Labor costs

[mad691]

Can Airlines Pin Their Woes On Labor Costs Alone?

Aviation Daily 05/19/2004

Labor costs, labor costs, labor costs. That's the drum airlines have been beating for nearly three years as they desperately try to restructure and win concessions from workers to stay competitive with growing low-cost carriers (LLCs).

It may come as a surprise to some network carrier executives, however, that cutting labor costs will not lift their carriers out of perennial red ink to the solid ground of a low-cost operation. According to a new analysis by The DAILY and partner Eclat Consulting, low-cost carriers like Southwest actually pay some of the highest wages in the industry, but they have an efficient all-around business model. Southwest has had 52 straight quarters of profitability.

Other network carriers, such as US Airways, which went through one bankruptcy and are now screaming for more concessions from labor, had the highest non-labor unit costs of the 12 U.S. carriers in the study. Perhaps the problem dwells deeper than hourly wages. A basic point that seems to be lost is that many airlines' business models -- and not merely wage rates -- drive losses.

The DAILY and Eclat discovered that Southwest devotes 41% of total expenses to labor, more than any other carrier except Delta and 10% to 15% more than other low-cost carriers. Southwest's Boeing 737 pilots are the industry's third-highest paid, ramp workers and mechanics rank highest and flight attendants rank fifth-highest despite nearly two years without a raise due to stalled contract negotiations.

These wage scales contrast sharply with other low-cost carriers, such as JetBlue, America West and AirTran, which consistently pay lower wages than legacy carrier counterparts. Yet Southwest continues to be competitive with other LCCs in total unit costs, paying less than eight cents per available seat mile.

In terms of labor unit costs, the efficiency of the Southwest model is clearly evident from the data. Despite its high nominal wage rates and the high percentage of costs associated with labor, Southwest's labor cost of 3.2 cents per ASM is lower than that of all traditional network carriers except Continental, which pays 2.78 cents.

One reason for this is the more efficient use of labor, which is a byproduct of a business model built on high aircraft utilization, short turn times and better crew scheduling.

"Labor costs must of course be managed, but not in isolation." said John Donnelly, Eclat managing consultant. "The mantra of high labor costs must transition to one of fundamental change if the industry is to achieve sustainable profitability."

The fact remains that Southwest still pays a significantly higher labor CASM than other LCCs that use similar efficiencies. While these airlines take advantage of the lower wage rates as well as lessons learned from the Southwest model, the data show that the game is still about all expense lines, not just labor.




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

 

[Falconjet]

Finally!

Can somebody PLEASE give me a big AMEN for this article!

I hope that the honchos at DALPA and ALPA get this and other rational info to the mainstream media before its too late!

FJ

 

[General Lee]

That is what Dalpa has been saying all along here. We don't mind giving up some pay, but how about a good plan to go along with it?

Bye Bye--General Lee

 

[wms]

The DAILY and Eclat discovered that Southwest devotes 41% of total expenses to labor, more than any other carrier except Delta and 10% to 15% more than other low-cost carriers. Southwest's Boeing 737 pilots are the industry's third-highest paid, ramp workers and mechanics rank highest and flight attendants rank fifth-highest despite nearly two years without a raise due to stalled contract negotiations.

In terms of labor unit costs, the efficiency of the Southwest model is clearly evident from the data.

One reason for this is the more efficient use of labor, which is a byproduct of a business model built on high aircraft utilization, short turn times and better crew scheduling.

Efficiency, productivity and effective management. Pay well, provide a good environment, and expect alot from employees. And above all, set a good example at the top.

 

[General Lee]

Here is something about other costs at Delta:

The following excerpt is from the May 25 issue of Plane Business Banter:

"Delta: A Good Aggressive Choice

Taking third place for the week were shares of Delta Air Lines, which saw shares up 33% for the week, closing at 6.64.

The story here? Gary Chase, analyst at Lehman Brothers, and, I might add, a new dad, wrote a note last week that basically said what I have said here. If you want the best risky play in the industry, here you are.

Gary said in his note, "While we believe Delta shares are compelling on a probability-weighted basis, we acknowledge that risks to the story are extreme. We believe Delta has a lot of potential upside, but the company must resolve its pilot cost issues before it can address many of those opportunities."

Chase upgraded his rating on the shares from "2-Equal Weight" to "1-Overweight."

I found it interesting that as part of his research note, Chase also addressed an issue that I have mentioned here, and that Sam Buttrick, analyst with UBS, pushed the airline on in its last earnings call. That issue? That pilot costs are just one part of the overall cost problem at the airline.

In Chase's note, he states that his analysis shows that Delta experienced more escalation in non-labor costs between 2000 and 2003 than any other carrier he follows -- even though the airline maintains the lowest non-labor costs among the network airlines.

Or, to put it another way, if the airline were to reduce its non-labor costs to the same level that it had in 2000 (an 8% reduction), savings at the airline could match, or even exceed those generated by a 30% pilot cost reduction.

The bad news? The company does not seem to be making much progress in this area."


Bye Bye--General Lee

 

[MedFlyer]

It's all about productivity. The DL pilots could probably keep most of their pay...if they were willing to be more productive. However, DALPA has refused productivity reforms, so instead they will give up massive pay.

In Chase's note, he states that his analysis shows that Delta experienced more escalation in non-labor costs between 2000 and 2003 than any other carrier he follows -- even though the airline maintains the lowest non-labor costs among the network airlines.

It's pretty scary that DL has the lowest non-labor costs among the network carriers, but is losing the most money of all the carriers.

 

[General Lee]

Medflyer,

The NW guys won't be doing that---they seem to want to give up the pay before the rules, since the rules are harder to get back. I think Dalpa will give up a little on the rules and then more on the pay. Here is the article about the NW pilots:

Northwest pilots prefer pay cuts to job cuts
Liz Fedor, Star Tribune
May 26, 2004NWA0526
Pilots at Northwest Airlines want their $200 million in annual labor savings to come primarily through pay cuts rather than changes in scheduling, vacations or other work rules, a pilots union leader said Tuesday.

"Our philosophy is to make our cost reductions in W-2s rather than changing work rules," which could produce more job losses, said Curt Kruse, a spokesman for the Northwest branch of the Air Line Pilots Association (ALPA).

The union outlined its negotiating approach in a four-page memo recently mailed to pilots. Kruse, a Northwest A320 captain, elaborated on ALPA's strategy in a Tuesday interview.

Last month, Northwest's pilots union leaders voted unanimously to propose $200 million in annual labor cost savings in order to help the Eagan-based airline regain profitability. Northwest management has said it needs to cut pilot costs by $442 million a year.

Kruse said pilot negotiators would like to reach a tentative agreement with Northwest by September or October.

The cost reductions the pilots are proposing would run through 2006, as opposed to the 6½-year agreement sought by management.

"The $200 million was not a number we grabbed out of the air," Kruse said. "Our analysis shows that it would bring us down to a pilot unit cost which would be competitive with our main competitors, mainly United and American," he said.

It's unclear how much of the airline's total savings will come from pay rate cuts, because the union might accept some work rule changes that have no impact or limited effect on staffing levels. The pilots union also might be given credit for separate agreements that provide an economic benefit to the airline, such as one under discussion covering expansion of the cargo division.

The current contract includes a pay range of $35,000 to $240,000 a year. Northwest's compensation is the second-highest in the industry behind Delta Air Lines. Among the major carriers, Kruse said Northwest had been the second-lowest for several years.

But that all changed when US Airways and United Airlines filed for bankruptcy protection in 2002, and American Airlines averted bankruptcy in 2003. The trio substantially reduced pay rates for airline employees, and some pilot groups agreed to scheduling changes that reduced vacation accruals and required more flying each month.

ALPA cautioned against agreeing to such changes at Northwest.

"While it may be relatively painless on an individual basis to give up a few days of vacation per year or work a few extra hours per month, the cumulative effect on staffing can be significant," ALPA said in its memo to Northwest pilots.

Work rule changes could delay recalls and increase furloughs. Currently, 881 pilots are on furloughs out of a population of about 6,200 pilots.

For example, altering the vacation accrual rate could save Northwest $46 million a year and reduce the workforce by 223 pilots, the union said.

Though Northwest pilots support two years of labor savings, the union proposal does not demand that wages "snap back" to pre-concession levels.

"We expect pilot pay rates at our key competitors to remain at or below those at Northwest well beyond the end of the proposed [two-year] agreement," the ALPA memo said. A "snap back" clause could harm Northwest's ability to refinance its debt and increase the "risk of a Chapter 11 [bankruptcy] filing."

But the pilots are calling their proposal an "investment agreement," because it does include provisions for future financial rewards such as airline stock.

"Northwest has very serious financial challenges," Kruse said. "We've seen where the rest of the industry has gone. We believe that we can do better for Northwest as a corporation and for the pilots by working out a mutually agreeable deal without dragging Northwest through the same kind of process that American, United and US Air have gone through."

The pilots union is the first work group to show its receptiveness to labor cost cuts. "We still firmly believe that all Northwest unions will have to participate in making Northwest competitive," Kruse said.

To date, the other unions have publicly opposed Northwest's call for concessions.

Northwest received the pilots' proposal April 28, and Kruse expects executives to formally respond to it before union leaders convene for a June 8 meeting.

In addition to reviewing the pilots' proposal, Kruse said, Northwest management is updating its business plan to include assumptions for higher fuel costs and pension law changes. Management is attempting to cut its annual labor costs by $950 million.


Bye Bye--General Lee

 

[MedFlyer]

Medflyer,

The NW guys won't be doing that---they seem to want to give up the pay before the rules, since the rules are harder to get back. I think Dalpa will give up a little on the rules and then more on the pay. Here is the article about the NW pilots:

Unfortunately, this way of thinking is exactly why the major carriers will continue to struggle and fail. Pilots at the LCC's recognize that efficiency is a key to survival and growth....note I didn't say low-pay was the key.

Meanwhile pilots at the majors seem hell bent on ensuring they have the most inefficient and bloated carrier possible.

 

[General Lee]

Medflyer,

The majors have asked for a certian amount of money--and we are supposed to come up with the rest. That is true---they said "you need to give us the much $$$$ in concessions....." and we will figure out how to do it. I am getting sick and tired of your ranting. Here at Delta we are down almost 3000 pilots from pre-9-11. We are going to lose another 250-300 Capts on June 1st. Is that not good enough for you? One of the major problems here at Delta is that we have too many RJs---and not enough mainline aircraft to take back the same number of passengers that are back from pre-9-11 days. Also, the fares have dropped and the only way to combat that is with more seats--hence larger airplanes, not more RJs that are clogging up the taxiways and not bringing in that much revenue. Airtran has dropped their RJ feed in favor of the 717s. That is what should happen here at Delta. Take a look at what Delta mainline was pre-9-11 and now. Are we bloated now? You guys have grown and now we need more seats to bring in needed revenue. You need to re-examine what you are thinking and don't call us bloated---we are far from it. We have shrunk considerably and actually need to expand our ranks and our airplanes......

Bye Bye--General Lee

PS--read this again and tell us again it is our fault....(Are you management at Comair???)

"Or, to put it another way, if the airline were to reduce its non-labor costs to the same level that it had in 2000 (an 8% reduction), savings at the airline could match, or even exceed those generated by a 30% pilot cost reduction.

The bad news? The company does not seem to be making much progress in this area."

 

[MedFlyer]

Medflyer,

The majors have asked for a certian amount of money--and we are supposed to come up with the rest. That is true---they said "you need to give us the much $$$$ in concessions....." and we will figure out how to do it. I am getting sick and tired of your ranting. Here at Delta we are down almost 3000 pilots from pre-9-11. We are going to lose another 250-300 Capts on June 1st. Is that not good enough for you? One of the major problems here at Delta is that we have too many RJs---and not enough mainline aircraft to take back the same number of passengers that are back from pre-9-11 days. Also, the fares have dropped and the only way to combat that is with more seats--hence larger airplanes, not more RJs that are clogging up the taxiways and not bringing in that much revenue. Airtran has dropped their RJ feed in favor of the 717s. That is what should happen here at Delta. Take a look at what Delta mainline was pre-9-11 and now. Are we bloated now? You guys have grown and now we need more seats to bring in needed revenue. You need to re-examine what you are thinking and don't call us bloated---we are far from it. We have shrunk considerably and actually need to expand our ranks and our airplanes......

Bye Bye--General Lee

Is DL still bloated? Yes. Look at DL's mainline unit costs....they've dropped a little, but not nearly enough to be competitive (even if you neutralize fuel costs).

You can blame RJ's all you want, but it doesn't change the fact that DL mainline is still an inefficient operation. Some of that inefficiency is derived from DL's hub-n-spoke network which is inherently inefficient and some of that inefficiency is derived from your contract.

Just because DL laid off a bunch of pilots doesn't make DL a more efficient carrier. Simultaneous to those layoffs, DL also grounded a large number of planes. That's NOT improved efficiency...its just shrinkage.

The reason Airtran found 717's more appealing than RJ's is because Airtran is an extremely efficient operation with low costs. If DL had Airtran's mainline costs, mainline DL would be growing like wild.

Does DL have too many RJ's? Yes. Instead of fixing the mainline business model, DL chose to just replace it with RJ flying. It wasn't a good long term strategy, but that's the way it goes. Your union could have prevented it, but you chose not to.

 

[XRMEFLYER]

One of the major problems here at Delta is that we have too many RJs---

Wrong again professor! Stick to yanking the gear and monitoring the cabin temp and leave the MBA stuff to the MBAs. The Airtran example that you use as evidence for your simple simon redundant argument does not apply. Entirely different business model.

Also, the fares have dropped and the only way to combat that is with more seats--

That is making a pretty large assumption in terms of the number of people looking to go on any given flight. There are plenty of these routes that you think should be flown by larger planes where we are currently only getting 25-40 folks a flight. A DCI plane on that route is the difference between profitability and a loss. Yes larger planes have a lower CASM, but you have to fill those seats to make money. If it were not for that little detail, we would all be flying 747-400s everywhere because they are "cheaper." But it's the marketing people who are inept and corrupt and out to get you guys though by conspiring to limit the number of people who want to avail themselves of Delta's services right smart guy?

You guys have grown

Yeah, and your point is?

don't call us bloated---we are far from it.

Right, you are the model of efficiency!

I am getting sick and tired of your ranting.

There are plenty of us who feel the same about the little pearls of wisdom you share so generously with all of us. So as hard as I'm sure it is for you, get over it and try to come to grips with the stark reality that no one really gives a dam what you are sick of.

Now drop and beat your face private!

 

[General Lee]

Medflyer,

I am glad that we agree on one thing, that we have too many RJs. As far as being inefficient, a lot of that comes from major RJ usage---the CASM skyrockets upward with RJs on shorter flights--and that CASM is blended in with ours to make it seem like ours is bloated. Think about it--the more seats you have the lower the CASM---how many domestic 767-300s do you see every day at ATL? We have more widebodies in ATL than UA and AA have combined in ORD. All of those seats lower the CASM. But, then you throw in 100 RJs in the takeoff line going here and there, and the average CASM rises. RJs are expensive, and Airtran has noticed this.

Sure, there will be some inefficiencies with a hub and spoke system, and Grinstein said he will be addressing that with a rolling hub probably--which will allow crews to stay in their same aircraft and not have to sit for three hours or do a bag drag to another terminal. So, he is trying to address that problem. Rome wasn't built in a day, and we can't copy Southwest exactly.

We also parked a lot of planes---you are correct--and that takes less pilots. But, now we need them back--and we have too many RJs that create log jams while not bringing in enough revenue. We need those planes back---but our last management team thought incorrectly that RJs were the answer. Grinstein will change this.

Lastly, my union did make the mistake in the early 90's of not bringing the RJs to mainline---and they have no doubt hit their collective heads on walls since then. But, I don't know one Mainline pilot that didn't want a staple with ASA and Comair attached to us. The problem then arose that your senior pilots--who were the minority--chose to cry foul and wanted date of hire. That is where everything fell apart---and the junior guys at that time didn't have the ballz to stand up to the senior tyrants.


Bye Bye--General Lee

 

[General Lee]

Xremeflyer,

I was wondering when you would show your ugly face again.......

So, RJs are the answer for us and not Airtran, Southwest, or Jetblue? Hmmmmmm. We are competing directly with them, and a lot of RJs compete on the same routes. If the LCCs fares are lower, and they have more seats, they can squeeze out a profit when we cannot with an RJ. Sorry--but that is true. We at Delta have two operations at mainline---Domestic and INTL. Domestic provides feed thru hubs---and we are having more and more LCC competition--so we are now transforming to take them on directly--and RJs are not a part of direct competition with the LCCs. You really need to learn that fact---you seem to be missing it constantly. The LCCs are growing--and your RJ is becoming obselete--sorry to break that to you..... The INTL flying has no LCC competition as of yet, and probably not much will occur on that front for awhile. Everytime a LCC puts a mainline sized aircraft on one of your routes---you will have to be replaced by a mainline aircraft (flown by us---sorry) to compete effectively. We should be doing that on ATL--ROC, SYR, CAK, and others--but we don't have any new airplanes as of yet. Grinstein said at the SLC meeting that he "Cannot see DCI flying them." (referring to the future 100 seaters) After our pay cuts I am sure we will order some new ones--for us. Sorry.

You say "we have to fill those seats" to make a profit.... We are! News alert to Xream-me---the passengers are BACK! Where have you been? Do you really think that we can only fill a CR7 between DFW and JFK--two of the largest cities (NYC and DFW) in the US? I bet we could fill something larger, but we are litterally scaring away all of our Medallion passengers with CR7 flights from DFW to OAK, DCA, JFK, etc......Any truth to that tough guy? Oh yeah, there aren't enough people from those cities to warrent a larger plane. The fact is that we don't have any more larger planes.....

As far as other people caring what I think---there are more than you think. You are the one who spouts off inaccuracies and then pretends to be a military jerkoff. Go back to cleaning latrines---you are probably better at that anyway.....Enjoy!

Bye Bye--General Lee

 

[MedFlyer]

Medflyer,

I am glad that we agree on one thing, that we have too many RJs. As far as being inefficient, a lot of that comes from major RJ usage---the CASM skyrockets upward with RJs on shorter flights--and that CASM is blended in with ours to make it seem like ours is bloated. Think about it--the more seats you have the lower the CASM---how many domestic 767-300s do you see every day at ATL? We have more widebodies in ATL than UA and AA have combined in ORD. All of those seats lower the CASM. But, then you throw in 100 RJs in the takeoff line going here and there, and the average CASM rises. RJs are expensive, and Airtran has noticed this.

I'm well aware that larger planes have lower CASM's. But even if you take out the RJ's, DL's MAINLINE CASM is still too high. In fact, DL actually did separate out the mainline CASM last quarter...it was 10.38 cents. That's too high to be competitive. Once again, you can't blame RJ's for all DL's problems.

We also parked a lot of planes---you are correct--and that takes less pilots. But, now we need them back--and we have too many RJs that create log jams while not bringing in enough revenue. We need those planes back---but our last management team thought incorrectly that RJs were the answer. Grinstein will change this.

I'm glad you trust Grinstein to make these all these changes...but I don't. He could easily just be telling you what you want to hear in order to get concessions. After concessions are given, there's no way to know if you'll actually get more planes.

But even if Grinstein is being genuine, DL's balance sheet is so profoundly damaged, it will be hard to get a lot of new planes in the next few years.

 

[On Your Six]

Xrmeflyer,

I happen to think the General is very insightful - unlike you with your lame put downs and one-liners. You're so clever with your unsubstaniated one-liners....

For your information, this is a public forum and opinions are expected. So, the General is entitled to his opinion and his viewpoints. His perspective is different than yours - he knows more about Delta and its structure than you do and I am sure you have a much different perspective about Comair or ASA. Personally, I think you have an inferiority complex and you are trying to compensate through cutting one-liners. That's great.

You are each entitled to your opinions. If you don't like the opinions expressed, you can tune out.

 

[General Lee]

Medflyer,

Sure, the balance sheet is messed up, but what else can we do? We need to "earn our way out" as Grinstein says. Can you trust everything he says? I don't know. Do we have a choice? Nope. We want to do this without going to Chap 11---and good ole Chris Renkel from Dalpa stated once again, "I am 100% positive that we can do this without going to the courthouse." I don't think Grinstein would spend so much of his valuable time (he is 71, and he moved his wife from SEA to ATL) to just lose control to a judge. We shall see.....

Bye Bye--General Lee

 

[XRMEFLYER]

You have it all figured out don't you private? Maybe the front office types will take your sage advice and implement some of your high speed ideas. I'm sure none of that has occurred to them and they are just waiting for a guy of your stature to show them the way.

On Your Six, I'm glad to hear that you enjoy your boyfriend's material. Did You know the two of you could head up to Massachusetts and make it official now?

As for the main body of your post, your psych 101 prof would be so proud of how much you learned in his class and what a fine clinical psychiatrist you have turned out to be as a result.

If you were paying attention instead of formulating your defense of your sweetheart, you would have noted that it was her lack of tolerance for the opinions expressed of another that I was referring to.

Enjoy!

 

[On Your Six]

King of the lame one-liners....

XRMEFLYER,

Ha ha ha. Do you wonder why people don't take you seriously? You're a pathetic joke - and you know it. Why don't you use your limited brain power and try to substantiate ANY of your claims instead of using idiotic one-liners?

Time waster............

 

[General Lee]

X-ream-me,

All anyone has to do is read your posts and see what your motives are. If you can't come up with a good counter--then you just "slam" them. We can all see that direct competition between LCCs and RJs teamed up with Majors just doesn't work, and you probably can see that too---and even though you are a tough Marine or Army Ranger--you are......scared. It's ok son, you can cry if you want to---that won't make you a wimp--not really anyway. If you really want to see a military guy cry---rent "Born on the 4th of July" with Tom Cruise---I am sure you need a good cry anyway......

Bye Bye--General Lee

 

[XRMEFLYER]

If you can't come up with a good counter--then you just "slam" them.

Hey everyone has to be good at something. It's important to find what that is and run with it. I'll leave the heavy mental lifting to the great thinkers of the world like you!

Six, you really know how to hurt a guy. Referring to my one liners, which is not 100% accurate seeing as how they are often 2,3 or even four liners, as idiotic and all. It's ironic really, that you are doing precisely what it is that you are villifying me for in the first place.