Just over a month ago, I profiled United’s poor operational performance and how it wasn’t getting better. My, how times have changed. United is once again running a solid operation while American, well, American is in real trouble thanks to what can only be seen as pilot action.

Why don’t we let this chart tell the tale.

Clearly United has seen serious improvement while American has, um, seen the exact opposite. But why did I break these dates out this way? My original post showed performance through August 12, so that’s why I isolated the beginning of August. After that point, things started to improve. The end of the month saw an airline in far better shape than at the beginning.

I broke it at the end of the month just because it’s a natural break. There was no other reason than that. But why September 12? Ah, that one was easy.

On the evening of September 12, word started to leak out that American management had released the terms it planned on imposing on the pilots now that management had received permission to do just that from the court. The airline decided to impose some terms off the original term sheet, certainly worse than what the pilots had already voted down. Needless to say, the pilots were not happy.

Does that make it the fault of the pilots? Not entirely. I’d say both sides blew this one. The pilots were not smart to reject the last proposed contract. They did it out of anger but it was bound to result in something worse than they could have had if they had just come to an agreement. Now I think they’re starting to realize just what a bad idea that was but they’re just getting angrier.

Now, management could have implemented the last terms sheet as proposed and the pilots probably wouldn’t have had the kind of negative reaction they had. In the end, both the pilots and management should have been able to see where this was going to end up. Anyone want to take guesses what happened next?

Starting the very next day, on time performance tanked. That’s right. The 10 days after the terms came out, only half the airline’s flights went on time. (And by the way, American Eagle was over 87 percent so it wasn’t a weather issue or any sort of anomaly like that.) Oh, and the cancellation rate for American went up a lot as well. We’ve all seen this story play out before.

You’ll hear plenty of rhetoric saying there is no pilot action, but that’s just ridiculous. Of course, that doesn’t mean it’s necessarily illegal pilot action. There are clear differences between what’s happening here and what we saw with US Airways last year. Most notably, the union leadership is actively discouraging any kind of organized pilot action, at least on the surface. But it is defending pilot decisions to not “ignore serious maintenance issues.” But we all know what’s going on here.

My guess is that this will get sorted out in the courts one way or another, but for now, American is running an awful operation. Talk about a complete flip from where we were a month ago. Now all I can say is that it’s best to avoid flying American in the near term. Please note I say American, and that’s specifically what I mean. If you’re flying American Eagle, then you should be just fine. In fact, American Eagle is running a very good operation lately.

Meanwhile, if you’re flying United, you can take a deep breath. It looks like the operation has finally turned a corner. Let’s hope it stays there and doesn’t go backwards.

Unlike any other large airline in the US, Southwest has had an incredible streak of good labor relations. Despite being highly unionized, the airline has had labor peace for most of its 40+ years. How has the airline done this? Well, it has long put a high priority on supporting its people and that has meant a no layoff policy, ever-increasing wages, and no outsourcing. In return, Southwest’s employees are very productive and famously-friendly.

This has worked for the airline ever since it began, but now the airline finds itself in a different situation. As CEO Gary Kelly noted in an excellent letter to the troops back in December, Southwest’s wages are the highest in the industry. With growth almost non-existent and profits being squeezed, it’s just a matter of time before a labor fight turns ugly. Right now, it’s the ramp workers who are making a lot of noise.

It’s no surprise that today’s Southwest is not exactly the same as the one from days of yore. The airline is in a very different place now. While Southwest was once the scrappy upstart, clawing its way to the top, it is now the largest passenger carrier in the domestic US market. It isn’t the lowest cost operator and it’s not nearly the low price leader it used to be.

A Brief History
Up until the last decade, Southwest relied on rapid growth to fuel its business. It never had to worry about layoffs. When times were tough for the other airlines, Southwest thrived by introducing low fares into more and more markets. It mercilessly stole traffic from the big guys. That growth also kept labor costs low. Even though wages kept climbing, the constant influx of new blood to fuel the expansion meant that there were a lot of people working for entry level wages.

Things should have started to change in the last decade. Legacy airlines going through bankruptcy one after another brought their cost structures closer to that of Southwest. At the same time, fuel cost increases meant that demand would be slowing. Southwest should have been transforming to face that challenge. It didn’t.

Southwest was was able to rely on its fuel hedges as a crutch. While many people suggested that this fuel hedge was brilliant, all it did was prevent Southwest from adjusting to the new reality of high fuel prices. Once the hedges ran out, Southwest had to make big changes.

Merging to Find Growth
Since that time, Southwest has been a different airline. It has slowed to almost no growth after realizing that there were few big opportunities left for the airline in the US, especially considering the rapid rise in fuel costs that it faced when the hedges ran out. So what did it do? It turned to a merger, acquiring AirTran to grow its business.

When Southwest first announced it would take over AirTran, I got excited at the prospect of Southwest figuring out a way to serve smaller cities but that hasn’t happened. We’ve seen Southwest ditch the smallest airplanes, cut the small cities AirTran served, and really back away completely from this idea of serving smaller towns. The merger now seems to be mostly about Atlanta and eliminating a competitor.

So here we are with an airline that has seen internal growth stagnate and profits start to lag. What can Southwest do to combat this?

Labor the Untouchable
The one untouchable has always been labor. Back in 2004, the first CEO after Herb Kelleher, Jim Parker, tried to take a stand in labor negotiations with the flight attendants. The flight attendants weren’t happy with the raises being offered (and yes, they were offered raises). In the end, Herb stepped back in, gave the flight attendants more, and Jim resigned soon after.

While there have always been minor spats over the years, the big dust-ups like that have been very rare. Is it time for a labor confrontation to come to a head once again?

It wouldn’t be a surprise, especially considering that letter that Gary Kelly wrote last year. Labor has enjoyed a great ride with Southwest, but will it be ready to face the challenges that Southwest is facing today?

Outsourcing
Last week’s rumblings were from the airline’s ramp workers protesting at Chicago’s Midway Airport. The rampers have decided to take their negotiations public by announcing that Southwest has asked for the right to outsource 20 percent of their jobs. That’s certainly one way to reduce labor costs, but as you can imagine, when I spoke with Charles Cerf, President of TWU Local 555, he and the rest of the rampers were not very happy with this plan.

Southwest, for its part, says there is no effort to outsource jobs at Midway, but of course, that doesn’t mean it wouldn’t change its mind if it could get the right to do it in contract negotiations. I assume it has to have at least some interest or it wouldn’t bother asking for it. Then again, it already has the right in some cases and it doesn’t use that.

Something I didn’t realize is that Southwest’s current contract with its rampers allows the airline to outsource jobs in new cities with fewer than 12 daily flights. Yet when it opened Panama City in Florida and Greenville/Spartanburg and Charleston in South Carolina, it kept jobs in-house. (That provision makes it even more surprising that Southwest has walked away from AirTran’s smaller cities.)

You would think that any level of outsourcing would take away from the Southwest culture, but Southwest has to find a way to contain its costs. I can see how the airline might come to the conclusion that it would rather outsource some jobs to lower costs instead of putting downward pressure on compensation for its own employees.

Maybe this is Southwest just trying to position itself in negotiations. It could give up the outsourcing ask in exchange for something else. I really don’t know. Since this is part of a labor negotiation, Southwest won’t comment (and really, it shouldn’t). But it wouldn’t surprise me in the least to see Southwest trying to do things differently.

Southwest has a cost problem on its hands, and it has a tall task ahead to try and figure out a way to tackle it. Inevitably, this means there are bound to be more serious clashes with labor than we’ve seen in the past.

This week, Delta accomplished something incredibly rare… it came to a new tentative agreement with its pilots 7 months BEFORE the contract was amendable. How the heck did that happen? Both sides wanted something and there was time pressure for it come together. If the rank and file approve, Delta pilots will get big raises, but most importantly for travelers, the airline will shift to bigger jets with better passenger amenities.

Union contracts in the airline industry are different from most others in that they never expire. Instead, at a certain point they become amendable. This is supposed to avoid disruption in service, but in reality, it’s just an awful process that draws out contracts negotiations over several years. It’s only when the stars align that things get done in a timely manner. But a timely manner would be soon after the contract is amendable, not the 6 months beforehand that we see here. So what’s the story?

There was a unique opportunity on the table for Delta to get a hold of AirTran’s fleet of 717s that Southwest has decided it no longer wants as part of its acquisition. But for Delta to get those airplanes, it had to get the pilots to agree to fly them for a rate that would make this move a smart idea. So there was some urgency for Delta to come to an agreement sooner rather than later to make this work out. Sure enough, the pilots were interested and the deal came together. Let’s talk about what this means for everyone.

Delta Pilots Fly the 717
If this is ratified, Delta will take the 88 717s in the AirTran fleet today. I don’t know the terms, but you know that they’re getting a smoking deal on these aircraft. The Delta pilots will fly the 717s at the same rate they’re paid to fly the DC-9s today. In the last quarterly report, Delta still had 21 DC-9-50 aircraft in the fleet, but those are on their way out to be retired soon. The 717s, which are just a bit shorter, will take over for those DC-9-50s with 110 seats split between First, Economy Comfort, and coach.

50-Seat Regional Jets Slashed by 65 Percent
But that’s not a one for one replacement; there are still an extra 67 airplanes if we do the math. Delta says it wants to keep capacity flat, so what else will happen? The airline will slash and burn the 50 seat regionals. Here’s how Delta lines up with 50 seaters as of the last quarter:

That’s 353 of those 50-seaters buzzing around. And you know what the new contract would allow? No more than 125.

Holy cow, that’s a massive decrease. Delta is happy about this because with oil where it is, those 50-seaters are completely uneconomical. The pilots are happy because they get rid of a ton of outsourcing. But wait, we’re still out of balance. Let’s do some math. The DC-9s have 120 passengers, so multiplied by 21 airplanes and you have 2,520 seats. The 717s have 110 seats, so multiplied by 88 airplanes and that adds 9,680 seats. The RJs have 50 seats, so multiply that by 228 airplanes that are going away and you have 11,400. So right now, we’re removing 13,920 seats and adding back only 9,680. What about the rest?

70 More Big Regional Jets
It’s the bigger regional jets that balance this out. At last check, Delta had contracted for 102 aircraft in the 65 to 70 seat range. Those are a mix of CRJ-700s and Embraer 170s. In addition, Delta had contracted for 153 of the 76-seat jets, which are a mix of CRJ-900s and Embraer 175s. As part of this deal, the pilots will allow them to contract for up to 70 more of those 76-seat jets as long as Delta adds new mainline aircraft at a rate of 1.25 to 1. It’s pretty convenient that 1.25 times 70 is … 88 (if we round up), the number of 717s that the airline would acquire.

The Final Tally = Better Customer Experience
That means Delta adds another 5,320 seats, or about a total of 1,000 more seats than it will remove from the fleet. In the end, Delta gets rid of 228 money-losing 50-seaters and the terrible, cramped, single class experience that comes with them. It gains 158 bigger jets with First Class, wifi, and just a bigger more comfortable cabin. This will give Delta a more consistent offering for customers, and it’s going to come at a pretty nice price as well. I’m sure Delta is getting a great deal on the 717s, and all Southwest has to do is push them to the other side of the Atlanta airport.

The Losers
That’s great news for both sides. Who loses? Small cities may potentially lose out. The lucky ones will see fewer flights on bigger airplanes. The unlucky might lose out, but hopefully those 125 50-seaters that remain will be able to keep service to most of those cities, if not all. The other losers here are some of the regionals. I say “some” because some stand to gain 76-seat flying while others will lose. The biggest loser in my opinion is likely to be Delta’s wholly-owned subsidiary Comair. The airline has been shrinking for years, and now it will likely lose half its fleet. (It is the only operator of the older CRJ-100 so those are most likely going away.) This could be the end of that airline entirely, with the remaining big airplanes merged into Pinnacle?

The Rest
So is that everything here? Not quite. The pilots are also getting big pay raises out of this. Over the three-year term, rates will increase by 20 percent, sometime more depending upon the aircraft. Is Delta insane? How the heck is going to pay for that?

Well, buried in the contract somewhere are productivity gains. I don’t know the details on exactly what Delta gets, because those rules are pretty tough to get through. But Delta is going to get better production out of its pilots, and that will help to offset the hourly rate increase. Another offset is a reduction in profit-sharing. As we’ve seen many times before, variable compensation starts to shrink as unions fight for more in base pay.

Wrap Up
In the end, I like this deal as a passenger because the customer experience will dramatically improve. And I like this as someone who watches the industry as well. While I start to hyperventilate when I see such big pay increases, Delta is really getting a lot out of this deal in return. It helps when both sides have goals that align and are motivated to strike a deal. It sure paints a stark contrast to what’s been happening over at United lately. Now, we just have to wait to see if the pilots vote to take it or not.

[If you'd like to read the entire mind-numbing 400+ pages of the agreement, I've got an updated version attachedit right here thanks to Holly Hegeman over at PlaneBusiness.]

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.