Statement – Captain Duane Woerth
to Transportation Research Board, 1/11/99
"Looking at Alliances"
I’m pleased to have been invited to participate in this panel today.
I’m speaking as president of the Air Line Pilots Association, the labor union which represents more than 51,000 commercial airline pilots in the U.S. and Canada.
As a labor union, we look at alliances in one way: how do they affect the livelihoods – the jobs and job security -- of our pilots?
To airline pilots, global alliances seem to be a potential threat, but at the same time a potential opportunity. Since the evidence to date seems to suggest the large alliances are taking market share away from un-aligned or "under-aligned" carriers, most pilots believe being outside these large alliances may be more dangerous to job security than being inside.
Nonetheless, living inside a large alliance produces considerable anxiety for United States and Canadian airline pilots, and today I’d like to spend some time explaining to you why that is so.
Our focus today is to look at what alliances and international code-sharing have meant and produced so far.
To begin, let’s go back four or five years -- before most of these arrangements went forward -- and look at what they’ve accomplished. Is it what was intended? Do we care? Do we need to re-examine our policies before we get much further along?
By our policies, I mean our internal union policies as well as our support for current international aviation policy of the U.S.
We’ve always been of the belief, and we’ve testified to that many times, that one of the principal objectives of policymakers should be the provision of a United States air transportation system that is capable of competing in the global marketplace.
The Federal Aviation Act mentions three groups who should be kept in mind when these policies are developed: airline consumers, who are interested in a good value; airline companies, who need an environment in which they can produce a profit, and operate a safe and reliable system, and -- believe it or not -- there is a section in there on workers’ interests. We’ve got plenty of people worried about the first two groups. We’re here to worry about the employees.
I’d like to point to a couple of examples that show that these alliances have not been as much to the benefit of U.S. workers as might have first been thought.
DOT has to date approved these alliances with the proviso that they be accompanied by an "open skies" agreement, generally believing that the third, fourth, and fifth freedom rights generated by open skies would enhance competition.
But let’s start with Canada. The goal of that agreement was to provide more transborder service between the U.S. and Canada.
The US - Canada Aviation agreement signed just about four years ago gave Canadian airlines the right to serve any city in the U.S., and gave U.S. airlines unlimited access to Canadian cities with the notable exception of Montreal, Toronto, and Vancouver – by far and away the most desirable cities in Canada to serve. These three cities were phased in over two or three years.
This phasing seems to have had a very predictable outcome. "First mover" advantages are very significant in the airline business.
[Slide 1 – U.S. – Canada ASMs by Country]
We took a look at the data for the years since the phased bilateral was introduced. Canadian carriers have been far more responsive than U.S. carriers to the increased access rights.
This is not at all surprising, since Canadian carriers were given a huge head start advantage in the big markets that really matter: Vancouver, Montreal and Toronto.
The overwhelming volume of traffic has been flown by the pilots of Air Canada and Canadian Airlines. We’re of course happy for the pilots of Canada that we represent. We’re delighted that this has meant new work for them.
But what I wanted to point out here is that the amount of new service provided by U.S. carriers to Canada since this new agreement has been in force is materially less in comparison. ASMs provided by Canada essentially doubled – nearly a 100 percent increase – while U.S. ASMs increased slightly more than 25 percent since 1993.
The United States’ two largest carriers – United and American, entered into code-sharing alliances with Air Canada and Canadian, rather than add substantial new competitive service themselves. The "job score" to date -- given these circumstances that began with phasing -- is that Canadian pilots got most of the jobs, and U.S. pilots, while experiencing some modest growth, mostly got the warm and comforting feeling of seeing United and American’s code on a computer screen!
And, more recently, what’s happened in Germany? The U.S. and Germany entered an Open Skies agreement in 1996. The flying appears to have been redistributed in favor of German carriers. Once again, look at what’s happened.
[Slide 2 – U.S. Germany ASM’s by Country]
Whether you measure it in terms of block hours or, as here, in available seat miles, the bar graphs that represent the non-U.S. carriers always seem to be marching ever upward, while those representing U.S. carriers tend to be flat, or on the decline. U.S. ASMs actually declined by nearly 10 percent, while German ASMs increased by very nearly 50 percent since 1993.
Our Economic and Financial Analysis Department analyzed the effect of code-share arrangements on transatlantic traffic overall.
[Slide 3 – U.S. Airline Growth in Transatlantic]
It’s fairly obvious that the winners in these arrangements, by and large, have not been our pilots. U.S. flying has declined, while flying by our counterparts overseas has grown dramatically.
Goldman Sachs’ review of these alliances as recently as November confirms our fears. And I quote: "We believe that the alliance benefits have disproportionately accrued to European rather than U.S. carriers, because U.S. hubs access a greater share of connecting traffic than do European hubs. . . Since the advent of alliances, European airlines have increased market share 15 percentage points, and European carriers now offer 65 percent of transatlantic capacity."
At this point, I know that some of you are thinking: "Europeans must have lower labor costs. That’s why they’re getting the jobs." You could not be more wrong.
[Slide #4 – U.S. Carriers. . . Unit Costs]
U.S. carriers have lower operating costs than their main code share partners. It is clearly in the airlines’ interests to have U.S. pilots do more international flying.
U.S. carriers have lower pilot labor costs. Something is amiss here, isn’t there?
Pure economic academic theory dictates that if you’re cheaper and more productive you get the job. The problem is that the airline industry has a lot of things that get in the way and blow pure academic theory out of the water.
Government involvement, especially government ownership in the airline business, distorts the marketplace considerably. Since that subject is worthy of 10 conferences all by itself, I won’t spend more time on it, other than to emphasize that when U.S. pilots look at global alliances and worry, it is largely because of foreign governments’ involvement in many of the airlines in the alliances.
So what are we going to do?
Twenty years ago, we tried to seek employee protective provisions from the government to get some relief for our employees who would be adversely impacted by deregulation. Thousands of our members were displaced due to deregulation. None of those employees saw a dime from an EPP.
These days, we look to build protections into our collective bargaining agreements. We’ve become very aggressive in getting adequate job security provisions in negotiations.
What we got in the Northwest agreement signed last fall, for example, was very important to the pilots’ future job security. Northwest pilots are assured of getting 50 percent of all block hours in the KLM joint venture. In addition, for all international code-share flying, Northwest pilots will get at least 50 percent of all hub-to-hub flying, and 100% of all Northwest hub to partner non-hub flying.
In every large global alliance, pilots are forming international alliances of their own. We’re banding together as pilots across national borders to protect our mutual interests. We’ve decided that we had better begin to take matters into our own hands and start steering these alliances toward something we can live with.
These pilot alliances are signing protocols providing for immediate sharing of information relevant to working/social conditions or career opportunities. Furthermore, our pilots are very much aware that in alliances, they might easily be pitted against one another in an effort to undermine pilot resolve in negotiations.
It has happened already. Lufthansa management was reportedly very blunt in ’96 in negotiations with its pilots – it demanded that they moderate their demands or risk having their flying transferred. This is just the kind of "whipsawing" we as a pilot union are trying to work to prevent.
We have said in many venues that we want to cooperate in order to make our airlines profitable. We much prefer cooperation to confrontation.
One of the things I learned in business school is that managements and companies ultimately end up with the unions they deserve.
Managements in those alliances where workers are part of the decision-making will find their unions cooperating to make "seamless service" viable and profitable. Those who use threats, or who have no employee involvement, may well find it significantly more difficult to attain their objectives. Believe me, we have done it both ways.
The pilot alliances are pressing very strongly to protect their pilot members’ interests, and they are prepared to confront any management or governmental agency that they believe to be threatening their livelihoods.
* * *
I said at the beginning of my remarks that three groups have a vested interest in where alliances are going: consumers, airline companies, and airline employees.
We believe there should be a review process in place to see, as the alliances evolve, how the "balance sheet" indeed reads for all of these groups.
The jury is still out on alliances. We’re not averse to them, so long as they – and the policies that support them – are structured and enforced in such a way that there is a balance of benefits for our workers.
We are constantly reviewing our internal policies, as well as how we believe the policies of our government are working for us.
We continue to support the open skies policy as set forth by Secretary Peña in 1994.
We feel that phasing in of U.S. bilateral rights is unwise, and may very well result in "first-mover" consequences, such as those we’ve seen in Canada.
The bottom line: We will cooperate with alliance managements where cooperation is rewarded, and confront alliance managements who seek to whipsaw employees and encourage a "race to the bottom" in pay and working conditions.
Thank you for your attention this morning.