Labor is not the problem

[AAflyer]

This seems to be running in a few threads, thought I would say my piece and let the comments fall under one thread.

What if we all worked for free? We find ourselves barraged again with repeated allegation that our labor costs are fundamental to the industry problems, this is not so.

In 1993 Bob Crandall was seeking $300 minllion in savings on the Aa pilotss contract in order to make AA more competitive with SWA. Specifically, it was labor that was targeted, however the actual products were vastly different. Therewas no pretense of competing with SWA. In fact, industry comparisons over the last decade all the "majors" are compared to each other but not "the other" airline. SWA with its no frills service was never viewed as acompetitor but when the opportunity arose for cost comparisons, they were the easy benchmark to throw in the face of labor.

American's premium service and SWA's leisure market are products that are worlds apart. 9 years ago AA's labor costs were 38% of it's costs. SWA's were a few points lower. Today a look at labor during the last two "NORMAL" qrtrs. (Q1 of 2001 and Q2 of 2001, show that labor was 37% of both AA and SWA. UAL was only slighlt higher at 38%. Labor costs in the industry range from 35-38% of total costs.

Presently however AAand UAL management are citing higher proprtionate levels of labor costs. Why you may ask? They are choosing to man inefficiently. The result of "over manning" is that pilots receive lower furlough rates and rsik having labor costs thrown in their faces or held up to politicians. AMR operates its people and equiptment at an underutilized rate to be more seponsive as flying returns to pre-9-11 levels. SWA, which did not REDUCE its flying, is still at 37% labor costs.

This begs the question, if we worked for free and corporate salaries were eliminated would are costs still be out of line with SWA. Yes. This is because you are comparing apples to oranges. AMR's revenue stream is based on business travel and premium services and revenue. SWA is based primarily on leisure market revenue.

As the economic good times developed untapped markets that offered low fares which lured travelers out of their cars and into airplanes, emerging new-mid-level carriers presented a third travel ooption, but were undercapitalized and failed to deliver the large net-work carrier services. These carriers also failed next to SWA balance sheet, yet labor costs were never blamed for their demise.

SWA has never citied labor costs as part of the reason for it's SUCCESS. Instead, it credits a sound businees plan and highly motivated workforce.

So what has changed. Before accepting labor costs at UAL and DAL have surged to unprofitable levels, we should remind ourselves that labor costs were trimmed significantly at UAL in trade for equity. This equity appreciation model failed miserably. At DAL, overall costs have been balanced on the shoulders of mainline pilots as the airline increases operations of it's low cost RJs.

Would shrinking an airline or chopping labor costs make airlines more viable? no!

Would labor costs have made Yugo a viable product? Would low labor costs make tube televisions able to compete with Hi Def TV? the answer is again no.

American tickets today generate only 60-90% of the revenue that theyu did a year ago. If labor costs were eliminated the loss would be less, but not significantly so.

If pilot costs were eliminated, the cost per seat mile drops from 11.22 cents per ASM to 10.07 ASM. This is also FULLY ADJUSTED for our pension and benefits. In the face of unit revenue dropping to 18% our contribution would be seemingly insignificant. The pilot costs per ASM is only .0115 cents per mile.

Increasing pilot costs by 20% increases overall costs per ASM to .0018 per ASM.

Should AA or other airlines focus on pilot wages as a way to shore up revenue swings of 15-18%? I don't think so.

In an industry that markets a perishable commodity, high fixed costs compel AMR and others to get more planes flying to generate more revenue that will cover costs. In today's economy revenue is dicatated by 2 things. product differentiation and competitive capacity. Overtime our revenue at AA based on sale of premium tickets has fallen prey to a number of factors.
1. Internet sales
2.More efficent tracking of business expenses
3.over-capacity
4.Development of new RJ markets
5. Hub bypassing (which will continue)

Another factor is mainline hub and spoke systems do not offer enough product differentiation to prevent customers from flying point to point. Market share will drive carriers to examine feasibilty. individual markets will continue to define themselves. Low cost carriers are in a position to attack lucrative point to point flying previously dominated by premium carriers. New equuiptment and route structures are enabling SWA and JB to overlay AAs and other routes. Business will be pressured to gravitate to the lowest cost services and will gladly do so as some of the new carriers begin offering sat tv and internet services (that is why I love jumpseating on JB thanks guys!!)

So how LOW do labor costs have to go to make AA and others viable? too low. The premium customer market is now at 9% down from the high 14% that AMR and others enjoyed in 2000. That means revenue will remain below the break even point for our business model. this problem had surfaced before 9-11. The AMR revenue pricing model is damaged. Stripping labor costs will not make this model profitable until capacity is tripped out and revenue seat miles rates increase significantly.

Cost per ASM at SWA is approx .076 cents per ASM. As demonstrated, dropping the pilots out of the AA formula will not make it competitive. It only reduces AA's costs per ASM to .1007 cents per ASM. Yes ladies and gentlemen only down to .1007. It is the companies premium product, International services, and carrying costs for that type of infrastructure to support the product, drive costs well beyond SWA costs (for all you people thinking we can all take on SWAs model).

Are the labor force expenses, as part of the cost structure in line between the two carriers? YES!!!! At SWA the labor has traditionally been 37% of costs. PILOT labor at SWA equals .75 cents per ASM. SWA ocerall costs are 7.6 cents per ASM. For the past decade. Pilot labor costs have remained at aprrox. 10% of the cost per ASM. At AA the pilot costs are 1.15 cents per ASM and costs are 11.22 per ASM. AA has done a fine job managing these costs, but still has to overcome the cost burden inherent with
1. Multiple fleets
2.extra training
3.Higher percentages of reserves.

Even if adjusted stage length costs were considered, the argument only gets stronger that AA labor reductiuons would still not make it competitive with SWA. Ladies and Gentlemen :
IT IS A PRODUCT AND REVENUE PROBLEM, NOT A PILOT PROBLEM

Airlines know that they must address revenue issues. As the only controllable cost, LABOR is an easy target. But even Wall Street gets it, pointing out that revenues are lagging and business models are aging.

While labor has always been ready to listen to the needs of the industry, we know that flying for free couldn't fix the ills that plague this battered industry. Here are the facts:

If you and I fly for free, service to Brookings, SD will still need to be subsidized.

If you and I fly for free, premium carriers will still need to fix their revenue problems.

If you and I fly for free we only give the company more time to delay difficult decisions.

It's time for the industry as a whole to recognize that its pilots and entire workforce deserve respectful wages and safe work rules.

AAflyer
Stats are from a cost study performed for the APA by airline analyst Bob Mann.
Much of the commentary is from Capt Dave Eitel. SFO dom char.

 

[jetexas]

Nice post AAflyer.
Maybe AMR should try to look more closely at their corporate model in regards to Labor/management relations instead of slashing and burning every penny they can and seemingly trying to emulate the competition. The "new corporate structure" should include an analysis on how to positively ( keyword "positively" )motivate employees and therefore improve customer service and resultant revenues? Happy employees = Happy Revenues.
Then again, I don't have the 'big picture'.

 

[guitarflyer]

Yeah,
how come these jag-offs never talk about MANAGEMENT costs.
They always whine about pilots' salaries being the problem. God forbid the CEOs & managers take a paycut. They might miss a payment on their 2nd boat or something.

 

[kilomike]

Well said, Guitarflyer!!

Amen, Guitarflyer. Those CEOs would not be willing to take a pay cut, ooooohhhhh, noooo! One could buy several aircraft with the pay of some of the CEOs and vice presidents at the majors!!

There are other, non-labor expenses that could be eliminated. One example comes to mind. A friend who flies for UAL told me that the pilots are required to take company physicals. That costs LOTS of money, and Southwest never does this--and guess what?? Safety is not compromised in any way...... Hmmmm, that makes one wonder if they really have their heads on straight to fix their financial problems at UAL???!!! As I understand it UAL pilots over 50 have to take this big physical annually.

I am sure there are many other examples of wasting money at the majors. I would be interested to hear of other examples.

Fly safe,

kilomike

 

[BigFlyr]

As a former (pre-strike) EAL mechanic-turned-pilot I've heard all about the labor cost issues, and for the most part, I agree that they alone are not responsible for the major's losses. Poor (top heavy) management and over-paid CEOs and CFOs are more likely the reasons, to name a few.

I do have a question, however... Just what is "PREMIUM SERVICE" and "PREMIUM CUSTOMERS" you mention in the post?

I haven't had any service that could be called "PREMIUM" riding in coach, EVER... at AA or any other major I can think of!

If "premium service" means you have to dish out 5 times more for a larger seat and an alcoholic beverage, then they can have it!

JB offers new airplanes with video games and blue potato chips... Thats about as "premium" as it gets and they are a "low cost operator", so the premium service issue is a non-issue IMO.

 

[AAflyer]

Premium

Premium was designed for the business elite. Walk into an Admirals club (AA lounge) have any ticket changes accomplished by service staff while you have a drink and confrence call or relax, then board first class to Europe , champagne, business journals, cavier, etc. etc. That is what "premium" has meant in the past, and still does on our International flagship service. That is the service or distiguishing difference between the low-cost carriers, as well as the route network. I don't see JB or SWA serving Tokyo, Rio, or Zurich, these would also be considered premium routes.

I am glad a few took some info away, but even CEO pay like I explained earlier will not sink or save an airline, once again it is a product and revenue problem.

AAflyer

 

[AAsRedHeadedbro]

I agree.

The "premium" service they must be talking about has to be up front because "coach" class on AA (and every other major) really is nothing more than a bus or train ride. Worse, actually, because the seats are smaller. I have a hard time believing that our (AA's) "snacks" (a 1/2 ounce bag of disgusting...something) on our four hour flights and a movie (if you're willing to fork over 5 dollars for the headset) really constitute premium service, as compared to SWA or even Jet Blue.

 

[AAsRedHeadedbro]

International First Class passenger volumes are a VERY small part of our overall customer totals but the services associated with flying in that cabin are a large part of our cost structure. I have to believe that may be why senior management has decided to eliminate International First Class on all aircraft except the 777's and replace the unused volume with a larger Business Class.

I must say though, when my wife and I travel to Europe, 777 First Class sure is a nice way to travel...standby, of course.

 

[A Squared]

AAflyer,

The repeated use of the word Premium left me with the same sort of questions as BigFlyer. The thrust of your post seems to be that your salary shouldn't be compared to SWA pilots because you're a "premium" pilot. I'm wondering, what exactly is that "premium" service you provide to either your company of your passnegers? What is it that is so much better that it necessitates that you be paid 2 times what a SWA pilot is paid? (if you don't like the number 2, substitute whatever number you do like. Suffice to say, it will be greater than 1) Do you fly twice as smoothly? When you say bye, bye to the deplaning passengers, is your smile twice as sincere? Are you half as likely to have an accident? Do you hold the glideslope twice as closely on an ILS? Are you more commited to making the flight go smothly? Is this reflected in your airline's on time performance?

If one of your flights were flown by a SWA crew, would the passengers be able to tell the difference? If not, then why are your services twice as valuable?

What is the "premium" service your airline provides to the customer in coach? I've ridden on your airline, and I don't recall anything premium about the experience. I don't remember having more seat space, I don't recall the food being better, I don't recall the service being any more cheerful or efficient.

So, for a given flight at a given time between 2 cities that both SWA and AA serve, what is so much better about AA's service which would cause me to pay a premium (the actual correct meaning of premium; pay more)to travel on AA over Southwest?

regards

 

[AAflyer]

Redhead,

This is true, but when we were rocking, the 2% of business travelers gave us 27% of our revenue. Now that the business group has slipped, they are revamping the system. Asia is doing fairly well, however South America and TransAtlantic flying has yet to rebound, they are hoping the 767-300ER retrofit will save money, they are planning to keep the 777 seats in though. As I look at the JFK bid packet, the 777 is serving peek business hours or high demand time, and us lowly 767 guys are picking up the off peak, looks like it may work.

AAflyer

 

[AAflyer]

A squared,

Where did you get that I am a premium pilot, may I suggest you re-read the post, then read further down were I defined premium.

Then re-read the labor cost ratios. Understand what I am saying. I merely wanted to point out my salary in the grand scheme of things will not save the airline. If you can not figure out the the revenue on a 767 overseas is far greater than a 737 flying from Luv to Orlando than I can't even begin to explain the rest.

Also understand when I use premium, it is what we have marketed to the business passenger, yes all coach classes are pretty much the same, but I would have to say we seem to have a fair amount of compliments on our legroom at AA. I don't think AA is any better than the rest. Delta UAL, NWA all offer premium services in first class, especially over-seas.

Lastly, with my horribly high pay we are still in line with what labor is at SWA approx 37%, it just happens that our infrastructure being a global airline is significantly more.

If someone wants to fly from Denver to DFW first class and then have their bags transferred to Zurich, or London etc, then enjoy first class international service they will pay for it, many did when the economy was booming, and they still pay for it now, whether you like it of not SWA will never offer that. UAL, NWA, DAL will ,that is premium service, the majors make a lot of money off that.

AAflyer

 

[publisher]

AH Ah

What you are saying is that this is a complex issue.

The example I have used here and elsewhere was Fedex. They started with one product, overnight by 10am or whatever. When Flying Tigers, Emery, and others tried to compete, they were not successful because they kept the service integrated with their full freight business. The overhead and inefficiency of that program had a cost and infrastructure that was hard to make time sensitive.

Airborne was the only one who came up with a slightly different model and concentrated on exactly what Fedex was doing. As a result, they were somewhat successful.

In good times, you can make money with these huge lumbering companies but that same size and power is soon useless in a market like this. Ask the North Vietnamese what a small effective efficient mobile unit can do targeting a specific area versus a big lumbering army with all kinds of support structure.

 

[seagle]

Jetexas is right, the key word is service. And the big boys don't provide it anymore. Fly on AA from Miami to Dallas and get a bag of pretzels and not one smile from anyone! Deal with security, long lines, late flights malcontent employees and guess what? Both the business and vacation traveler will go else where. SWA, Jetblue, etc. That is it in a nutshell. The big boys Sh*t on the passengers during the boom days, and now those pax have moved on during the bust days. Either driving or tele-conferencing, fractionals, or the SWA, Jetblue option. Not trying to start anything except concur with Jetexas' presumption of service or really lack of service as being the issue here.

 

[AAflyer]

publisher,

Happy with your post, was expecting a lot worse from you (ha ha). Yes the lumbering giants need to change, but they will always offer services that the low frills companies can't, the secret in a nutshell is how to have the global infrastructure, yet compette on the low yielding Florida routes, but still pointing out that a pay cut or lower wages will not get the majors out of the jam they are in.

AAflyer

 

[AAsRedHeadedbro]

AAFlyer, I see your point clearly and I agree with it. Management is taking this severe downturn in the business and attempting to pin blame on it's supposedly high labor costs, among other things. Even if pilot labor costs were zero, the major airlines would still be in trouble due to the inefficient way the airlines are run. The last I checked, labor didn't run the major airlines. Senior management does.

That's about all I have to say about that (Forest Gump said).

 

[SDF2BUF2MCO]

Interesting discussion....
I do think labor is a major part of any business. The key is how people are utilized in conjunction with the way the business flows (and yes wages and benefits are a big part as well). Another key is focusing on what kind of business you want to be. If you want to be all things to all people then it is going to be much more difficult to manage it efficiently. A company like SWA is more narrow in their focus.
A non-airline business example is Wal Mart vs. Target. Wal Mart goes for being the cheapest prices and volume. Target goes after the "up scale" discount shopper but less volume. Target is not as low on prices but their niche appeals to a different kind of customer. Both companies are successful at this time. I speculate that both pay similar wages and benefits (albeit lower wages and benefits compared to other industries).
I agree with AA that people could work for free and that still may not solve a companies woes. Labor plays a big part but not the only part. I see two major issues in upper management. One is the love of bureaucracy (ISO9000 and Sixth Sigma are examples. BTW the cartoon Dilbert does a good job of capturing the essence of this bureaucracy at least in non-airline businesses). This is due in part to not coming up with solutions so by forming a committee a business feels good they're doing something. The other part, and I think probably the most important, there lacks honorable people at the top. They'll do anything to make themselves look good or keep their little kingdom (all in the name of share holder value of course!). Not to sound too judgemental because that may be human nature. In addition, the pressure to perform may make a normal human being do strange things.
On another note, it seems like we have it backwards regarding business in that businesses are bent on "slashing costs" while our bloated government is only concerned with expanding and getting more money out of its citizens

 

[BigFlyr]

This is true, but when we were rocking, the 2% of business travelers gave us 27% of our revenue.

AH-HAAA!

AAflyer, first let me compliment you on your well composed original post and follow-ups. I knew I would open a can of worms with the "premium" vs low-cost carriers issue. I did not mean to compare apples with oranges either, fully aware that JB or SWA or AirTran to name a few, don't offer the "frills" packages that are apparently only 2% of AA's business but 27% of AA's revenue. THERE'S THE PROBLEM RIGHT THERE!

Maybe the majors should "spin-off" their "premium" services as independently operated airlines to compete with other "premium" airlines rather than have their losses subsidized by their "non-premium" coach domestic operations.

 

[AAflyer]

Bigflyr,
I agree, this is why the old gouge your best customer will not work anymore. I wish I knew how to solve these problems, hoping that these guys and gals areputting their MBAs to good use.

AAflyer

 

[A Squared]

AAflyer,

No, you didn't explicitly state that you were a premium pilot, but, in your first post, you objected quite strenuously to your pay being compared to Southwest pilots, because your's is a premium airline, and southwest is not. If you believe that a comparison to southwest pilot pay is invalid, you must believe that there is a difference in the service you provide.


>>>>If you can not figure out the revenue on a 767 overseas is far greater than a 737 flying from Luv to Orlando than I can't even begin to explain the rest.

Yes, I understand this concept quite well, in my post I spoke of making a comparison between similar flights. You're merely trying to cloud the issue by attempting to shift the comparison to domestic vs international routes. Comparing pilot costs per ASM are about as good a way as we have for removing equipment size, length of route and such from the equation, so why don't we look at those instead of trying to divert attention with specious details? By your own numbers; AA's pilot costs per ASM are 53% more than Southwest's. That's substantial in anyone's books.


You seem to have 2 points:

1) Your pay alone is not responsible for your airlines problems, there for your pay shouldn't be cut

and

2) Your airline's ratio of labor costs to total cost are similar to southwest's or other airlines, and therefore your pay shouldn't be cut.


OK, number one:

Yes I agree that labor costs alone are not solely responsible for AA's economic plight. There are probably numerous reasons, high fixed costs, excessive executive salaries, the costs of the Admiral’s rooms, I don’t know what all, but I’m sure there are a lot of reasons that AA’s costs are too high. But to say that pilot salaries must be left alone, because they are not the sole reason that the company is in trouble is just silly. Companies rarely go bankrupt for one single reason, generally it’s a collection of factors. Right now, United is staring down the barrel of bankruptcy. They also have the highest pilots salaries. Are the pilot’s salaries *the* reason they are in trouble? No. Are the salaries *one* of the reasons they are in trouble? Absolutely. Each cost AA has contributes to it having a poor bottom line, and each cost should be examined for possible reductions. I’ll agree that executive salaries should bear equal scrutiny. The fact remains that pilot labor costs at AA are high compared to other operators competing on some of AA’s routes.

Which brings us to number 2:

You keep mentioning the percentage of labor costs as if it had some real significance. It doesn’t, it’s just another specious and deceptive argument. AA’s costs are too high. 37% of too high, is still too high. The fact that AA fancies itself a "premium" airline doesn’t logically require that it pay pilots more. The pilots are not a part of providing that "premium" service. They don’t serve drinks in the admiral room. They don’t make ticketing changes for the select business traveler. They don’t transfer the passenger’s luggage to the Zurich plane in Dallas. None of the "premium" services that you speak of are performed by the pilot. The AA pilot’s shows up and fly the plane, in a manner which is indistinguishable from the way the Southwest pilots fly the plane. Just because your employer provides additional services to the customer, doesn’t somehow entitle you to more money. Perhaps I can illustrate the irrelevancy of your labor cost ratios with a non-airline comparison:

Suppose you have 2 hotels in the same city, a cut rate hotel, and a 4 star hotel. Both have the same number of rooms, and roughly the same occupancy rate. Each of these hotels needs to have it’s garbage hauled away, so they pay a garbage company to haul it away.
Now, does it make sense that the 4 star hotel should pay 53% more per ton of garbage hauled than the cut rate hotel?

Does it make sense that the trash hauling costs of the 4 star hotel should be the same percentage of the hotel’s total costs as the cut rate hotel’s?

Of course not, the trash hauling costs at the 4 star hotel should be a *smaller* proportion of the total costs. The 4 star hotel is obviously going to have much higher costs in a lot of areas. Higher capital costs from a higher quality building with more elaborate furnishings, Higher taxes on the more valuable real-estate, staffing the kitchen with European Chefs vs. the short order cooks in cut rate hotel’s kitchen, the Bellhops that the other hotel doesn’t have, more maids per room, boxes of mints to put on the pillows, silk sheets rather than cheap polyester ones. Exercise rooms, and Saunas. ...... the list goes on. The 4 star hotel will have much higher costs per room night But does that mean that their trash hauling costs should be proportionally higher? No.
The yearly dollar amount of the trash service could be expected to be slightly higher at the 4 star hotel, because you could expect the 4 star hotel to generate slightly more trash per room night, but the ratio of trash costs to total costs at the 4 star hotel should be much lower than the cut rate hotel; the 4 star hotel provides more services, but the trash is about the same. The trash hauling that the trash company does for the 4 star hotel is not intrinsically more valuable than the trash hauling done for the cut rate hotel, merely because the 4 star hotel provides a greater level of service to it’s customer.

So to bring it back to the question at hand, yes, AA provides a greater level of service to *some* customers, so their costs per ASM could reasonably be expected to be higher than SWA’s, but the AA pilots themselves do not provide a higher level of service than SWA pilots, so there is no reason to claim that the pilot costs per ASM should be proportionally higher.

Hey, I don’t want to see your company having troubles, and I don’t want your salary to be cut. None of this makes me particularly happy, and it’s not good for anyone in aviation.

My point is that your reasons that your salary should not be cut are completely without basis in reality.


Regards

 

[1900laker]

Jetexas is right, the key word is service. And the big boys don't provide it anymore. Fly on AA from Miami to Dallas and get a bag of pretzels and not one smile from anyone! Deal with security, long lines, late flights malcontent employees and guess what? Both the business and vacation traveler will go else where. SWA, Jetblue, etc. That is it in a nutshell. The big boys Sh*t on the passengers during the boom days, and now those pax have moved on during the bust days. Either driving or tele-conferencing, fractionals, or the SWA, Jetblue option. Not trying to start anything except concur with Jetexas' presumption of service or really lack of service as being the issue here.

Not necessarily, and before I proceed, let me state that I don't have a dog in this fight but just an observation I made as a commuter.

I commuted back and forth from BWI to STL all summer. My two direct flight options for non-reving (OAL jumpseating) were AA and SWA. I consistently made it on more SWA flights because they had seats left to sell, while many days every single flight on AA was oversold, overcapacity. And I am comparing apples and apples, both having direct flights. I even checked the prices on tickets for the two (just out of pure curiosity) and found that AA was charging more. So what is the reason behind this. While some have undoubtedly gone to southwest for cheaper fares, they are still leaving the gate with open seats, while some passengers on AA were left standing at the gate, having paid a higher price in the first place. I'm not so sure that the majors have p'od the traveling public as much as one might think. Thoughts?