UAL Concession Details

[Blue Dude]

Read any airline study. People choose tickets for price first, then schedule, then ff progams and other perks. If the prices were equal, the very vast majority of the people would be choosing the majors for their schedule, alliances, ff programs, international routes, etc. Evidence of this can be found in the multitude of low fare airlines who have gone out of business when directly competing with a major. IF the lcc's lose their cost advantage, they will die, or come to their employees to help them recapture it.

Your last sentence makes no sense to me. I still don't see it. Assume I'm dense and draw me a picture.

A cost advantage only affects the bottom line of that carrier. It is not a competitive advantage in the sense that it can be used against another carrier. Obviously, setting ticket prices is a competitive advantage, and the ability to set lower prices is consequence of lower costs. However, given equal fares, it makes no difference who has the lowest costs as long as that cost can be covered at those fares. Therefore, I'll reiterate that if Delta lowered its costs to be competitive at the lower fare levels, there would be no incentive for AirTran to further lower costs, because the situation at Airtran would be unchanged and it was already making money.

Here's a fictional scenario:

AirTran and Delta both serve ATL - LGA. Fares are roughly equal at an average of $150 one way. Load factor is 70% for both. Distance is 761 mi. RASM (for both carriers) is therefore 13.80 cents per mile. OK so far?

AirTran has a cost advantage. Suppose that on this route they have a CASM of 10.00 cents. Suppose further that Delta's CASM is 15.00 cents. Therefore AirTran makes money and Delta loses money.

Now, Delta management cracks heads and by some miracle gets their CASM down to 10.00 cents. Both carriers now make money on this route. In fact, at any cost below 13.80, Delta makes money on this route. Now what I don't understand is why suddenly AirTran must now lower their costs still further. Why should they? They're making just as much as before. Consumer behavior hasn't changed, as neither product has changed, nor has the fare structure, so your comments regarding ff miles, etc. are irrelevant. The competitive relationship between Delta and AirTran is unchanged by Delta's cost reduction.

 

[FlyDeltasJets]

Blue,
That's just it. Your example is fictional. While your one example might be accurate, it is not indicative of the system. When you study the system numbers, you will find that airtran's system RASM for 2002 was 8.69 while DAL's was 9.39. Airtran is the cheaper alternative, a fact which is the primary reason for their current popularity.

 

[goldentrout]

There are many things I don't know about the DAL MEC and what goes on there.

All I can see is 1260 pilots on furliguh since 9/11, and 800 new pilots at DCI. You'd only have 460 guys on furlough today, and they'd all probably be back by the end of the year if the DAL MEC ahd been pro-active on 9/12/01.

I find it hard to bellieve that if the DAL MEC had gone to managment on 9/12/01, and said...we end scope, you buy all the RJs of whatever size you want...we just want to fly them...at the DCI rates...management would have said no.

I speculate the reason management told you to pound sand about getting RJs is that you were not willing to fly them for the same rates that we fly them. By the way, Comair pilots are not starving to death, living 5 to an apartment. Many actually have nice cars and houses...but most don't have a second vacation home or a 50K car...that's why Comair makes money

Now, you'll probably have to fly RJs for our rates anyway, because why would management give them to you if it's going to cost them more for you to fly them than DCI?

I agree, it is no secret that management has already asked for concessions...I guess I was more referring to the "do it or else" statement which was basically was has happened at UAL/US Air/AMR.

DAL can't be far behind.

And as much as it will hurt us at Comair, I fully expect the DAL MEC to take as many 70 seaters as he can get...and why not 50 seaters too? That's been my contention all along...a job flying a small jet is better than flying no jet.

By the way, our contract is not all that bad. With our B fund, a Capt at 5 years can amke around 80K/year on the 50 seater and 90K on the 90 seater.

We get 11 days off, 12 in months with 31 days. We have a duty rig, 100% cancellation, 100% deadhead. Line holders are getting 14-16 days a month off. Hotels are nice and clean, some downtown.

So what do you ting the DAL MEC is going to do? All the 70 seaters? Only those above the scope clause? All new RJs at mainline?

What's you best guess?

 

[Blue Dude]

Blue,
That's just it. Your example is fictional. While your one example might be accurate, it is not indicative of the system. When you study the system numbers, you will find that airtran's system RASM for 2002 was 8.69 while DAL's was 9.39. Airtran is the cheaper alternative, a fact which is the primary reason for their current popularity.

Delta, can't you answer a straight question? I gave a simple example to illustrate a principle. Now it's your turn.

System RASM is irrelevant because the two systems aren't in 100% competition. If it were possible, the correct basis of comparison would be aggregate RASM's only where the two carriers are in competition. Since that data is unavailable, I used a single route to make the comparison easier.

Now I'll ask you again. Given equal fares, what difference does it make which carrier has the lower cost as long as that cost is covered? How does lowering Delta's costs, in and of itself, take anything from AirTran?

 

[FlyDeltasJets]

I thought I did answer your question. I don't accept that fares are equal, except on a few specifice seats on a few specifice routes on a few specific dates. I attempted to prove this by researching numbers to back up my assertion. Why you don't feel like I answered your question in beyond me.

You are correct that the rasm's are disparate, and therefore not a truly accurate measure. However, it is the best we have, and far more accurate than some anecdotal and arbitrary evidence of a random ticket price on a specific date. Furthermore, as we have far more ASM's over which to spread the revenue, the fact that ours is still higher is even more telling.

I don't know how else I can answer your question except to say that I disagree with the concept on which it is based.

 

[Blue Dude]

I don't know how else I can answer your question except to say that I disagree with the concept on which it is based.

All I was trying to do was set up a simple example. The specific details are unimportant. You can surely come up with your own example if you don't like mine.

I'd just like to know the mechanism by which AirTran would be forced to lower their costs if Delta lowered theirs. You claim that Delta has a higher RASM. That's wonderful. Therefore, they won't have to lower their costs to AirTran levels in order to make as much money. But my point was, and remains, that changing cost structures does not in itself change the competitive balance of power. Only changing the revenue landscape does that. Delta's act of lowering cost, in and of itself, has no effect on AirTran, but cutting ticket prices would. In that case, it would hurt Delta more than AirTran to do so unless Delta somehow got its costs below AirTran's. If you can find a hole in my logic, please point it out.

 

[FlyDeltasJets]

I will. Airtran is able to attract passengers and make a profit only because they are able to offer lower prices than Delta. They are able undercut us because their costs are lower. If the costs were equal, they would lose their ability to undercut us, and therefore (I believe) lose most of their pax to our route structure, schedule, alliances, ff program, etc. They would obviously not want this, and would attempt to cut their costs to a level again lower than ours.

You disagree with that premise with the argument that the ticket prices are already the same. I disagree with that assessment, and have pointed out what I feel to be evidence supporting my belief. Of course, you don't have to believe me.

 

[goldentrout]

So great...this is market economics at it's finest.

DAL lowers prices to put a competitor out of business, while at the same time adjusting overhead so they can turn a profit.

If AirTran goes under because DAL competes with them, so be it.

However, once DAL puts them out of business, they have to realize that the AirTran fare is what the market will bare...they'll have to keep their overhead costs in line with that fare.

Employee wages will be based on whatever profit margin that fare can provide.

Otherwise, another AirTran will rise up and fill the low fare market if DAL tries to hike its fares above what the market will bear.

That's exactly how the low cost carriers got started...people wanted to go somewhere tomorrow or next week, but were not willing to pay $1000 to do it.

However, the major airlines could not afford to offer a $250 dollar ticket, because their revenue model was based on a higher fare scale.

The low cost carriers saw they could make aprofit on a $250 fare if their overhead was significantly less than the major airlines.

Basic supply and demand...supply for seats on a route goes up...demand remains steady or decreases on that route...ticket price on that route goes down.


Pilots may THINK they are worth a certain amount of money.

What pilots are really worth is whatever the market will pay them. Based on SWA and Jet Blue, looks like an FO is worth about 40-60K/yr, and a Capt 100-150K/yr.

In the economic history of this country, almost every attempt by a union to artificially inflate wages and benefits above what the market will pay has lead to the demise of that industry or corporation...steel...textiles/clothing...auto industry (Chrysler)...and now the airlines.

 

[Blue Dude]

If the costs were equal, they would lose their ability to undercut us, and therefore (I believe) lose most of their pax to our route structure, schedule, alliances, ff program, etc.

No, you see, it's not costs that would be the trigger here. It's only if Delta abandons its fare premium in an attempt to match AirTran that could cause AirTran harm. Costs do not affect other carriers. That's the point I was trying to make. Charging lower fares attacks other carriers, not lowering costs.

If Delta lowered fares to match AirTran's then (since you say AirTran would lose business) that would harm AirTran, and your scenario may indeed eventually play out. But in order to get there, Delta would have to lower costs, not just enough to become profitable, but far beyond that to the point of being profitable after throwing away revenue. So whose fault is that? Is it AirTran's pilots, or is it a Delta management with the overweaning arrogance to crush its own revenue base in order to sink another carrier? Haven't they learned that lesson yet?

 

[SDF2BUF2MCO]

More than just labor

From goldentrout:

"In the economic history of this country, almost every attempt by a union to artificially inflate wages and benefits above what the market will pay has lead to the demise of that industry or corporation...steel...textiles/clothing...auto industry (Chrysler)...and now the airlines."

That may be part of it but some other parts contributing to America's business demise is the costs of government (over) regulation, a larger tax burden, and perhaps the Philadelphia lawyers.

As far as what the market will pay regarding wages. That is true in principle but it is also what people are willing to work for. I'm just a layman, but I think $40K is a little low to pay someone with a four year degree and an ATP ticket. They pay more for a non-experienced MBA person out of college. A MBA degree is easier to obtain (IMHO) than a commercial and/or ATP ticket. Think companies take advantage of a person's strong desire to fly and the mindset "you're just lucky to have a job right now". Reminds me of some the talent agents for the entertainment business here in Orlando. Still can't figure out why people (supposedly)don't want to pay more than $250 for ticket but don't think twice about paying $129 a night at the Hilton? Too much for this commoner to comprehend.

 

[FlyDeltasJets]

No, you see, it's not costs that would be the trigger here. It's only if Delta abandons its fare premium in an attempt to match AirTran that could cause AirTran harm. Costs do not affect other carriers. That's the point I was trying to make. Charging lower fares attacks other carriers, not lowering costs.

I don't know if you noticed, but we have been losing a little bit of money. Our RPMs and total revenue is down significantly, while that of the lcc's is up. The reason? Ticket prices. They are able to make money with a lower ticket price, and as a result of their lower prices, people are flying them. Delta mgt seems to have no choice but to lower fares, and to do so, they must lower costs. This frightens me, because I am of the opinion that fares are outrageously low as it is.



If Delta lowered fares to match AirTran's then (since you say AirTran would lose business) that would harm AirTran, and your scenario may indeed eventually play out. But in order to get there, Delta would have to lower costs, not just enough to become profitable, but far beyond that to the point of being profitable after throwing away revenue. So whose fault is that? Is it AirTran's pilots, or is it a Delta management with the overweaning arrogance to crush its own revenue base in order to sink another carrier? Haven't they learned that lesson yet?

Don't you see that their revenue base has already been "crushed"? It is down by billions of dollars. If they did lower fares (read: cut costs) they will do so not because they want to, but because they have to. Ticket price is the number one purchase driver, and as we are seeing with every legacy carrier, people are buying the tickets that cost less. Delta has concluded that they must lower fares, not to harm airtran, but to save our airline. I cannot say that I disagree with them, though it concerns me greatly. We as a profession have allowed mgts to compete using lower labor costs as a weapon, and it is biting us as we speak. It is naive to think that any airline pilot will be exempt from the consequences.

Pattern bargaining works both ways. I felt better about our futures when we were all fighting to raise the bar. Granted, we were doing so for selfish reasons, but in the end, we all benefitted (even the lcc guys). We are now watching the effect of the bar being lowered. It will get worse. For all of us.

 

[FlyDeltasJets]

What pilots are really worth is whatever the market will pay them. Based on SWA and Jet Blue, looks like an FO is worth about 40-60K/yr, and a Capt 100-150K/yr.

Golden,

What you continue to ignore is the fact that the market is only supporting those wages because they are lower than ours? Why do you assume that the same market forces won't lower those wages in the future. If you accept that the lcc's you mentioned are having an effect on salaries and ticket prices, wouldn't they be vulnerable to the same effect if a still lower cost carrier were to arise? The lcc pilots make the money they do only because we make to money we do. The market is supporting the 150k captain because our captains make so much more. If our captains were to drop to 150k, you will see some harsh results. It may not happen immediately, but it will happen. That lower "overhead" (technically, employee wages are not considered overhead, but your point still stands) which allowed the lcc to make a profit in your example will be neutralized. Once the ticket prices are equal, the lcc's will lose market share due to other market drivers like schedule, ff program, etc.

You are correct, the market is powerful. If we were to let it operate without limitations, as you suggest, we would not be having this conversation, for both of us would have been replaced with a Korean Air pilot making $5/day. Perhaps that will happen someday, but I am not ready to accept it quite yet.

P.S.
I assume that you are happy about mesa's new contract. Many of your collegues are pretty upset with the effects it will have on their contracts. I find it pretty ironic that many of the same people criticize me when I point out the effects the lccs have on our contracts. I guess it's easier for most of them to continue you calling me an "arrogant a-hole." Thank you for not resorting to that tactic!

 

[Blue Dude]

Don't you see that their revenue base has already been "crushed"? It is down by billions of dollars. If they did lower fares (read: cut costs) they will do so not because they want to, but because they have to. Ticket price is the number one purchase driver, and as we are seeing with every legacy carrier, people are buying the tickets that cost less. Delta has concluded that they must lower fares, not to harm airtran, but to save our airline. I cannot say that I disagree with them, though it concerns me greatly.

You just contradicted yourself! You just got through saying that Delta commands a fare premium because of its ff program, int'l presence, etc. and now you're saying that only price matters to the public. Which is it? Do those things have value to the public or don't they? Or are you saying that they only have value when they don't have to pay extra for them? I could see that. In that case the question is: is it worth it for Delta to offer these things when they cost money, but people aren't willing to pay for them?

In any case, your slippery slope of reverse pattern bargaining has yet to appear. Pay has been lowered at LCC's in the past in order to keep costs lower, but that's always a precursor to collapse, not a competitive response. Are there any current carriers where this has happened? Has a single carrier lasted long enough to provoke a further response, i.e. a further lowering of rates at a major carrier? No. So far it's theory. I will grant that in theory this could happen, but in practice lower wages aren't nearly enough to save a company, and therefore the LCC in question promptly self-destructs before they can ratchet down major airline wages.

 

[Blue Dude]

Once the ticket prices are equal, the lcc's will lose market share due to other market drivers like schedule, ff program, etc.

Just a quick note: this does not always happen. For instance, it's JetBlue that commands a fare premium when it competes with DLX. Average fares are 20% higher. I grant you, this isn't a lot of money when you're talking about fares to Florida, but it is significant. It's this fare premium that Song is designed to combat, not loss of market share due to lower fares. JetBlue usually doesn't have the lowest fare, but does very well anyway.

BTW, thanks for the debate, Delta, I'm enjoying this.

 

[FlyDeltasJets]

Blue,

I did not say that we command a fare premium. I said our ticket prices are, for the most part, higher. Obviously, the public has not supported this. Any airline expert will tell you that price is by far the number one purchase driver. My point is if that the prices were equalized, the other drivers would come into play, and most of the lcc's would lose that comparison.

Jetblue is the exception, because your product is so different (and good). I think however, that once song is in place, my original point will still stand.

You are correct that we have yet to see the full effects of the lcc compensation packages. We are, however, seeing the start of the slide. If you think that the present attack on the high salaries of the majors has nothing to do with lcc's, I fear that you are deluding yourself. When your competitors enjoy a huge advantage on the industry's largest cost, there is naturally going to be a response. It only frightens me that so few seem to be recognizing the effect, and so many think that wages will stabilize at a "reasonable level." I see no indication that this will occur if we as a profession do not force it. I don't think many realize that, and it worries me.


P.S.
You're welcome. I also enjoy debate, especially when I'm not being called an a-hole like so many of my opponents like to do. Thanks for keeping it civil.