Air Transport World

Coping with profits.(Editorial)

What rotten luck. Just when things were going in the right direction; just when governments and labor groups appeared to grasp the seriousness of the situation, who would have thought?

Profits! And at the worst possible time. Second-quarter financial results were just fine, thank you. And the third quarter looks to be a major winner, barring some unforeseen natural disaster. Now, unions and governments can just shrug off predictions of doom, point to the recent quarterly results and ask, rhetorically: "Where's the fire?"

A government's response to the return of profits is predictable. Governments run from one disaster to the next. Are you teetering on the edge of a precipice, one tax load short of a slide over the side? Fine, that has the government's attention. Start to build a profit ladder to climb out of the debt canyon? Sorry, no crisis here--get in line with everyone else seeking tax relief.

With so many problems facing the governments of the world, the fact that one industry's improving financial fortunes fail to sustain government attention, absent a concerted lobbying campaign, isn't surprising.

And how can we blame the unions for taking that short-term look on life and business? That's what they've been trained to do. That's what the majority of business and financial leaders do.

How's your company doing? "Oh, just great. Last quarter pulled $250 million net." But what about the $5 billion debt piled up in the deepest slump airlines ever encountered? How much of a dent has the profit made in that mountain of debt? And with major new equipment needs on the horizon for most airlines, that quarter-billion-dollar victory will get you two widebodies. But never mind that. The stock market likes your current situation and the share price has improved steadily, so all is right with the world. This mind-set is what pervades labor groups' perception of corporate health.

The airline executives with the clearest vision of the industry go beyond the bluff and bluster of the latest stock quote to acknowledge that the business is a long-term play. Knowing this and looking at the lessons of recent history, it is easy to see that new labor/management agreements must institutionalize change, and by the permanence of the change, build a fortress against backsliding inspired by short-term success. Management must help to invent solutions that can survive the arrival of profits.

Unions cannot be painted with a common brush. Some have shown extraordinary prescience and concern for their livelihoods. Others have been less-blessed and ultimately, their members have paid the price for that lack. The lessons of those failures should be clear, yet, there remains a dogged determination among some to hold fast in the absence of pending disaster.

The experience of USAir stands out as an exercise in labor/ management paralysis. Billions in losses and the highest seat-mile cost in the U.S., management pounding away for givebacks, unions demanding a lot in return, an agreement seemingly within reach and the whole thing comes crashing down when the airline has the great misfortune to report a profit.

In Europe, the resistance of labor in some situations more closely resembles the head-in-the-sand behavior of Eastern Airlines' unions than that of a professional organization knowledgeable about industry, national and company trends.

The fact that some European airline managements, especially those of government-controlled airlines, for years had their heads deeper in the sand than the unions, is slight consolation. Now that the rising tides of competition and constrained government support are pushing managements toward rationalizing their companies, labor groups would do well to start educating their members on the new facts of life, and to substitute a search for a common ground of agreement for seeking the heads of the management group on political spikes.

If the wave of profits happens to hit airlines such as Air France or Iberia in the midst of their reconstruction efforts, we fear the short-term good news will destroy whatever momentum has been generated toward modernizing company structures.

Ultimately, the difficulty of maintaining support for BandAid givebacks in the face of profits is what makes it imperative for management to craft deals with labor that are so long-term and comprehensive that periods of profits are viewed as one of the expected consequences of a continuing effort, and not the signal for concluding the program and returning to what existed before.

Labor has every right to expect a share of the fruits of success. But management cannot revert to the old forms, either. Short-term and snap-back agreements do not provide the foundation for the creation of the permanent, structural change necessary for survival.

STRONG AND STRONGER

U.S. major airlines turned in their strongest quarter in more than five years, earning $994 million as every airline in the group was profitable. In the year-ago period, losses at Continental, Delta and TWA reduced the group net to $24 million (see table in article, page 86).

EC CONDITIONS LUFTHANSA-SAS LINK

The EU Commission outlined preliminary conditions for approval of the proposed Lufthansa/SAS alliance. Confirming earlier indications of concerns about a duopoly on Germany-Scandinavia routes, a statement in the EU Official Journal said the airlines must guarantee access to certain routes for competitors and modify or scrap various bilateral accords they have with other carriers.

For example, if third airlines are unable to secure slots at Frankfurt, Dusseldorf, Oslo and Stockholm, the two airlines would have to forfeit slots there.

Interested parties have 45 days to comment on the ruling. Separately, the EC approved the Sabena/ Swissair alliance (see "Europe report," page 10),

AIR CANADA, CANADIAN VEER OFF COURSE

Air Canada and Canadian Airlines Corp. turned in disappointing second-quarter results, and both said annual results would be below expectations announced earlier, with Canadian forecasting an annual loss of C$35.4 million, while Air Canada is holding out for a small profit, down from a forecast of around C$100 million.

As recently as Feb., CP forecast a return to profit in 1995, but lower revenue growth in Southeast Asia markets as well as inside Canada, coupled with the need to take a C$13. …

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