Monday, January 14, 2008

The Sky Is Falling ( ! / ? )

Last week, months of persistent rumors were given credibility when one of the major US airlines publicly announced that they were holding merger talks with several other major airlines, including NewCo's parent company. This was mere confirmation of what had been spread as gospel truth by industry and general media for months despite firm denials by numerous executives that any such thing was in the works. Therefore, the announcement wasn't much of a surprise - after all, who believes a thing CEOs say these days? In a hundred years, I suspect the epithet "CEO" will be used as interchangeably with "liar" as "Benedict Arnold" is now with "traitor."

That said, a public announcement before God, the SEC, and the NYSE - not necessarily in that order - does seem to increase the probability of a merger actually coming to fruition by several fold. At least, that's how the markets took it: the stocks off all three companies involved shot up 20-30% the first day alone, and most other airline stocks inexplicably took a mighty jump too. Meanwhile, the aviation message boards were freshly abuzz with speculation as to what form the merger would take, which aircraft would be phased out and which bases closed, what the name would be, how many employees would be axed, and what other unholy unions the merger mania might spawn. The mood among airline pilots was uniformly gloomy. One wag posted the following darkly humorous checklist:
Loosening of scope.....................Check
Catastrophic terrorist attack....Check
Recession.....................................Check
Bankruptcies...............................Check
Record pay cuts...........................Check
Termination of pensions...........Check
Elimination of work rules.........Check
Record high fuel..........................Check
Age 65...........................................Check
Mergers........................................Check
Second recession........................Check

Career destruction checklist complete to cabotage.
Standing by for the career change checklist.
When I accepted the job at NewCo I knew that RedCo being bought or merged was a distinct possibility. It's a risk I took. If the merger does go through, I could be out of a job. It's not that NewCo is going anywhere - both companies no doubt value having low-cost JungleBus feed - but that if RedCo furloughs pilots as a result of the merger, those pilots flow back to NewCo and displace the current pilots. The question is whether RedCo will really furlough, and if so how soon. The worst case scenario involves them parking a ton of DC9's towards the beginning of a speedy merger, resulting in massive furloughs and flowdowns to NewCo. In that case I could be out of a job in less than a year. The best case scenario involves early retirement payouts being offered to RedCo pilots as ALPA's price for blessing the merger, resulting in a mass exodus of everyone over 50 and few if any furloughs. Either scenario could happen, or something in between.

I'm still a little skeptical as to whether a merger is really going to happen. RedCo and WidgetCo doesn't make that much sense to me. Everybody points out that they have complimentary route structures, with a large European network for Widget, an extensive Asian presence for RedCo, and relatively little overlap in their domestic routes. Well, if there's so little overlap, how exactly will merging the companies save a ton of money? If merely offering customers an expansive worldwide network were the goal, couldn't the same thing be accomplished through a close marketing alliance like the one RedCo has with KLM? Everyone seems certain that the Bush DOJ will take a laissez-faire approach to this megamerger; certainly a more modest marketing alliance would survive scrutiny as well. One can make the argument that mergers will give the surviving airlines greater pricing power, but consider that capacity cuts have done nothing and will do nothing for the legacies' pricing power in a deregulated environment because there is always some low-cost carrier eager to swoop in and snatch any morsels of market share that fall from the legacies' table. With Open Skies rapidly approaching, that will soon hold true on transoceanic routes as well.

Merging the airlines will bring a host of problems. Take a look at the fleets, for example. The only overlap is the B757, plus some commonality between the DC9 and MD88/MD90. A merged airline would have the following fleet: DC9, MD88, MD90, B737, A320, B757, B767, A330, B777, B747 - and soon, the B787. Even Aeroflot has a less bastardized fleet! I think integrating the pilot groups is going to be just as messy as it has been at USAirways, since RedCo has a more senior pilot group than Widget. Even messier will be integrating RedCo's heavily unionized flight attendants, rampers, and customer service personnel with their non-union counterparts at Widget.

It's my opinion that this is not about making a healthy, prosperous long-term company and is all about creating wealth in the short term for a select few. It's already common knowledge that much of the pressure to merge has come from hedge fund managers and other private investment firms. With few other individual or institutional investors actively involved in corporate governance, they have the CEO and board of directors' ears. It helps that company executives themselves stand to profit handsomely from any transaction. The bottom line is that this may very well go through no matter how disastrous it will be over the long term. Think how much wealth was generated since the announcement, without anything really happening. Then again, maybe the whole thing will fall apart and the hedge fund managers will have to satisfy themselves with a few hundred million dollars in short-term profit taking.

In the meantime, I'm not worrying too much. There's not much I can do for now but try to get as much JungleBus time as I can and keep my eyes open for JungleBus-rated pilot opportunities here and overseas. If the worst-case scenario does happen, at least I got my ATP and a valuable type rating out of it. Till then, I'm just going to enjoy the flying and try to not listen to the gloomy rumor mill too much.

5 Comments:

Blogger Ryan said...

Well put. Now that you have the ERJ-190 type, and if things go south there's always BlueCo.

2:52 PM  
Anonymous zb said...

Enjoyed your post. Such things always create some sorrow, but weren't you just saying a few posts ago that there's actually a huge demand for pilots right now? With this in mind, I would take the merger rumors with a grain of salt. Doesn't RedCo have too few pilots already? I would be more worried if the route networks of the two companies had more commonality.

12:10 AM  
Blogger Will said...

I've been watching the merger rumor mill pretty closely, simply because I'm a couple of weeks away from applying at NewCo and another Red Tail affiliate that flies Saabs.

The big question for me of course is: If the merger happens and I'm near the bottom of the seniority list how long can I expect to still have a job?

My personal answer is that I'm not going to worry about it. There's never a good time to get into airline work, just times that are relatively less bad.

If I get hired, fly for six months then get furloughed because Red Tail parked their DC-9s and those crews flowed back to NewCo, well, so be it. I can always go back to instructing or, shudder, get a real job.

On the other hand, I could have a fine second career with NewCo and retire quite happily as a regional captain in 23 years.

Any advice for folks who are thinking of coming into your shop?

Will

8:10 AM  
Anonymous Anonymous said...

Till then, I'm just going to enjoy the flying and try to not listen to the gloomy rumor mill too much.

This is the best part of your post. The reality is that the majority of the US-based airline business is under stress, and the majority of the problems are structural, as opposed to with one company. And no amount of whining, divine intervention, CEO brilliance or bleating from the unions are are going to fix things, unless the structural issues are fixed. And each party has so many legacy issues and constraints that the best you get is some patching or some power grabbing, not fixing.

And so the best thing to do is recognize that weird stuff is going to happen, take personal charge of your career and do not expect the CEO or the union head to take care of you, and vote with your feet as you go to a better place.

9:40 AM  
Anonymous Anonymous said...

Ever consider the possibility that a merger might only involve the management of the two companies? Pilots/planes would then continue to operate separately but be managed from one office. Save the cost of two full management operations and avoid the cost/animosity of trying to merge two seniority lists.

CEO brilliance - mutually exclusive terms? Seems that way at times.

9:51 PM  

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