Concession Bargaining

Wage concessions first appeared as a result of the financial setbacks experienced by Eastern in the middle of the 1970s, before deregulation. East­ern’s unions agreed to a one-year wage freeze in 1975, and in 1976 signed on to a new employee participation plan, known as the Variable

Earnings Program (VEP), under which employ­ees would return 3.5 percent of their wages to the company beginning in 1978 in return for profit sharing.

In 1981, the unions at Braniff agreed to a 10 percent wage reduction, but Braniff went into liquidation shortly thereafter anyway. Pan American unions agreed in October 1981 to a 10 percent wage cut, in return for an employee stock ownership plan and a seat on the board of directors. This was the first time that labor had negotiated a seat on any airline’s board, and of the 13 largest carriers in the United States, it was the only board seat. At United, the pilots gave work rule concessions, agreeing to more flying time and to the crew-size issue. They also gave up some bonus pay provisions.

Concession bargaining appeared to be lim­ited to situations where the financial condition of the airline had been directly impacted by either claimed economic conditions or the effects of deregulation, or both. It also is clear that con­cession bargaining most often resulted in a quid pro quo back to the unions, as well as a “snap back” provision designed to reinstate the wage concession when the carrier was again financially stable.

Concession bargaining included wage reductions, work rule changes, delay or elimi­nation of future wage increases, current wage freezes, and reductions in vacation allowances and fringe benefit reductions. Concession bar­gaining also appears to have been most effec­tive with pilots and flight attendants, but less so with the mechanics. In fact, for many years IAM refused further wage concessions after the Braniff agreement in 1981. The practice of con­cession bargaining continued over the ensuing years.

In April 2003, American employees agreed to $1.8 billion in wage, benefit, and work rules concessions to help the airline avoid bankruptcy. That same month, United employees represented by ALPA, Association of Flight Attendants (AFA), the International Association of Machin­ists and Aerospace Workers (IAM), the Transport Workers Union (TWU), and the Professional Airline Flight Control Association (PAFCA) agreed to $2.2 billion in average yearly savings to avoid liquidation. Through January 2003, US Airways employees agreed to over $1 billion in cuts to avoid liquidation. Of the three air­lines, only American was able to remain out of bankruptcy.

Perimeter Rules-LGA and DCA

In addition to the anticompetitive constraints of slot and gate access, at LaGuardia and at Ronald Reagan National, there is the additional con­straint of perimeter rules. These restrictions pro­hibit nonstop flights of more than 1,500 miles into and out of LaGuardia11 and nonstop flights of more than 1,250 miles into and out of Reagan National. The purpose of these rules was to pro­mote the use of the new JFK and Dulles (IAD) airports as the long-haul airports for the area when they were built in the 1950s.

The effect of these rules is to restrict entry, particularly in the case of startup airlines with hubs outside of the established perimeter. Under these rules for instance, America West, the sec­ond-largest airline started after deregulation, was precluded from serving these two airports from its Phoenix, Arizona, base of operations.

At the same time, all seven of the largest, estab­lished airlines in the United States could easily serve these airports from one or more of their hubs.

By virtue of two federal statutes,12 DOT was allowed to award 44 new slots to airlines at DCA, 24 of which could be used for flights to cities more than 1,250 miles away. These slots were awarded to airlines serving six cities (Den­ver, Las Vegas, Los Angeles, Phoenix, Salt Lake City, and Seattle). See Figure 31-1.

LaGuardia has one exemption to its perim­eter rule—to and from Denver International.

The continuation of perimeter rule con­straints, especially for LGA, has been roundly criticized as no longer necessary. Under these arguments, the protected airports (JFK and IAD) no longer need development, and the introduc­tion of Stage 3 and Stage 4 aircraft into the fleet has reduced the airports’ noise footprint for all types of jet aircraft such that the restriction on long-range jet aircraft is no longer necessary.

Щ Marketing Strategies-Frequent Flyer Programs

Frequent flyer programs began in the early 1980s as a device to encourage customer loyalty and to entice frequent travelers to use a chosen airline to the exclusion of all other competing airlines. The customers who normally fly the most, and usually at the highest fares, are business travelers whose costs of travel are usually paid by their employ­ers, or accounted for as a business expense. Fre­quent flyer awards are based on miles flown with the airline that go directly to the passenger, not the employer. So far these awards have not been considered taxable. Thus, the frequent flyer has a potential personal and financial incentive to continue to fly with the sponsoring airline, often paying its highest fares. A new entry into one of these markets, whether by a startup or by an established airline, is very difficult.

FIGURE 31-1 Summary of slot exemptions granted by DOT under AIR-21 and Vision 100 as of September 2006.

Compensatory Use and Lease Agreements

Under these types of agreements, which are pro­gressively in use at more modern and successful airports, the airline pays only for the facilities and services actually used. The airport assumes the responsibility for meeting the costs of opera­tion like any other owner. One survey reported that 20 percent of these types of agreements have Mil clauses. Compensatory agreements, without Mil clauses, allow the airport full latitude in the use of its funds and allow the incentive to add additional services in the interest of the public and the airport instead of the interests of the incumbent airlines at the airport.

Hybrid Use and Lease Agreements

These agreements typically exclude nonaeronauti­cal uses (restaurants, rental car operations, etc.) from the residual pool, so that an airline’s guaran­tee is limited to the cost of aeronautical operations only. The airport retains earned revenues from its nonaeronautical operations while being guaran­teed a break-even on airfield activities. Seventy – four percent of these agreements contain Mil clauses, the average length of which is 20 years. While these agreements are anticompetitive with respect to capital improvement and expansion projects, they do give the airport the incentive to expand its nonaeronautical sources of income.

■ Gate Leasing Arrangements

Airport gates obviously are a finite commodity and an essential element of both airline service and competition in the airline industry. In com­bination with overriding use agreements, or as separate undertakings with airlines, airports have normally utilized three methods of allocating gate use to airlines serving that airport:

1. Exclusive-use contracts

2. Preferential-use contracts

3. Airport controlled gates

The Air Transportation Safety and System Stabilization Act3

The main provisions of the statute provide:

1. Direct payments and loan guarantees

a. All U. S. air carriers were eligible to share a $5 billion fund to compensate them for direct losses due to the federal ground stop order that resulted immediately after the terrorists’ attack, and incremental losses incurred between September 11 and December 11, 2001

b. Issuance of up to $10 billion in federal loan guarantees and credits to air carriers, subject to terms and conditions set by the president

2, Insurance and liability

a. Limited the liability of air carriers, certi­fied by the DOT as victims of an act of terrorism, for losses suffered by third par­ties to $100 million in the aggregate (due to the terrorist act) with provisions for the government to assume all liability over that amount

b. Prohibited the imposition of punitive damages against either the carrier or the government as a result of the terrorist act

c. Granted the DOT authority to reim­burse air carriers for insurance premium increases due to September 11

3, Tax provisions extending certain tax due dates for air carriers

4, Creation of a victim compensation fund to compensate individuals (or their survivors) for injuries or death caused by terrorist – related aircraft crashes on September 11 The Act established the Air Transporta­tion Stabilization Board, whose function was to administer the issuance of the $10 billion in federal loan guarantees to affected airlines. As a precondition to the issuance of any guarantees, the Board had to determine that:

1, Credit was not reasonably available to the airline at the time of the issuance

2, The intended obligation (the loan and the purpose for the loan) was prudently incurred

3, The transaction was a necessary part of maintaining a safe, efficient, and viable com­mercial aviation system in the United States

By the middle of 2002, some 400 air carriers had applied for compensation for direct losses as a result of September 11. The government had approved and paid $4.3 billion to 382 different carriers. The largest payments went to the larg­est airlines. United received almost $725 million, American received $656 million, and Delta got $595 million.

At the same time, the Stabilization Board continued to work through applications for loan guarantees. It quickly became clear that the Board was not going to rubber-stamp applications for the airlines. America West, the first to receive guarantees, was required to rework its application several times in order to satisfy the Board, and the guarantees were conditioned on the airline granting to the government a form of collateral
to guarantee repayment, warrants on one-third of the airline’s stock. Warrants are options to pur­chase stock at a predetermined price.

The Board rejected other applications, including Vanguard Airline’s request for just $7.5 million in guarantees. Eleven other small airlines made applications, with varying results.

Major airlines were slow to apply, primarily because of the rigid stance taken by the Board in evaluating applications. In addition to requir­ing security for the government guarantees, the Board also required the airlines to make operat­ing changes designed to increase the likelihood of repayment. US Air, for instance, received conditional approval for $900 million in guar­antees dependent on the airline securing size­able concessions from its employees. The labor unions would not agree, and U. S. Air went into Chapter 11 in August 2002. United Airlines also applied for guarantees in an amount of $1.8 bil­lion. Again, labor would not agree to the conces­sions required by the government. In December 2002, UAL filed for bankruptcy protection under

Chapter 11 of the Act. The other legacy carriers were just barely hanging on. Later in this chap­ter we will review the record of all remaining legacy carriers’ use of Chapter 11 since 2001.

Domestic Airlines in the 21st Century

A deregulated air transport system driven by consumer demand based primarily on price has emerged in the 21st century. It is a system that tends toward a low-cost approach as its first goal, and then tries to find ways to survive while provid­ing it. Airlines have not proven to be good invest­ments in an economically deregulated world. As of 2012, there is only one domestic airline that possesses investment grade credit, the minimum rating of BBB-, and that airline is the only airline that has been consistently profitable under the deregulated system. See Figure 35-29 for a com­parison of corporations and their credit ratings.

Airways flight 101, crashed in Miami, kill­ing 20. The NTSB cites Chalks’ inadequate maintenance program and the FAA’s failed oversight of the airline as probable causes.

• Aug. 27, 2006: Comair flight 5191, operat­ing under a code share as Delta Connection, crashed in Lexington, KY, killing 47 passen­gers and 2 crew members. One crew member survives. The final NTSB report cites pilot performance as the probable cause and non­relevant conversation by crews as a contrib­uting cause.

• Feb. 12, 2009: Continental flight 3407, a Col – gan Air-operated plane flying under a code share as Continental Connection, crashed out­side of Buffalo, N. Y., killing all 49 on board and 1 on the ground. NTSB cites the captain’s inappropriate response to a stall, unprofes­sional pilot behavior, and Colgan Air’s inade­quate procedures for flying in icing conditions as probable causes.

The last accident, Colgan Air flight 3407, was highly publicized in the news media and in aviation circles. The issues raised by this event concerned the adequacy of entry-level flight qualifications of pilots, the airline’s training stan­dards for all pilots, the acceptable level and qual­ity of crew rest, and pilots’ pay levels. The first officer of flight 3407, for instance, was paid a salary of $16,000 per year, lived with her parents in Seattle, Washington, and commuted to her home base at Newark by overnight deadhead­ing, at least partially due to financial constraints. It was said that she also had a part-time job in a coffee shop.

The airplane flown by Colgan Air was painted in Continental’s livery, including Conti­nental’s trademark globe on the tail, and only the fine print on the ticket gave any indication that this was not a Continental operation.

In February 2012, the FAA proposed to sub­stantially increase the qualification requirements for first officers consistent with a mandate in the Airline Safety and Federal Aviation Administra­tion Extension Act of 2010. The proposed rule is entitled “Pilot Certification and Qualification Requirements for Air Carrier Operations.” Among other things, this proposal would require an Air­line Transport Rating for first officers, completion of a new FAA-approved program for the ATP cer­tificate with enhanced training requirements, but contain allowances for reduced minimum flight time to qualify for the ATP rating under certain circumstances, including military training or a four-year baccalaureate degree program.

This rule seems to have stirred some contro­versy, with even the former FAA administrator Randy Babbitt on record as saying he does not think this is the best solution to the problem, cit­ing overall safety statistics. It must also be rec­ognized that the kind of flying that the regionals have to perform is not comparable with that of the mainline carriers. Regionals perform many more takeoffs and landings, thus more instru­ment approaches in IMC, fly at lower altitudes, use shorter and narrower runways at outlying air­ports, and often fly turboprop equipment.

Overall, according to the NTSB, from 2000 to 2009, it was more than twice as safe to fly as it was in the preceding decade, and more than seven times safer than in the 1970s. While these are impressive and reassuring statistics, unan­swered questions implicit in the foregoing illus­trations of regional practices remain.

IATA Inter-Carrier Agreement and IATA Measures of Implementation Agreement

In 1995, at the urging of the Department of Trans­portation, discussions were initiated between for­eign and U. S. carriers under the auspices of IATA and ATA, to reach voluntary agreement to waive the limitations of liability set out in Warsaw. Later that year, these carriers signed the IATA Inter-Carrier Agreement (IIA) that committed the airlines to take action to waive the limitation of liability provisions of the Warsaw Convention. In 1996, the second step was taken when many of

them signed the IATA Measures of Implementa­tion Agreement (MIA), which waived the War­saw limitations up to 100,000 Special Drawing Rights (SDRs). SDRs are monetary units repre­senting an artificial “basket” currency developed by the International Monetary Fund to replace gold as a world standard. Recently 100,000 SDRs represented approximately $130,000. By the mid­dle of the year 2000, 122 international carriers, comprising more than 90 percent of the world’s air transport industry, had signed IIA, with most of those also signing MIA. The effect of these developments was that any international passen­ger who qualified would have an absolute right to receive a payment of approximately $130,000 regardless of airline fault.

Advent of the European Union

Although it had taken 30 years to accomplish, by 1987 the basis for broad European cooperation had finally been achieved. It had taken the sepa­rate efforts of all of the EC institutions to make it happen: the Commission, by its Memorandum No. 1 and Memorandum No. 2; the Parliament, by its civil action against the Council; the European Court of Justice, by its decision in the Nouvelles Frontieres case; and finally, the Single European Act. Henceforth, national autonomy would take a back seat to the unity of the European Union.

Competition Rules in Air Transport

Now it was the turn of the Council to take the leading role in implementing the goal of full economic integration by restructuring air trans­port policies. The Council, in 1987, adopted regulations (the Competition Rules) designed to apply the rules of competition, mandated by the Treaty of Rome, to scheduled air transport. These regulations applied only between Mem­ber States, not to internal domestic traffic nor to operations between a Member State and a non­Member State. Air transport operations to third – party states were, and had been, controlled by bilateral agreement beginning after the Chicago Convention in 1944.

The Council regulations came in three phases, or “packages” as they were called, between 1987 and 1993. The third set of regula­tions, effective on January 1, 1993, effectively satisfied the goal of air transport liberalization mandated by the Treaty of Rome. This group of regulations dealt with the important issues of fares, market factors (slot allocations, capacity, etc.), computer reservation systems, ground han­dling, cargo services, mergers, and subsidies.

In addition, by 1993 there had already begun a trend toward privatization of national airlines. British Airways was the first of the national air­lines to privatize, in 1987, followed by Icelandair, and others were well on the way to privatiza­tion, like KLM (39 percent government owned), Sabena (53 percent), SAS (50 percent), Lufthansa (48 percent). Still others, like Air France, Iberia, and Olympic remained wholly government owned, but the trend toward privatization had been started. By the end of 2002, KLM and Iberia were fully privatized. Privatization among other international airlines is shown in Figure 39-1.

Predation and Merger

The Council’s competition rules are mainly enforced by the Commission. Commission investigations of predation and mergers can be

compared to those of the United States Depart­ment of Justice. With respect to mergers, the EU and the United States agreed in 1991 to coordi­nate their activities so as to reduce the likelihood of significant discrepancies existing in their anti­competition rules and policies regarding transat­lantic mergers and acquisitions.3

Who Owns Outer Space?

Like the crossing of the Rubicon, traversing the Karman line marked a point of no return for humanity. In the context of the Cold War, the potential for disaster was palatable. ICBMs were now a reality, and there was no defense. Mutually Assured Destruction (MAD) was the acronym of the day, and it was a chillingly accurate description of what any miscalculation by either (later any) nuclear power would bring. This was the Wild West on an international level, without a sheriff.

In the context of international civil law, however, many people held out hope. It had been remarked by both astronauts (American) and cosmonauts (Soviets) that national boundaries on earth were not discernable from space. Boundar­ies on earth, of course, imply the sovereignty of nation-states, and they have been the cause of wars since time immemorial. But there was something about being in space that seemed to strike a humanistic, rather than a nationalistic, chord in those first space travelers.

In 1945, the United Nations was founded among the world’s sovereign states in the hope that it could provide a forum for the peace­ful consideration of issues between states as an alternative to war. The United Nations is large, and through its organizations (its commit­tee structure), programs (such as trade and food programs), and specialized agencies (such as WHO, the World Health Organization), it has assumed many and varied roles in the interna­tional community.11

In 1958, the United Nations set up an ad hoc committee called the Committee on the Peaceful Uses of Outer Space (COPUOS) consisting of 11 Member States. COPUOS became a permanent committee in the U. N. in 1959, with 24 mem­bers. Among the purposes of this body were the promotion of international cooperation in space, the encouragement of continued research and dis­semination of information concerning space, and the study of legal problems arising relating to the exploration of outer space.

The main question confronting CUPUOS was whether a coherent form of international law could be brought to govern human interaction in outer space. If so, what form should it take? In view of international tensions at the time, this was a daunting task.

SpaceShipOne (SSl)-A Different Kind of Space Flight

April 1, 2004, FAA/AST granted the first license ever issued for a private, crewed, suborbital flight. The award went to a company founded by aero­nautical pioneer Burt Rutan, Scaled Composites, in conjunction with joint venturer Paul Allen. Rutan, an aerospace engineer, gained a reputa­tion for developing new, unconventional air­plane designs built of strong, light, composite materials. In 1986, his Voyager aircraft was the first to fly around the world without refueling.

Just one year before being awarded the fed­eral license, Scaled Composites revealed that it was working on a spacecraft design to compete
for the Ansari X Prize.33 At the time, there were 27 announced competitors for the prize. The Ansari X Prize, in the amount of $10 million, was offered by the X Prize Foundation for the first private, non­governmental launch of a reusable manned space­craft, capable of carrying three people into space with safe return, twice within a two-week period. The Ansari X Prize is patterned after the early 20th century practice of awarding monetary prizes to aviators in order to spur greater achievements in the then-nascent aviation field. In particular, it is reminiscent of the Orteig Prize of $25,000 that was posted by Ray Orteig in 1919 for anyone who suc­cessfully completed a nonstop flight between New York and Paris. The Orteig Prize was claimed by Charles Lindbergh in 1927. (See Chapter 13. See also the NASA Centennial Challenges below.)

The Ansari X Prize stipulated that the spacecraft exceed 100 kilometers as the

FIGURE 41-10 SpaceShipOne.

required threshold of space (the Karman line) at 62.1 miles above the earth. The SSI flights origi­nated from the Mojave Airport Civilian Flight Test Center (now Mojave Spaceport) in Califor­nia. SpaceShipOne was aerially launched from a specially Rutan-designed carrier jet called “White Knight.” The spacecraft was powered by a hybrid rocket engine that used nitrous oxide (laughing gas) as the oxidizer and synthetic rubber as the fuel. (See Figures 41-9, 41-10, and 41-11.)

The first competitive flight in the Ansari X Prize competition occurred on September 29, 2004, achieving an altitude of 102.9 kilometers and a maximum speed of 2.92 Mach. On Octo­ber 4, 2004, SpaceShipOne duplicated its earlier successful suborbital flight, this time to 111.996 kilometers and a maximum speed of 3.09 Mach, thereby completing all requirements for the Ansari X Prize. That date was the 47th anniversary of the first Sputnik flight.

SpaceShipTwo is a follow-on suborbital, air-launched space vehicle being developed by a joint venture between Scaled Composites and the Virgin Group (Virgin Galactic). The vehicle was introduced to the public in December 2009 and, as of July 2012, is undergoing glide tests. The company is taking bookings for suborbital flights set to start late in 2013 at a price of $200,000.

The joint venture plans orbital flights using its planned SpaceShipThree, assuming success in its Virgin Galactic project. Orbital flight is much more difficult to achieve than is suborbital flight since the speed necessary to gain escape veloc­ity is on the order of 7 to 8 times that required to reach suborbital altitudes. While SpaceShipOne reached the Karman line by accelerating to a little over 3 Mach, orbital vehicles will require 25 Mach to achieve escape velocity. Reentry is also much more complex, since all of the excess speed must be dissipated on reentering earth’s atmosphere.

Two-Tiered Wage Agreements

Two-tiered wage agreements, or b-scale wages, are a form of concession bargaining that first arose at American Airlines in 1983. The b-scale refers to a wage rate applied to workers solely on the basis of their having been hired after a specified date. The plan is, therefore, prospective in benefit rather than immediate. Once in place at American, the two-tier system rapidly proceeded through the ranks of most carriers, and was readily adopted. By 1986, with the exception of Braniff and Con­tinental, all major carriers had the system in place for at least one craft of employees, and 70 percent of all union contracts carried b-scales.

The agreement typically involves a gradual “payoff,” or a limited period during which the new employee will be paid under the reduced pay scale. The plan typically will be merged with the higher wage scale, usually within five years. The wage reduction historically has ranged from 20 percent to 45 percent.