Sunday, July 29, 2001

Regional carriers forever changed by Comair strike

Labor relations, feeder airlines' worth questioned

By James Pilcher
The Cincinnati Enquirer

        The Comair pilot strike might be over, but repercussions from the 89-day walkout continue to echo throughout the airline industry — especially for regional carriers that have become so vital to the nation's transportation system.

        There are two areas where Comair strike will have lasting impact, say industry experts, officials and even the president of the international union that represented Comair's pilots.

        Future labor relations at fellow regionals probably will be forever changed, with the Comair pilots scoring an unprecedented contract that raises issues about how much pilots are worth.

        And potentially more significant, the strike has raised questions at major airlines about the worth of owning feeder airlines — as Delta Air Lines does with Erlanger-based Comair.

        The fallout has begun.

        Continental, for example, is spinning off its Continental Express unit in an initial public offering in September. Last month, Northwest backed off its planned purchase of Mesaba Airlines, which operates as Northwest Airlink and has a major maintenance facility at the Cincinnati/Northern Kentucky International Airport — the home of Comair as well as Delta's second-largest hub.

        And the 600 or so pilots at Air Wisconsin, a separately-held company that flies for United Airlines' feeder network, are 15 days away from a possible strike..

        “Before the (Comair) strike, it wasn't a big concern,” said Jim Parker, Atlanta-based regional airline analyst for Raymond James & Associates. “But now, it has caused the major airlines to rethink the need to own these things and all the side issues.

        “The labor issue may not be the overriding concern, but it may be the straw that broke the camel's back.”

Comair spinoff?

        No one is saying that the trend eventually will lead Delta to spin off its subsidiaries such as Atlantic Southeast Airlines or Comair, which Delta purchased for $1.91 billion in January 2000.

        Delta chairman and chief executive officer Leo Mullin earlier this monthtold Wall Street analysts that even considering the purchase costs and the $195 million Delta lost on the strike, the Comair purchase still “turns out to be a good acquisition for us financially that substantially exceeds our target rates of return.”

        He said the reasons for buying the regionals — locking in the higher profit margins generated by regionals; easing coordination in attacking new markets; and providing seamless customer service — were valid still.

        “We really haven't changed our attitude toward ownership,” Mr. Mullin said. “We continue to feel good about the regional jet market and continue to believe the proper course of action is to continue to own them.”

        But during the strike, both Delta and Comair officials saidthe smaller company possibly could be liquidated or sold had the pilots not settled.

        Comair officials would not comment last week on a possible sell-off, saying they were concentrating on restarting the airline. Flights began July 2, following the settlement reached on June 22.

        Mr. Parker said he knows of no such moves within Delta to spin off either Comair or ASA, which begins pilot negotiations next year.

        “Whatever Delta does, it would look good for Delta,” said Mr. Parker, who has been recommending publicly for two years that major carriers not own their feeder airlines. “It would only make sense. They looked good when they bought the companies and they would look good now when they spun them off.”

A possible trend

        As for the Continental spinoff, officials for that company would not comment on the reasons for the impending stock offering, citing securities law. Mr. Parker also would not comment directly on that situation, saying his firm was helping underwrite Continental Express IPO.

        Analyst Jamie Baker of UBS Warburg said that while the timing might look suspicious, the deal is being made more to raise cash for the Houston-based airline rather than avoid labor troubles.

        “People are sure going to be watching it and seeing how it works for them,” said Debby McElroy, president of the Regional Airline Association.

        Northwest's decision to back out of the Mesaba purchase also was a decision based more on money than on potential labor problems. Many industry observers and insiders said Northwest shareholders balked at the company's offer of $13 a share.

        Northwest already owns about 25 percent of Mesaba stock, which has traded recently at about $9 a share, and Mesaba exclusively carries Northwest Airlink passengers.

        Still, in announcing the decision to back out of the deal on June 14, Northwest executive vice president and chief financial officer Mickey Foret cited “recent developments in the regional airline industry” for the pullout.

        The announcement came as the Comair strike was still under way and just before Mesaba began renegotiating the contract with its pilots.

        “If in fact labor is a reason, it's silly, but we make a convenient scapegoat,” said Duane Woerth, president of the Air Line Pilots Association International, the umbrella union that represents pilots at most U.S. and Canadian airlines, including Comair, Delta, Mesaba and Air Wisconsin. “Six months ago, airline stocks were strong buys, and then it became "those doggone pilots are making us spend more money.'

        “I think a primary motivator for these moves is that airline stock is depressed, and they are looking for a way to improve shareholder value,” Mr. Woerth said. “The regionals have proven to be profitable, and this industry has always had a herd mentality. They were under pressure to buy them, and now they're under pressure to sell them off.”

Other issues

        The Comair strike raised another issue that will continue to resonate: what regional pilots are worth and how they should be compensated given the changing face of the regional industry and its new reliance on bigger jets over smaller turboprops.

        On the first issue, Mr. Woerth said the Comair contract “was a clear win for those pilots,” because it pulled all the advances regional pilots were seeking into one document.

        “This was a unfortunate but necessary strike,” Mr. Woerth said. “If it wasn't going to happen at Comair, it would've happened somewhere else. This segment of the industry was not going to be changed without a fight. And yes, it changed the industry.”

        He said regional pilots now can try to create contracts that allow them to make regional flying a career, and begin “pattern bargaining,” which means each local branch will use the previous contract at another airline as a stepping stone.

        Comair spokeswoman Meghan Glynn said that the contract also was a win for that company, because it allowed the strike to end and Comair to resume operations and “remain competitive.”

        Still, the Comair contract has become the standard for all other regional pilot groups seeking deals, said UBS Warburg's Mr. Baker.

        “It's unlikely any other pilot group will be willing to accept wages and other benefits less than what Comair got,” Mr. Baker said.

        Mitch Madison, strike committee chairman for the ALPA branch at Air Wisconsin, said everyone paid close attention to what happened at Comair. He added that union leadership at his airline has its own goals, especially since pilots there fly different, bigger airplanes than at Comair.

        Still, the issues remain the same as in the Comair strike — compensation, job security and retirement.

        Mr. Parker said the strike also heightened awareness of the importance of regional airlines, which carry one of eight domestic passengers. That means possible fights by other labor groups who want their share as well.

        Ms. McElroy echoed that sentiment, pointing out that flight attendants at Piedmont Airlines, a feeder for US Airways Express, picketed US Airways headquarters near Washington, D.C., last week, seeking wages more in line with flight attendants at the parent company.

        “This already has changed the industry,” Ms. McElroy said. “We'll just have to wait and see how.”


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