Friday, September 10, 2010

(R)Evolution

I've put off writing this post for two months, with good reason. When NewCo was unexpectedly sold off on July 1st, I was so emotional about the whole thing, so utterly pissed off, that anything I cared to write would have been a fireball launched directly into the face of my new employer, daring them to fire me. Since then, I've had time to simmer down and think through what this sale, and even more disruptive recent events, mean for the industry. There have also been some positive developments that are making me think that perhaps I'd like to keep my job, after all.

On the morning of July 1st, I was flying from Houston to Minneapolis on day three of four. I was paired with Mike, an excellent FO and great guy with whom I'd flown a number of times. We'd just pulled into gate G18, completed the shutdown checklist, and turned on our phones; they both began going crazy with multiple texts and voicemails we'd missed during the flight. We looked at each either; it was obvious something big was up. My first text was from a friend who flies for Pinnacle. "What the heck...you guys are screwed!" it exclaimed. When a Pinnacle guy says you're screwed, he isn't kidding. I loaded up the company website and discovered that WidgetCo had sold NewCo late the previous night. That wasn't the shocker; there had been swirling rumors of an impending sale. The unexpected part was who we were sold to.

Our new parent company has been around for some 30 years. I'll give them the pseudonym "Osage Airlines," in honor of their early days flying to Lake of the Ozarks. They are privately owned by one individual, who built the airline from the ground up. They do not have a good reputation among pilots. Part of it is their industry-wide reputation for being cheap. There are lots of cheap regionals, though; most of the animosity stems from something that happened about five years ago. Osage had been awarded new CRJ-700 flying for a major airline. Because of a scope clause at one of their existing mainline partners, they were forced to start a new certificate. The original plan was to use Osage pilots; however, when their ALPA MEC refused to fly for below-market rates, Osage decided to bypass them by using non-Osage pilots. This appeared to be against the Osage pilots' contract, which stipulated they were to do all flying controlled by Osage Airlines. Osage management got around this by creating a new holding company to own both Osage Airlines and the new company, and then successfully arguing that the contract was between the pilots and Osage Airlines, not the new Osage Holdings. The new airline - let's not sugarcoat it, I'll call it Pariah Air - took delivery of 25 CRJ-700s and hired pilots while Osage was getting rid of older turboprops and furloughing. It created an enormous amount of ill will among pilots, and those who went to Pariah are despised by many regional pilots - including the many Osage furloughees that ended up at NewCo. My First Officer, Mike, was one of these furloughees. You can imagine his reaction to learning that WidgetCo sold NewCo to Osage Holdings.

We had a three hour break after our arrival from Houston, so we packed up and walked down to the crew room. The mood there was veering between bleak and apoplectic. Between the press release and an employee FAQ, we got a few details. NewCo was sold for a paltry $20 million, which was financed by WidgetCo, who also leased the aircraft back to Osage Holdings. We were to be operated as a separate airline, alongside Osage Airlines and Pariah Air. Our nonrev benefits were to be slashed to those of a contract carrier. Most alarmingly, the flowthrough agreement to WidgetCo - our senior-most 60 pilots were scheduled to flow yet this year, with me close behind - was revealed to be subject to cancellation due to the sale. Although the FAQ said that all parties would meet soon to determine the future of the flow agreement, the consensus that morning was that it was toast. Delta didn't want it and Osage didn't want it, we believed, and we were the suckers for ever thinking it might work despite the failure of other flowthrough agreements across the industry. Our company president, to his credit, showed up in the crew room to deflect angry inquiries from an increasingly hostile crowed. I didn't believe one of his answers and made it clear to him. Finally, Mike and I headed out for the flight to our Columbus overnight. During the crew briefing, I told him: "If there was ever a flight in which we were distracted a dangerous level, this is it. Let's both be extra vigilant and watch out for each other." We did, and got to Columbus just fine, where we promptly headed to the nearest brewpub to commiserate over beers.

It helped to empathize with our colleagues at Mesaba, for NewCo wasn't the only airline that WidgetCo sold on 1 July. A little history is in order. Mesaba was forced into bankruptcy in 2005 after the bankrupt RedCo withheld millions of dollars in payments owed them; RedCo subsequently purchased Mesaba for mere pennies on the dollar. Fast-forward to 1 July 2010: WidgetCo, having bought all of NewCo's assets including Mesaba, sells Mesaba to Pinnacle Holdings for $62 million. I would say a lot more about this but everything I could type would constitute more of those fireballs I was talking about.

It turned out that this double sale was only the start of interesting developments for the regional industry this summer - or perhaps the continuation of trends I noted earlier this spring. Skywest recently announced the purchase of erstwhile industry giant ExpressJet Airlines, which it plans to merge into subsidiary Atlantic Southeast Airlines (ASA). Meanwhile, Freedom Airlines shut down after WidgetCo won litigation allowing it to cancel its contract for poor performance; the survival of Freedom's parent Mesa Air Group seems increasingly in doubt. American has made it increasingly clear that Eagle is for sale if someone would just make a reasonable offer. Just last week, Comair (still wholly-owned by WidgetCo) announced that it would slash its fleet to half of its already-diminished number and furlough a substantial portion of its workforce.

Just what is going on here? A key component is the increasingly obvious obsolescence of the ubiquitous 30-50 seat regional jet. The $150/bbl oil of 2007 felled the first blow, the depressed revenue environment of 2008-2009 gave the RJ a further bludgeoning, and major airline consolidation into 2010 just may have put the final nail in the coffin. Mind you, 30-50 seat RJs will always have a niche to fill, but it has become apparent that there are far too many in use today for roles they do not fill well. This has left many regional airlines desperately exposed; as 30-50 seat contacts come due and are not renewed, these airlines stand to shrink significantly, with an accompanying explosion of their cost structure and subsequent loss of competitiveness in all seat categories (see: Mesa Airlines).

So what to do? I think there are essentially four choices out there for those who own or manage regional airlines. You can try to go independent, either with existing aircraft or by acquiring larger aircraft. From Independence Air to go! to branded ExpressJet, the track record is not encouraging here. You can acquire larger national airlines and use them to compete with mainline "partners," as Republic Holdings has done. The jury's still out on that one. You can acquire other regional airlines in an effort to diversify your air service agreement portfolio, obtain synergistic cost savings, and decrease competition for increasingly scarce RFPs. This seems to be the tack taken by Skywest, Osage, and Pinnacle. Or, you can position yourself to be acquired. I think this is what WidgetCo is doing with Comair, and American with Eagle.

So I get what Osage and Pinnacle were thinking when they picked up NewCo and Mesaba. The real question is what was Widget looking to gain by selling these airlines off - particularly for a paltry $82 million, a tiny fraction of WidgetCo's total debt? I'm still trying to figure this one out. You could take Widget's CEO at his word when he told investors that it was simply a way to decrease Widget's liability. Think about that one for a sec. It implies that the bean-counters were so concerned about the possibility of a crash and ensuing liability from one of the regional airlines 100% under their control that they chose to move those airlines out from under their control, and ostensibly decrease their liability in case of a mishap. Doesn't give one the warm fuzzies, does it?

In the week after the sale, surprise and confusion gave way to seething anger. Dawn said she had never seen me so negative about my career in the decade she's known me. That's no way to go through life, though, and I've cooled off considerably since. Thus far it's looking like Osage is willing to let NewCo keep running the way it's been run - which isn't perfect, mind you, but has improved considerably since I started and is at present a pretty decent operation that backs up its pilots when they make safe decisions. Furthermore, I was pleasantly surprised when WidgetCo agreed to keep the flowthrough agreement for all NewCo pilots on property as of the sale. If current hiring projections hold, there is a real chance that I'll be at the controls of a Diesel 9 or Mad Dog or Fifi sometime next year. I sure hope it happens - the regional industry is getting far too interesting for me as of late!

I haven't mentioned one potentially truly revolutionary development. The Continental and United pilots are demanding, as a condition of cooperating in the merger between their airlines, a gradual end to outsourcing, with all regional flying eventually to be flown by pilots on the combined seniority list. I consider this a definite long-shot to actually happen, but if it does you will see a great deal more turmoil in the regional industry as well as great celebration from airline pilots of all descriptions.

7 Comments:

Anonymous Joel P. said...

I'd be curious to hear more about your exchange with the company boss, and that Q&A in general, but I certainly don't want to get you fired with a possible upgrade around the corner.... in any case I hope it all works out for you and your fellow pilots.

As for the new state of the industry, what will the typical career progression look like for the pilot starting out in the next few years with the likely elimination of many of the entry-level airline jobs? Will there be hiring at majors creating rapid turnover at the remaining regionals? Is it just too early to have any idea?

As always, thanks for writing.

11:16 PM  
Blogger Sean O. said...

There's been very little said following this deal. I'm glad to read your take on it. On the lighter side, I was never a big fan of the NewCo call sign. Perhaps it's appropriate to change it to snowmobile?

6:36 AM  
Anonymous John Z. said...

Hey Sam. I just wanted to follow up on the first posters second question. What do you think the future holds for new pilots? I finished my training two years ago and still haven't been able to secure employment as a pilot. Do you still think it will turnaround to 2006-2007 hiring levels like you stated in a post awhile back? I have a good job outside aviation, and am having trouble convincing myself i can overcome the barrier to entry that seem to be growing larger daily.

5:10 PM  
Blogger Aviation Jobs said...

Aircraft bankruptcies has been prominent nowadays. It is important that before you settle for a company, you must know its background.

5:41 AM  
Blogger Sam said...

Joel P-- Not much to say about the exchange with TC. I wasn't rude, but he was trying to put the best face on what everyone else considered a very bad situation, and nobody really bothered hiding their skepticism. I give the guy props for sticking around and taking the heat in that environment, and for subsequently being true to his word and standing by our pilots in defense of the flow-through.

As for what comes next...who knows, really, but here's my personal belief. In the short term, people in Joel Z's situation are going to be stuck for a while. A few majors are starting to hire in small numbers but it probably won't really pick up for a few years, at least until Age 65 retirements resume in Nov 2012. Meanwhile, regional furloughs outnumber regional newhires. In NewCo's case, virtually everyone we're hiring has prior 121 experience and often 5000+ hours. Flight instructors and 135 types are mostly stuck where they're at. First jobs are scarce-to-nonexistent. John Z is one of the lucky ones in that he has a good job outside aviation. I wouldn't be too anxious to make the jump to flying until things really start to turn around - just stay current so you can take advantage when that starts to happen.

It's my belief that the economy is going to be somewhat slow in recovering and the onset of growth at the majors will probably happen around the same time that retirements resume in large numbers. There will never be a true pilot shortage at the majors, but those who are qualified shouldn't have trouble finding a job, and the regionals will have fairly decent turnover.

The problem is that most of the mature regionals out there now have a sizable cadre of lifers, many of whom originally intended to move on to the majors but never got the chance and in the meantime started a family and now can't or won't take the hit in pay and job security and quality of life to start over at a major. These lifers greatly restrict the number of Captain slots available to those who wish to get their turbine PIC and move on to the majors, particularly as regionals contract, merge, or shut down. It's my belief that once the hiring swing at the majors is truly underway, the regionals' importance to filling major airline slots will be reduced relative to 135 or corporate backgrounds, or that turbine PIC will become less important than 121 experience and many regional FOs will go straight to the majors. Either way I think you'll see major changes to the well worn CFI->Regional FO->Regional CA->Major Airline career path.

12:26 PM  
Anonymous Anonymous said...

Hey Sam,
I rediscovered your blog this year- found it at the end of the schoolyear last year and forgot about it. I am from the twin cities and am in my jr. Year at UND- I was hoping to go to Mesaba but since Pinnacle bought them, well...Skywest is the goal now. Do you know anyone who flys for them? I have just heard a lot of bad things from friends at Pinnacle. I was wondering about that last line you wrote "Either way I think you'll see major changes to the well worn CFI->Regional FO->Regional CA->Major Airline career path." What do you think those changes will be? From what I understand you are saying PIC time won't be as important and turbine SIC will be enough for the majors?
Thanks

8:37 PM  
Blogger Karthik said...

Unemployment is the worst case, but these can be minimized through education to everyone. In India, Government has made compulsory education to the all the children's and i hope in future there are more job openings and everyone gets benefited. Through this site Best of luck for getting a good jobs in your career

4:59 AM  

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