Friday, April 27, 2012

End Game

Well my, it's certainly been an interesting few weeks in the old "bums in seats" business, eh? WidgetCo pilots started contract negotiations about six months early, Southwest/Airtran possibly reached a deal with WidgetCo to offload their MD-95s B-717s, and the UCAL pilots got so fed up with their own joint contract negotiations that they announced they'll be seeking a release to strike from the NMB (good luck!). The biggest and juiciest piece of news involved the APA and several other unions at American Airlines forming an unholy alliance with USAirways' "Drunk Dougie" Parker to potentially disrupt Tom Horton & Co's plans to rape and pillage the employees in bankruptcy court. Under the agreement, the AA employees will lend their considerable influence on the creditors' committee in support of a merger with USAirways in exchange for slight raises (as opposed to the 20%+ cuts AA is seeking). It's not that AA management is opposed to a merger; they just want to wring every possible cent in bonuses, stock options, and golden parachutes out of the bankruptcy process before they do it. I think we'll see a few more twists before this particular chapter is through.

Of most interest to me, however, was Pinnacle Airline Corp's own bankruptcy filing on April 1. This is the second bankruptcy filing in several years by a major regional holding company (the first being Mesa) and it reflects the huge challenges that have developed across the entire regional airline industry in recent years. I first wrote about these challenges two years ago, and was accused by a few readers of being a negative Nellie (although I personally consider the regionals' demise to be a net positive for aspiring airline pilots). The trends I noted then have continued and intensified. The regionals' cost structures have continued to increase, major airlines have continued to cancel and not renew contracts for 40-50 seat feed, and additional growth in the 70-90 seat segment has been extremely limited due to scope constraints.

The regional airline industry has tried numerous strategies to cope with these challenges, with dubious results. One idea is to branch out from fee-per-departure flying to perform at-risk independent flying, sometimes with larger aircraft. ACA tried this with Independence Air, ExpressJet attempted their own brand, and Mesa entered the intra-Hawaii market with go!. All were failures. A variation on this strategy is to purchase a mainline carrier to essentially act as a shock absorber for surplus regional aircraft and a hedge against losses from fee-per-departure operations. Republic Airways Holdings did this by purchasing bankrupt carriers (and erstwhile clients) Midwest Airlines and Frontier Airlines and replacing some of the mainline service with Republic-operated E190s and E145s. It hasn't worked out well, with Frontier posting consistent losses and RAH now looking to spin them off.

The other tack taken has been to acquire multiple additional certificates as a means of diversifying one's contract portfolio, reducing one's exposure to the tumultuous 50-seat market, and as a means of securing 70-90 seat growth. Skywest started the consolidation trend with their purchase of ASA and then ExpressJet. The usually-profitable Skywest subsequently posted a loss in 2011. The company I call Osage Holdings started a new certificate ("Pariah Air") and then bought my own airline, NewCo, from WidgetCo in July 2010, an event I wrote about a few months later in the context of industry consolidation. Osage is privately owned and does not file SEC reports, so I have no idea how that's working out for them.

Pinnacle Airlines, meanwhile, purchased Colgan Air in 2007 and Mesaba Airlines (from WidgetCo) in July 2010. It made sense at the time; Colgan diversified Pinnacle's portfolio to include Continental Airlines and the Q400 airframe, while Mesaba decreased Pinnacle's exposure to the 50-seat market. The Mesaba acquisition was at a particularly attractive price, and was financed by WidgetCo, but involved a new fee-per-departure agreement that was not made public at the time but apparently included industry-low compensation rates. This was WidgetCo's quid pro quo for Pinnacle expanding their 70-90 seat business. Unfortunately, it meant Pinnacle began hemorrhaging money when merging the airlines proved costlier than expected. In the first months of the year, Pinnacle tried renegotiating their contracts to stave off bankruptcy. WidgetCo refused to modify the agreements, and Pinnacle filed bankruptcy on April 1.

Here's where things get really fascinating. The bankruptcy filing included $74 million in debtor-in-possession financing by none other than, you guessed it, WidgetCo. Pinnacle announced that among other things, this money would repay a $44 million debt owed to, yep, WidgetCo - so that WidgetCo needn't vie with other creditors for repayment. Pinnacle then moved to terminate its feed agreements with United/Continental and USAirways - incidentally killing the entire Colgan operation and leaving a gaping hole in United's Newark feed at the same time Widget is ramping up operations at LaGuardia - and reject the associated aircraft leases. There is widespread speculation that Pinnacle will emerge from bankruptcy as a whole-owned subsidiary of WidgetCo.

If this all seems a little familiar, it's because we've heard this story before. In 2005, Northwest Airlines filed for bankruptcy and stopped payments to longtime contractor Mesaba Airlines. It forced the otherwise healthy Mesaba into bankruptcy, where Northwest bought them for pennies on the dollar. WidgetCo inherited Mesaba in the merger, then sold them off to Pinnacle, thereby sowing the seeds of Pinnacle's demise. In any other country this would be a national scandal. Here, playing dirty pool is just good business. I fully expect other major airlines to follow suit in dealing with their own costly regional contractors and unwanted 50-seat feed. Consolidation having failed, the regional airlines are essentially left without any good options for survival.

I feel very badly for the hundreds of Pinnacle, Colgan, and Mesaba pilots who are soon to be out of jobs, downgraded, or displaced - particularly Mesaba pilots, given their recent history. At the same time, the majors are essentially tearing down a system that they themselves created. It was natural that they would maintain it only as long as it was advantageous to do so - which it manifestly is not in a world with $105+/bbl oil and consolidated mega-airlines. I think there will always be a certain role for regional airlines, but it's going to be a niche rather than as the mainstay of major airlines' domestic networks. For those pilots who have seen the two-tier system up close and experienced the havoc it has wrought on the piloting profession, the destruction of that system can only be a good thing. It will ultimately mean more jobs at the major airline level, less downward pressure on those jobs' wages, and very possibly a shorter career path to the majors.

Friday, April 13, 2012

Around the World

Longtime readers likely know that my teacher-wife Dawn and I usually take overseas trips every year during her spring break. Or at least we try to...two years ago, we were going to Vietnam, got stuck in Moscow, had to come back to the States, and rode my motorcycle through the Southeast instead. Last year, we were going to China, had a death in the family that cancelled that trip, and did a motorcycle trip down the west coast from Portland. This year, we weren't really intending to take a trip, because Dawn is busy working on her Masters Degree. At the last minute we decided to go anyways, returning to Thailand since it's pretty cheap and easy, and we loved it the first time we went in 2007. Our friends and recent travel buddies Brad and Amber happened to have the same days free, so they joined us for this trip.

This ended up being our first round-the-world trip. The MSP-Tokyo flight filled up so we went to Amsterdam instead, took the train to Düsseldorf, and then caught airberlin to Bangkok, where we met up with Brad and Amber who had nonrevved over via LAX and Taipei. We rode the overnight train to Surat Thani, caught a bus to Phuket, and due to delays missed the overnight boat to Koh Phi Phi. After spending the night in Patpong, we caught the morning boat to Phi Phi. It was as beautiful as described, and as popular. We beat the Tonsai crowds by staying on nearby Long Beach, which was gorgeous and uncrowded. The snorkeling right off the beach was quite good; Brad and I saw reef sharks.

The next morning we moved on to Koh Lanta, a tranquil island whose beauty and popularity are more subdued than Phi Phi. The rainy season has started a little early on Thailand's Andaman coast, for there were thunderstorms every evening, but the days were quite nice and actually not that horribly hot. Our second day on Koh Lanta, I started my PADI Open Water Diver course, which I've been wanting to do ever since doing an intro dive on Koh Tao five years ago. The first day consisted of coursework and pool dives. The second day, Brad went diving with me at Koh Haa, a group of six islands about 15 miles southeast of Koh Lanta. I did well on the dives, and even got to go in an underwater cave ("The Cathedral") on the second dive. The third day, Brad and Amber headed up to Bangkok, while I completed the third and fourth dives required for the OWC near Koh Phi Phi, and even got in a third tank for a long and very good day of diving.

It wasn't all underwater adventures. We also rented scooters (and on Wednesday, a tuk tuk!) to explore the island. On Thursday, the girls went elephant trekking. On Friday, once Brad and Amber left to catch their flight out of Trang, Dawn enjoyed zooming around the island on her own scooter - "I can't wait to get home and ride my motorcycle!" she told me afterwards. That night, we went to a rather chilled-out full moon party at a little jungle bar on the south side of the island.

Rather than mess around with non-revving intra-Thailand, I bought full-fare tickets from Krabi to Bangkok for Saturday afternoon. We arrived early enough to head into town and check out the massive, entertaining Chutachak Weekend Market. We ate tons of delicious street food and bought a few neat trinkets for well under $20 total. Back at the airport, we happily got on the first flight we tried, a Thai Airways 747 to Tokyo. We'd been thinking we'd have to two-hop it from Tokyo, but the direct 777 to MSP turned out to be emptier than expected, and we were back home "only" some 40 hours after leaving Koh Lanta. The travel time meant we had significantly less time in Thailand than we'd have liked, but it was a very good spring break nonetheless, and all the better for having shared it with friends. Here are some of my favorite photos from the trip.