3 Links I Love: Let’s Buy Alitalia, American Jacks Up Pay, United Mourns JFK

Alitalia, American, Labor Relations, Links I Love, United

This week’s featured link:
Lufthansa says not interested in taking over AlitaliaFinancial Express
The worst airline ever continues to live up to its name. Just about to run out of cash, the airline turned to its unions to agree to a plan that would include big cuts. The unions said no. So now Alitalia will go into reorganization once again. What’s going to happen? Well, apparently they’re going to sell the airline to the highest bidder. Lufthansa, one of the likely buyers, says it’s out. That’s good news for us… I say we all get together and bid.

Here’s the plan. I put in 1 penny to purchase Alitalia. You guys all band together to pay off the debt. Sound good? I know a lot of people think Alitalia is going away, but I don’t believe it. It might be Alitalia 1,384,000.0, but I can’t imagine the Italian pride allowing the airline to finally disappear.

Two for the road:
A letter to American employees from Doug Parker and Robert Isom on team member payAmerican Airlines
If you work on the front lines, you heard cries of joy earlier this week. If you work on Wall St, you heard cries of pain. American has decided to ratchet up pay for pilots and flight attendants to meet the industry average even though contracts aren’t amendable for several years. Labor is happy (or should be). Meanwhile Wall St is livid that a billion dollars is going away from the people who own the airline and toward labor instead.

If this is starting to feel like the year 2000 to you, you’re not alone. Every time there’s a raise, it just means it’s money that gets clawed back in the next downturn. I know the industry is different now, but I’m not convinced it’s different enough to support these wage levels.

United Airlines President: Leaving New York’s JFK ‘Was the Wrong Decision’Skift
Scott Kirby isn’t happy about United’s decision to walk away from JFK and consolidate transcon service at Newark instead. Even though the JFK service was said to lose money, it was really important to some very big accounts, and now United is paying the price. Though rumors have swirled about United going back into JFK, don’t count on it. There’s no room at the inn, and even if United did go back, it would be hard for it to win back the business it’s already lost.

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43 comments on “3 Links I Love: Let’s Buy Alitalia, American Jacks Up Pay, United Mourns JFK

  1. Be careful what you wish for, Cranky !!!…
    Even with a debt-free sheet, not sure you can turn that airline around quickly enough without loosing a bit more than your shirt !…

  2. Cranky, are you predicting a downturn? I’m not sure I understand you comment on pay. If AA is matching their peers on pay wouldn’t it be an issue for all airlines should there be another recession? In slow times I can understand belt tightening but sharing the wealth right now seems like an appropriate thing. I know it’s hard to narrow the focus for a major company with 1000’s of employees but it should be in the shareholders best interest to have happy employees that in turn produce more.

    1. A – I’m definitely predicting a downturn. There’s ALWAYS a downturn. I don’t know when it’s coming, but it will come. And yes, it will impact everyone. If I were in this situation, I’d rather get a good wage that they won’t have to take back when things go south. But instead we get into this cycle where wages explode when times are good and then get clawed back when times are bad. I understand it’s the way of the world, but I personally don’t like it. Now, maybe Doug Parker and others are right that the industry is different and we can whether a downturn without having to do that. But we haven’t had a significant shock to prove it either way.

      1. Are you saying it’s better to not have a raise during good times even if it has to be rescided later?

        That seems weird.

        Owners get a “raise”, too, during good times (higher dividends) that may get killed during a recession.

        1. Oliver – Yeah. I’m saying I’d rather get x consistently than a salary of x-2 in bad years and x+2 in good years. It should all come out the same, but I’d rather have the consistency. Makes for easier budgeting. Now profit sharing is different, of course, but that’s not what we’re talking about here.

          1. so it’s like a lump sum vs. a steady stream. I suppose that if the majority is near retirement then the lump sum seems more appealing.

            1. true….if you retire in a down year then you’d already collected through the lump sum. so what’s the loss in that scenario. The only ones affected would be the one’s who remain with years left who’d be affected post the down year & assuming an accompanying pay reduction. right?

            2. IO – It depends entirely how you calculate it. If you start in a down year, then you aren’t getting the payout until the end. So if you retire in a down year, you miss out.

              But I look at this as someone who likes the idea of budgeting and having a steady (hopefully steadily climbing) stream of income. I want to be able to bank on getting paid a good wage and not having to be whipsawed back and forth. Everyone is different, but if I were in a job that paid a salary again, I’d prefer something that way.

            3. ….more appealing and likely to be accepted due to their majority in the voting pool.

  3. Does Kirby really think that anything will be accomplished by trashing the decisions of his predecessors? United isn’t going back to JFK whether it was the right thing to do or not. Bragging that he was part of the reason United pulled out of JFK while he was at AA does nothing to help United but does everything to brag about himself when American had less to do with United’s demise at JFK than JetBlue or Delta which gained larger portions of UA’s passenger base when UA left JFK than AA did. Further, it is the low cost carriers that have reduced revenues in the transcon market and AA and UA both use/used strategies to carry a portion of the market on premium-heavy aircraft which forces up unit costs even as premium cabin fares have fallen due to low cost carrier competition.
    Kirby would do well to focus on making the strategies which he has developed work in real life than throw stones at others. He has more than enough failed strategies including the LaGuardia-National slot swap which did far more to rearrange the New York market in a competitor’s favor than any other transaction in NYC aviation history.

    1. United left JFK because it is an airline bloodbath for competition and growth and because it had a huge hub at EWR.

      Implied in Kirby’s thinking is the notion that United really didn’t lose money at JFK and that the high-value first class customers the airline attracted was the economic offset for accounting losses from the JFK operation.

      I don’t buy it. I am assuming that before United shuttered JFK, someone, somewhere did the math and looked at more that just the accounting. Good analysts looked at the marginal revenue, I assume by pulling Mileage Plus data from JFK operations and seeing what they meant to United. If they didn’t, shame on them.

      But with Delta, American and Jet Blue all hunkered down at JFK and the location of JFK halfway to the Hamptons, there’s limited room for any growth, absent severe price cutting.

      1. There isn’t room for growth in NYC, period. Of course United did the math and knew it wasn’t worth staying.
        My point is solely that it does nothing except stroke Kirby’s ego to criticize decisions of executives that came before him even while he made decisions that had far larger impacts on the competitive situation – but no executive was classless enough at any airline to criticize the fact that US gave up 25% of the slots at LaGuardia for $60 million once the AA merger and divesture and new Brazil frequencies were re-awarded. It is simply mind-boggling for someone to be so quick to criticize someone else’s decision with that kind of skeleton in his closet – and not very far from the door.

  4. The thing is, United’s focus on Newark may be a mixed bag in the short term, but they haven’t abandoned LaGuardia, Since LGA will have its landside improvements online a long time before JFK, it may be more worthy of attention. If LGA is able to some day extend its airside infrastructure onto Riker’s Island (a BIG IF from an environmental standpoint) it will become even more attractive for new traffic. If the much-ballyhooed improvements at JFK ever materialize, it might be worth it *then* for United to return… in their own terminal space that’s under their own control, instead of space that’s leased from an airline they’re not even allied with.

    1. I don’t necessarily disagree, but there is still the perimeter rules to deal with. Doesn’t necessarily help from the west coast.

  5. “Meanwhile Wall St is livid that a billion dollars is going away from the people who own the airline and toward labor instead.”
    Ain’t that America in a nutshell.

    1. The horror. Employees want 1/1,000 of the raises being given to the executive staff. If only we could bring back slavery so they wouldn’t have to be paid at all. Imagine the profit potential!

  6. I think you’ve got it slightly wrong about Alitalia, union leadership said yes (as in recommending its members to vote for the plan) but the very union members voted no.

  7. Regarding the American pay raises, the problem is not that American employees will make more or that any airline raise should be seen as something that will have to be clawed back in the future. The problem is that American tells Wall Street that most of its employees work under collective bargaining agreements that have defined increased costs to the company into the future which Wall Street has moved to model AAL’s costs. Twice now, including with profit sharing, AAL has increased pay outside of the collective bargaining process and in response to labor’s discontent.
    Yesterday, AAL’s financial performance was below average for the industry so Wall Street justifiably disliked hearing that American mgmt. is choosing to add more costs on top of weak financial performance that itself was driven by cost increases.
    Further, Parker required that the pilots and FAs sign long term CBAs as part of the merger and bankruptcy exit process. It was a given that other carriers would sign CBAs that would surpass American’s levels before AAL would reopen those contracts.
    Parker has to decide whether he is going to sign fair and reasonable CBAs with labor and then stick to them or short change them and then have to reopen them because American labor rightfully recognizes they are making less than their peers.
    As AAL’s CEO, Parker has to decide how he is going to come up with a plan to pay his people well and meet expectations of investors. Underpaying his people and then reopening contracts won’t work w/ Wall Street.

    1. Foreign ownership rules prevent EY (or any non-EU company) from owning the airline.

      Etihad showed up and thought it would be able to get the unions to agree to changes. It failed at that like so many before.

  8. I’m a proud Italian, but eventually, the pride and stubbornness of the Unions will the cause of their demise. The entitled sense displayed by the majority of the employee population needs a reality check!

  9. How about a ual JetBlue merger? it would give ual JFK, more airbuses, and introduce small narrow body (rjs), plus get the Middle East business back that was lost.

        1. United, Delta and American are all out of the merger business for the foreseeable future. The only airline that could buy JetBlue would be Southwest. And they fly Boeing to JetBlue’s Airbuses. Not gonna happen.

  10. It’s not like American is giving pilots and flight attendants 20% increases. The raises are meant to bring them to parity. This is a far more consolidated airline world than in 2008. Even with the growth of ULCCs, the legacy airlines enjoy more pricing power than before, and their segmented product allows them to compete on fares, yet increase overall revenue (at least in theory). Parker made the point that the old American’s problem wasn’t a cost problem but a revenue problem. I don’t think the situation is as dire as you or Wall Street think it is, but I could be wrong. In any event, we’ll see what happens. If AAL stock gets hammered, the company can simply buy back more shares.

    1. American has been buying back shares more aggressively than any other airline. They have been financing aircraft and increasing debt even while other carriers are using cash from operations to buy new aircraft. The result? AAL has the highest debt ratio in the industry by a considerable amount. I’d love to see American employees have pay on parity with the industry but that is not the business plan that Parker built and what Wall Street expected. Parker’s proposal to raise pay came as AAL posted the 2nd worst profit margin in the industry for the 1st quarter, only better than UAL. While everyone wants to see American employees regain parity, so do the investors that, with all due respect, have tens of billions of dollars invested in AAL – whether that is a popular sentiment with employees or not. AAL stock has been hammered over the past 2 days because investors aren’t convinced that AAL can meet all of the obligations it says it wants to including to employees and investors. Other airlines including LUV have been able to balance all of those demands for decades so it doesn’t mean that employees can’t be well compensated

      1. The 2nd worst profit margin compared to what? 2008? Margins are still better overall than they’e been historically. Why not take advantage of ridiculously low interest rates instead of using cash you can never access again? Based on what I’ve seen on the various 10-Qs, American isn’t buying back stock “more aggressively” than others (allowing for the fact that American is bigger by most measures than the others). And don’t forget, American put off ordering new aircraft far longer than the other legacies. It has some catching up to do, and is close to the end of that process. Wall Street looks at the short term. Much of Southwest’s success is that it’s historically managed for the long term.

        1. AAL’s 1st quarter 2017 net profit margin was higher only than UAL among US large jet airlines.
          AAL is paying more than $500 million more in interest costs per year than nearly every other US airline. Debt has a cost and those interest costs reduce the amount of money that AAL can spend for other things – including employee salaries – and come up with the same profit margin as other carriers.
          AAL’s deliveries of new aircraft might slow but the debt will take decades to bring back to comparable levels as other airlines. Further, AAL as well as DAL and UAL will have to start paying cash income taxes in the next few years. AAL also will have to spend $1 billion per year in the next few years to fund its pensions; no other airline has that amount of pension obligation in the coming years. All of that is on top of $2 billion in debt obligations/repayments. AAL’s cash demands are already higher than any other airline even proportionate to American’s size and they will only get worse.

          1. I could be wrong, but I seriously doubt that American’s debt will take “decades” to pay down. American’s management and board have far more information than we do about the financial condition of the company. If one looks at the freight railroads, I believe that will give you an idea of the long term future of the consolidated airline industry.

            1. I appreciate you being willing to discuss the topic.
              You might want to look at the 10K annual reports from American and Delta for 2016; you can find both on the investor relations websites of each airline.
              AA and DL generate very similar amounts of revenue; you are undoubtedly aware that the two airlines take very different approaches to their finances.
              You might not be aware that AAL has $25 billion of debt on its books compared to DAL. AAL has $5.5 billion in interest payments due to be paid compared to $1.1 billion for DAL. Even though many believe American’s fleet renewal is winding down, they still have $18 billion worth of new aircraft/engines on order compared to Delta’s $12 billion even though Delta is receiving more aircraft over the next 3 years than any other US airline.

              I’m simply trying to show you that there are very real differences in the strength of the finances of two very direct competitors. In addition to Delta’s greater revenue generation per seat mile, those cost and indebtedness differences directly translate into Delta’s greater ability to pay its people more including with larger profit sharing.

              As much as you and I and a whole lot of people want to see American people make more money, the company has little financial flexibility to do so now and its ability will be diminishing going forward. The airline industry is full of cases of financially stronger airlines being able to do things that other airlines could not.

              all the best – but keep your eyes wide open

            2. You’re forgetting AAL has a lot better ASSETS due to the debt level. The average age of AA aircraft is under 10 years, the youngest among the 4 legacies, Delta jets average age is over 15 years.

            3. and that increased asset base and debt is predominantly aircraft. Unless AAL liquidates those assets, they are merely generating a greater expense for no revenue advantage since AAL does not generate more revenue per seat mile than other airlines.

              the goal is not to collect the most amount of assets but the greatest return for investors… which usually starts with profits.

              again, the point of the discussion is to note that AAL is spending money on new aircraft and the debt associated with it which limits its ability to spend on other things including salaries. Lots of AA employees are proud of employee salaries but I doubt if few have considered that American can’t spend the same amount of money on salaries as long as other expenses are above average compared to the industry

            4. should say…
              Lots of AA employees are proud of AA’s new aircraft fleet but I doubt if few have considered that American can’t spend the same amount of money on salaries as long as other expenses are above average for the industry (while revenues are not).

            5. Tim – Remember that the current management team had nothing to do with these orders. That was made by the previous pre-merger management, so the current team had to work with what was inherited.

            6. exactly… but they have made lots of decisions since then, including the massive stock buybacks which they have engaged in even while taking on debt to fund the aircraft replacement. Arguing that taking on debt makes sense because interest rates are low doesn’t work when the increased debt costs American more money in debt service now and doesn’t give them a real operational cost advantage because fuel costs have been low which makes the ROI on new aircraft much lower.

  11. I thought it made sense for UA to ditch JFK. There aren’t very many connecting opportunities at JFK compared to EWR since it is a major hub. Also, IIRC, EWR and JFK are about the same distance from Manhattan anyway. I’m not sure about driving time, but I know driving the Van Wyck sucks at most any time. I don’t think the NJ Tpke is anywhere near as bad as the Van Wyck.

  12. If someone outbids you I’ll chip in my 2 cents and up the consortium bid. We can sell the parts to others and double our money.

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