Right Gauge or Right Gouge?

Is American seeking the right gauge or the right gouge? You decide.

On February 22 Mr Virasb Vahidi, the Chief Commercial Officer of American Airlines, was interviewed by Terry Maxon of the Dallas Morning News as a follow on to a letter Vahidi had sent to AA employees. In that letter Mr Vahidi, attempts to make the case that American’s current pilot contract restricts AA’s commercial ability by almost two-thirds of $1billion per year and referred to American management’s desire to “right gauge” AMR’s operations using a variety of larger regional jets and other outsourced partners’ flights.

Mr Maxon is a well respected, long time aviation industry reporter for the DMN. In Maxon’s article Mr Vahidi stated that: “American is at a very significant competitive disadvantage.”

Interestingly, for reference, Mr Vahidi cited the route between DFW and Chicago O’Hare (ORD) as an example.....“You see, they [United Airlines] can effectively flex supply with demand. That obviously creates a better revenue answer...”

Mr Vahidi was presumably lamenting that as UAL has the right to operate a seventy seat jet between DFW and O’Hare and AA may not, that this is somehow the missing “piece” of AA’s new business plan puzzle. Let’s investigate that claim and analyze the reality of Mr Vahidi’s “right gauge” reasoning.

The day before the story was reported was a Tuesday (Feb 21). As many travel blog specialists remind customers, Tuesday (especially a Tuesday in February!) is typically the most lightly traveled day. As recently as March 17 Tom Parsons’ of bestfares.com. mentions Tuesday (and Wednesday) as the travel day(s) usually offering the cheapest fares.

On Tuesday Feb 21 AA had fourteen scheduled flights between DFW and Chicago O’Hare (ORD). Both airports are cornerstone hubs for AA. Flights were scheduled approximately sixty minutes apart. Each of these AA flights were on full-sized 140 seat MD-80 aircraft, configured for 16 first-class seats and 124 seats in coach.

American’s first flight - AA2320 - departed at 5.45 am (ughh!). As Mr Vahidi noted, United does indeed use an outsourced (not using a United airplane or United flight crew personnel) seventy seat regional jet for its first flight of the day between UAL-spoke DFW and UAL-hub Chicago O’Hare (ORD).

A “hub” is a major airport where there is a very large concentration for one particular carrier and in several Cities such as Chicago, New York and Los Angeles etc, at least two or more carriers. For example, Delta has a massive hub presence in Atlanta (ATL) as well as the NYC airports (JFK and LGA). United has a large hub presence at several airports including Chicago O’Hare (ORD), Denver (DEN) Houston (IAH) to name but a few. American has recently identified the five cornerstone hubs - DFW, ORD, NYC, Los Angeles (LAX) and Miami (MIA) - where it will concentrate its flight connections.

Hubs were created post deregulation as a means to allow airlines to provide a far greater number of city-pair destinations for sale to their customers. These routes typically involve some kind of connection (or transfer) from the inbound flight/jet to the outbound flight/jet at, or “through”, a carrier’s hub. Hubs are thereby used to “feed” the carrier’s jets with these connecting passengers, as well as attracting local passengers (known as O & D) whose journey may begin or end in these hub-citys by offering a multitude of destinations from that hub.

A “spoke” would be considered the beginning (or ending) of a route from a non-hub airport. These multiple spokes “feed” passengers from outlying airports into the hubs.

So, in the specific example highlighted by Mr Vahidi, AA is flying a route between two of its major hubs using full size jets, whereas United is “feeding” its hub in ORD with local passengers picked up (from what United considers a spoke) in DFW.

From its DFW hub American flies full size, silver jets to 117 cities. United (UAL) has a far lower presence at DFW and so UAL would regard DFW as a spoke of its network. United currently offers seven destinations from DFW with its spoke passengers feeding into United’s hubs in NYC, Chicago, Denver, Houston, Los Angeles, San Francisco and Washington (Dulles).

As a reminder, Mr Vahidi complains that United (UAL) has an “advantage” because UAL can currently schedule and fly a seventy seat jet from DFW to ORD, whereas American cannot. While that may sound like an impediment to good business let’s review the passenger loads on the very day Mr Vahidi stated his desire to “right-gauge the airline”. Maybe the evidence from the day of the interview will prove this claim to be a red-herring.

As previously noted, AA2320 departed at 5.45 am. On that day (Feb 21) AA2320 left the gate with sixteen (16) first class passengers and eighty-one (81) in coach for a total of ninety-seven passengers on board. This first AA MD-80 departure was the lightest passenger load of the day. American flights 2336, 2338, 2348 and 2368 all left with a full (140 seat) passenger load. Throughout that Tuesday all sixteen first-class seats were filled on every one of those fourteen flights. The next lightest load of the day was AA 2372, the last flight from DFW to ORD at 6.55pm. It carried 111 AA passengers. In total, on Feb 21 AA offered 1960 seats for sale between DFW and ORD and of those available seats 1762 passengers were carried (including ten non-working airline staff). This represents an average load factor of around 89% on the most lightly traveled day of the week!

Although nearly 200 seats spread over fourteen flights were empty, in real terms that load factor represents an operational nightmare had one or more of the flights cancelled due to mechanical or, more likely at this time of year, weather event. As many who travel this route regularly well understand, passenger standby lists caused by flight cancellations due to inclement weather may take several days to clear.

So, we must ask ourselves what “business case” may be the motive for Mr Vahidi’s desire to “right-gauge” the airline on this route? Could it be that he would like those ninety-seven customers on the first flight to “fight for” the seventy seats on the small jet he’d like to offer as replacement to the full size airplane? Would those seventy customers pony up more cash so they could ride regardless? What would the remaining twenty-seven disappointed customers do? Where would they spill away to? What other carrier would benefit from these passengers who’d refused to be gouged? How much would it “cost” AA to get their business back?

For many years, AA has religiously applied a yield management strategy to its routes. Yield management presents a mathematical application/solution to a logistical problem. In its earliest form, yield management tracked the passenger demand on a year over year basis and attempted to “match” passenger seat supply with passenger demand. As information technology has continued to develop this data is now applied on a second by second basis, resulting in the continuous adjustment of seats for sale and the prices charged for those remaining seats.

So, not only during a more lightly traveled month like February but year round, is AMR management attempting to bleed their best customers for ever higher fares by substituting a full size jet for a seventy seat jet and gouging the seventy highest paying customers to ride at the expense of the twenty-seven unlucky passengers who will no doubt find a different way to ORD? Is that what right gauging’s about?

While the extra dollars may occasionally make sense in the very short term, AA has spilled away more passenger traffic from this yield management strategy than it has gained - and much of that traffic has converted over to Southwest Airlines, who is no doubt delighted about that!

Of course, once those former AA passengers take their business elsewhere, practically the ONLY way to get them back is to sell tickets cheaply. This creates the self fulfilling prophecy; “We can’t compete!” which leads to AA’s retreat in that market and the substitution or implementation of smaller jet service. It is an open secret that most flying customers prioritize ticket price over every other consideration when “airline shopping” on-line.

Blind allegiance by American to a smaller and smaller jet yield management mantra will thus lead to ever-reduced revenues (which is indeed AA’s REAL problem as identified by many Wall St analysts) and the downward spiral continues.

By contrast and in the exact opposite manner Southwest Airlines (SWA), arguably the most consistently successful airline, is addressing its revenue needs by taking delivery of larger and larger planes, thereby spreading the operating cost over a greater number of on-board customers. At SWA, there isn’t an RJ to be seen and their smaller Boeing 737’s are being swapped for the larger versions!

By its own admission in its recently filed 1113c AA has lost $10 billion during the last decade. Yet, AA doesn’t consider this managerial practice to be the primary reason for its stunning business failure. Being able to “right-gauge the airline” will prove that? Really? Doesn’t it just sound like more of the same [failed] plan?

Not only does Mr Vahidi want to replace the full size silver AA jet with a seventy seat jet to ‘better compete’ just for good measure he also wants those customers to ride on one of the worst regional airlines to boot! To follow AA Chief Commercial Officer Vahidi’s logic, he wants to subject an even greater number of AA’s current passengers to the worst regional airline in the business! (See, US News’ latest Airline Quality Report)

If you were the Chief Commercial Officer of a viable business would your “new, improved” business plan be founded upon exposing an ever increasing number of your best customers to your worst product? Would you then expect them to return, if a competitive alternative existed? Seriously?

Mr Vahidi’s “right gauging” appears to make little business sense. Unless one considers the last decade of AMR ramping up their regional carrier American Eagle unit “a business success”. Gained at the further expense of mainline American and it’s long suffering customers, I might add.

Incidentally, as previously mentioned, Denver (DEN) is a hub for United. Denver would be considered a “spoke” for American’s network. Would it surprise you to discover that United flies ONLY its full size jets between its DEN and Chicago O’Hare hubs.

Guess what size aircraft AA schedules for its first flight from AA’s DEN-spoke into its Chicago O’Hare hub?

You got it - a seventy seat jet, as permitted by the current AA pilots contract.

Now that you too have the gouge on this part of American’s latest business plan, you can decide whether Mr Vahidi’s “competitive disadvantage” complaint is valid or another managerial red-herring.

Enhancements Part V: Taxable Pension Contributions

Management’s final “enhancement” provides that if as a result of eliminating the pilots’ current A-Plan and B-Plan, converting to a strict 401(k) Plan, a pilot exceeds the current IRS limits for 401(k) contributions, management will pay the pilot those amounts that exceed the IRS limits in taxable income instead of keeping the money.

Management’s proposal:

Company contributions on compensation above the IRS compensation limit will be paid as taxable income to the participant.*

No pilots reach these limits under the current A and B Plans so this “enhancement” is not currently needed. This problem is one created solely by management wanting to get rid of the A and B Plans and converting them to a 401(k) Plan. Management wants to give the pilots an “enhancement” that may result in the pilots’ pension plans being taxed as ordinary income for the first time ever.

If the pilots agree to the other 67 onerous items, a couple being agreeing to terminate their A-Plan and eliminate their B-Plan, management will provide them with this final “enhancement” - a smaller pension and a pension plan that may be taxed.

An enhancement? Really?

Enhancements Part IV: Pension Contributions

Management’s two final “enhancements” pertain to the pilots’ pension plans.

With the first one, management proposes that if the pilots do not prevent management from terminating the pilots’ A-Plan, and the Court ultimately allows it to be terminated, then and only then will management pay the pilots the money they propose.

Under this scenario, management proposes to eliminate both the current A-Plan and the current B-Plan and replace it with a 13.5% 401(k) contribution. If the pilots agree to management’s proposal prior to the actual A-Plan being terminated then the Company will not pay this 13.5% directly to the pilots as is done today under the B-Plan, but instead they will escrow the 13.5% contribution and will not transfer the assets to the pilots until the A-Plan is terminated. If the A-Plan is not terminated, the pilots would not receive this escrow amount.

To receive this first pension “enhancement,” the pilots must agree to change their 11% B-Plan to an 11% 401(k) contribution. If they allow their A-Plan to be terminated, management will provide the pilots with an additional 2.5% 401(k) contribution. For these major changes to the pilots’ A and B Plans, management will agree to pay the pilots what they agreed to pay them from the escrowed account.

Management's fourth enhancement:

Amend the agreement to provide that the Company will offer a replacement benefit through the SuperSaver 401(k) Plan with a thirteen and one-half (13.5%) percent Company contribution. Company contribution will be escrowed and is contingent upon court approval of DB plan termination. Otherwise, funds will revert to Company.*

So, if the pilots agree to eliminate their B-Plan and allow the termination of their A-Plan, management will provide the pilots the enhancement of paying them what management has proposed under their proposal which is significantly less than what pilots currently receive under their A and B Plans.

This is an enhancement? In what universe?

Enhancements Part III: Is This The One True Enhancement?

Management has stated they are offering an industry leading profit sharing plan, but as shown in a previous posting, their proposal is not industry leading at all. But is it at least an enhancement?

Management’s profit sharing proposal is below:

1. Current profit sharing plan and the Annual Incentive Plan (AIP) would be eliminated.
2. Beginning at the first dollar of pre-tax income, the new profit sharing plan would pay awards equal to fifteen (15%) percent of all pre-tax income, prorated to take into account any groups of frontline employees who do not participate in the plan. Pre-tax income for the purposes of these awards will be calculated prior to the effects on income of any special, unusual, and non-recurring items and inventive pay. 
3. The Enhanced Fund would be distributed equitably to all employees based on each employee’s earnings. Profit sharing is not considered compensation for purposes of determining Company contributions or other benefits under any retirement plans.
4. Individual Enhanced Awards will be distributed no later than March 15 of the following year for employees who meet the eligibility requirements as long as minimum funding requirements are met. 
5. The implementation of the Enhanced Profit Sharing Plan is contingent on reaching a consensual agreement. 

As discussed with Enhancements Part I, Sequence Protection, and Part II, Pay Increases, Enhancements Part III, Profit Sharing, is contingent on the pilots reaching a consensual deal. No consensual agreement? No profit sharing.

But is this an enhancement? Under the current profit sharing plan, employees would receive 15% of all net income above the first $500 million. With management’s 1113 proposal that would change to 15% of all net income starting with the first dollar of net income.

Under their business plan, management anticipates lowering current employee salary, wages and benefits from about $6.2 billion to approximately $5 billion annually through the bankruptcy process.

With the new first dollar profit sharing proposal, employees would receive $75 million more than they would under their current profit sharing plan (15% of the first $500 million). With an annual payroll of approximately $5 billion, that would equate to 1.5% of an employee’s annual wages being distributed to them as profit sharing.

Is this an enhancement? Yes it is, if the pilots agree to the other 67 onerous items that will result in drastic compensation reductions - higher medical costs, loss of sick leave pay, pay banding, less than annual CPI pay increases, loss of international override pay, loss of night pay, elimination of E, F and G time (duty rigs), pay for sequences on a trip basis not on a leg basis, loss of military guarantee and finally the loss of the pilots defined benefit plan, just to name a few. For all of that, the pilots can anticipate the one enhancement in management’s 1113 proposal, a 1.5% profit sharing plan increase if AMR makes $500 million annually.

Fair and Equitable? You decide.

Enhancements Part II: Base Rate Pay Increases or Base Rate Pay Erosion?

As discussed in Part I of Enhancements, American Airline’s management has proposed five provisions in their 1113 term sheet they describe as “enhancements.” However, these provisions are contingent on the pilots of American Airlines consensually agreeing to the other 67 plus contractual concessions management is proposing, most of which can only be described as draconian and many just seem plain punitive.

But are these five asterisk marked items really enhancements or are they just further concessions? In Part I of Enhancements, it was illustrated how management’s proposed sequence protection is nothing close to approaching an enhancement. It was just another management-designed concession cloaked in the cover of calling it an enhancement.

But what about pay increases? Have they finally provided the pilots with something that may incentivize the pilots to agree to their other 67 plus requested concessions?

Under management’s proposal they propose providing the pilots with 1.5% annual pay increases for five years after the first year of the agreement if the pilots consensually agree to all the other concessionary provisions of their 1113 term sheet.

One of the requirements of their 1113 term sheet is that the pilots agree to management’s proposal of a six year duration agreement.

In 2003 management also proposed a six year agreement that was eventually agreed upon as a five year duration contract that ran from May 2003 until May 2008. As of the date of American Airline’s bankruptcy filing on November 29, 2011 management and the pilots’ union had been in negotiations for three and a half years past the amendable date of May 2008. Prior to that contract, management and the pilots union had negotiated what eventually became the 2003 agreement for nearly two years past its previous amendable date.

Prior to the 2003 agreement, the last pay increase the pilots of American Airlines received was a 2.5% increase in 2000. As part of the 2003 agreement, the pilots of American Airlines agreed to an immediate 23% pay reduction in May of 2003 from their 2000 pay rates. In May of 2004 the pilots received a 6% restoration of part of the 23% pay reduction since many of the work rule concessions of 2003 were now fully implemented which resulted in additional cost savings that offset 6% of the previous 23% pay reduction. They also received 1.5% pay increases for each of the following five years of their five-year agreement beginning in May of 2004.

On the amendable date of the 2003 agreement in May of 2008, the American Airlines pilots’ hourly base pay rates purchasing power was 66.5% of the pilots 2000 pay rate purchasing power as a result of the 17% pay reduction in 2003 and the effects of inflation and the lack of base pay rate increases that kept up with inflation since 2000. The CPI (Consumer Price Index) averaged 2.8% from 2000 until 2008. The American Airlines pilots averaged a 10.6% decrease in hourly base pay rates since 2000 whereas the CPI had increased 24.7%.

Since the amendable date of the 2003 agreement in 2008 the American pilots’ hourly base pay rates have been further eroded due to further effects of inflation and the fact that American’s pilots have not had any pay increases since 2008.

From 2008 until today, inflation has averaged approximately 2.8% annually or a compounded total of 11.7%. This has further reduced pilot pay rates to a total of 59.5% of inflation adjusted 2000 base pay rates.

Today, as adjusted for inflation, the pilots of American Airlines make slightly less than 60% of the purchasing power they did in 2000. That’s right! Every pilot’s base aircraft pay rate has been reduced by 40% since the year 2000 when compared to inflation.

Now, American Airlines management is offering an “enhancement” of “pay increases” in exchange for the pilots consensually agreeing to management’s 1113 term sheet, including a six year duration agreement.

Pay increases? Or further pay erosion? As illustrated above, pilots have endured over a decade of pay erosion due to lack of pay increases that have kept up with inflation. Management understands the power of this end result and once again apparently hopes to use it against the pilots.

Looking around the industry and particularly at American Airlines, pilot contracts are taking years past their amendable dates to renegotiate. At American, it has been four years since the amendable date of their pilot contract and at many other carriers it is even longer. It is safe to assume that if the pilots of American Airlines agree to a six year duration contract, the contract will be in effect for at least eight years and quite possibly, more like ten years.

If you were to use an average of nine years before the pilots of American Airlines were able to negotiate a follow-on contract to the one American management is now proposing and assuming inflation would continue to average 2.8% annually through the term of the agreement then the total compounded inflation would be 28.2% for those 9 years. Meanwhile, under management’s 1113 term sheet they have offered five annual pay increases of 1.5% a year, 1.3% less than forecasted annual inflation. Management is offering a 7.7% compounded pay raise through the term of the agreement while inflation will be approximately 28.2% over those nine years.

Under management’s proposal, assuming a 6-year contract will ultimately be a 9-year contract, the current hourly base pay rates for pilots will only be worth 86.4% of their current purchasing power. When compared to 2000 pay rates, the last time pilots received a pay increase approaching CPI, their hourly base pay rates in effect prior to the next contract being ratified when adjusted for inflation will only be worth 51.4% of their 2000 pay rates. That’s right, nearly 50% less than they were making in 2000 for doing the same job.

Under management’s proposed 1113 “enhancement,”American Airlines pilots will endure another 13.7% erosion of their current hourly base pay rates and will see their purchasing power worth only 51.4% of their 2000 hourly base pay rates.  If American pilots will simply agree to management’s draconian and often times punitive proposals, management will provide the pilots of American Airlines with this “enhancement.” 

As illustrated in a prior discussion, the pilots of American Airlines already trail the only true “new generation” carrier by nearly 10% and with management's “enhancement,” pilots will see a further reduction in their purchasing power of nearly 14%.

Is it any wonder the public has recently been reading that the leadership of the pilots' union is publicly stating that American Airlines management is not trying to conclude a consensual agreement but is instead pursuing another court designed strategy?

What in this proposal provides an incentive for an American Airlines pilot to want to agree to the other 67 plus concessions? Further pay reductions?

Is management bargaining in good faith? Are they treating the pilots fairly and equitably? Are they credible in trying to conclude a consensual agreement?

Enhancements Part I: Sequence Protection or Line Holder Reserve?

American Airlines management presented the APA with their term sheet on February 1, 2012. The term sheet contains over 72 separate contractual modifications with many of them having numerous subparts.

Of the 72 items, 67 were major concessionary modifications. The other five items management described as contractual enhancements were contingent on reaching a consensual agreement. In effect, if the APA does not agree with management’s 67 plus concessionary demands, the pilots will not receive the five "enhancements" noted by an asterisk on their term sheet.

Enhancements? Really?

One of the items touted by management as being an enhancement is sequence protection. The term sheet contains the following proposal:

“11. Provide pay protection for the scheduled value of a sequence disrupted due to cancellation, misconnect or illegality.*” Notice the asterisk signifying an enhancement?

The provision above was included in section II. COMPENSATION of their term sheet. However, the real details of this provision were buried in number 14 of section III. WORK RULES titled “Recovery Obligation.”

“14. Provide greater flexibility following a cancellation, misconnect or illegality.”

Notice there is no asterisk associated with this provision. Why? Because even they realized they couldn’t try to describe this as an enhancement.

An important point to understand is their pay protection “enhancement” is contingent on their “Recovery Obligation.” They are not separate provisions. So what does AMR management mean by, “Provide greater flexibility with recovery obligation”? Management’s “Work Rules Proposal” of 2/7/2012 serves as a vivid reminder that when it comes to pilot work rules, the devil is truly in the details. Simply put, this “enhancement” is anything but.

Sequence Protection or Forced Reserve (including RAPs)?...

Understanding management’s proposed new filling of open time procedures is necessary to fully comprehend why their proposed sequence protection is the furthest thing from an enhancement.

Their proposal for filling open time is:

“Filling of Open Time - Order

1. Sequence Protection Obligation”

To receive sequence protection, pilots will have to be the first available for open time coverage, before make-up, reserves, etc. But what is a pilots’ obligation for being available for the filling of open time? Management’s proposal further defines recovery obligations:

“Replacement Window Flying:

The originally scheduled flight departure (OUT) time on the first day of the sequence until the end of the sequence footprint plus four hours, or the end of the calendar day, whichever is greater, or

For Trans Oceanic including to/from Hawaii and U.S. to South of the Equator, the end of the sequence footprint, plus thirty (30) hours.

Pilots shall be available for recovery flying as follows:

• The Company may proffer and the pilot may voluntarily accept replacement flying that commences prior to the sequence footprint and/or finishes beyond the replacement flying window (including replacement flying that will cause an illegality with the pilot’s next sequence(s)). 

• The Company may assign replacement flying within the Replacement Flying Window that causes an illegality with the pilot’s next sequence(s). 

• The pilot will be available for DOTC for flying the following day, commencing on the day prior to the origination of the cancellation and ending with DOTC on the day prior to sequence termination. 

• Crew Schedule may assign a RAP on any day for which a pilot is being pay protected and has not been assigned a sequence. On the first day of a cancelled sequence, the RAP cannot be scheduled to start earlier than three hours prior to departure of the cancelled sequence. 

• The Company may not involuntarily assign a pilot to replacement flying that signs-in before the sign-in time of the originally scheduled sequence footprint. This does not prohibit the Company from reassigning a pilot in accordance with the definition of Reassignment” in Section 2. 

• With mutual agreement between the Company and the pilot, a pilot may decline a replacement flying assignment at the time of notification and forfeit the applicable sequence protection.” 

Is management really trying to propose sequence protection as an enhancement?

Will management force all pilots of cancelled sequences to participate in recovery obligations even if a pilot does not seek sequence protection?

According to management’s proposal domestic pilots must be available for recovery obligations until at least midnight of the last day of their cancelled sequence and as late as 0359 the next morning in some instances. By example, if a pilot’s trip was originally scheduled to terminate at their base at 9:00 a.m. on the last day of their sequence that pilot would be on the hook for forced flying to at least midnight of that day 15 hours later. Essentially, any planned social event or family commitment on the day of the originally scheduled bid sequence is placed at risk of being missed not unlike a reserve pilot today.

For international pilots, management’s proposal is even worse. Management expects international pilots to be available for up to 30 hours past the original termination time of their cancelled sequence. That is more than an extra day of availability management expects a pilot to be obligated for. So, if a pilot has anything of importance in their life they will need to make sure it is at least two days after the termination of their sequence.

A pilot may voluntarily accept an assignment outside of the footprint of their cancelled sequence but what happens if they decline to accept such assignment? Are they still pay protected? This isn’t addressed.

The Company may assign a pilot to replacement flying that causes an illegality for the pilot’s next sequence...

Is the pilot pay protected for this conflict? Does the pilot now have to endure yet another rotation on sequence protection reserve (recovery obligation) to protect the sequence management forced the pilot to conflict with?

Pilots will be required to be on call for the coverage of open time for the number of days of their cancelled sequence. As an example, if a pilot’s three-day sequence was cancelled they would be obligated for up to three days of open time coverage assignment.

Pilots may be assigned to a reserve RAP for the number of days of the protected sequence...yes, a reserve RAP. Under a RAP system a pilot is on reserve call and must be available to report to the airport for a trip. That means every pilot who commutes--40% plus of American Airline’s pilots--will have to purchase a hotel and sit reserve to get the enhancement management is so generously offering.

The Company may not involuntarily assign a pilot to sign-in before the sign-in time of their cancelled sequence, but they can reassign them to do so. What’s the difference? The time before the original sequence's sign-in will be paid at 150%, but not the time after. In essence under management’s reassignment proposal they can assign a pilot to anything at anytime.

A pilot can decline a replacement flying assignment and forfeit sequence protection as long as the Company mutually agrees. If the Company does not agree they can force the pilot to fly the assigned trip even though the pilot is willing to give up the sequence pay protection.

In management’s 1113 term sheet management has offered the pilots of American Airlines five contractual enhancements if they agree to the other 67 plus major concessionary items.

Does management really propose this form of sequence protection as an enhancement?

Management’s proposed enhancement will:

• Make pilots whose sequences were involuntarily cancelled the first pilots to be used for open time coverage, not the last as is done today. 

• Require pilots to be available to fly as much as 24 hours domestically and 30 hours internationally AFTER their originally scheduled arrival time back at base. Pilots will be unable to plan for social events and family commitments during those extended availability time periods.

• Allow the Company the ability to assign pilots to flying that conflicts with the pilot’s next sequence resulting in the pilot sitting as a reserve pilot twice, once for the original cancelled sequence and the second time for the company-created conflicted sequence. 

• The pilot must be phone available during the entire time of daily open time coverage for the number of days of their cancelled sequence. 

• Pilots may be placed on reserve RAP status for the same number of days as the cancelled sequence. Pilots who do not live at their base, as well as pilots who do, will need to be base available for assignments. Not only will reserve pilots be reserves, line holders will now be reserves as well.

• If a replacement trip does not fit the footprint of the cancelled sequence, and does not fit the rules of assignment under sequence protection, management still reserves the right to assign the trip to pilots anyway under the reassignment provisions meaning there are no assignment limitations. In a very real way, your sequence protection is little more than the bait to get you phone available so management can have their way with you in the form of reassignment. 

• A pilot can decline a replacement flying assignment but only if the Company agrees. What are the odds of that? 

Management proposes that if the pilots agree to the 67 plus onerous proposals in their1113 term sheet, they will provide the pilots of American Airlines with this new sequence protection “enhancement.”

When even their “enhancements” are a punitive, it’s legitimate to question the credibility and fairness of their 1113 efforts. Fair and equitable or opportunistic retribution? You decide.

Premium Pay or Empty Bag?

Management has proposed the following language for premium pay for pilots:

“Replace current premium pay provisions with a single premium rate of fifty (50) percent (total is base rate plus fifty (50) percent of base rate) on Company designated sequences. If sick anytime during the month, sick bank hours will be replenished before premium is paid as additional compensation.”

Once again, management doesn’t seem to understand how an airline operation actually works. Even their attempt at providing an incentive becomes punitive. Management proposes a provision to enhance the productivity of pilots like other carriers have but, unlike other carriers, in addition, they attach a punitive provision to it. They just can’t seem to help themselves. They have to be punitive.

As part of this 1113 process, management has expressed their intent to increase the productivity of American Airline’s pilots. Beyond any doubt, American’s pilots will be more productive at the end of this process. Many carriers such as Delta, Jetblue, Continental and Alaska already have provisions in their contract to incentivize their pilots to fly more hours when the Company is in need of pilots to cover the schedule. At Delta, pilots are paid 200% of their base rate for premium pay. Jetblue pilots are paid 150% for any hours above 78 and for flying on days off or holidays and Continental and Alaska pilots are paid 150% of base pay for premium pay. Not a single one of these carriers however, attach any punitive provisions to their premium pay provisions. Is it any wonder that American couldn’t get a deal with its pilots?

In certain instances under management’s 1113 proposal, they intend to pay pilots who call in sick 60% of their base rate for sick. Under the proposal shown above, they propose a premium pay provision to entice pilots to pick up additional flying at times the Company finds themselves short of pilots to fly its schedule. Specifically, they propose to pay pilots 150% of their base rate on selected sequences (trips), but if a pilot has called in sick for the month they will use the time to fill up their sick bank instead of paying them.

If a pilot has called in sick during the month their time for the premium sequence will be placed in the pilot’s bank at presumably 150% of the time of the sequence (details yet to be explained). But, if the pilot is paid at 60% of pay for calling in sick in the future for a sequence the pilot is only actually paid 90% (150% times 60%) of pay for flying this premium sequence. What pilot would bother picking up this premium sequence under this scenario? What pilot would pick up a premium sequence if they had called in sick during the same month if they won’t get premium pay? The answer is a resounding, “nobody!”

Did they really mean to propose paying less than normal pay as an incentive?

As virtually every other airline management understands, the only reason to offer premium pay is to incentivize pilots who would not normally fly to do so for extra money. However, under AMR management’s proposal, they offer premium pay but then have a provision that would pay pilots even less than normal pay. In the very proposal in which they are trying to build incentives to operate the future schedule of the airline, they can’t resist putting in a provision that has precisely the opposite effect. Do they even understand their own proposal?

As each of management’s proposals are scrutinized, it becomes quite apparent that there is some sort of deep-seated animosity driving their 1113 proposal. Provision after provision contains punitive elements.

One provision after another is cherry picked from other carriers for the negative aspects while the positive aspects of those carriers’ same provisions are ignored. There is no consistent comparison amongst the “new generation pilot contracts” or even fair and equitable treatment between employee groups. Instead, these proposals take the form of a management team singularly focused on exacting punitive retribution from their most highly skilled employees.

Is Mr. Horton really trying to forge a new relationship with his employees? Is the Human Resource department at American Airlines continuing on the same adversarial path they have for the past decade?

Or can they just not help themselves?

What is a "New Generation Contract"? Part II

...A Competitive Contract? Or Just a Fancy Buzzword for Overreaching? Part II

In Part I of this two part series, it was illustrated how management used a completely different methodology in 2003 to support their claims for concessions valued at $660 million or 31% of the total pilot contract. If they used that same methodology today it would not support near the amount of concessions they are seeking, which ironically is once again another 31% of the total pilot contract.

Part I was not just based on a competitive contractual comparison of contracts but a comparison meeting all the elements to determine management’s goal of a “new generation” carrier, in essence – Delta (DAL). There is no greater example in the industry of “new generation” than DAL. It has been through bankruptcy; it’s pilot contract is competitive; it’s profitable and it is well managed. It’s what American Airlines was the last time it was managed by a seasoned leader, Bob Crandall, an industry leader.

As compared to their peers at other carriers who have ratified the most recent contracts in the industry, the pilots of American Airline’s are compensated at less than competitive pay rates, but how do the rest of the employee groups at American Airlines compare to a “new generation” carrier?

Three elements of the current industry pilot contract landscape are essential for understanding the premise of this discussion...

• UAL, CO, US and AW have not concluded new agreements in over six years. All are expected to do so sooner rather than later. 
• AK, HA, Spirit, Jetblue, and Frontier are niche players. 
• Best compensated SWA is treated as an outlier and therefore excluded from this discussion. 

This leaves Delta as the one true “new generation” carrier...


It was shown in Part I that American’s pilots are currently paid between 5.6% to 9.6% less than DAL pilot pay rates on the 767 and 737 respectively. As shown on page 13 of the Delta Pilots’ Contract Comparison, 777 Captains at American make 10.2% less than a 777 DAL Captain, $226 an hour for a DAL 777 Captain and $205 an hour for a American 777 Captain.

How do other employee groups stack up?...

Looking at the APFA Fight Attendant Hourly Pay Rates, American’s flight attendants are paid slightly higher rates than DAL flight attendants, $46.00 an hour domestically for American’s flight attendants and $45.73 an hour domestically for DAL flight attendants.

Also looking at the TWU Fleet Service Hourly Pay Rates, American’s ground workers are paid slightly higher rates than DAL ground workers. American ground workers make $21.16 an hour and DAL ground workers are paid $21.00 an hour.

In both cases, the flight attendants and ground workers are compensated at the top of the industry...

Only SWA pays higher wages for ground workers while only SWA and Continental pay higher wages for flight attendants. If SWA is excluded for the other employee groups, as was done in Part I for pilots, American’s ground workers are the highest paid in the industry and only Continental’s flight attendants make more than American’s flight attendants.

In sharp contrast with the other employee work group wages above, pilot wages at American trail not only SWA and DAL but also AK and HA, the most recent pilot contracts ratified in the industry. American’s pilot rates also trail many of the particular aircraft pay rates at CO.

Executive base pay rates tell an identical story…

When looking at executive base rates, even American Airline’s management exceeds DAL management’s base rates. The AMR CEO's base salary for 2010 was $669,646, the last year of available data (AMR filed bankruptcy on November 29, 2011 and there is no full year data available). Even Mr. Horton’s former base salary of $618,135 for serving as AMR’s President prior to assuming the CEO role in 2011 was higher than Delta CEO’s 2010 base salary of $600,000.

*Note: It is reported that Delta CEO Richard Anderson’s base salary remained $600,000 for 2011 while former AMR CEO Gerard Arpey’s base salary would have been approximately $670,000 for 2011.

Every employee group at American EXCEPT PILOTS exceed the base pay rates at the one true “new generation” carrier, DAL…

Why should American Airline’s pilots be the only employee group at AMR to have base pay rates less than the true new generation carrier? Why would the pilots of American once again agree to give a disproportionate share of concessions—like they did in 2003—when they would be the only employee group to trail new generation wages even though they are willing to make the other required changes to the their contract? Why would the pilots of American Airlines ever agree to anything other than fair and equitable treatment of all employees, including the pilots, like Mr. Horton stated in his February 1, 2012 letter?

Is AMR management really seeking a “new generation” pilot contract?...

Are they really treating the pilots fairly and equitably as compared to the other employee groups, including themselves? Or...could it be that AMR’s Finance and HR department management is taking advantage of a crisis to exact punitive retribution in a campaign against its pilots?

What is a “New Generation Contract”?...

...A Competitive Contract? Or Just a Fancy Buzzword for Overreaching?

The following is the first in a series of two critical articles on the subject of American Airlines (AA) management’s claim that they need a “New Generation Contract.” What’s that? Is it just their latest creative methodology to extract unnecessary and overreaching concessions they want, or a true attempt to get a competitive pilot contract?

In 2003, during the timeframe most other legacy carriers were entering bankruptcy the pilots of American Airlines consensually agreed to $660 million in annual concessions, 31% of their contract. This agreement was and still remains the largest consensually agreed to concessionary contract in aviation history.

During the negotiations leading up to this concessionary agreement, management designed and promulgated the model from which the pilots’ concession would be determined. They insisted that the 2003 agreement must end up being competitive with the latest ratified pilot contracts in the industry because the newest contracts in the industry represented where the industry was headed - the new generation.

At the time, both USAir (US) and United (UAL) had entered bankruptcy and their pilot contracts had been driven down considerably below industry standard. Southwest (SWA) pilot’s meanwhile had one of the most productive pilot contracts in the industry with pay rates about 10% below those in effect at American Airlines at the time.

Management developed a model using USAir, UAL and the SWA pilot contracts as the financial benchmark because they were the three most recent contracts ratified in the industry. They were also the three lowest valued contracts in the industry, in essence, below industry standard.

Today management wants another chance at a “new generation contract,” however their methodology to determine what that is has changed considerably from their methodology used in 2003. Why? Because using the same methodology as they used in 2003 does not work to their advantage. They must change their methodology to tailor it to the kind of contract they are really trying to pursue, a less-than-industry-standard style contract.

Using the 2003 methodology, management would look at the latest ratified contracts in the industry—where the industry is headed—like they did in 2003. The latest ratified pilot contracts in the industry would be SWA, Alaska (AK), Delta (DAL) and Hawaiian (HA).

Continental (CO) and UAL pilots are still in negotiations and are anticipating reaching an agreement within the next twelve months as the integration of the new United concludes. USAir and America West (AW) pilots have been involved in a protracted seniority integration and have not been able to conclude an agreement. However, the USAir flight attendants just agreed in principle to an industry leading contract, giving rise to the probability that the new USAir pilot group will conclude an agreement in the future as well. (See page 2 of the “Delta Pilots’ Contract Comparison” for ratification timeframes).

Given that the CO, UAL, US and AW pilots will conclude an enhanced contract in the future, management’s 2003 methodology makes even more logical sense today.

Unlike 2003, when SWA pilots were paid less than American Airlines pilots, today SWA pilots make approximately 31% more than American Airline pilots ($216 an hour for a SWA 737 Captain and $165 for a AA 737 Captain. See page 14 and 15 in the “Delta Pilots’ Contract Comparison” for pay rates). Is it any wonder AMR management wants to change their methodology?

Both Delta and Alaska fly the 737; HA does not. Delta has a Captain pay rate of $181 an hour and Alaska has a Captain pay rate of $180 an hour for the 737, both are approximately 9.6% above American’s current 737 Captain pay rate of $165 an hour.

Both Delta and Hawaiian fly the 767; AK does not. Delta has a Captain pay rate of $189 and hour and Hawaiian has a Captain pay rate of $199 an hour for the 767, 5.6% and 11.2% respectively above American’s current 767 Captain pay rate of $179 an hour.

Using the same methodology as AMR management used in 2003, you would use the four carriers, SWA, DAL, AK and HA and the 737 and 767 for comparison purposes. Using their 2003 methodology, American’s “New Generation” contractual 737 pay rate would be somewhere between the DAL, AK and the SWA pay rate. The 767 pay rate would be somewhere between the DAL and HA pay rate.

Now management, along with some of the casual media, analyst or public observers might argue that SWA is an outlier, not to be used as a fair comparison. Pilots—especially American Airlines pilots—on the other hand, would argue for their responsibility, training and associated risks, SWA is not an outlier at all, but a realistic benchmark for the value of their professional services.

Recognizing that reasonable people can hold differing viewpoints on the role of SWA pay rates and further recognizing that this debate is unlikely to be resolved in the 1113 process, the overly conservative position to take for this discussion would be to exclude SWA pilot pay rates, even though there are many logical arguments to not do so. This in and of itself is obviously very debatable amongst the pilot group, but one chosen as the most conservative position to take to best illustrate the false nature of management's arguments.

Federal Express (FE) and United Parcel Service (UPS) pilot contracts are excluded as well which is equally controversial, considering pilots at those airlines provide precisely the same type of service to their employer as American’s pilots do for AA. For the sake of keeping this discussion as valid and unbiased as possible, freight carrier pilot contracts are conservatively excluded from consideration.

By dropping SWA and using the same methodology as in 2003, you would then be left using DAL, AL and HA as the comparators since they have the most recent ratified contracts. Each of the pay rates have been discussed above. Based on these three carriers, American’s 737 Captains are paid 9.6% less than these carriers and somewhere between 5.6% and 11.2% less on the 767.

Taking the discussion of “new generation” one step further, one can conservatively argue that new generation must be a comparator of those carriers that have used the 1113 bankruptcy process to implement many changes under the force of the bankruptcy process.

Of the three carriers, DAL, AK, and HA, only AK has never used the 1113 bankruptcy process. Therefore, another conservative position to take on determining a “new generation” contract would be to exclude AK as a comparator. Ironically, both of the remaining carriers, DAL and HA were the last two major airlines to use the 1113 bankruptcy process to negotiate contracts.

An American 737 Captain would still be paid 9.6% less than the newest generation 737 Captain pay rates and the same 5.6% to 11.2% less than a 767 Captain using new generation contractual pay rates.

Consistent with the same conservative approach, one could argue that both HA and AK are niche carriers serving a limited geographic area, though both are expanding their networks around the country. If you excluded both HA and AK you would be left with DAL as the comparator for what a pilot “new generation” contract should look like.

DAL has the following characteristics that support the argument that it is an appropriate comparator for a qualified “new generation” carrier:

• It has used the 1113 bankruptcy process to develop a new generation competitive pilot contract. 
• It is the largest fully integrated carrier in the world (the new UAL is not yet fully integrated). 
• It is the largest Domestic Carrier providing 16.3% of the US domestic market share (Source BTS). 
• In 2011, excluding special items, it reported a $1.2 billion annual profit. 
• For 2011 it provided its employees $264 million in profit sharing. 

Management coined the term, “new generation.” UAL, CO, US and AW have been in contract negotiations for years with each of their pilot contracts being negotiated over six years ago. Each of these pilot groups will certainly conclude an enhanced agreement in the future. They therefore cannot realistically be used for benchmarking today to determine the future because nothing about them is new generation.

Unlike in 2003, management doesn’t want to use the latest contracts in the industry. They want to use whatever they can whenever they want. There is no consistency, no logic and no foundation for management’s proposals. It's all about overreaching

The actual “new generation” comparison shows an American 737 Captain is already paid 9.6% less than a “new generation” 737 Captain and a 767 Captain at American is already paid 5.6% less than a “new generation” 767 Captain.

Is AMR management really seeking a competitive contract for their pilots or are they seeking something else?

What’s Their Definition of Competitive?

As you look at AMR management’s 1113 proposal you have to begin to ask yourself if this management team is truly seeking a competitive contract or just compiling a collection of the lowest contract provisions with the intent of producing a less-than-industry-standard contract?

It doesn’t take long to conclude that management is trying to produce a contract that contains the least restrictive pilot provision of each contractual item. To do so, they are taking each significant element of the contract and forcing a comparison to the carrier whose contract contains the least restrictive similar provision. Instead of taking a carrier’s complete pilot contract and comparing all of the provisions within that contract, management is swinging for the fence on everything. By doing this, management is clearly aiming for a pilot contract that is much lower in costs than any other pilot contract, far beyond any definition of reasonable or necessary, and clearly not an industry competitive contract.

One of those provisions is below:

“Eliminate two hour pay for Reserve Availability Periods in excess of seven (7) per month.”

Not unlike what they attempted in 2003, Management has made no secret of the fact that they are trying to implement many of the scheduling provisions currently flown by Continental pilots. Among the most onerous of those scheduling rules are duty rigs which will be discussed in a subsequent posting. In the case of reserve availability pay, management is trying to “cherry pick” some of Continental’s contract while ignoring many of their other provisions concerning reserve pay.

Currently, American Airlines pilots who are on reserve are either in a short call (reasonably available) status or long call (12 hour) status. To provide domestic pilots with an acceptable quality of life so they are not tethered to the airport for their 19 days of availability, management is required to pay a pilot two hours of pay if they are placed in a short call status for more than seven (7) days per month. Reserve pilots at American are guaranteed 73 hours of pay per month. If they fly more than 73 hours, they are paid for those hours as well. Management is incentivized to use their reserve domestic pilots productively.

Management is now proposing to eliminate the two hours of pay for additional days assigned above seven (7) for short call so that they can put pilots on nineteen (19) days of short call a month. Continental has a short call and a long call system as well. Short call pilots have unlimited short call availability as management is proposing but their pilots are paid 76 hours of pay, not 73 hours as AMR management proposes to pay. Long call pilots at Continental are paid 72 hours a month and are paid one (1) hour of pay for each short call period over two (2) per month. A long call pilot has to be available within nine (9) hours and a short call pilot available within three (3) hours.

Under management’s proposal they want to have the flexibility that Continental enjoys in assigning pilots to short call, but they don’t want to guarantee pay for it like Continental does…

American also proposes that any pilot can be assigned at any time in the month to either short call or long call for no differential in pay. Continental has a bid system where pilots either bid short call for 76 hours of pay or long call for 72 hours of pay prior to the month.

AMR management wants it all and then some more…

AMR management instead wants to “cherry pick” Continental’s unlimited short call availability but they don’t want to pay extra for it like Continental does. They want to place any reserve pilot in a short call status at anytime throughout the month, whereas Continental assigns a pilot to either long call or short call for the entire month prior to the start of the month. If Continental needs additional short call reserve pilots during the month, they must pay a long call pilot an additional hour of pay on top of their 72 hour guarantee for each time they use the pilot for short call more than two times a month, unlike Americans’ current system which does not require extra pay until the eighth time a pilot is placed in a short call status.

Under Continental’s contract, if a long call pilot is placed in a short call status seven (7) times during the month Continental must guarantee that pilot 77 hours of pay. Also at Continental, if a pilot bids a short call schedule, they can be placed on short call an unlimited amount of days but are guaranteed 76 hours of pay for the month. At American, they currently guarantee reserve pilots 73 hours for the ability to assign seven (7) short call days a month in addition to their other 12 days of availability.

American’s pilots are already guaranteed fewer hours for each short call day. Management wants more…
Under Continental’s contract, their pilots would be guaranteed either 76 hours of pay or 77 hours of pay for their management’s ability to assign a pilot the same seven (7) days that American is currently able to assign. However, American only has to pay a guarantee of 73 hours of pay. Under management’s proposal they want to be able to assign a reserve pilot to unlimited short call days for no extra pay.

Is AMR management “cherry picking” or in good faith trying to negotiate an industry competitive contract?

Fair and Equitable Quality of Life...Who's Pulling? Who's Winning?

As part of management’s 1113 proposal, they are proposing changes to work rules that would increase the number of days a domestic pilot is traveling away from home from the typical 15 to 16 days a month under our current contract to 17 to 20 days a month under their proposal.

According to past studies, airline pilots and flight attendants on average travel more days a year than any other profession. Every pilot at American at some point has missed Christmas with their kids, Thanksgiving with their family, birthdays, anniversaries, children’s sporting events and a never-ending list of other special occasions.

Unlike management employees, who get holidays off so they can be with their families, pilots are out flying American’s customers around the world so they to can spend the holidays with their loved ones. Meanwhile, pilots often end up sitting in some hotel on a holiday that typically has no services, sometimes not even a restaurant, because even the hotel lets most of their employees off for the day.

Management gets weekends off whereas pilots miss most of their children's’ weekend activities because they generally have to work some or, for junior pilots, all weekends. The airline never rests, even though management does.

The stress and strains of missing important events places an undue and often misunderstood hardship on pilots as spouses and particularly young children cannot understand why their spouse or parent does not attend these special occasions while most other spouses and parents do. Very few pilots have the seniority to receive all weekends off and the ability to simultaneously receive another special occasion off. Simply put, pilots are often left with making the choice on which event they will miss and which person they will disappoint.

When pilots reach their layover destination they will often look for ways to unwind to take their mind off what they are missing at home and the lingering effects of the disappointment they have left behind with their loved ones. There isn’t a pilot out there with children that hasn’t walked out the door with a crying child asking him or her not to go. But that is their job and they make huge personal sacrifices for it. Sacrifices that most others, and obviously management, does not understand.

Today when a pilot arrives at a city for between 16 and 33 hours, the crews will be placed in a downtown hotel location. Airport locations are typically noisy due to airport noise, have very few if any outside restaurant choices, limited areas to shop and they seldom have acceptable areas to exercise due to the traffic around an airport. Downtown hotels on the other hand offer the pilot the ability to go for a run in a park, go shopping, choose between multiple restaurants and, more often than not, quieter rest accommodations than at an airport location.

For an infrequent traveler, this difference between a downtown hotel and an airport hotel may not seem like much. For pilots who spend their lives on the road, this simple change has a tremendous impact on their lifestyle and in many cases the temporary ability to leave the thoughts of disappointed loved ones they left at home.

Now under management’s 1113 proposal, they're insisting on making most if not all layovers at airport locations. They also propose that they will unilaterally decide which hotels will be selected with no input from the pilots and flight attendants like is done today and like is still done at most other carriers. Those who will have to live in these hotels will have no say. Instead, those who will be going home every night after work will determine what is appropriate.

The proposal's language...

“Eliminate the requirement to select from mutually acceptable facilities. Modify to give preference to airport hotels.”

In addition to proposing pilots spend several more days a month working away from home, management is simultaneously pushing for pilots--regardless of the length of the layover--to spend their time at an airport location that typically has little or no services. Pilots could be spending 33 hours at an airport hotel with nothing to do other than remain in their room waiting for the return flight. International pilots who fly around the world to destinations such as London, Frankfurt, Beijing, etc., could find themselves spending 25 hours staring out of a hotel window looking at airport runways.

Under management’s hotel accommodation proposal, they myopically attempt to save four million dollars annually on 8,000 pilots who will collectively spend more than 500,000 nights each year in hotels away from their families.

In contrast, management provides accommodations for one, yes one, executive in a $30 million London home. This home is not located near the airport where American’s largest European operation operates. No, the house is located--yes you guessed it--in a downtown location near all the sites and activities.

From the Dallas Business Journal, December 14, 2011:

“The five-bedroom house in London's high-end Kensington district has been used as a residence by company executives, including Tom Horton who was recently named chairman and CEO of the company, Reuters reported. It also has been used for events.

It is a 10-minute walk from the former home of Princess Diana and has gentry and diplomats as neighbors.”

So, while American’s crews are laying over in London away from their families at an airport hotel with nothing to do under management’s proposal, American’s executive is having dinner with his family in a downtown location at an American Airline's provided accommodation.

If American were to sell this $30 million home and buy the executive a more reasonably priced accommodation of $1 million, the other $29 million dollars and interest earned could pay for pilots’ downtown locations for another decade. Instead, management proposes to negatively impact 8,000 pilots’ quality of life while the executives live like middle eastern sheiks.

AMR executives write about "fair and equitable." They are asking their employees to trust them. After 2003, former AMR CEO Gerard Arpey and his executives were telling their employees that it would be shared sacrifice, that it would be "pull together, win together." How's that working out?

Does current AMR CEO Tom Horton and his executives really think for a minute that the employees of this airline will begin to trust him when he proposes to slash the quality of life for 8,000 pilots in order for a $25 billion company to save $4 million annually while at the same time one employee enjoys a $30 million mansion?

If this is Mr. Horton’s fair and equitable proposal on trust he might as well be telling the employees don’t worry, we will "pull together win together...again."  Either way, his words are falling on deaf ears because as always, actions speak so loud we can’t hear a word you’re saying.”

Reserve Guarantee Protection...Fatigue Management or Something Else?

For years, pilot fatigue has been a concern in the airline industry. As a result, Congress, the FAA and the NTSB have collaboratively worked with airline management and labor to develop new comprehensive fatigue rules. In December of 2011 the FAA issued new rules to curb pilot fatigue.

One of the components of the new FAA fatigue ruling concerns fitness for duty.

This component is listed below:

“Fitness for duty. The FAA expects pilots and airlines to take joint responsibility when considering if a pilot is fit for duty, including fatigue resulting from pre-duty activities such as commuting. At the beginning of each flight segment, a pilot is required to affirmatively state his or her fitness for duty. If a pilot reports he or she is fatigued and unfit for duty, the airline must remove that pilot from duty immediately.”

Under the ruling a pilot is now legally responsible to ensure his/her fitness for flight duty. If the pilot is not fit for duty, they are required to remove themselves from duty for the safety of the flight.

There could be a myriad of reasons that a pilot may not be fit for duty (fatigued) for a flight. Examples include lack of sleep at a noisy airport layover hotel and loud guests that keep others awake but the most often cited reason for fatigue is long duty periods under stressful situations and adverse weather. During adverse weather situations, a pilot’s duty day is often extended in excess of 12 hours while they have to deal with increased workloads as a result of snow, thunderstorms or other weather events. With the combination of increased hours and increased mental fatigue as a result of the extra concerns a pilot has to deal with, many pilots often becomes fatigued. The harsh and potentially lethal reality is that fatigue, often unrecognized can result in clouded judgment, an unacceptable combination for someone flying an airplane.

In the wake of the Buffalo Colgan Air accident, the government has taken years to develop rules in an attempt to protect the traveling public from another pilot fatigue accident. The ruling has been out less than two months and AMR management is already trying to place punitive language in their pilots’ contract that could influence pilots not to call in fatigued.

Management’s proposal to “delete guarantee protection for reserves,” appears financially punitive for reserve pilots. While the details have yet to be explained, it appears the proposal would reduce a reserve pilot’s pay if he or she calls in fatigued for duty. So now a pilot has to pick between losing pay by calling in fatigued or flying fatigued to receive their compensation. Management understands that given the major financial impact of their 1113 proposals on pilots’ pay, most pilots will be forced to fly fatigued rather than accept further pay reductions. Is this form of “pilot productivity” in the public interest?

Is management’s 1113 proposal really trying to manage a fatigue policy or have they designed a financially punitive proposal that forces a pilot to make the wrong decision?

Most Generous Profit Sharing Plan in the Industry? Really?

In March, 2010 as part of negotiations with the Association of Professional Flight Attendants (APFA), the union that represents the American Airlines flight attendants, AMR management developed a document “Flight Attendant Negotiations News 2nd edition” to explain management’s position on their proposals. One of those explanations was about profit sharing. Page 3 of the document contains the following explanation:

Profit Sharing Plan: The company proposed to replace the existing profit sharing plan with a new profit sharing plan that rewards employees at the first dollar earned and matches Continental's plan - the richest plan in the industry.

[Modified] The company's proposed plan would reflect Continental's new plan which:
-->Creates an award pool of 15 percent of annual pre-tax earnings. This percentage would establish a fund from which awards are distributed to all participating employee groups.

During the same time period in the spring of 2010, AMR management also developed a document “From the Ground UP” for use in the negotiations with the Transport Workers Union (TWU), the union that represent American Airline’s baggage handlers. Page 10 of the TWU document contained the  explanation in the inset below:

Management's TWU Profit Sharing Proposal

During 2010, management was negotiating with two separate employee groups, the APFA and the TWU, and telling both of them they would be getting the “richest plan in the industry”, yet they were two entirely different plans. How could that be? Were they intentionally misleading the employees of each group? Were they unaware of what the richest plans really were? Were they negotiating in good faith with each of their unions?

On February 1st, 2012, AMR management provided their employees with 1113 term sheets describing the concessions they proposed for each employee group. Also contained in the 1113 term sheet for pilots were a few enhancements contingent on reaching a consensual agreement to the concessions listed. Once again management made a proposal on profit sharing and made statements that they would provide their employees with the richest plans in the industry, but this time it is contingent (the carrot) on employees agreeing to their 1113 terms.

To Be (Pensionable) or Not To Be, That is The Question...

On February 1, 2012, Jeff Brundage, Senior Executive Vice President Human Resources, also wrote a letter to AMR employees containing the following quote, “....and a new, first-dollar profit sharing plan that matches the most generous plans in the industry - provisions we propose as part of a reaching consensual agreements with the unions. “

Management’s 1113 profit sharing proposal is below:

1. Current profit sharing plan and the Annual Incentive Plan (AIP) would be eliminated. 
2. Beginning at the first dollar of pre-tax income, the new profit sharing plan would pay awards equal to fifteen (15%) percent of all pre-tax income, prorated to take into account any groups of frontline employees who do not participate in the plan. Pre-tax income for the purposes of these awards will be calculated prior to the effects on income of any special, unusual, and non-recurring items and inventive pay.
3. The Enhanced Fund would be distributed equitably to all employees based on each employee’s earnings. Profit sharing is not considered compensation for purposes of determining Company contributions or other benefits under any retirement plans.
4. Individual Enhanced Awards will be distributed no later than March 15 of the following year for employees who meet the eligibility requirements as long as minimum funding requirements are met.
5. The implementation of the Enhanced Profit Sharing Plan is contingent on reaching a consensual agreement. 

In 2005 Delta airlines filed for bankruptcy protection and their management also provided their pilots with an 1113 term sheet. Following negotiations on the 1113 term sheet the Delta pilots concluded a consensual agreement.

Today, as described in the Delta Pilots' Contract Comparison on page 26, Delta pilots have the following profit sharing plan:

The pilot profit sharing plan for Delta pilots clearly states the profit sharing awards will be pensionable, while AMR management’s proposal clearly states profit sharing will not be considered compensation for pension purposes.

How can AMR management in good faith make the statement to American Airline’s pilots that their profit sharing proposal, “matches the most generous plans in the industry ”, when it clearly does not?

Why is AMR management intentionally making inconsistent and what appears to be misleading statements to all its employee groups about profit sharing plans? It leads you to question if AMR management even understands their employees’ competitive position amongst their competitors?

Schedule or Actual - Does Management Really Understand?

Currently American’s pilots are paid the greater of schedule or actual for flights on a leg by leg basis, just like other carrier’s pilots are paid.

If a pilot is scheduled to fly a three day trip that consist of nine legs (flights) over that three day period, the pilot will be paid the greater of what each leg is scheduled to be flown or what is actually flown.

Example:

A pilot is scheduled to fly a three day trip that pays 15 hours of total pay for the three days. On the first leg of the trip, he is scheduled to fly from Chicago O’hare to St.Louis. The leg from Chicago to St. Louis is scheduled to be flown in two hours. Because of delays in Chicago, the leg is actually flown in two hours and 15 minutes. This pilot will now be paid a total of 15 hours and 15 minutes of pay for his three day trip since the actual time of the leg, 2 hours and 15 minutes, was 15 minutes longer than the scheduled time of 2 hours.

On the return leg from St. Louis to Chicago, the trip is once again scheduled to be flown in 2 hours. The actual flight time of this leg on the return trip takes one hour and 50 minutes, ten minutes less than schedule. Since the scheduled time was two hours and the actual time flown was one hour and 50 minutes, this pilot will be paid the greater of schedule or actual or in this case, the scheduled time of 2 hours. His total trip pay still remains at 15 hours and 15 minutes, the original trip projection of 15 hours plus the additional 15 minutes flown on the first leg.

This provision has been in the pilot contract for decades, because previous management representatives understood its need.

For much of it’s more recent years, American has been managed by finance managers not operations managers. Every CEO at American since Bob Crandall’s appointment in 1985 has had a background in finance. Every one of them, Carty, Arpey and now Mr. Horton was groomed from within under the same corporate philosophy and culture that has existed at American for the past two decades.

When you look at the names of the most successful airline executives over the recent past, with the exception of Mr. Crandall, every one of them were NOT finance managers. Herb Kelleher of Southwest was a lawyer by trade. Gordon. Bethune at Continental was a mechanic and most recently Richard Anderson, the current CEO of Delta, is also a lawyer. By contrast, American Airlines has never had anyone other than a finance trained CEO since 1985 and every one them is a product from within.

Apparently, American has lost its understanding of how parts of the airline operation actually work. Financial managers are great with spreadsheets, P & L’s, financial calculators, and talking to analysts, but how well has that translated into understanding how to operate an airline?

AMR management no longer wants to pay pilots the greater of scheduled or actual flight time on a leg by leg basis. Instead, they propose paying pilots based on the greater of scheduled or actual flight time on a sequence basis (the entire three day trip) but how well did they think this one through?

Using the same example as above, under management’s proposal:

A pilot is scheduled to fly the same three day trip that pays 15 hours of total pay. On the first leg of the trip, the pilot is scheduled to fly from Chicago O’hare to St.Louis. The leg from Chicago to St. Louis is scheduled to be flown in two hours. Because of delays in Chicago the leg is actually flown in two hours and 15 minutes. This pilot will now be paid a total of 15 hours and 15 minutes of pay for his three day trip since the actual time of the leg, 2 hours and 15 minutes, was 15 minutes longer than the scheduled time of 2 hours.

On the return leg from St. Louis to Chicago the trip is once again scheduled to be flown in 2 hours. The actual flight time of the leg on the return trip takes one hour and 50 minutes, ten minutes less than schedule. Since the scheduled time was two hours and the actual flight time was one hour and 50 minutes, this pilot will be paid the actual time NOT the scheduled time for this leg, or in this case, one hour and 50 minutes. The total trip pay is then reduced by 10 minutes since he had over flown on another leg. After the first leg from Chicago to St.Louis the pilot’s pay increased from 15 hours to 15 hours and 15 minutes because the first leg took 15 minutes longer than schedule. The 15 hours and 15 minutes is then reduced by 10 minutes (the amount under flown) to 15 hours and five minutes because on the St. Louis to Chicago leg he flew less than schedule.

Under management’s proposal if any leg is under flown it will have the effect of reducing the pilot’s pay if any other leg within the sequence was flown greater than scheduled.

Back to the discussion of financial managers, spreadsheets, and calculators…Ignoring the operational realities, from a strict academic financial perspective, this spreadsheet’s output makes financial sense. A person who does not understand an airline operation would conclude--as AMR management apparently has--that you would save money under AMR management’s proposal because you could pay pilots less. The proof is in the spreadsheet right? Wrong! Why? Because spreadsheets don’t fly airplanes, pilots do.

But here is where the difference is highlighted between financial managers and managers that understand how an airline operation actually works. Under management’s proposal, if a pilot flies less than the scheduled flight time on a flight, he would reduce his pay if he had flown over on any previous leg as in the example above. So ask yourself this, if management implements their proposal, in the future what Captain at American Airlines would ever under-fly a flight if it resulted in a pay cut for him? The flight will only move as fast as the Captain wants it to.In other words, will there ever be another early flight arrival at American Airlines again under this proposal?

This is the very reason that managers in the past at American Airlines and the other airlines agreed to the current system of paying the greater of schedule or actual on a leg by leg basis and not based on the entire sequence. Managers in the past understood how the operation of an airline actually works; spreadsheet-based conclusions that ignore predictable human behavior and fail to account for the practical nature of a work rule in the real world airline operation are faulty conclusions that are not credible. Most importantly, they fail to provide the solid foundation upon which to form a viable business plan.

Senior AMR management is trying to convince the Unsecured Creditors Committee, the Court, the public, and their employees that they have a viable business plan for the future. At the same time, the AMR managers that are actually running the day-to-day operation of the airline are trying to implement policies and procedures that will predictably result in a reduction of the flight schedule reliability which most certainly will also result in dissatisfied customers and ultimately an airline with a declining revenue base. Is this really the basis of senior management’s proposed business model for the future?

If senior management is ever going to convince the Creditors Committee, the Courts, the public and their employees that they are truly trying to turn the page to a new chapter they must first understand that apparently some of their management team is not yet reading from the same book.

Does management really understand what they are proposing?

International Rates of Pay

Management’s 1113 proposal proposes to eliminate all international rates of pay for pilots and pay pilots domestic rates of pay for both domestic and international flights.

International pilots at American and every other carrier are tasked with a great responsibility. American’s international pilots fly aircraft costing as much as $200 million that carry upwards of 250 passengers to destinations all over the world on four separate continents. International pilots, unlike domestic pilots have to be trained and knowledgeable of their Company’s international policies and procedures, air traffic control procedures for each separate country they fly to, customs procedures for each destination, special mountainous training procedures and special route procedures that require international pilots to be capable of exercising emergency divert procedures into some of the most remote and environmentally unforgiving airports in the world. To accomplish this, international pilots must attend an additional day of training each year in addition to any training a domestic pilot undergoes.

As compensation for that extra responsibility, international pilots are currently paid an additional stipend known as international override of $6.00 an hour or about 3% of their hourly pay. Of the 10 biggest US passenger carriers, and two cargo carriers, FedEx and UPS, only two carriers do not currently pay an international override, Continental and United. Both of these carriers are currently in negotiations and as a result of their upcoming integration, the new United CEO Jeff Smisek has publicly stated that United is expected to conclude a new pilot agreement within the next twelve months. As part of this agreement, the pilots at the new United are expected to negotiate an international override pay rate like every other pilot group.

AMR management on the other hand wants to eliminate this provision and pay pilots only domestic rates of pay because apparently they do not believe pilots need to be compensated for the additional responsibilities and burdens placed on an international pilot. AMR management has also proposed that flight attendants be paid strictly domestic hourly pay rates. However, in a strange twist on fair and equitable they propose ADDING a new provision for flight attendants, “to pay an override for International segments on top of Domestic base pay rate,” a 6.5% override of $3.00 an hour in addition to their Domestic base pay rate. Their proposal for flight attendants offers a new provision that is similar to the international override that is currently paid to pilots, the pilot provision they want to eliminate.

Unlike almost every other US carrier’s management, AMR management apparently does not believe pilots at American Airlines deserve additional compensation for all the additional responsibilities required of an international pilot. Even worse, while AMR management is proposing that a very experienced Captain who is in command of a $200 million aircraft and 250 lives does not deserve a $6.00 per hour override for his added responsibilities, they are proposing adding a new provision for flight attendants who are tending to customers in the cabin of the aircraft that provides additional compensation of $3.00 an hour for their responsibilities.

Is this really a fair and equitable proposal?

For years, the public, the media, and analyst have witnessed the very divisive and often destructive relationship AMR management has had with its employees, particularly its pilots. These parties are left trying to figure out the cause of this destructive behavior that does nothing to improve American’s standing but just continues to drive American further behind its competitors.

On February 1st, AMR Chairman and and CEO, Tom Horton wrote a letter to AMR employees, in his letter he wrote the following:

“Another risk comes from within. Divisive and destructive rhetoric of the past has not served American or its people well, and indeed has only served to strengthen our competitors. Believe me, our competitors see an opportunity to take advantage of any internal uncertainty or instability. This is a moment when such discord can have profound consequences. It is time to turn the page and open a new chapter for American.

... Our industry is now defined by the changes our competitors made in restructuring to secure their futures, and the landscape is littered with those airlines that failed to change..."

American’s corporate communications continues to produce literature for its managers with catch phrases such as, fair and equitable, necessary and consensual in an effort to paint management as the reasonable party in the process. But the international pay override proposal is just one example that illustrates the complete disconnect between their catchy phrases and well-written correspondence and their internal actions.

The pilots at American Airlines cannot understand why management, especially those charged with fostering better employee relations at American Airlines, continue what appears to be a punitive and demeaning management doctrine directed at their employees, particularly one of the most important employee groups in the eyes of American’s passengers, the professionals to whom they entrust their lives on a daily basis.

If Mr. Horton is sincere about his well written statement above, if he is sincere about leaving past discord behind and turning the page to start a new chapter, if he is sincere about seeking just those changes AMR’s competitors made in restructuring and nothing more and if he is sincere about avoiding joining the littered landscape of bankrupt carriers that didn’t survive, he might want to start by not just having those words written for him by his managers, but by having the action of those words instituted for him by his managers.

If Mr. Horton is truly trying to turn the page to a new chapter, he needs to be aware his managers are not yet even reading from the same book.

Pay Banding...Training Cost Savings or Hidden Agenda? Part 2

The following is the second of two articles illustrating significant issues with management’s pay banding proposal. Although at times, this becomes a technical numbers discussion, readers are urged to read and re-read as necessary to fully understand the significant pay cuts hidden in the proposal. While reducing unnecessary training expenses is a worthy endeavor, that will NOT be the primary result of management’s proposal. No other pilot group has ever agreed to this form of pay banding.

Be very aware of the fine print in management’s pay banding proposal...

Management proposes in their 1113 proposal that aircraft that have an FAA maximum certificated seat configuration of fifty (50) percent or less of the difference between the highest FAA maximum certificated seat configured aircraft in one Group and the lowest FAA maximum certificated seat configured aircraft in the next higher Group will be placed in the next lower Group. Aircraft that have an FAA maximum certificated seat configuration of greater than fifty (50) percent of the difference between the highest configured aircraft in one Group and the lowest configured aircraft in the next higher Group will be placed in the higher Group.

Their proposal has grouped the A321 in Group III, the same Group as the MD80 and the 737-800. The MD80 is configured for a seating capacity of 140 passengers at American Airlines and according to the Boeing website has an FAA maximum certificated seating configuration of 152 seats in a two class configuration and 172 seats in a single class configuration. The 737-800 is configured for a seating capacity of 160 passengers at American Airlines and has an FAA maximum certificated seating configuration of 162 seats in a two class configuration and 189 seats in a single class configuration.

The first important item to note is that management’s proposal does not state which FAA maximum seating configuration will be used, the two class configuration or single class configuration?

Under management’s proposal, Group IV would contain the 757-200. The 757-200 is configured for a seating capacity of 188 passengers at American Airlines and according to the Boeing website, has an FAA maximum certificated seating configuration of 200 seats in a two class configuration and 228 seats in a single class configuration.

According to the Airbus website the A321 has an FAA maximum certificated seating configuration of 185 seats in a two class configuration and 220 seats in a single class configuration.

When comparing FAA maximum seating configurations, management’s new proposed methodology for determining pay rates, the A321 has a maximum seating configuration of 185/220 (two class/single class), the 757 has a maximum seating configuration of 200/228, the 737-800 has a maximum seating configuration of 162/189 and the MD80 has a maximum seating configuration of 152/172.

Comparing the A321 to the 757, 737-800 and the MD80, the A321 maximum seating configuration of 220 is much closer to the 757 maximum seating configuration of 228 than it is to the MD80 maximum seating configuration of 172. However, management proposes to include the A321 in Group III with the MD80 and pay an MD80 pay rate and not to include it in Group IV and pay a 757 pay rate.

Management is proposing that APA abandon a decades old methodology of negotiating individual pay rates for aircraft and accept a methodology based on seating configuration and then within the very same proposal they ignore their own methodology.

Management then developed a new lower paying group, Group II, and placed the A319 in it. Their reasoning? It has a lower seating configuration than the MD80 and the 737-800. Now they follow their new methodology but only when it provides the ability to lower pay rates. As you can see there is no consistency. Once again, this calls into question the credibility of those advancing such inconsistent proposals.

As discussed in Part I of this two-part paper, other carriers agreed to pay the same pay rate for the A319 and the A321’s. They agreed to this because by paying one pay rate they may pay a little more for the A319 then what they could individually negotiate a pay rate for, but they pay a little less for the A321 pay rate. Other carriers have agreed to a trade off - common ground between union and management. AMR management is not seeking common ground, they are trying to cleverly lower pilot pay rates any way they can.

Management’s proposal will have APA pilots flying aircraft with 192 seats in a two-class configuration for MD80 pay rates while paying less than market rates for the A319? 

Using management’s proposal to determine future groupings, with the A321 at 185/220 and the 757-200 at 200/228 there will never be another aircraft placed in Group IV, the 757 Group, with a FAA maximum single class seating configuration of 224 seats or less, or two class seating configuration of 192 seats or less, if the A321 is placed in Group III. To illustrate the effects of their proposal, if Boeing were to build an exact identical aircraft to the 757 in the future, under management’s proposal that aircraft would be placed in Group III, the MD80 grouping, not Group IV, the 757 grouping, even though it was the exact same aircraft but was designated differently. Clarifying this point further, this proposal will have APA pilots flying aircraft with 192 seats in a two class configuration for MD80 pay rates.

767 for 757 pay? 737 for MD80 pay rates? It turns out this proposal has NOTHING to do with reducing training expense and everything to do with lowering pilot pay...

When management grouped the individual aircraft within each grouping they took another opportunity to lower pilot pay rates by setting each Group rate at the lowest aircraft rate within the Group not the highest rate or even an average or blended rate. Their proposal lowers the 767-200 and 767-300 pay rates to the 757 pay rate, a $5 an hour pay reduction. It then lowers the 737-800 and 737-900 pay rates to the MD80 pay rate, another $5 an hour reduction.

On February 1st, Senior Vice President Human Resources, Jeff Brundage, wrote a letter to all employees that included the following statement, “Across all workgroups, we are proposing to maintain base pay rates to the greatest extent possible. In some cases, that will mean the savings will come from increased productivity. In others, it will rely on outsourcing..."

Management has made no secret about their desire to improve pilot productivity so that American Airlines’ pilots are as productive as any pilot group in the industry. It is also common knowledge to just about everyone--except apparently AMR management--that American Airlines pilot pay is already at or below its competitors. Recent contracts by our competitors have provided pilot pay rates above those paid to American’s pilots and two of the most recent contracts by carriers that were the last carriers to file bankruptcy, Delta and Hawaiian, have pay rates that exceed current American pilot pay rates by as much as 10% and 6% respectively.

With the exception of some changes to flight attendants' international pay rates, which we will address in a separate discussion, no other employee group besides the pilots is having their base pay rates reduced. When looking at American’s competitors’ pay rates for flight attendants, American's flight attendants have higher hourly pay rates than every other carrier including Delta, with the exception of Southwest and Continental. The fleet service baggage handlers have hourly pay rates in line with every other carrier except Southwest, whose rates are higher.

Management’s February 1st letter proposing to maintain base pay rates appears to apply to every employee group except pilots, even though American’s pilots significantly trail recent contracts by pilots at our legacy competitors at Alaska, Delta, Southwest and Hawaiian. Instead, management wants to reduce pilot pay rates while preserving other employee group’s pay rates even though they are currently near the top of their peers' pay scales. Meanwhile, management is demanding major productivity concessions from pilots while trying to pursue these further pay cuts.

Management has crafted a proposal that takes a concept that was designed by other carriers to reduce training costs and has cleverly developed a proposal to do little else than completely gut pilot pay. They then publicly state they intend to try to preserve pay rates in exchange for increased productivity. It appears that statement by management was not meant for pilots, just the other employee groups.

Once again, you have to ask, is this proposal fair and equitable? Even more so, is this proposal credible?