Duane E. Woerth’s Remarks
Board of Directors Meeting
October 21, 2002
Fellow pilots, family members, guests, and friends — welcome to the 39th regular Board of Directors Meeting.
We meet at a time of great challenge and of great concern for our airlines, our industry and our country.
But great challenges are nothing new to this great union. We have met them head on and with vigor at every turn.
We know that the industry we have chosen — NO — the industry that WE have built and love – is forever volatile.
We know it is one day up and next day down. As the saying goes, “knowing is half the battle.”
During our 70-plus years, pilots have built a strong, vibrant, and nimble union. We not only plan strategically, but we can react to change which is beyond our control.
We can react to a world that has changed in an instant.
Two months ago, I was testifying before the Commission on the Future of the U.S. Aerospace Industry. Some members of that Commission could not wait for my testimony to end so they could inform me of the conclusion they had already reached simply by reading the Wall Street Journal. I was informed; the problem with the U.S. airline industry was obvious – labor costs, especially pilot costs, were too high.
Since one of the primary functions of this Commission was to do a thorough analysis of the global challenge presented by the European Aerospace industry, I asked a simple question of them: “If that is true, why are all the major European network carriers, who have higher labor costs and lower productivity than U.S. carriers, still profitable?”
This stubborn fact kind of gets in the way of the “its all a labor cost problem” mantra, doesn’t it? The global airline industry is not collapsing – most of it is doing just fine.
Full-year profits for 2002 could equal those of 2000 for Air France, KLM, and Lufthansa. Even Air Canada, which was a financial basket case while most U.S. carriers were reporting record profits a few years ago, made money in the 2nd quarter this year.
Why is only the U.S. airline industry sinking like a stone?
Most importantly, what should be ALPA’s near-term and long-term game plan for protecting and enhancing the airline piloting profession in the face of all this adversity?
That’s the most important question, but before answering it, we need to understand the true nature of the current dilemma and the root causes of it.
The old saying that when the economy catches a cold, the airline industry gets pneumonia is, of course, still true.
The airline business is, and probably always will be, highly cyclical. But, this mild recession alone cannot account for the frustration we are enduring. Other forces must be at work.
So what’s different this time? One significant difference is that the “bubble economy” created by the dot.coms, the telecommunications industry, and other high-tech companies affected airlines and their pricing model much more than our managements realized.
Airlines rode that bubble to a large extent with the techies. In year after year of revenue growth, airline managements were able to continue to milk that “nouveau riche” crowd – those business customers with unlimited corporate travel budgets and personal wealth that made millions of Americans felt rich enough to buy and use expensive, refundable walk-up fares even though the person sitting next to them only paid $99.00, -- far below the real cost of that seat. Worst of all, this disparate price model created a tidal wave of resentment in these business travelers.
When that bubble burst and business travel revenue disappeared by as almost as much as 30 percent overnight, network carriers were caught flat-footed.
Most of them went into deep denial that their cash cow was gone and, like a deer in the headlights, they froze and did nothing. They prayed that their cash cow would come back so they would not have to change anything – in other words, so that they would not have to manage a new hub system, manage a new passenger mix, or manage a new price model.
Unfortunately, the only action virtually all passenger airlines did take in their panic to reduce distribution costs back-fired in a textbook case of the “law of unintended consequences.”
They believed that if they could force most of the ticket sales to the Internet, they could slash travel agent commissions and lay-off thousands of employee reservationists and thereby reduce distribution costs by 3 to 5 percent.
To induce customers to use the Internet, they reduced ticket prices sold via the Internet significantly below cost and even allowed the introduction of “ticket auctions “ like Priceline.com and similar ventures to further erode their ability to set prices. The stark reality is that through these actions, passenger airlines have surrendered much of the control of their own distribution system to consumers.
Compared to this, General Custer and the 7th Cavalry would call “selling guns to the Indians” pure brilliance.
Oh, they succeeded in reducing distribution costs by a few percentage points all right. The problem is they further reduced revenue by over 10 percent with excessive Internet discounting. No matter how you try to dress it up, a significant portion of the loss in revenue can be attributed to this distribution debacle.
Another consequence of the bursting of the bubble economy relates to pension funding. While the bubble economy was in full “bubble” – those years of record profit spanning 1995 to 2000, many airline managements put no cash, or very little cash, into their employee pension plans because the hyper-inflated stock market values allowed them to claim that these plans were “technically” adequately funded.
Instead, many managements literally took their “excess cash” in the late 1990s and invested hundreds of millions of dollars buying back their own company stock, which they felt was undervalued.
Some managements wanted to buy out a previous partner: for example, US Airways bought out British Airways’ shares, Northwest bought back KLM’s shares, and Continental bought back Northwest’s shares.
Most of these geniuses paid more than four times – and up to 10 times – the current trading price of the stock, so now they’re out of cash and are also staring at billions of dollars in underfunded pension plans. This pension crisis could very well be the most troublesome aspect of our present situation.
Why? Because competing with the rising tide of low-cost carriers, like Southwest, Air Tran, Jet Blue, Frontier, and National, to name but a few, is difficult enough. However, now that a collapsed stock market and low interest rates have caused “legacy” airlines to have multibillion-dollar pension and retiree health care problems – problems these low-cost carriers I just mentioned do not have – their ability to compete with low-cost carriers is made twice as difficult.
Ten years ago, low-cost and niche carriers had 5 percent of the domestic market; today they have more than 23 percent. Their biggest one-year gain ever was this year, as major network carriers shrank and low-cost carriers expanded. Now their combined market share now exceeds a United, an American, or a Delta.
Ten years ago, except for Southwest in Texas, Arizona, and California, low-cost carriers were not a factor in most of the country; now they are a major force and at least three of them have well financed balance sheets. As one airline president described it, “low-cost carriers have achieved critical mass” and now pose a serious threat to network carriers and their futures.
But of all the factors that have changed in the last year, the one that has most exacerbated what would otherwise be a mild recessionary setback and turned it into a full scale economic disaster is the relentless increase in user fees and taxes on this industry.
Combined with the soaring security costs that have been passed on to the airlines in the form of unfunded federal mandates, additional user fees and taxes add up to a multibillion-dollar hole in the ground. According to the Air Transport Association, these items have increased airline costs by $4 billion per year.
The number of taxes and fees has grown relentlessly over the years. Today 15 different types of fees and taxes are added on to ticket prices or cargo bills. When a government attempts to discourage consumption, it adds on hefty taxes, sometimes referred to as sin taxes. For example, cigarettes are taxed at a whopping 18.2 percent, however that is less than half of the tax rate on a $100.00 domestic airplane ticket – 44 percent of that ticket is taxes – 44 percent!!! Taxes and fees average 26 percent throughout the entire pricing spectrum, which is still 50 percent higher than the taxes on cigarettes!!
These are straws that are breaking our backs. On September 11, 2001, the 21st century equivalent of Pearl Harbor occurred in New York City, the Pentagon, and a field in Pennsylvania. It has been reported a million times that we are at war. The news media reports on the War on Terrorism every day. Yet to finance this war, the industry that was its primary victim is being asked to pay for the war through increased user fees and security costs that cannot be passed on to the consumer. Well, if it’s a war, then the majority of the budget to fight the war rightly belongs to the Department of Defense or Homeland Security – and should not be placed on the backs of airline employees.
I am so sick of hearing about the airline industry’s $5 billion “bailout” – I could scream. This industry pays more than $11 billion every year in user fees and add-on taxes – every year – not just once in a lifetime – every year. We paid back our $5 billion “bailout” before Memorial Day this year.
But the final coup de grace is being handed to us courtesy of the Airline Stabilization Loan Guarantee Board.
Two-thirds of the airline stabilization package approved by Congress was $10 billion in loan guarantees to act as a short-term bridge loan backup. The White House didn’t like any part of the “airline bailout bill,” as they called it, and fought it like a tiger. They negotiated the grant portion down to $5 billion from a significantly higher amount that many members of both parties knew was needed, and they only agreed to the loan guarantee provision if the Executive Branch was given 100 percent control of the terms and conditions.
Well, we all know now what that was all about, don’t we? Use the Loan Guarantee Board as a club to beat long-term concessionary deals out of airline unions – and especially pilots.
A key feature of the bill, designed by a bipartisan Congress to stabilize the industry, has been converted into a labor-bashing weapon by the White House. Anybody who doesn’t believe that ought to have a talk with the pilots of America West, US Airways, and United pilots.
The bottom line is that, in spite of the recent past of the seven best years of growth and profitability in aviation history, a tough situation has been made critical because:
This is not a pretty picture – is it?
But, before we begin to formulate our collective response to this current financial crisis, we cannot ignore the long-term structural changes that have so long been affecting this industry in profound and fundamental ways. We must step back and take into full account “big picture” issues.
For example, one big picture issue is the globalization of the industry. In 1994 we rolled out ALPA’s globalization strategy in preparation to deal with a rapidly changing world of international open skies and global airline alliances.
We have vigorously resisted aero-political efforts to further liberalize aviation trade agreements beyond the current open skies definition. For instance, we absolutely will not permit cabotage. We’ve had to go to great lengths to ensure aviation rights are not part of the World Trade Organization and not included in the General Agreement on Trade in Services, which would introduce cabotage via the back door of “national treatment clauses.”
Ever since the merger of Air Canada and Canadian, at least once every six months the Competition Bureau in Canada keeps reopening the cabotage debate in Ottawa as well. I’ve met several times with Minister Collenette of Transport Canada on this subject and I intend to return to Ottawa in several weeks to cover this and other issues with the Minister Collenette once again.
In any event, a decade ago when open skies and global code-sharing alliances were just getting started, economists and trade representatives predicted that U.S. carriers would be at a tremendous economic advantage – you’re going to love this – because of our lower labor costs and would make huge gains in market shares as a direct consequence.
Well, we disagreed. We believe that, although the total market would surely increase, the U.S. market share would more likely shrink instead of grow because U.S. airline managements would be more interested in a pro-rate piece of the marketing agreement and would rather just code-share instead of purchasing the aircraft and paying a crew. We predicted this situation would get much worse and escalate in bad economic times when U.S. carriers would be quick to park aircraft and reduce capacity compared to Europeans.
So which prediction was correct? ALPA’s prediction was right on target and for all the reasons we stated:
What is going on? Of all the international alliances since open skies, only one – NWA – KLM – has a commercial agreement between the carriers that mirrors the pilots protocol calling for a 50-to-50 division of the flying.
Since the advent of German open skies, United flights increased from 62 a month to 217, for an increase of 155; Lufthansa on the other hand increased from 429 to 770, an increase of 341 flights.
Since open skies with France, Delta increased its monthly operations from 124 to 186, an increase of 62, while Air France increased from 346 to 647, an increase of 301.
The really big question is: What’s going to happen next when financially distressed U.S. carriers decide to sell their aircraft and increase code-sharing instead?
What’s going on in the Pacific? Well, in 1992 the U.S. had a 55 percent market share and the Pacific Rim airlines had a 45 percent market share. Today the market share has reversed to a 40-60 split in the Pacific Rim carriers’ favor.
Code sharing isn’t as advanced in the Pacific as in Europe, but that’s about to change. The challenges to pragmatically deal with job issues associated with international brands like the Star Alliance, One World, Wings and Sky-Team are going to increase – not decrease – in the near term.
However, the urgency of finding strategies and tactics to effectively deal with international airline brands pales into insignificance compared with the absolute necessity of countering airline managements’ domestic branding game both in the United States and Canada.
As ALPA’s president, I am constantly being invited to speak at management, investment banking, and law conferences. In less than two weeks I’ll be right back in this hotel as a featured speaker at the American Bar Association’s Forum on Air and Space Law.
And over the last year-and-a-half, but especially since the COMAIR strike, there has been but one overriding theme at every one of these conferences: “Airlines are not airlines – they are brand managers.”
Their goal is to have multiple holding companies that manage dozens of other companies that possess individual FAA or Transport Canada operating certificates – but market them as a single brand and have each certificate holder compete on a basis of the lowest pilot cost.
When Mesaba formed a holding company to purchase Big Sky Airlines for over five times the market-trading price and run it as a separate entity, whatever remaining doubts we may have had about how far management would go in their pursuit of more and more subsets for the brand should have been eliminated on that day.
About now, all the cargo pilots in the audience are saying, “welcome to our nightmare.” This is the exact same shell game the cargo industry has been using for decades to suppress cargo pilots’ wages and benefits – but above all, it has been done to eliminate their job security.
Every pilot needs and deserves as much job security as possible – and the only legal vehicle to obtain job security is through a contract that defines and captures the work intended to be covered in that contract. To be opposed to the concept of job security, commonly referred to as scope – is as ridiculous as being opposed to oxygen, blood, food or water.
Airlines have been applying their branding strategy against us ever since code sharing was deemed legal by the Justice Department. In response, some of us have developed scope clauses that are over 70 pages long.
How is the current generation of scope clauses performing in the world of airline branding? Let’s take a look and see.
If they were supposed to prevent this result where the growth rate of passengers being flown by pilots with inadequate pay, working conditions and pensions is three times greater than those being flown by pilots earning what we like to call industry standard wages, -- I’d have to say they’re not working so well. If they were designed to prevent the acquisition and use of Bombardier and Embraer as replacements for narrow body DC-9 and 737 – well it’s not working there either.
If they were supposed to prevent the parking of 600 wide-body and narrow-body aircraft after September 11 of last year and the resultant 6,000 mainline furloughs – they are just not working.
Management has a strategy to further divide us and ratchet us down – they call it “brand management.” We need a counter strategy and we need it yesterday. What I believe we need is brand governance for pilots within the brand. Traditional scope fences will still be necessary outside of the brand, but inside the brand it is going to require a paradigm shift to what I call “the next generation of scope.”
This next generation of scope sets contractual standards for brand eligibility. This scope focuses more on the quality of the contract rather than merely on the quantity of small jet aircraft. To remove management’s financial incentive to develop even more substandard subsets within the brand and accelerate the proverbial race to the bottom – which they think they’ve got right now – all of us need to work on a coordinated brand scope strategy.
Every pilot group within the brand is going to have to put some skin into this new game in its own enlightened self-interest.
Look, as pilots we realize that every flight is an endless series of course corrections and adjustments, and none of us ever hesitate to make the necessary changes when we have evidence that we are not on our intended course. All of us immediately plot a new course, a safer course around unpredicted thunderstorms.
In adjusting our coordinated job security strategy for pilots within a brand, we need not, and indeed must not, waste a single second or one ounce of energy playing the “blame game.”
Let’s just face up to the reality of the brand management thunderstorms in our path and upgrade together to a new course, to a new joint and coordinated job security strategy within a given brand.
Will this be easy? No way!! It will be exceedingly difficult and not just because management will resist it. That’s nothing new, managements resist every thing we do to better protect pilots. What’s going to make this tough is that some of our own pilots are going to resist this effort, at least initially, aren’t they?
And who can blame them? They are out there flying the line, working 16-hour days, away from their families for 2/3 of their lives and still believe they are employed by an airline, not a brand manager. It will be up to us, their elected leadership, to have the courage to tell them the truth, that “somebody moved their cheese,” and it wasn’t other pilots, it was management.
After nearly a quarter of a century of deregulation, we must candidly acknowledge that airline managements have been successful in their propaganda in trying to get pilots to believe that we are all competitors. Their message is: those pilots with different wings and different uniforms – they are the enemy, they are your competition!!
We are not competitors!! Managements must compete!! Not us!!
And not just esoterically, but legally. As a national union we have anti-trust immunity. We can legally share, we can legally coordinate, we can legally collaborate, we can do whatever we need to do to protect and defend this profession and its wages and working conditions.
With all the other legal advantages managements possess under labor law, can we afford not to exploit our only legal advantage of anti-trust immunity to the max? I think not.
As this Board, the highest governing body of the world’s largest and most powerful pilot union, conducts its business over the course of this week, it would be easy enough to lapse into one big “woe is me pity party.”
But to do so would not only be a disservice to our current and future members, it would be disgraceful to all of those who came before us and struggled against much bigger odds. To do so would require us to deny our proud heritage as fighters.
You may recognize this photo of Big Bill Hopson, an airmail pilot of the 1920s, it is the very first photo in George Hopkins’ book, Flying The Line.
Big Bill doesn’t look like the type who would enjoy or indulge in a pity party or a few rounds of the blame game, does he? I have to believe that when Professor Hopkins picked this photo as the first for his book, he did it with the awareness that deep inside every single modern airline pilot there is a Big Bill Watson wannabe.
Part John Wayne, part Robert Mitchum, with all the swagger and attitude to back up your claim as the world’s greatest pilot.
But like a very high percentage of his fellow airmail pilots, Big Bill died in a plane crash in 1927. Surviving the early years of commercial aviation was not a percentage bet. You had a better chance of surviving combat.
Charles Lindbergh was an airmail pilot in his early 20s who crashed twice on the Chicago – St. Louis mail route, before making his historic flight across the Atlantic to Paris in 1927. After being toasted as an international hero in Europe, Lindbergh returned to fame and fortune (his $25,000 prize money in 1927 is equivalent to a half million dollars today), as well as a tickertape parade down the streets of New York.
Another airmail pilot flew the Chicago – Minneapolis route and in early 1927 was the pilot of Northwest Airlines inaugural passenger flight between those two cities. The price of a ticket was $49.00 one way, and the pilot’s name was David Behncke. You already know the rest of the story.
While Lindbergh risked his own life to prove what aviation was capable of, Behncke refused to risk the life of a passenger a few months later to prove what authority captains would require to make aviation safer to realize its enormous potential. And of course he was fired for it.
While airmail pilot Lindbergh became rich and famous, airmail pilot Behncke became unemployed and anonymous. But 12 years later, Behncke, then a United pilot, was also in the streets of New York – not in a tickertape parade, but at the front of the Labor Day parade with New York’s mayor LaGuardia as president of the most influential and credible aviation political force in the country and, indeed, the world – the Air Line Pilots Association.
To me, Dave Behncke is as great an American hero as Charles Lindbergh. By the way, in April of 1969 when Charles Lindbergh was made an honorary member of ALPA, he expressed the exact same sentiments at his induction ceremony.
What a heritage, what a legacy – we have to live up to. Are we worthy of the mantle of leadership we now wear? In 1932, a year after our union was established in the dawn of the Great Depression, the first Board of Directors meeting of ALPA was held in the Troy Hotel in Chicago. Total delegates: 19. Total pilot represented: 344. Total financial resources available: 0. Total contracts: also 0. (ALPA’s first contract would not be achieved until 1939)
But the total number of those delegates and line pilots who shared a common vision of one union, one voice, with one mission – that was 100 percent. As the commercial says, that shared vision became priceless, absolutely priceless, and in the final analysis that was all they needed to change the world.
At the dawn of the 21st century, and facing a gauntlet of trials and tribulations, the union leadership assembled here today must fully embrace and recapture that shared vision of one union – one voice – and one mission. For it must be self-evident to all of us that this generation of airline pilots is going to have to change the world again or be prepared to live with the consequences of our inaction.
Two years ago we took an historic first step by launching our Pilot Unity Campaign with which we have had tremendous success. Continental and Continental Express and FedEx have merged with us, and Gemini has joined.
But we cannot rest on our laurels; we must complete the mission. We must continue to pursue Southwest because no airline in the country affects the price of tickets more than does Southwest.
And American, which was one of ALPA’s founders and now includes our brothers and sisters from another founding airline, TWA, needs to return to its roots. The American pilots’ contract is more than a million dollars a day cheaper than the United and Delta pilot contracts.
If we cannot enforce pattern bargaining at the top, we cannot pull up the rest of the industry.
We must also pursue the low-cost carriers to improve their pilot contracts. We are in active discussions now with Frontier and Kittyhawk.
We can’t blame low-cost carriers only on management; we must do our part. The Pilot Unity campaign must continue. Organizing is fundamental to trade union success, and we can never quit.
Secondly, we must continue to significantly strengthen our political muscle – in terms of ALPA PAC dollars but even more importantly in terms of pilot education and awareness of how political decisions affect their careers even more than the economic climate affects it.
If we are going to protect collective bargaining rights and defeat the McCain/Lott bill, if we are going to reverse the airline user fee and tax problem, if we are going to protect our pensions from pension reform, which to corporations means their “escape clause loophole plan” …..
If we are going to persuade governments in both the United States and Canada to back us up with full and complete Captain’s Authority…..
If we are going to eliminate at long last the regulatory differences for cargo, charter, and supplemental carriers …..
If we are going to stop cabotage and keep aviation rights out of the WTO …..
If we are going to do all these things …..
Then we had better become one awesome political powerhouse.
I am proud to say that we’ve doubled ALPA PAC contributions over the last four years, and we’ve increased the membership participation rate by 50 percent this year alone.
But to execute our necessarily ambitious action plan, we need to double ALPA PAC again. And the best way to do that is by doubling our participation rate – not just the individual contribution rate – and we must focus our efforts there. As chairman of the ALPA PAC, I am setting a goal of doubling our participation rate by 2004.
But just setting goals won’t change the world. Forming more study committees won’t change the world. Hiring more consultants won’t change the world. Raising more money won’t change the world. Passing some resolutions won’t change the world.
If we stay the same and don’t adjust our strategies and tactics to the new threats confronting us, then we are not going to change the world.
If we stay the same, the brand managers are going to continue to succeed in forcing us to live in their world that meets their needs – not ours.
If we stay the same and simply just passively await our individual and collective fates, we’ll be the first generation of airline pilots who didn’t have the right stuff.
But I have great news for you today. As your president, I’ve had the opportunity to meet with the elected leadership of every single pilot group here and we’ve got the right stuff.
This is the generation of pilots who turned the corner on a decade of concessionary bargaining and made more gains in three years than at any time in the last 20.
This is the generation of pilots who supported the 89-day COMAIR strike and forever changed the definition of “regional.”
This is the generation of pilots who got serious about organizing and pilot unity and added more new members in one year than anytime in our history.
This is the generation who politically got the $30 billion Aviation Trust Fund off budget after 20 years of trying and failing by our predecessors.
This is the generation of pilots who weathered the most substantial industry consolidation in history in Canada.
And this is the generation of pilots who after eight of our brothers were assassinated in their cockpits, said “NEVER AGAIN,” and we overcame the opposition of the President of the United States and got 75 percent of the House of Representatives and 90 percent of the Senate to support our position on arming pilots.
This generation of pilots clearly has the potential to live up to the proud legacy of all those heroes of ALPA’s illustrious past. But will we?
Ever since ALPA’s first Board of Directors meeting 70 years ago in 1932, airline managements and governments have awaited anxiously for the results of those meetings. When we’ve left these meetings united and in solidarity, we’ve accomplished great things.
When we left fractured or have exposed our internal bickering to the public view, our pilots and their families have paid the price and suffered the consequences.
This Board needs to be a full-blown union rally that sends forth the clear and unmistakable message that ALPA is more than up to the enormous challenges that lie before us.
We will not be intimidated. We will not be bowed. So that 70 years from today, some future ALPA president can declare that this Board and this generation of pilots saved the industry and saved this profession from its darkest hour.
Only you can do that!! And I know that you will!!