Good afternoon. Before I begin my talk, I would like to thank Julius for this opportunity to speak with you.  Today I’d like to share some insights with you that I have gained during my professional career as a labor union leader, airline pilot and businessman. I think these insights are unique, and hope you will find them helpful as you make investment decisions in the future.

Most of you know me as Duane Woerth, president of the Air Line Pilots Association, International. But, what many of you don’t know is that I’m also a captain with Northwest Airlines, flying the Boeing 747. I have been an airline pilot for 21 years – with Braniff until its demise – one of the casualties of deregulation – and with Northwest for the past 16 years.

Almost one year ago, in the summer of ’98, my fellow Northwest pilots and I lived through a terrible and unnecessary ordeal – a labor strike – that ultimately cost my company millions of dollars. Besides the money value, the strike also damaged our company’s position in the industry, and the company’s refusal to bargain in good faith extinguished feelings of goodwill from my fellow pilots and customers – past, present and future.

The lesson I learned, firsthand, from this nightmare is that past sacrifices and employee loyalty to a company do not correlate with rewards.  Instead they can mean the polar opposite.

To stir things up a bit, I’d now like to share yet another part of my professional history that you likely don’t know about.  Before serving as ALPA president, I was a member of the Northwest Airlines Board of Directors, as one of its labor representatives, for five years.

Through this experience, I gained a greater understanding of the importance of cost-competitiveness, productivity, profitability and the all-powerful bottom line—the many building blocks to a company’s ultimate success or failure.

ALPA has members on several boards of directors – Northwest, United, TWA and Delta, to name a few. Most airline directors have little or no airline experience. Therefore, they generally rely on the management directors’ advice.

Labor brings a unique perspective to this equation—not only do we have airline experience, but the experience is on the "front line."  Based on our unique experience and understanding, labor representatives provide significant contributions to boards’ decision making, aiding the airlines’ successful performance.

Serving as a Board member during our contract negotiations, and the ensuing strike, put me in a unique and paradoxical situation. At first I felt pulled at both ends to consider—to protect—the interests of both the company and my fellow pilots. However, at the end, what I realized is although these interests may be construed as different, they really are interrelated.

Many of you might disagree with this. You might think my current role as labor leader and my former role as corporate board member are contradictory. Well, for those ladies and gentlemen in opposition, I have a surprise for you. We are progressive thinkers at ALPA.  We are in the midst of an era when pilots must understand the necessity of being both savvy business people and savvy members of the labor movement. The two are not distinctly separate, nor are they contradictory. Instead, they are inextricably linked.  ALPA leads the labor movement in approaching issues through this balanced and innovative way of thinking. And, we take great pride in this.

As I said earlier in this presentation, I’d like to assimilate some observations from my three unique perspectives. I’d then like to relate them to some factors you might wish to consider in your professional role.

First, where do we stand today as pilots? Where does ALPA stand at 53,000 members strong?

Pilots are leaders by nature. We’re hired because that quality contributes to the safe operation of our aircraft. And, we’re trained to become even more effective in that role.  Fittingly, we are the employee group that led the way during the late ’80s and early ’90s in making significant sacrifices in pay, benefits and changes to our working conditions to rescue our respective airlines from financial devastation during some of the darkest days in aviation history. Other labor groups followed suit.

You remember those years—marked by a worldwide economic recession, high fuel prices, the Persian Gulf War, outrageous price wars and the demise of two great airlines – Eastern and Pan American—all which resulted in devastating losses for our industry.  My own airline [Nothwest] came within hours of filing for bankruptcy protection before labor bailed it out. TWA would have ceased to exist had it not been for our sacrifices. Pilots at Delta, U.S. Airways and many other airlines, large and small, made the difficult decision to ratify concessionary contracts.

It was the right thing to do at that time.  It was the only thing to do.  It was done because we were constructively engaged in the process.

These pilot groups knew the reality of the business. They knew that pilots, as an employee group, are inextricably linked to their respective airlines. They knew their personal welfare—and that of their families—was tied to their employers because of our profession’s distinct seniority system.  A pilot can’t simply update his or her resume and float from one airline to another.

If you move to a new airline, you start over at the bottom of the seniority and compensation scale, no matter how many years of experience you have. I know. I did that when I went from Braniff to Northwest.  So, in a way pilots are married to their airlines. We realize this. We know how important it is for our companies to be strong financially. And we have been dedicated—we are dedicated—to preserving our airlines’ viability and ensuring their success.  We have to be.

Figure A illustates concessions made by the megas and some of the major airlines during this era.  Northwest pilots in our ’93 contract took a 15.47-percent cut in pay to bail out our company facing bankruptcy because of an LBO that built a mountain of debt over the airline. United pilots, in their ’94 contract, agreed to a 15.7-percent pay cut and significant reductions to their retirement plans to facilitate their ESOP – with absolutely no guarantee of success. This was a five-year contract, which remained active, even when the company rebounded and performed outstandingly in the market.

Delta pilots in ’96 took a pay reduction, gave up retirement benefits, and agreed to more flexible work rules, directly causing company productivity to rise in subsequent years. In ’92, the pilots at US Airways—US Air at the time—agreed to a drop in pay and a change in work rules in their contract. And, finally, the TWA pilots, prior to their recent contract, worked under pay rates and work rules way below the industry standard to bail out a company that was almost constantly in the red.

In addition, we, the pilots, also recognized the need for our airlines to remain competitive in an ever-changing industry. Through constructive engagement with our managements, we enabled several airlines to establish low-cost, no-frills operations that were designed to compete with the likes of Southwest Airlines and the new entrant airlines in the marketplace.

The decision to support these operations—United Shuttle, Delta Express, and US Airways’ MetroJet—involved a great deal of debate—much like that surrounding the next wave of innovative thinking in the aviation industry—the use of regional jets.  It also took a great deal of progressive thinking by the pilots. We had to agree to the establishment of a whole new second tier of wages, but ALPA was willing to participate.  It was a good business decision by the pilots and their managements.

Through sacrifices and progressive thinking—with our constructive engagement, we rightfully anticipated an appropriate return on our "investments"—particularly as we were company stockholders in many cases. Management told each ALPA pilot group that its members would reap high dividends if the economy reversed, and the companies rebounded—if the future was prosperous.  We did not—could not—foresee management’s lack of memory of their employees’ loyalty and significant contributions or their unwillingness to constructively engage.

Northwest pilots were shocked that it took a strike to achieve four annual raises of three percent and full retroactivity, especially after their management offered higher raises to the machinists' union.  As a Board member, I knew that in ’98 we stood on remarkably more solid financial ground than in ’95.  Northwest posted record profits during the four years proceeding the 1993 negotiations.  Additionally, NWA took out a very large line of credit as a financial contingency.  In the end, however, this contingency fund—this war chest—was used against Northwest’s employees who asked  only for a fair return on their investment.  Isn’t that irony at its best?  You are all experienced investors and know that high risk doesn’t necessarily equate with high reward. There is no certainty in this. But, let’s say your high-risk investment performs well—beyond expectations? Isn’t it, then, a certainty that your reward should be correspondingly high?  This possibility of reward is the reason why people play the high-risk investment "game."  With our negotiations, management decided to pursue a very high-risk strategy based on the assumption that the President of the United States would intervene to prevent a strike—a gross miscalculation.

On different occasions, management claimed the company lost between $500 million to $1 billion during the strike. Management spent $50 million on advertising alone. Even if the amount lost was $500 million, that is more than three times higher than the total cost of contract improvements ALPA gained at the end of the strike (see Figure B).

I must say that the Northwest situation is an example of constructive engagement gone bad.

To balance things out, I’d like to bring up one positive example—the United ESOP in 1994. This is constructive engagement at its best. Both United management and its pilots worked together for the benefit of all. Through some "give and take" on the part of both parties, the company today is thriving and its employees now own 60% of that viable airline.  United management definitely understood the power of constructive engagement. Will the promise of this positive, progressive relationship continue? It has so far, and despite dire predictions from some Wall Street pundits.

I’d like to shift gears for a moment, and touch on another area where ALPA has been constructively engaged since the early 1990s—on the international stage. We have been forced to become more and more involved in this arena to protect our jobs.

We have witnessed our airlines establish these global airline systems and they are resulting in increased profitability for their members—often at the cost of non-aligned carriers.

You may wonder why ALPA is concerned if we’re talking about increased profitability resulting from these alliances. 

It’s really quite simple—it’s an issue of jobs.  Our concern focuses on the real and implied possibility that our jobs may be transferred to an alliance partner under some guise of "cost savings." Well, let me tell you: this simply won’t work.  Figure C clearly shows that U.S. carriers have an advantage, measured by unit cost, over most of their European counterparts.  We are the "low-cost carriers."

Yet, despite this cost advantage, U.S. operators are losing ground to European operations in the international market, particularly in the transatlantic region (see Figure D).  While U.S. carriers’ growth in this market has remained relatively flat since 1993, operations marketed with a U.S. carriers’ code—but performed by a European operator—have grown dramatically.

While we recognize the value of these alliances, we want to ensure that our pilots share equally in the growth opportunities. We will not allow ourselves to be "whipsawed" by alliance partners.

Toward that purpose, we, too, have established pilot alliances with our counterparts at foreign flag carriers. For example, we have our Association of Star Alliance Pilots, the Global Pilot Alliance and the Oneworld Cockpit Crew Alliance.

With our counterparts, we have agreed not to let airline management whipsaw one group against another; to work together for equitable shares of the alliances’ growth; to guarantee that the bar for pilot wages, working conditions and professional standards be raised; and very importantly, ensure high international air safety standards.

As you know, safety is a top ALPA priority, and the main reason why the union was established 67 years ago.  The other reason ALPA was created was to represent the interests of our pilot groups during contract negotiations. And, I have to tell you that 2000 is going to be a pivotal year. We have numerous contracts on the table.

ALPA pilots want to ensure our negotiations remain exercises in constructive engagement. However, the determination of whether we will be constructive or confrontational lies primarily with management.

Unfortunately, we foresee some battles in the horizon. Some of our pilot groups have been put on alert by management that their contract 2000 efforts will not be discussions of returns on their investment. Instead, they will center on how to cut costs further.

Well, let me tell you that labor has done its lion’s share in this regard already. The buck stopped here … a long time ago. Costs need to be cut elsewhere—from vendor agreements, fuel, leasing agreements, and especially, senior executives’ salaries.  In addition, airline managements' claims that they need to preserve liquidity in case another recession hits the industry is outrageous.

The industry is in excellent financial state and has recovered from its earlier devastating losses. Airlines have built up their balance sheets and have been conservative in their growth plans and planning, and the economy continues to be strong—the latter despite earlier predictions by some Wall Street analysts for a recession in 1999.

Airline managements have shown that they are in such strong financial positions that they can successfully weather crises (see Figure E ). Just take a look at United’s results despite the Asian economic crisis.

So, despite the ridiculousness of managements’ claims of protecting the company in the event of a future market crisis, we pilots know that in our negotiations we still must remain progressive. We also must deal with the realities of the marketplace.

And, as I said earlier, we must keep in mind that our interests often overlap those of senior management.  A financially healthy carrier is as important to our employer as it is to its pilots, our fellow employees and the passengers we serve.

We know management will try to use this mode of thinking to their advantage during the upcoming negotiations cycle.  However, the message we want to pass on to management is that cost decisions made in the past were based on a certain set of assumptions.  Decisions made in Y2K will be based on a different set of assumptions.

Take a look at the list of carriers with pilot contracts outstanding in 2000.  I do hope that these negotiations will be successful for all parties involved, and bargained in good faith. However, some do have the potential to be ugly. All could affect the air transportation system in North America.

During this time of prosperity, ALPA will fight to ensure that promises made will be promises kept. As a former Board member, I hope that negotiations will be positive and constructive. As a labor leader, I must say that we have learned our lessons well, and if anything, we have been conditioned to fight for any reward we can get. And, we are getting pretty good at this—if you consider the end result of the Northwest situation last year.

The aviation industry is in for an awakening in 2000. Assumptions of constructive engagement made in the past may be unrealizable today. Much of this rests with management and their agreement to provide pilots with gains for past pain.

ALPA also is ready, willing and able to fight to protect our jobs in the global marketplace. We refuse to continue to provide the lowest-cost professional product for alliance-created job growth to be enjoyed by pilots at foreign carriers.

Similarly, we will work to protect our jobs domestically. The Association will stick to our guns that  cabotage will never be the rule in the United States. We will continue to work with Congress and other aviation groups to ensure that this never happens.  The U.S. aviation marketplace is the largest and richest in the world. It exists by virtue of U.S. innovation, competition and equity. No market in the world compares to it. So should we allow foreign airlines—many of them government-subsidized—to come in and cherry-pick it?  ALPA’s position is on the record: We will fight cabotage using every means we have.

In conclusion, I want to express that after much deliberation and thought, using the experience gained from my three professional roles, I remain optimistic, but realistic, about what the next year holds for aviation, and particularly for the piloting profession. I foresee a year of rollercoaster-like inclines, dips and turns along the way on many levels, but I doubt anyone will say it won’t be an eventful or exciting ride.

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