September 20 - The Best of Times/Worst of Times


INDUSTRY ANALYSIS

 

 

The Best of Times/Worst of Times 

The Disingenuousness of the Big Three US Airlines

By Kevin Mitchell

According to Delta Air Lines, American Airlines and United Airlines (Big Three), it simultaneously is the best of financial times warranting great optimism for the future and the worst of times with such a bleak future that their very existence is in doubt. It is impossible to credibly reconcile these diametrically opposite self-assessments. However, the explanation depends on the audience and what they are seeking from them.

For nearly three years the Big Three have waged a scorched earth, multi-million dollar political campaign urging the US Government to abandon its highly successful 25 year-old Open Skies policy. Simply put, at any cost to the US economy and other US aviation stakeholders, the Big Three want to eliminate much-needed competitive choice provided by Emirates Airline, Etihad Airways and Qatar Airways (Gulf Carriers). Their political campaign failed to convince the Obama Administration. Understandably, the Trump Administration also is skeptically viewing it. After all, on its face, it is difficult to take seriously the Big Three’s cries of commercial harm and a dire need for government protection given that in 2015 and 2016 alone the Big Three had a combined net profit of $28.8 billion.

When speaking with Wall Street analysts and at industry events the Big Three are quick to tout their record-setting profits. Arguing that the market is in fact undervaluing their stock, they trumpet expectations of clear flying to future financial success beyond the horizon. The loudest upbeat voice is Doug Parker, the CEO of American Airlines. Just last week at an Airlines for America conference Mr. Parker declared “I feel as good about this business as I ever have, and I’ve been in it a long time.” Coming from Parker, that is a ringing and highly credible endorsement. After all, Parker has put his money where his mouth is by foregoing a salary and instead betting on the future of American Airlines by taking his compensation in stock.

However, when the Big Three speak with politicians demanding the Trump Administration abandon Open Skies, that assessment could not be more starkly opposite. Making a claim that would even embarrass Chicken Little, the Big Three argue Open Skies must be sacrificed to prevent the sky from falling on them and their existence.

To hear them tell it, despite their record-setting profits, they currently are suffering substantial commercial harm as a result of alleged unfair Gulf Carrier competition and the US airline industry as we know it is at grave risk. If the Trump Administration fails to replace Open Skies with a protectionist managed-competition scheme like Canada’s Blue Skies policy, then the Big Three ominously predict 1.2 million US aviation industry jobs are at risk of being lost.

As an important aside, the 1.2 million jobs political sound bite is absurd on its face. According to the US Department of Transportation’s Bureau of Transportation statistics, as of July 2017, there are 699,128 full and part-time airline employees in the US.  Here’s the link: http://btcnews.co/2fzPpdJ.

Assuming for the sake of silly argument that competing with two Gulf Carrier flights – one year round and the other a few months during the Summer – put the entire 1.2 million US aviation jobs at risk of disappearing in their entirety, the ridiculous claim would still be over 500,000 aviation jobs short. 

So where are those other 500,000 jobs at risk? One thing is for certain, the explanation is not the potential impact on jobs created and supported by Boeing’s 777X program. Gulf Carriers have purchased 235 of the 306 777Xs ordered allowing that important program to launch and support hundreds of thousands of American aerospace manufacturing jobs. In stark contrast, the Big Three – self-proclaimed champions of US jobs -- have purchased none. Instead, they prefer to support European jobs by buying the Airbus A350-900, which Delta CEO Ed Bastian recently proclaimed to be Delta’s flagship airliner.

So, what’s the explanation for this apparent best of times/worst of times disingenuousness? Why is it that when Big Three senior executives are dutifully exercising their legal requirement of candor when speaking to Wall Street analysts they say one thing to keep their stock prices high but, when speaking to Trump Administration officials and Members of Congress, they tell a polar opposite story? And, what happens when the two versions of reality clash -- which version do they stand behind and which do they abandon?

Thanks to Delta, we know the answer to the latter question and the dichotomy.  The two versions of the world collided in a July 2015 Delta earnings call when a Wall Street analyst asked Glen Hauenstein, its then EVP and Chief Revenue Officer and now President, about its political claim that Delta is suffering current commercial harm due to Gulf Carrier competition. Did Hauenstein parrot the “sky is falling” claim? Not at all.

Mindful of his duty of honesty as an executive in a publicly traded company, to his credit, Hauenstein honorably and unequivocally admitted, “we are not” suffering commercial harm. That full exchange is below. It makes crystal clear that when the two irreconcilable storylines collide, at least Delta, and presumably American and United too, quickly disavow the political rhetoric and candidly admit there is no commercial harm and, despite all the bluster, no legitimate claim.

The admission by Mr. Hauenstein on Delta’s July 15, 2015 earnings call of no commercial harm, and therefore no case, could not be more clear:

Michael Linenberg - Deutsche Bank

“Yes I am just -- but I’m wondering Glen are you seeing some displacement of that traffic to competitors such as Emirates or Etihad or Qatar as they continue to add more and more seats into the marketplace? And I’m looking more like U.S. into India, Middle East, Africa because there is a decent amount of flow traffic between you and your partners.”

Glen Hauenstein - EVP and Chief Revenue Officer

“Correct. As we’ve stated in the past, we are not -- we have not been the largest player in the U.S. to India or the Indian Subcontinent but it is a significant long-term threat to us. As much a missed opportunity, we believe that under the right and clear circumstances that we should be able to fly non-stop from the U.S. into India.”

It is time for Trump Administration officials to have a direct conversation with the Big Three asking them which version of reality – the one they tell to Wall Street or the whiny version voiced to politicians – is accurate. They cannot have it both ways simultaneously claiming it is the best of time and the worst of times. Moreover, the Trump Administration should pointedly ask Delta to reconcile their claim of current commercial harm – not future speculation about it -- with Hauenstein’s candid admission to Wall Street that is not true. This distraction has gone on long enough. It is time for the Trump Administration to tell the Big Three to either file an International Air Transportation Fair Competitive Practices Act case asking the US Department of Transportation to evaluate their claim, or drop the matter.

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