board of Directors in August.
Donofrio: And have you gotten a first peek at any of this, or is it pretty much in their court right now?
Malone: It’s in management’s court. We have not seen any of the results of the plan so far. Management has kept us apprised of the process being used, but has not asked us to participate in formulating the plan, nor have they invited our input regarding any of the issues with which we are familiar.
Donofrio: From strictly a cost perspective, your pilot contract stands out right now as head and shoulders above the others. Management now says that even their last proposal (estimated by the Street at roughly $800 million) is no longer enough to get back on parity with your competitors. Do you think that this is correct? Why or why not?
Malone: Well, we’ve never been interested in just achieving pure parity. We’ve worked very hard to achieve the contract that we did three years ago. Having said that, we do agree that pilot costs need to be addressed. Just how far they need to decline -- and how much equity we get in return for this enormous sacrifice and investment in the company -- is what these negotiations are all about.
Donofrio: Delta’s debt burden has increased tremendously in the past couple of years. Even with competitive operating costs, they may be at an overall cost disadvantage. Do you think that this should be addressed in any eventual agreement between the pilots and management?
Malone: Yes. The union’s governing body (Master Executive Council) is attempting to re-start negotiations with management to lower pilot costs, contingent upon the participation of all the other stakeholders in the company. Our view is that we’ll be part of the overall solution, but only a part.
Donofrio: The pilot members at US Airways have recently lost their pensions and United’s could be next. What can be done to ensure that Delta’s pensions aren’t also vulnerable?
Malone: First, we should not make the mistake of seeing all the pilot pension plans as the same. The US Airways plan was terminated in bankruptcy because the company could not emerge from bankruptcy without making those major contributions. The bankruptcy judge asserted that US Airways would have to liquidate without terminating the plan. At this point our plan poses no such threat. As you can see with the case of United Airlines, pension plans have been a much talked about issue lately. But the Delta pilots’ pension plan is in good shape right now.
Donofrio: Would you (the pilots’ union) be interested in sharing more of the risk (both upside and downside) through average rates supplemented by profit sharing. Does that work with respect to aligning labor and mgmt goals?
Malone: Yes, in fact we’ve proposed meaningful profit sharing, and we’re only going to participate in this restructuring if it leads to real profits for the company. This is very important to us. We believe management should line up the same way; perhaps they should look at restructuring their salaries along the same lines.
Donofrio: What do you view as the differences between Delta’s new management team versus your old one. Do any of these changes impact the pace of negotiations?
Malone: We don’t negotiate on the basis of who is temporarily in charge. We negotiate on the basis of our pilots’ interests since we are here for the long haul. We respect the management team as professionals and hold them to a high standard.
Donofrio: Is there anything you’d like to add as it relates to labor negotiations right now or should I move on to long-term strategy?
Malone: I want to reiterate our view that anything the pilots do is just a part of the overall solution, and we will make our agreement contingent upon other stakeholders participating. The pilots’ contract alone cannot solve all the airline’s problems.
LONG-TERM STRATEGY:
Donofrio: How do you view your longer-term relationship with mgmt. Do you think that it is
necessary to become more involved as a strategic partner, with respect to decision making? You said it hasn’t been happening right now.
Malone: It has not been happening. With respect to the strategic plan, we are a group that on a day-by-day basis works through Delta’s hub-and-spoke system, dealing with air traffic control, the TSA, and all of those issues that affect an airline’s operation. Given that we, as pilots, observe this firsthand, we are a bit surprised no one from the pilot group was interviewed to make that input. More importantly, we are still perplexed by management’s decision to refuse to allow a voting pilot on the Board of Directors. Time and time again, there have been mistakes made that might have been avoided had the pilots had a voice. In this agreement we’re negotiating, we will obtain equity for our investment in the company, and we believe that with that equity will
come a voice in the form of governance.
LOW FARE AIRLINES:
Donofrio: How real is the threat of the low fare airlines to the legacy carriers? Do you see this as temporary, given their lower initial costs due to lower capital costs and labor seniority costs. That’s the first part of my question.
Malone: Is it a threat, yes it is. This is basic economics. When there are two comparable products and one party is selling its for less, generally the consumer will gravitate toward the lower cost product. This is a reason why we are trying to be part of the solution in lowering costs. However, there is still some product differentiation: the legacy carriers have very powerful hubs, and that should enable us at times to charge a premium for our product.
Donofrio: Would you expect the longer-term outcome to be the low-cost carriers coming up to the mainline cost bar or the reverse?
Malone: Right now costs are coming down for the mainline carriers. I believe that with respect to labor, over time as the LCCs’ employees become more senior, they will start to expect, demand and negotiate improved compensation packages, work rules, pensions, and that the LCCs’ cost advantage will diminish accordingly.
Morning Meeting Notes
July 27, 2004
4 of 13
LABOR NEGOTIATIONS:
Donofrio: Airlines are often accused of targeting labor costs, specifically those of union workers, first during financially challenging times. Do you think that this is the case at Delta?
Malone: Yes, I do. In the midst of Delta’s financial crisis last year, management approached the pilots immediately without first attempting to restructure its debt and other cost burdens. Even while the former management team was asking the pilots for concessions, it was setting up SERP plans for executives and requesting government relief.
Donofrio: Do you think that there are other, more obvious cost-cutting targets at Delta that should betackled first?
John Malone: Yes. Management should also have targeted our leases and our debt, not to mention vendor and airport authority contracts. At this point everything needs to be evaluated simultaneously. ALPA is participating on the committee of unsecured creditors in an effort to make that happen.
Donofrio: What about revenue enhancement initiatives? Do you think mgmt can do more?
Malone: We’re waiting to see the strategic plan that management has been working on since January.
Donofrio: And then as a reminder, will that be presented to the Board of Directors in August?
Malone: From what we’ve heard, it goes to senior management and the Board of Directors in August.
Donofrio: And have you gotten a first peek at any of this, or is it pretty much in their court right now?
Malone: It’s in management’s court. We have not seen any of the results of the plan so far. Management has kept us apprised of the process being used, but has not asked us to participate in formulating the plan, nor have they invited our input regarding any of the issues with which we are familiar.
Donofrio: From strictly a cost perspective, your pilot contract stands out right now as head and shoulders above the others. Management now says that even their last proposal (estimated by the Street at roughly $800 million) is no longer enough to get back on parity with your competitors. Do you think that this is correct? Why or why not?
Malone: Well, we’ve never been interested in just achieving pure parity. We’ve worked very hard to achieve the contract that we did three years ago. Having said that, we do agree that pilot costs need to be addressed. Just how far they need to decline -- and how much equity we get in return for this enormous sacrifice and investment in the company -- is what these negotiations are all about.
Donofrio: Delta’s debt burden has increased tremendously in the past couple of years. Even with competitive operating costs, they may be at an overall cost disadvantage. Do you think that this should be addressed in any eventual agreement between the pilots and management?
Malone: Yes. The union’s governing body (Master Executive Council) is attempting to re-start negotiations with management to lower pilot costs, contingent upon the participation of all the other stakeholders in the company. Our view is that we’ll be part of the overall solution, but only a part.
Donofrio: The pilot members at US Airways have recently lost their pensions and United’s could be next. What can be done to ensure that Delta’s pensions aren’t also vulnerable?
Malone: First, we should not make the mistake of seeing all the pilot pension plans as the same. The US Airways plan was terminated in bankruptcy because the company could not emerge from bankruptcy without making those major contributions. The bankruptcy judge asserted that US Airways would have to liquidate without terminating the plan. At this point our plan poses no such threat. As you can see with the case of United Airlines, pension plans have been a much talked about issue lately. But the Delta pilots’ pension plan is in good shape right now.
Donofrio: Would you (the pilots’ union) be interested in sharing more of the risk (both upside and downside) through average rates supplemented by profit sharing. Does that work with respect to aligning labor and mgmt goals?
Malone: Yes, in fact we’ve proposed meaningful profit sharing, and we’re only going to participate in this restructuring if it leads to real profits for the company. This is very important to us. We believe management should line up the same way; perhaps they should look at restructuring their salaries along the same lines.
Donofrio: What do you view as the differences between Delta’s new management team versus your old one. Do any of these changes impact the pace of negotiations?
Malone: We don’t negotiate on the basis of who is temporarily in charge. We negotiate on the basis of our pilots’ interests since we are here for the long haul. We respect the management team as professionals and hold them to a high standard.
Donofrio: Is there anything you’d like to add as it relates to labor negotiations right now or should I move on to long-term strategy?
Malone: I want to reiterate our view that anything the pilots do is just a part of the overall solution, and we will make our agreement contingent upon other stakeholders participating. The pilots’ contract alone cannot solve all the airline’s problems.
LONG-TERM STRATEGY:
Donofrio: How do you view your longer-term relationship with mgmt. Do you think that it is
necessary to become more involved as a strategic partner, with respect to decision making? You said it hasn’t been happening right now.
Malone: It has not been happening. With respect to the strategic plan, we are a group that on a day-by-day basis works through Delta’s hub-and-spoke system, dealing with air traffic control, the TSA, and all of those issues that affect an airline’s operation. Given that we, as pilots, observe this firsthand, we are a bit surprised no one from the pilot group was interviewed to make that input. More importantly, we are still perplexed by management’s decision to refuse to allow a voting pilot on the Board of Directors. Time and time again, there have been mistakes made that might have been avoided had the pilots had a voice. In this agreement we’re negotiating, we will obtain equity for our investment in the company, and we believe that with that equity will
come a voice in the form of governance.
LOW FARE AIRLINES:
Donofrio: How real is the threat of the low fare airlines to the legacy carriers? Do you see this as temporary, given their lower initial costs due to lower capital costs and labor seniority costs. That’s the first part of my question.
Malone: Is it a threat, yes it is. This is basic economics. When there are two comparable products and one party is selling its for less, generally the consumer will gravitate toward the lower cost product. This is a reason why we are trying to be part of the solution in lowering costs. However, there is still some product differentiation: the legacy carriers have very powerful hubs, and that should enable us at times to charge a premium for our product.
Donofrio: Would you expect the longer-term outcome to be the low-cost carriers coming up to the mainline cost bar or the reverse?
Malone: Right now costs are coming down for the mainline carriers. I believe that with respect to labor, over time as the LCCs’ employees become more senior, they will start to expect, demand and negotiate improved compensation packages, work rules, pensions, and that the LCCs’ cost advantage will diminish accordingly.
