February 1 was a big day at American. It was the day that the airline went over its (not really) new and improved business plan with employee groups, and that meant detailing the cuts it was going to ask for. As you can imagine, this brought some outrage but also a lot of sadness. American is asking for very deep cuts from employees (and elsewhere), and it’s not really presenting anything new. This seems like the same plan it’s been operating under, just free of some employee contract limitations.

Admittedly, American hasn’t shared all the details of its plan. That wouldn’t be very smart at this point, I suppose. But it’s shared enough at a high level so that it can make its case for massive cost reductions. You can read CEO Tom Horton’s letter to the troops with the high level plan to “not just to compete, but to win.” There’s the “win” phrase again. Ugh.

In short, Tom outlines a strategy of increasing revenue by $1 billion a year while cutting costs $2 billion a year, more than half of which ($1.25 billion) will come from employees. This is the magic plan. Let’s take this one side at a time.

Plan to increase revenue by $1 billion a year
The revenue plan has three parts to it. The $1 billion a year is expected to come from “network scale, fleet optimization, and product improvements.”

Network Scale
American has laid out an ambitious (and quite likely overly aggressive) plan to increase departures by 20 percent over five years from its cornerstone markets of LA, New York, Chicago, Miami, and Dallas/Ft Worth. That’s right. TWENTY percent. For the relatively mature industry we have here in the US, this seems to be very aggressive. I was going to guess that much of this would be from smaller airplanes with fewer seats, but then I saw Tom tell Terry Maxon that the increase would be more in the international arena than domestic. That makes me think that it’s less about regional jets and more about larger aircraft growth. That could mean some serious capacity growth. It’s starting to sound like the days of old when airlines mistakenly chased market share only to hurt themselves and everyone else in the process.

This isn’t just about the 20 percent increase under the American brand, however. This is also about increasing codesharing. Right now, it can’t grow its domestic codesharing business but it has proposed eliminating those shackles. Hello, JetBlue.

Fleet optimization
At first, this seems like a cost savings and not a revenue savings, right? I mean, the airline keeps talking about adding newer, more fuel efficient airplanes and retiring older ones. That has nothing to do with revenue. But that’s not what I think the airline is talking about here. This is really American talking about growing its regional fleet. Today, there is a very tight cap on outsourcing of flying on aircraft with more than 50 seats. American has maxed it out with 47 CRJ-700s, and that’s the only aircraft American has between 50 and 136 seats.

That’s a huge disadvantage for American versus Delta and United, both of which operate about 200 to 250 regional aircraft with more than 50 seats. American is getting aggressive, shooting for the right to outsource a boatload of flying on airplanes all the way up to 88 seats. In a minor bright spot for American’s own employees, American has also ordered Airbus A319s that will give it an option below 136 seats (maybe in the 120 seat range). That’s what American means by fleet optimization, having more aircraft in between the 50 and 136 seat range that it can use to better match seat supply with demand.

Product improvements
This is something that really has nothing to do with bankruptcy. American has already suggested it would improve the onboard product, but what can it do to actually goose revenues? Well, the new flat beds that it’s putting in business class on the 777-300ER aircraft are a good start. Hopefully that expands to the rest of the international fleet, because people aren’t willing to pay a premium for the inferior product in business class today. The new premium economy section could help as well, though that also reduces the number of seats so it relies on American being able to generate a good premium to make it worthwhile.

So that’s what we see on the revenue side. Bankruptcy should allow for more liberal codesharing and regional flying contracts. That’s really it. Now let’s look at the flip side.

Plan to decrease costs by $2 billion a year
Of the $2 billion in annual savings that American wants to see, $1.25 billion will come from employees. The rest will come from a variety of things that allow American to reduce costs – get out of expensive contracts, reduce rates for suppliers, ditch assets it no longer needs, etc. But as expected, American rests the bulk of the weight on employees.

The basic proposal (and it’s only a proposal at this point) is for every work group to give up 20 percent of compensation. That doesn’t mean salaries get cut by 20 percent, but it’s a combination of all types of compensation from benefits to productivity. The cuts vary by each group, and you can read all the union term sheets here.

Some will see pay reductions, all will see pensions terminated, and benefits will cost more for the employee if American has its way. There will also be major increases in productivity. For example, for flight attendants, American wants to increase the maximum monthly hours from 77 (domestically) to 100 which will result in an average of 80 to 90 hours scheduled per person month. I won’t get into the details of each workgroup’s proposed changes, but you should definitely take a look.

In return, what will employees get? There will be company-wide profit sharing that starts with the first dollar of income. Of course, that’s for the employees that don’t get a pink slip. American will be laying off 13,000 employees, about 15 percent of the airline’s total today, and it will come from all groups. We’ll see 1,400 management positions gone, 2,300 flight attendants, and 400 pilots.

But the biggest cut comes to mechanics and fleet service workers – more than 4,000 each. Those deep cuts will come thanks to more outsourcing. American will shut one maintenance base (Alliance, in Ft Worth) and it will start to outsource a lot of work so that it doesn’t need all these employees anymore. The TWU represents both these groups and leadership sounded downright sad in its conference call discussing the proposed cuts. The pilots and flight attendants, on the other hand, sound more angry. At least the pilots don’t sound surprised. The flight attendants strangely acted like they didn’t see this coming.

Let’s back up for a second. Twenty percent more departures in five years but 15 percent fewer employees? Seems strange to think about it, but it really is all about outsourcing.

We do need to keep in mind that these are not final. There will be negotiations and the ultimate resolution will undoubtedly be less dramatic than what we’re seeing here. Regardless, the employees that remain will need to be more productive and they won’t be compensated as well for the work they do. There will need to be more flexibility with work rules, including codesharing and regional flying.

In the end, this doesn’t sound much like a turnaround plan at all. It sounds like an airline continuing to push forward with its same old strategy, just with a new fancy lower cost structure to help it stumble into profitability. I find it hard to really become a believer in this plan, since it’s nothing really new at all. If anything, US Airways, Delta, and other potential buyers should be thrilled to see the current team not really proposing anything game-changing. It gives them a bigger opening to walk through.

Toward the end of the year, the FAA announced the final rule regarding changes in pilot rest requirements. [Read the entire final rule] This has been in the works for years, though it moved to the front burner after the Colgan Air crash in Buffalo a couple years back. The new rule will require more rest for most pilots, and that is generally a good idea. What isn’t a good idea is that cargo pilots are left out. They’re the big losers here, but small cities will also feel pain for a different reason. I’ll explain below.

The new rules don’t go into effect for a couple of years, but the impacts will likely start being felt sooner than that. After all, when pilots are given more rest, that means the airlines need more pilots to fly their schedules. So the airlines will need to start ramping up before the rule becomes law just to make sure that they’re in compliance. How many more pilots will an airline need? It’s hard to know since every airline is different. It’s not like they’re going to need to double the number of pilots they have or anything, but there will need to be more. Combine that with the end of the retirement holiday we’ve been living under for the last 5 years, and there are going to be a lot of job opportunities for pilots. (When the retirement age for pilots was raised from 60 to 65, that meant 5 years where no pilot would be forced to retire, and we’re getting to the end of those five years.)

Of course, when airlines need to hire more pilots to fly the same schedule, that means costs go up. Again, I’m not saying this is a bad thing. It’s just the way it is. So why do I say that small cities will be hurt most here? It has to do with the Flight Duty Period (FDP).

Today, pilots can be on duty up to 16 hours straight, and that’s called the Flight Duty Period. During that time, they can actually fly up to 8 hours (or more if there are unforeseen circumstances). Now, those numbers are changing depending upon when they fly and how many flights they have. So if a pilot comes on duty between midnight and 4a, then he can’t be on duty for more than 9 hours no matter what. If he comes on duty between 7a and noon, then he can max out at 14 hours on duty because that’s more normal for the body’s clock. (There are adjustments required depending upon how long the pilot has been in that time zone.)

But even if the pilot comes on duty at 8a, he can only be on duty for 14 hours if he has no more than 2 flights during that time. It slowly decreases the amount of time he can be on duty until you hit 7 flights. At that point, he can be on duty no more than 11.5 hours.

See how this is coming together? Small cities are the ones served by short hops, and regional pilots have the grueling task of flying many short hops during the day. That kind of flying is exhausting, and that’s why it’s those pilots who are going to see the biggest gains in terms of rest. Costs will go up most as a percentage for the regional airlines, it would seem to me, and that again puts pressure on costs to small cities that are already in trouble.

The rest of the rules impact pilots more broadly. While pilots could actually fly only 8 hours in a duty period before, it’s now up to 9 hours only if reporting between 5a and 8p. Overnight operations are still capped at 8 hours, but it’s important to note that there is no exception anymore. These times are hard cut-offs now. This changes when you have additional pilots on board for longer haul flights, but the framework is roughly the same.

When it comes to rest in between duty periods, that’s changing as well. Today, rest can be as little as 8 hours between the time a pilots is released from duty until the time he’s back on again. That hardly gives the opportunity for adequate rest in many cases. The new rule is 10 hours between periods, and that’s designed so that pilots can get 8 hours of sleep. That won’t always happen of course, but it is an improvement in the rule. And pilot are supposed to tell the company if they haven’t had enough sleep during that rest period. (I imagine that sounds better in theory that what will actually take place.)

There are other rules as well but we don’t need to get into the weeds here. The point is that this will help pilots to be more rested, and that’s a good thing . . . at least, most pilots.

There is a crazy carve-out here that exempts cargo carriers from the new rules, as I mentioned up top. Apparently, the cargo lobbying group earned its money, because this seems impossible to justify in any normal situation. Last time I checked, cargo pilots had the same value to their lives as commercial pilots, so if a certain amount of rest is deemed necessary for commercial pilots, then it should be the same for cargo. It’s probably even more important for cargo since they do much more of their flying overnight, against their natural body rhythm.

So are these rules good? I’m not a sleep scientist, so I can’t comment on if this change is enough, but the method that they settled on – trying to adjust to the body’s clock – seems smart to me. Yes, there will be a cost increase, but at least pilots will be better rested. It does, however, mean there’s even more pressure on the already-struggling small cities.

When you think about airline labor disputes, you probably think about strikes. After years and years of negotiating, the unions gain the right to walk out and that shuts the airline down, or it at least hampers its operations significantly. This weekend, we were faced with something else. Fans of the National Basketball Assocation (if there are any left) certainly know this tactic well: lockout. Qantas management decided to shut down the airline and lock out labor to force an agreement. Unlike the NBA, this required a quick resolution, so the government stepped in and made the airline fly. It’s exactly what CEO Alan Joyce wanted, but he’s going to get a lot more than he bargained for.

In Alan’s mind, he’s saving the airline from ruin.

There has been an ongoing dispute with labor for years at Qantas. This issue in particular centered around the pilots, mechanics, and baggage handlers. Most of the problems stem from a couple things. Qantas employees believe they deserve all the compensation in the world while Qantas management disagrees. Qantas is actively trying to go around them by setting up subsidiaries elsewhere, most notably with low cost carrier Jetstar which has employees with different work rules and pay rates.

This move has had the Qantas employees steaming for years, and it only got worse when Qantas announced it would set up a new premium airline in Asia as well. The assumption is that Qantas employees are not going to be a part of that enterprise because the pay and work rules for the Australian airline just don’t work in the world today.

Labor likes to point to the continued profitability of Qantas and how the airline can’t just push them aside in favor of cheap labor just to goose profits further. But Qantas is quick to respond that profits don’t come from the core international airline operation. That has been a money-loser and there needs to be changes in pay/work rules to get closer to what other airlines pay. That point is certainly up for debate in my mind.

The reality is that like in everything else, a compromise is necessary, but just as we see in the US political scene these days, none is at hand. There has been increasing industrial action from the labor groups with little strikes here and there. The mechanics have been working to rule and Qantas has seen performance suffer significantly.

Alan Joyce is Crazy … Like a Fox?
So what can Qantas do? It could keep negotiating in a situation where no deal will ever be made, or it could do something drastic. Alan chose Option B; he went scorched earth and shut down the airline.

Now why the heck would someone do that? It’s actually a clever move. (Don’t read that as me supporting it, but it is clever.) First, it shows the labor groups that Qantas is not screwing around. Alan is willing to shut the place down if the unions won’t come to the table and get serious about an agreement that works. Note that Jetstar, Qantaslink and JetConnect subsidiaries all kept running – it’s just Qantas itself that shut down. Qantas wants the unions to think that this will be a permanent solution if things don’t get resolved.

But more importantly, it pushes the government to get involved. The expectation had to be that by doing this on Saturday, the government would have acted swiftly and had the airline up and running again by the end of the weekend. That’s exactly what’s happening, though cancellations are likely to persist into the week as operations ramp back up. I think it probably took a little longer for the government to act than Qantas thought.

Qantas spent the weekend shut down but now, with the government’s urging, Fair Work Australia made the airline start flying again. The airline was deemed to be too vital to the economy to let it stay shut down, and that’s exactly what Alan was banking on. The airline was forced to re-start operations and labor has to stop all industrial action. Labor and management will enter into intensive negotiations over a 21 day period. if that doesn’t work, they go to binding arbitration.

And that’s probably what needs to happen here, because both sides seem completely loony to me with their thoughts about what’s right. If someone rational gets in the middle and strikes something fair, both sides will be unhappy but at least this will all be over.

So does that make this a smart move? It’s certainly a creative way to force the government into action, but it is also highly destructive of the relationship with every single employee as well as with the traveling public. Sure, it will end the industrial action but at what cost?

Some employees may have supported Qantas management before; not the unions, perhaps, but others. Now with this reckless grounding, employees have to be livid and somewhat nervous. I would start looking for a new job if this is how my senior management behaved. I certainly would have lost a great deal of respect for management.

If you pull a stunt like this and inconvenience thousands of travelers, you run the risk of pushing them off permanently. In the past, Qantas really didn’t have much competition within Australia or even to and from the country, but that has changed dramatically. Internationally, there are more flights every day from Asian/Middle Eastern carriers, and Qantas management isn’t shy to talk about it. That’s why it wants concessions from the union.

Virgin Australia Must Be Smiling
The biggest winner, however, is Virgin Australia. Even though Qantas wasn’t putting people on other airlines, Virgin responded quickly by offering discounted fares to Qantas fliers, lounge access for Qantas elites, and a bulked up schedule to accommodate the stranded folks. It also saw partners step in to help. Etihad offered to start flying routes on the airline’s behalf to pick up the slack.

For Virgin, it’s exactly what it needs. The airline has changed itself to focus on business travelers over the last year or so, and this is the perfect way to show Qantas loyalists what it can do. Those who have been burned by Qantas may not go back, or so Virgin Australia hopes. But Alan Joyce thinks that he’s found the way to success and he’s making that gamble.

Will people, employees and travelers alike, leave Qantas over this and look for better options? Qantas is betting that won’t happen, but I wouldn’t be so sure. Qantas has probably done serious harm to itself here. I would expect calls for Alan Joyce’s head to get louder and louder. But maybe that’s what the airline wants? Maybe, as the unions think, Qantas wants to shut down the old airline and start anew with cheaper labor and lower costs.

Now there’s a scary tale that you can tell at your Halloween party tonight.

Earlier this week, US Airways finally got the preliminary injunction it had asked for against its pilots related to the operational disruption that’s been going on for a few months. This was a clear victory for the airline as the judge seemed to agree with US Airways in great detail. I would highly recommend reading the 45 page ruling for some of the juicier tidbits. Chime in with your comments below.

And I thought I’d throw in a bonus topic this week for its insanity. Not sure how much readers know about Stelios Haji-Ioannou, but he is the man behind the “easy” name. The best known easy brand is easyJet, one of the largest airlines in Europe. While Stelios is still the largest shareholder, he doesn’t run the company. He has, however, inserted himself at times and made life difficult for all involved. Now, it appears he’s fed up and wants to start a rival airline, Fastjet or E-jet, to compete with, um, the airline he owns a big chunk of? Riiight. This one is just downright silly.

Remember that ad the US Airline Pilots Association (USAPA) took out in USA Today claiming that US Airways was unsafe? There was a specific flight used as an example and that may be coming back to bite the union. According to a letter sent from the company’s flight ops group to the captain, the airplane was found to be working just fine. Hmm. This is like a soap opera.

According to USAPA’s website, here’s what happened that day:

• When pushing back from the gate, the auxiliary power unit (a backup source of electrical power) and the Hot Battery Bus (a critical source of primary electrical power) both failed – in other words, the plane had no electrical power and no radio communications. None.
• After opening a window to verbally call down to the ground crew (the Captain’s only option), US Airways maintenance was able to restart the power unit, but offered no explanation as to why it failed or any reasonable assurance that it wouldn’t fail again.

So we have a couple issues here. US Airways did a thorough review to see what happened. According to the letter from the US Airways VP of Flight Ops that I’ve obtained, the airline tried to meet with the captain in person to discuss the review but she was unwilling. So they put the results in writing to her.

On the issue of the APU failing, no problem was ever found. The APU (auxiliary power unit) is like a mini-engine which provides power when the engines aren’t running. This is actually used to start the engines on the ground, but it’s not necessarily required for flight. If you’ve ever seen an engine started while you’re at the gate with a big generator nearby, then that’s probably a case where the engines needed an external start because the APU wasn’t working.

Back to this incident, the first entry in the logbook from the captain said “APU failed at gate, unable to restart.” According to US Airways, the mechanics did a test that found no fault with the APU and then proceeded to restart it at the gate without any trouble at all. The captain said she wouldn’t accept the aircraft unless the APU was fixed, but since the mechanics couldn’t actually find any problems that needed fixing, they deferred the issue as permitted by the maintenance program.

That was followed by a second entry from the captain saying:

After APU Auto Shutdown on gate with no external power connected, battery power lasted 3-4 minutes. Unable to restart APU or communicate on VHF [radio] #1.

So the APU failed and wouldn’t restart. US Airways pulled the Electronic Control Box (ECB), which the airline describes as the “brains of the APU.” The ECB records any abnormal events to help with maintenance. So the airline sent the ECB to Diehl Aerospace, which is described as “the repair subcontractor for Honeywell (the manufacturer of the APU).”

Upon review, no auto shutdown nor any failed attempt to restart the APU was recorded. Could the ECB have failed to record the incident? Unlikely. It recorded minor issues before and after the event so it was functioning properly. Diehl sent the ECB back saying no problems were found, and that ECB went back into service with no further issues. The APU apparently was working just fine.

But what about the radio not working? Was there an issue preventing that from functioning properly? Well, that assumes that the APU did shutdown. All we know for sure is that the APU didn’t automatically shut down. But as US Airways notes in the letter, “the ECB does not record a ‘commanded’ shutdown.” So maybe there was a commanded shutdown by someone on the aircraft? I have no clue because it’s not spelled out, but let’s assume that the APU was in fact shut down for one reason or another. What about those other issues that followed?

Apparently the airplane worked as designed. When on the ground, if the engines aren’t on, the APU isn’t on, and there is no ground power (basically, when the airplane is plugged in to a source at the airport), then the batteries will power many of the electronics. But there’s a catch.

To avoid completely draining the batteries while on the ground, the system will cut battery power when voltage drops below 23V for 16 seconds and the airplane is on the ground. When that happens, that VHF radio #1 won’t work. So that’s probably what happened here, and it worked as designed. Was the battery draining too quickly? Not according to US Airways. The airline says “the two main batteries were . . . tested by an outside source and have also been returned to the Company with no faults found.”

So the APU worked, the batteries worked, and the airplane in general seemed to work as advertised. The only thing I don’t see mentioned is anything about the “Hot Battery Bus” not working. The only mention of the hot battery bus in the letter is this:

. . . The [automatic battery shut off on the ground] will not disconnect the batteries when either one is discharged below 23V while in the air; they will continue to power the hot battery buses, DC BAT bus, DC ESSENTIAL bus, and the AC ESSENTIAL bus as long as possible.

So that seems to say that the bus (or buses), which provides continuous power to vital systems, was working. But no further mention is made beyond that. In short, US Airways says “this aircraft performed exactly as it was designed.”

Does that mean the captain fabricated what happened? I wasn’t there, so I don’t know. The only clue we have is from the US Airways letter which says “there is no discipline contemplated” after reviewing this incident. US Airways says it just wants to “put closure on the incident.”

It seems to me that if a pilot fabricated a maintenance problem, and it was proven conclusively, then that would be grounds for discipline of some sort, right? So since there is no disciplinary action here, maybe they’re chalking it up to a misunderstanding or confusion about the situation. Either way, it puts a serious hole in USAPA’s ongoing campaign to question the airline’s safety procedures.

[777 (not an A330) APU exhaust photo via Flickr user Robbie 1/CC 2.0]