Comair feeling cost-cut pressure: Industry's woes could hit profits
The Cincinnati Enquirer 9-25-04
Comair could be looking once again to take a swipe at labor costs, its biggest expense.
The Delta Air Lines subsidiary posted an operating profit of $23.1 million in the second quarter of 2004, financial data released this week by the U.S. Transportation Department show.
But observers note that costs have risen at the Erlanger-based regional carrier - and operating profit margins have fallen significantly for the first half of this year compared to 2003.
Meanwhile, Delta is looking to cut costs to avoid bankruptcy - and it next year may lower the fees it pays its regionals to carry Delta passengers.
"We're going to see an incredible amount of turmoil at all major regionals over the next couple of years," said Embry Riddle Aeronautical Institute airline economics professor Darryl Jenkins. "The mainline carriers can no longer promise their regional partners that they will make money when the majors can't make money themselves. And that has begun to trickle down to the regionals."
Comair may appear profitable, but the numbers may not be accurate because Delta owns the subsidiary, meaning that the parent could be skewing the profits to make its subsidiary look good for financiers, Jenkins said.
In addition, the figures are based upon industry standards that don't fully apply to Comair - since Delta pays the subsidiary per hour of flying, not per passenger.
Earlier this month, Delta said it would be cutting 6,000 to 7,000 jobs while trimming pay and benefits for non-union workers company-wide.
Delta's announcement did not include any immediate cuts for Comair, which employs more than 4,000 locally at the Cincinnati/Northern Kentucky International Airport - Delta's second-largest hub. But Comair officials warned then that the carrier needed to become cost-competitive with other regional airlines.
Citing regulatory concerns, officials with Delta and Comair would not comment on the federal statistics, required to be submitted by all airlines over a certain size.
But Comair spokesman Nick Miller did say that "the fundamental forces that are reshaping our industry are putting pressure on our airline" and that Comair was expecting to see parent Delta lower the fees it pays for carrying passengers as early as next year. Delta officials would not comment.
Miller would not specify what could happen with Comair's unions as a result, but said that any "non-competitive cost area" needed to be addressed if the airline were to continue to grow.
That includes Comair's pilots, whose 89-day bitter strike in 2001 landed them the most lucrative contract in the regional industry.
But soon after came the 9/11 terror attacks that accelerated an industry makeover. Now, industry analysts say that Comair's overall labor costs are some of the highest in the regional industry, pushing Comair's overall operating costs higher than average.
"If they don't become cost-competitive, they will lose business and any expansion possibilities - Delta has already shown they will do that, even to its own subsidiary," said Ray Neidl, airline analyst with Calyon Securities.
Late last year, Comair asked its pilots for concessions in return for the potential for new planes and more flying, but the pilots said no.
Delta chose in March to give the new planes to other less-expensive carriers in 2005. Comair next year won't expand its fleet for the first time in company history.
Just this week, Delta announced that another subsidiary, ASA, would get all but three of 28 new flights coming to Cincinnati as a result of the closure of Delta's hub in Dallas, although that move was not seen as related to Comair's costs.
J.C. Lawson III, chairman of Comair's branch of the Air Line Pilots Association, acknowledged that the company could ask to start talks soon or could wait until the current contract comes open for negotiation in January 2006.
"We don't have a crystal ball as to what could happen, but we are preparing for anything," Lawson said. "We know that they don't like our costs ... but when you appear to be turning a profit when times are horrible, and to say 'we want you to lower costs just because we want you to,' well, that's a hard sell to a labor organization."
When asked if Comair's pilots would be open to concessions in return for continued growth at the airline, Lawson would not comment.
But Lawson pointed out that other major regional airlines are matching the contract at Comair for their pilots, which would make it hard to backtrack.
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