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07
Captain David Bates
President, Allied Pilots Association
Dahlman Rose & Co.
Global Transportation Conference
Sept. 7, 2011
 
 
Introduction
 
Thank you for the opportunity to provide the Allied Pilots Association’s perspective on a range of issues that affect the pilots we represent, including the state of our industry and what’s in store for American Airlines.
 
The single most important point about APA is this: the pilots we represent have invested their careers in American Airlines. Because of the seniority system, we can’t walk away and replicate our income and career prospects somewhere else. In order to have full, rewarding careers, it’s in our best interests for American Airlines to be competitive and prosperous.
 
What do we view as essential ingredients to that success, along with some of the impediments?
 
I’d like to answer that question by examining some public-policy concerns we have and also look at a few issues specific to American Airlines.
 
Public-Policy Concerns
 
Let’s start with public-policy concerns. In APA’s view, the U.S. airline industry represents a vital asset that should be carefully nurtured as part of a coherent, comprehensive national transportation policy. Unfortunately, it seems that our industry is all too often taken for granted by policymakers and regarded primarily as a piggy bank—one that enables politicians to collect tax revenues in ways that aren’t readily apparent to voters. We’re an easy mark, since only a small number of companies—the airlines themselves—are required to remit the taxes and fees. Those taxes and fees are then included in advertised ticket prices and go generally unnoticed by travelers.
 
During Senate confirmation hearings to become President Eisenhower’s Secretary of Defense in 1953, General Motors CEO Charles Wilson famously stated that “for years I thought what was good for the country was good for General Motors and vice versa.” The same could be said today of the airline industry.
 
These days the airlines serve as economic bellwethers for our nation. When the airlines are doing well, the overall economy is motoring along—and the converse applies as well. So, what’s good for the airlines really is good for our country, and policymakers must be mindful of that link.
 
What’s involved in the “care and feeding” of the airlines by policymakers? First of all, we do not believe it makes good sense to permit our nation’s airline industry to become a “flag-of-convenience” system like U.S. merchant shipping. The flag-of-convenience system enables companies to avoid taxes and escape the minimum health, safety and environmental standards of their home countries. Under that scenario, the airline industry would become a worldwide “race to the bottom” and safety margins would suffer. Do you want to put your family on a high-performance jet aircraft in congested airspace knowing that the co-pilot has very little actual flight experience? I certainly don’t, yet that’s already the situation at our nation’s regional carriers, which routinely hire low-time pilots. Where safety is concerned, I believe we all have a vested interest in raising standards, not relaxing them further.
 
To address the problem of pilot fatigue, we urge policymakers to proceed with the release of new science-based flight- and duty-time rules for pilots that have been developed as part of a lengthy rulemaking process. The new rules had been scheduled for release on August 1, but were delayed at the behest of the Office of Management and Budget after intensive lobbying by some cargo and charter carriers. APA participated in the development of these new rules with the objective of mitigating pilot fatigue, which has been identified as a causal factor in numerous fatal accidents. The National Transportation Safety Board has long cited the need to address pilot fatigue as one of its “most wanted” safety priorities.
 
The cargo and charter operators resisting the new rules cite the particular demands of their business models. Evidently their business models don’t account for human fatigue. Whatever the mission—whether you’re flying a wide-body aircraft full of passengers halfway around the world or a smaller cargo plane from one mainland U.S. city to another, it’s imperative that you have properly rested and alert pilots at the controls. Otherwise, the consequences can be catastrophic in terms of both financial and human costs.
 
We urge Congress to approve a multi-year Federal Aviation Administration reauthorization bill as an essential component of a national transportation policy. In tandem with new flight- and duty-time rules, an FAA reauthorization bill would provide our industry with a greater degree of certainty and predictability, and would represent a commitment to investing in the infrastructure essential to preparing the industry for a more efficient future.
 
We also urge Congress to reconsider the tax burden on our industry. Along with being taken for granted, airlines are overtaxed. Right now air travel is taxed more heavily than alcohol and tobacco, which makes no sense. Aren’t “sin” taxes designed as disincentives to modify consumer behavior? The last time I checked, the contract of carriage between airlines and passengers didn’t include any warnings from the surgeon general...
 
Air travel remains the “physical internet” of our society. It’s the lifeblood of global commerce and a key driver of economic growth. Public policy should reflect its importance. Governments around the world have boosted fees to pay for security, airport improvements, customs inspections, tourism promotions and environmental concerns. According to some estimates, government taxes and fees can comprise more than one-quarter of the cost of a ticket. For an industry that doesn’t produce big profits in the best of times, that’s just too much.
 
Air Transport Association President & CEO Nicholas Calio recently described the industry as being plagued by a “groundhog day phenomenon” where taxes are concerned. He’s right—study after study confirms our industry’s outsized tax burden. So, enough paralysis by analysis—it’s time to do something about it.
 
Another aspect of our industry that would benefit from reform is our nation’s visa policy. At American Airlines, we rely heavily on our international business. Unfortunately, our government doesn’t make it very easy for those living in countries where a visa to enter the United States is required.
 
Roger Dow, president & CEO of the U.S. Travel Association, cites cumbersome visa application procedures as the reason why travel by foreign visitors to our country has lagged in recent years. No surprise there, considering the wait time for a “visa interview”—just to apply for a visa to travel to the United States—is 37 days for travelers in Beijing and Mexico City. It gets worse: the wait time for a visa interview in Rio de Janeiro is 94 days, and in Sao Paolo it’s 123 days. Country-wide in Brazil—incidentally, one of the world’s fastest-growing economies with a rapidly expanding middle class—the wait time for approval of a visa application is a whopping 240-plus days. We need to do better, considering that the average foreign visitor spends about $4,000 while they’re here. That spending translates into jobs, which is something on everyone’s mind these days. We’d be much better served to welcome free-spending international visitors with open arms, rather than a long line at the visa window.
 
I’d like to touch on another current policy question concerning our industry—whether to relax restrictions on foreign ownership and control of U.S. carriers. APA does not reflexively oppose relaxing these restrictions, which American Airlines management has been advocating. It’s an issue that we continue to study carefully. In all likelihood, our support for changing current laws would be contingent on including provisions that preserve U.S. workers’ career prospects. For us, the issue of foreign ownership and the threat of a flag-of-convenience system are closely related.
 
We also recommend that policymakers consider very carefully whether cabotage—that is, permitting non-U.S. carriers to fly point-to-point within our nation’s borders—is compatible with U.S. interests. Some of the carriers that would probably be interested in providing such service are heavily state-subsidized by oil revenues, do not provide financial transparency, and are based in countries that deny basic rights such as collective bargaining. It’s worth remembering that trade unionists stood at the forefront of the drive for greater personal freedoms in Poland and other former Soviet Bloc countries. Collective bargaining represents one of the cornerstones of a democratic society.
 
By permitting cabotage, we would also be exposing our nation and its travelers to flag-of-convenience carriers already in operation elsewhere in the world whose maintenance, hiring and training practices differ significantly from what we are accustomed to—and not in a good way.
 
About American Airlines
 
As for American Airlines, there’s no question that our pilots understand the link between the airline’s prospects and their own. Much like a marriage, our fates are intertwined.
 
What makes for the airline version of a “happy marriage?” A quick look around our industry illustrates that employee engagement and good financial performance are closely related. The companies that inspire employees to perform at their best are also the ones that perform better financially. It’s pretty simple, actually—employees who feel appreciated work hard to please customers, which results in repeat business and positive word-of-mouth, which in turn breeds further success.
 
Consider a couple of specific examples. Our cross-town neighbor Southwest Airlines has produced an annual profit every year since its inception. Canada’s WestJet has likewise been profitable throughout its history. These carriers share an emphasis on employee engagement and put their money where their mouth is by providing lucrative profit-sharing plans and cultivating a culture of ownership.
 
Notably, Southwest Airlines has the most unionized workforce, as a percentage, of any major U.S. carrier. WestJet, on the other hand, does not have any unions on its property. What can we conclude here? Unions, or the lack thereof, don’t determine whether you do well in the airline business—or any other. What matters is how you treat your people.
 
Without a doubt, running an airline represents a tremendously complex challenge. It’s not practical to craft a policy or procedure for every situation pilots and other employees encounter. Instead, it’s better to give workers some latitude to make the decisions they believe to be in the operation’s best interests. When you grant workers a greater degree of autonomy, they view that as a vote of confidence and they work hard to demonstrate that they deserve to be trusted. It’s a form of engagement—of harnessing discretionary energy—that will produce dividends across the operation.
 
American Airlines needs to find ways to engage employees more effectively. I am convinced that a lack of effective engagement is one reason our airline’s performance has lagged while other carriers have outpaced us. In a recent Gallup poll, employees who are engaged in their work are about twice as likely to report that their organizations are hiring, versus those who are actively disengaged and emotionally disconnected. In a Towers Watson study, the authors describe the engagement-performance relationship as a “virtuous cycle.”
 
Another form of positive engagement would be to conclude long-running contract negotiations with the represented employees. Just as our industry would benefit from the certainty of new flight time-duty time regulations and long-term funding, American Airlines needs the predictability of agreed-to labor contracts. APA and American Airlines management have been negotiating for more than five years. It shouldn’t take that long to reach an agreement, no matter how difficult and complicated the issues before us. We need to put these protracted negotiations behind us and focus on reinvigorating our airline’s competitive spirit.
 
On the plus side, I can tell you that APA is very enthusiastic about the re-fleeting that American Airlines announced last month. We recognize that the quality of the customer experience—ranging from cabin amenities to schedule reliability—needs improving. The magnitude of the order American Airlines announced was the kind of bold stroke that once characterized our airline. We’re hoping it’s a harbinger of things to come.
 
We’re definitely intrigued at the possibility of flying the Airbus A-319s now on order, assuming we can agree with American Airlines management on a pay rate and other necessary contractual provisions. Those right-sized aircraft could enable American Airlines to re-enter markets now served by regional affiliate carriers. In many instances, those carriers are flying smaller jets whose operating economics have become more and more unappealing with the run-up in fuel costs. And speaking of regional affiliates, the planned divestiture of American Eagle is something we’re closely monitoring. With regional airline economics dictating the use of larger aircraft, we believe a business case can be made for restoring American Airlines service to a variety of markets.
 
Something to keep in mind about our pilot group—of the 8,000 active American Airlines pilots, more than 1,000 are between the ages of 58 and 64. When Congress changed the mandatory retirement age from 60 to 65 four years ago, a large number of pilots opted to postpone retirement. As those pilots begin reaching age 65, we’ll start seeing a significant demographic shift. One byproduct will be lower cockpit costs and increased productivity, since new-hire pilots will start at first-year pay rates and have less accumulated vacation and sick time.
 
Productivity is an issue we’ve discussed at length with American Airlines management at the bargaining table. We know it’s of interest to you and I anticipate you’ll be hearing more about it as our contract negotiations move toward their conclusion.
 
We also understand there is considerable interest in American Airlines’ international code-share and joint-business relationships with other carriers. Just as no man is an island, airlines aren’t either. Our pilots recognize that international code sharing is standard industry practice. Particularly within the context of global airline alliances and coupled with antitrust immunity, code sharing represents a powerful planning and marketing tool—one that opens markets that wouldn’t otherwise be accessible. Of course, our bias will always be in favor of organic growth by American Airlines. The direct benefits of organic growth for our pilots are obvious.
 
In Conclusion
 
So, addressing the public-policy issues I enumerated would certainly help our industry and, by extension, the pilots we represent.
 
Pilots are realists by nature. We deal with the way things are, rather than spending a lot of time wishing they were otherwise. It’s been a challenging decade for the airline industry, with the 9/11 attacks transforming various facets of the business, foremost among them security procedures. Many of our pilots now volunteer to serve as armed Federal Flight Deck Officers to prevent another cockpit breach, a responsibility we scarcely could have imagined 10 years ago.
 
It’s also important for all concerned with our industry to understand the reality of what it takes to become a professional pilot. Many of our pilots received their training in the military, while others came up through the regional airline ranks. Regardless of the path you take, getting hired by a major airline takes considerable tenacity. It represents a major investment of time, effort and often money, if your path includes earning an aviation-related degree and underwriting the cost of various aircraft type ratings.
 
Earlier in my remarks, I expressed the view that policymakers sometimes take our industry for granted, which is a mistake. Another mistake would be to assume that qualified, experienced pilots will always be in the cockpit for your next flight. That’s something we should also not take for granted. Instead, I believe we have a responsibility to the traveling public to help ensure that the airline pilot profession retains enough appeal to attract smart, motivated people willing to make a long-term professional commitment. There has to be a sufficient return on investment, both now and in the future, not just for the pilots we currently represent but for the long-term well-being of the industry itself.
 
I am happy to take your questions.
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