Plan Could Shut Out Pinnacle, Mesaba

A labor accord at ailing Northwest Airlines [NWAC] could slam the door shut on future growth opportunities at Pinnacle Airlines [PNCL] and Mesaba Airlines.

The Northwest unit of the Air Line Pilots Association (ALPA) is willing to fly 70-seat regional jets (RJs) at a pay scale comparable to the top regional airlines. The proposal is one element of a $200-million package of wage givebacks and work rule changes that the union has made in an effort to trim the Minneapolis-based carrier's operating costs. The company, however, is seeking $300 million in concessions from the pilots over two years.

In the first six months of 2004, Northwest has posted a loss of $412 million. In the three previous years it had losses totaling $2.2 billion.

The Northwest pilots, under their scope clause, have the exclusive right to fly any plane larger than 55 seats. Under a complex formula, any regional partner can fly a limited number of RJs carrying 45 to 55 passengers. The 69-seat BAe Avro 85 flown by Mesaba is an exception, but that fleet is limited to 36 planes. Pinnacle flies only the 44-seat Bombardier [BBD] CRJ 200 - there is no limit on the number CRJ 200s the carrier can fly.

"There isn't a 70-seat pay scale since one has never come on the property," said Will Holman, the spokesman for the Northwest unit of ALPA. "If one came on the property, Northwest would have to pay a the next closest aircraft rate - a DC-9. We recognize the DC-9 costs would be too high for Northwest to purchase the 70-seater, so we would negotiate a pay scale that is competitive for the 70-seat aircraft."

A Northwest ALPA pilot, with 12 years of service, would earn $191 per hour as a captain on a DC-9. A first officer with two years' experience would earn $88 an hour. By comparison, a 12-year Mesaba veteran would earn $80 an hour captaining an Avro 85. Effective next month, a 12-year Horizon captain would earn $96 an hour piloting a CRJ 700. Horizon pays the most at that level of senority among the nine regional carriers surveyed. The industry's average pay is $83 an hour. The industry average for a two-year first officer is $33 an hour.

While he characterized the proposed rate is "competitive," Holman would not disclose the union's suggested pay rate for the RJ.

As part of the contract-within-a-contract proposal, a future 70-seat RJ would be considered the entry-level vehicle for new Northwest pilots. As a transition position - and to hold down the trip costs - the pilots flying a 70-seat plane would not be eligible for the company's traditional - and expensive - pension plan. Instead, the pilots would qualify for a 401(k) retirement plan just as the regional carriers offer.

The union wants the 700 furloughed mainline pilots to have the first rights to the 70-seat slots, but a furloughed pilot would not be forced to take a position on a smaller plane, Holman said. When US Airways [UAIR] created MidAtlantic Airways to fly the Embraer [ERJ] 170, furloughed mainline pilots were given a hiring priority for that new carrier. MidAtlantic pegged its pay scale to the American Eagle scale for the CRJ 700s.

A union position paper noted that Northwest could save money by avoiding the built-in profit margin in the fee-for-departure contracts it would have if Pinnacle or Mesaba were flying the 70-seat RJs.

The union remains hopeful that the plan will be accepted by Northwest since the company first suggested finding a workable scale to fly 70-seat planes. The carrier, in talks a year ago with the union, expressed a desire to fly up to 72 larger regional jets. The two sides may get together as early as this week to talk about the proposal, he added.

Two experienced aviation labor consultants downplayed the likelihood of the two sides reaching an agreement. However, a third industry consultant believes there is an 80 percent chance the plan will be adopted due in part to the poison-free labor climate at Northwest.

"This is identical to a proposal that was explored at great length at American Airlines [AMR] beginning in 1996," said consultant Robert Mann. The concept was explored in 1996, 2000 and again in 2002.

"The pilots can do it - that's easy. Unless everybody does it - flight attendants, mechanics and ground staff - you can't match the cost structure at Pinnacle and Mesaba. The pilots could not subsidize it enough to break even, even if they flew for free," Mann said.

"I reviewed it with ALPA in 2000," he said. "I don't think they really understood that. I guess they still don't understand it."

In addition, Mann noted that the labor situation at Northwest gets even stickier because there is one more union that would need to be involved than at American. As a result of the concessions at American to avoid bankruptcy, the mainline pilots gained the right to fly the 70-seat RJ. The company is precluded from assigning any more CRJ 700s to American Eagle. However, Mann noted that American has yet to negotiate a rate with the mainline union or purchase any additional CRJ 700s. "To get a rate on the books doesn't guarantee a plane will be bought," he added.

"I know that American Airlines explored the identical subject," said Claude Sullivan, an aviation labor law attorney with Ford & Harrison. "It was unable to come up with the numbers that made sense to American. American Eagle can operate it more efficiently than the mainline. I think we will just have to wait and see if [Northwest] can get different results.

"I would assume the other legacy carriers have researched this issue and determined that the 70-seater can not be operated by those carriers. That is why they are assigned to the regional carriers," Sullivan said.

"The argument that in order to operate a small jet you need a regional airline to operate it is going away," said consultant Michael Boyd, of the Boyd Group. "I give it an 80 percent chance. They are dealing with a labor union that really wants to make things work. You are dealing with an airline that has a clear vision of what it wants. There is no B.S. or smoke-and-mirrors at the bargaining table. Part of this is because [CEO] Richard Anderson is a straight shooter. There is a lot more collaborative effort there than what meets the eye.

"They don't need concessions from the mechanics or the flight attendants. The difference in those rates won't make that much of a difference," Boyd said.

Instead of sticking with the Bombardier line, Boyd said that Northwest is interested in flying the 70-seat Embraer 170 and the 100-seat Embraer 190. The larger Embraer is a logical replacement for the aging DC-9s, he said. The Embraer is 20 percent more efficient than the DC-9 to operate. Northwest has 156 DC-9s in its fleet with seating capacity ranging from 78 to 125 passengers.

If Northwest and the union strike an accord, Boyd said that Pinnacle and Mesaba "bluntly speaking - have no growth prospects. The small jet provider - what used to be called the regional airline - has no growth prospects. I don't care what Wall Street says. It is not a long-term growth industry. There are more 50-seat jets out there than can be absorbed. Customers are getting fed up with the 50-seat jets and the economics are getting dicey. This is why we are predicting there will be a big shakeout among the small jet providers.

"Pinnacle is a good airline. However, a wide-body 70-seat RJ is not in the cards for them. It is too close to the mainline. The Embraer 190 is perfect for Northwest to replace its DC-9s."

The chairman of Pinnacle's ALPA unit supports the plan. "They have had the 70-seat jet locked up in their contract for a long, long time," said Capt. Wakefield Gordon. "They are not taking anything away from us. The door has never been opened [for Pinnacle to fly the larger jets]. As far as we are concerned, this is a good idea."

While Pinnacle won't comment on the discussions between Northwest and its union, Pinnacle spokesman Philip Reed noted, "scope is an archaic form of job projection. In a free enterprise economy, the market and entrepreneurship are going to establish costs and expenses at a level that is commercially viable. We are prepared to fulfill any mission that is required for our company to be successful."

The Northwest ALPA unit included a sweetener in its proposals for the Pinnacle and Mesaba pilots. The plan would make it easier for the regional pilots to "flow up" to Northwest to fly the 70-seat planes. "It is a goal we have been working towards for some 15 years," Gordon said.

"Establishing a single career path for all Northwest network pilots through an 'NW 70' operation as a Northwest mainline entry position will benefit all," according to the Northwest ALPA position paper. "It will also give Northwest the ability to provide the right size aircraft for each market and be a more successful industry competitor."

>>Contacts: Will Holman, Northwest ALPA, (952) 853-2311; Robert Mann, (516) 944-0900; Claude Sullivan, Ford & Harrison, (404) 888-3841; Michael Boyd, Boyd Group, (303) 874-2000; Wakefield Gordon, Pinnacle ALPA, (901) 527-0355, Philip Reed, Pinnacle, (901) 348-4257.<<