Posted on 02/22/2010 9:51:34 AM PST by geniusbyosmosis
Dear Fellow Pilot,
This past week, Delta suffered what some suggest are setbacks to its strategic business plan. Japan Airlines elected to remain with the oneworld alliance rather than switch to the SkyTeam Alliance, and the U.S. Department of Transportation approved the proposed slot swap between Delta and US Airways, but with onerous and likely deal-breaking conditions attached.
In November, Delta and SkyTeam announced their interest in entering into a strategic partnership with Japan Airlines. Delta’s Asian network, combined with SkyTeam’s worldwide network, would have blended well with JAL. There is no question in my mind that Delta was the best choice for JAL. The economic argument for the alliance was compelling, and by mid-January, a number of sources reported that Delta had the inside track. It was only very recently that the tide seemed to turn, shortly after the appointment of Kazuo Inamori to the position of JAL chairman. Inamori expressed concern over the short-term costs of switching alliances, but there is also speculation that U.S. government officials may have interfered in the process by signaling antitrust concerns to JAL in advance of a decision and well before any antitrust application could even be filed—much less objectively considered. If these reports turn out to be true, the actions will make a mockery of the recently signed open skies agreement between the U.S. and Japan as the U.S. government will have inappropriately inserted itself into the free market process.
As Business Week reported this week, however, “Delta's hardly a loser in this tussle.” Delta will continue to have a strong Asian presence with its Narita hub and will likely aggressively pursue slots at Tokyo’s Haneda airport. Open skies talks will soon begin with China, and Delta is well prepared to take advantage of additional opportunities as they present themselves.
Closer to home, the U.S. Department of Transportation approved the Delta/USAirways slot swap at New York’s LaGuardia and Ronald Reagan Washington National airports. Under the terms of the original proposal, Delta would have transferred 42 pairs of slots to USAirways at Reagan National along with international route authority to Sao Paulo and Tokyo. In exchange, USAirways would have transferred 125 pairs of slots at LaGuardia to Delta and leased another 15 pairs with the option to purchase. However, the DOT placed conditions on their approval that substantially weaken the value of the deal and will likely render it unacceptable to both airlines.
Let me be clear. The DOT’s decision is not only anti-business; it is also anti-consumer and anti-labor.
The joint Delta/USAirways proposal would have allowed both carriers to capitalize on their network strengths, strengths developed with investments of time, money and employee labor. Capacity at LaGuardia, for example, would have increased by 13 percent with no commensurate increase in congestion. The result would have been increased travel options for our passengers, and this is one of the primary reasons the proposal shared widespread support from regional government and business officials. The transaction would have allowed the airlines to maintain existing air service and also add new nonstop service between two of America’s top business markets and small and medium-sized communities across the United States using a combination of mainline and regional jets.
From a labor perspective, much of the current and future success of our company is directly attributable to our sacrifices during bankruptcy. Without those sacrifices, our company might not have survived. Now, with the prospect of a slowly recovering economy and industry, we have the right to expect the federal government not to interfere with the legitimate business plans of our company. And as members of the largest pilot union in the world, affiliated with the 13 million-member AFL-CIO, we have the right to expect more from an administration that prides itself on being a friend of labor. We are not asking for special treatment; we are simply asking that our company be allowed to succeed in what is supposed to be a deregulated free market environment.
For both the consumer and labor, the reality is that the long-term interests of both are best served by a vigorously healthy, profitable, flourishing airline industry, and when the government interferes in the free-market process through overly intrusive regulation, that simply cannot happen. In fact, what the traveling public often takes for granted when they travel —highly skilled professional employees earning competitive wages, an exemplary safety record, broad consumer choice and even inexpensive fares—can only exist long term against the backdrop of a profitable and successful airline industry. Viewed from this perspective, there is no rational way to justify the DOT’s recent ruling.
When Congress passed the Airline Deregulation Act of 1978, it decided that the "maximum reliance on competitive market forces" would determine the quality, variety, and price of air services. Now, well into the fourth decade of deregulation, DOT has unilaterally decided its charter is not only to substitute its policies for the free market, but also to serve in “creating new and additional competition.” In a free market economy, that is not the role of government.
Additionally, under Title 49 of the US Code, the Congress directed the Secretary of Transportation to consider as being in the public interest, matters that encourage “efficient and well managed air carriers to earn adequate profits and attract capital.” The DOT’s decision does nothing to fulfill that obligation; indeed, it runs counter to that direction by handcuffing the ability of Delta and USAirways to most efficiently capitalize on their network strengths.
The joint Delta/USAirways proposal was filed with the DOT last summer. After an excessively long review process, the DOT granted the joint Delta/USAirways petition with the following conditions:
•The divestiture of 14 pairs of slots at Reagan National from USAirways (33 percent of the proposed slot swap total)
•The divestiture of 20 pairs of slots at LaGuardia from Delta (16 percent of the proposed slot swap total)
To complicate matters, not only did the DOT determine how many slots (which they characterize as a “scarce resource” (i.e. a valuable resource)) must be divested, but how quickly, and through an arguably arbitrary process, even specifically to whom the slots can be transferred—and the list is short. This would place Delta and USAirways in a position where they must divest to a government selected, hand-picked pool of airlines on a short timeline—possibly at fire sale prices—or the slots would simply be confiscated by the DOT for redistribution. When you look at the practical application of the proposed conditions, JetBlue is by far the most likely beneficiary of the DOT’s intended action.
The DOT’s claims that their actions are designed to protect the consumer are based on inconsistent arguments that are speculative in nature and unsupported by critical analysis. They make the argument, for example, that under the original proposal, the percentage of departures flown by Delta at LaGuardia and USAirways at Reagan National would be excessive. They fail to point out, however, that those percentages are currently already exceeded at nearby airports by United at Dulles and Continental at Newark. Southwest would share similar departure share percentages at Baltimore.
The DOT also spends considerable time speculating what Delta and USAirways might or might not do in terms of future route structure as they react to market forces criticizing that:
“While the carriers have made public some of their new intended services, including new service to small communities, they have not released all intended service changes. . . . As the two carriers reposition at LGA and DCA, there is no assurance that all markets currently being served by the departing carrier will be maintained by the new carrier” and “Under their proposal, Delta and US Airways are not committing to any particular markets for defined periods. They would be free, as is any other carrier, to discontinue routes that are being proposed and to initiate new routes elsewhere.”
But, just a few pages later, in a glaring example of government hypocrisy, they signal to their hand-picked list of slot beneficiaries that they will not be asked to meet a similar standard:
“We do not propose to require the purchasers of the slot interests to operate in specific markets or types of markets as this would deprive the acquiring carriers of the flexibility to deploy their assets based on prevailing market conditions.”
Your elected representatives have been engaged on the details of the proposed transaction from its earliest stages, and they are unanimous in the belief that the DOT should approve the transaction as originally proposed. In the weeks ahead, we will focus our efforts to that end. If the DOT order is implemented in its current form, the transaction will likely not go forward simply because the economic benefit will no longer exist. That will result in the loss of business opportunities for our company, the loss of increased choices for small and medium-sized communities and the loss of job growth opportunities for Delta pilots and our fellow employees.
Put another way, the DOT will have regulated a perfect trifecta of failure—a true lose-lose-lose scenario for the carriers, the consumer and labor.
The DOT has established a 30-day period for comments on the proposed grant of their petition. In the coming days and weeks, and after considering various options, I may ask for your help in a grassroots effort to let the DOT know that their decision, as it stands, is unacceptable.
President Obama, speaking on behalf of his administration in a recent interview with Business Week said “We are pro-growth. We are fierce advocates for a thriving, dynamic free market.” He added that his message to the business community was that “we have every interest in you succeeding.”
Apparently nobody passed that message to the DOT.
Fraternally,
Lee Moak Chairman Delta Master Executive Council Air Line Pilots Association, Int’l
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