Airline Industry Council: First Annual Meeting

1. Airline Industry Council: First Annual Meeting Industrial and Labor Relations Association January 7, 2005 Philadelphia, PA

2. Agenda for Today • Overview of Airline Industry Council • Our research partner: The MIT Global Airline Industry Program • Low cost competition: Panel discussion • What the AIC should do this year: Discussion

3. Industry Councils • Industry studies important due to competitive and employment dynamics that are unique to each industry • Proposal to advance industry studies through a network of Industry Councils at the IRRA • Concept proposed by Joel Cutcher-Gershenfeld and Paula Wells in Fall 2003, funded by Sloan Foundation

4. Industry Councils • Each council will include academic, government, labor, neutral and management representatives • IRRA will provide central staff support • Industry Councils can link with the Industry Centers already established and funded by the Sloan Foundation • ie. the MIT Global Airline Industry Program

5. Other Industry Councils • Aerospace Industry Council • Auto Industry Council • Construction Industry Council • Federal Sector Council • Health Care Industry Council • Telecommunications Industry Council • Potential for others in • Banking • Education • Food • Paper, etc.

6. Airline Industry Council Charter Aim: We are committed to promoting constructive dialogue and action on issues of policy, practice, theory and research that lie at the intersection of the interests of labor, management, government, neutrals and scholars, in the airline industry. Our scope includes the global airline industry, with attention to traditional airlines, the new emerging low cost sector, and to a lesser extent, regional and charter airlines. Structure and Operations: This Council will have a minimum of three co-chairs representing the management, labor and neutral, academic and policy-making communities. Each co-chair will serve for a two-year term, after which time new co-chairs will be selected by the Council membership.

7. Airline Industry Council: Initial Leadership • Academic co-chairs • Thomas Kochan, MIT • Jody Hoffer Gittell, Brandeis University • Labor co-chair • Pat Friend, Association of Flight Attendants • Management co-chair • Rob DeLucia, Airline Industrial Relations Conference

8. Airline Industry Council: Initial Members • Please see handout for full roster of members

9. MIT Global Airline Program: Our Research Partner MIT Global Airline Industry Program Airline Industry Council

10. MIT Global Airline Industry Program: Overview • Airline scheduling (Cynthia Barnhardt) • Fleet planning (John Hansman) • Airport management (Amedeo Odoni) • Safety and security (Arnie Barnett) • Coalitions and alliances (JP Clarke) • Marketing and fare structures (Peter Belobaba) • Labor and HRM (JH Gittell, Tom Kochan, Robert McKersie, Andrew von Nordenflycht)

11. MIT Global Airline Industry Program: Board of Advisors • Includes members from management, labor and government • Members with a particular interest in labor and HR issues • Bernhard Rikartsen, SAS • Seth Rosen, ALPA • Al Spain, JetBlue • Mike Campbell, former Continental Airlines • Patricia Friend, AFA • Steve Sleigh, IAM

12. MIT Global Airline Industry Program: Overview of Labor/HR research • Mutual Gains or Zero Sum? (ILRR article) • Labor Contract Negotiations in the Airline Industry (Monthly Labor Review article) • Southwest Airlines Way: Using the Power of Relationships to Achieve High Performance • Policy Recommendations (white paper) • Out of the Ashes (New Labor Forum paper) • Now launching: Study of Low Cost Airlines

13. Low Cost Sector Growing World Wide Total 111 LCCs, 16 started in 2003/2004 Source: http://www.etn.nl/lcostair.htm, airline news

14. Overview of U.S. market LEGACY AIRLINES AA – American Airlines UA – United Air Lines DL – Delta Air Lines NW – Northwest Airlines CO – Continental Airlines US – US Airways • Carried 73% of US passengerRPMs in 2003. LOW COST AIRLINES SWA – Southwest Airlines AW – America West Airlines ALA – Alaska Airlines ATA – American Trans Air JB – JetBlue Airways ATR – AirTran Airways • Carried 18% of US passenger RPMs in 2003. Analysis by Peter Belobaba and Gregory Zerbib of MIT.

15. Change in Market Share Change in Passengers Enplaned -- 2003 vs. 2000 30,000,000 20,000,000 10,000,000 0 TOTAL LEGACY LOW COST -10,000,000 -20,000,000 -30,000,000 -40,000,000 -50,000,000 -60,000,000 -70,000,000 -80,000,000

16. Legacy carriers have lost traffic each year since 2000; Low cost traffic has grown every year Annual % Change in RPMs 15 10 5 TOTAL LEGACY % LOW COST 0 2000 2001 2002 2003 -5 -10

17. CO, NW and AA only legacy carriers to post quarterly operating profits since 2001

18. SWA and JB consistently profitable, while ATA, AW and ALA have struggled to post operating profits Operating Margin / Low Cost Carriers 30% 20% 10% 0% 1999 1 1999 2 1999 3 1999 4 2000 1 2000 2 2000 3 2000 4 2001 1 2001 2 2001 3 2001 4 2002 1 2002 2 2002 3 2002 4 2003 1 2003 2 2003 3 2003 4 AS AW -10% % ATA SWA -20% JB ATR -30% -40% -50% -60%

19. Southwest and JetBlue market caps are high relative to their market share Source: Yahoo! Finance and airline traffic reports

20. We don’t know enough about the low cost sector, but suspect that in general it is: • Less unionized (with exception of SWA and ATA) • Lower seniority workforce • Lower pay, fewer benefits • Better financed • Newer aircraft

21. Questions about low cost competition • Will low cost airlines develop sustainable positive labor relations or follow same pattern as legacy airlines? • How can legacy airlines address low cost competition? • What are the most productive approaches? • Which approaches do not work?