Revenue Shifting: The Airline Version of the “Shell Game.”


Revenue Shifting: The Airline Version of the “Shell Game.”

Does anyone find it curious that whenever an airline finds itself in contract negotiations with its airline pilot union, the airline’s revenues drop, while at the same time, and in the same economy, the revenues for airlines with pilots under contract are rising?

In the old, pre-deregulation era, airlines were allowed to assist one another to help offset the power of pilot unions. Whenever an airline was struck, the other airlines would help out with revenues, to keep bondholders at bay, knowing that the favor would be returned when their pilots struck. That was made illegal as part of airline deregulation of the 1970s.

It is for this reason that Lorenzo never had joint meetings with his bondholders and his employee unions. He had to disguise where the money was to extract concessions. It is exceedingly difficult to tell one group of people that you have no money while at the same time telling another group of people that your are solvent and a safe place to invest, if the parties are looking at the same information.

Is the same thing happening today, but using the structure of the various code-share alliances? Are airlines moving money to and from, in a multi-billion dollar “shell game” they are playing with their employees?

We don’t know; but where there is smoke, there is a good chance of finding fire.

While the following hypothesis is nothing more than conjecture, it certainly fits the pattern used by airline executives of the past. “Airline A” is profitable to the point where the management can no longer hide the profits and contract negotiations are looming. “Airline B,” a code-share partner of “Airline A,“ is just finishing the final phases of large cuts in pilot compensation and now has their pilots locked-up for several years under less-than-favorable conditions to the pilots. Airline A arranges for B to show growth in the code-share part of its operation, while at the same time Airline A loses money on the code-share, and heavy CAPEX spending used by both airlines. Ticket prices don’t change and neither does the load, but revenue for A gets hammered while B’s revenue drives profits up several fold.

A pulls out its pockets and shows the pilots there is no money, while the executives at B rake in stock option money.

The pilots at A, look at the books, believe their management team, and agree to concessions. Pilots at B are looking forward to the opening of their contract, when suddenly, the tide reverses, and A books the profits, while B takes the hit and increases capital expenditures. B takes its pilots for a rinse, and the cycle repeats.

Anyone who had a big brother knows how this game works. Big brother and his friend take your ball or toy and toss it back and forth to one another, while you scurry about trying to retrieve it. It is great amusement for the bigger boys.

Same game – different toy.

United is profitable today. What becomes of the profit when Glenn cashes out at the end of the year, and Jeffery tells the pilots they have to be competitive with American? It will be a safe bet that the profit forecast will be pretty dismal. Air Canada pilots are being crushed by the government and will be forced to eat a bad contract, so the profits flow to Air Canada, Lufthansa, and All Nippon. Jeffery takes his pilots through the car wash and reaps his own reward.

It would work the same way with Delta and SkyTeam, or American and OneWorld. Never forget, A4A (formerly the ATA) likes pattern bargaining as well.

We already published a speech, from Australian Senator Xenophon, exposing how Qantas management plays this game with Jetstar. Are they also playing it with British Airways? Will Qantas funnel profits to American, once AMR management is done with the government-sponsored gutting of its pilots?

Southwest isn’t part of any comprehensive code-sharing network and consistently shows profits. FedEx and UPS work the same way, and show profits.

Why is it that only the heavily code-sharing airlines endure this drama? What are the odds that code-sharing airlines only show profits when the pilots can’t get to them, but are on death’s doorstep whenever pilot contracts reach their “end game, “ a scant few months before they show soaring profits, but only after the pilot concessions are finalized? Why the profound lack of curiosity regarding this masterstroke of benevolent timing for the few individuals that rake in 8-figure payouts?

Perhaps this is one good thing about having a major airline in bankruptcy. If the tide goes out far enough, we may be able to entice forensic accountants to trace where the money is going. Perhaps federal prosecutors will find high-stakes fraud worth pursuing. If the game gets turned on the executives, and those with the most exposed accounting fear being frog-walked into federal court, they will cut a deal and expose the entire charade. Prisoner’s Dilemma Game Theory works for executives as well.

Just as they have used bankruptcy to get us to undercut one anther to stay alive, the same can be used on them to keep themselves from being sued or imprisoned. He who turns first, turns best.

Fraud carries civil and often criminal penalties. If executives were intentionally defrauding their bondholders, employees, suppliers, and the government (think PBGC), while completely abdicating their fiduciary responsibilities to their shareholders, those mid-8-figure payouts for airline executives are going to be millstones around their necks in federal court.

As we said, this is nothing more than conjecture. We lack the access to the accounting and the expertise to make sense of it. We just find the empirical coincidences to be sufficient basis to ask a few honest questions.

However, if anyone has both credible and sourced information that would move our hypothesis into the realm of credible theories, or established fact, we would like to hear from you. We do not need additional conjecture, as we can do that on our own; nor do we need information that is nothing more than rumor, or “heard it from a friend, whose cousin knows a guy, that once was married to a low-level executive…” Keep that stuff on pilot messaging boards.

Your identity and sources will need to be known to us, but we will not release any information you do not wish released. We will not release your name, nor your source, without your consent. Keep in mind that anonymizing your source will likely prevent it from being used. Your name will be protected. As always, all correspondence that is highly sensitive should be encrypted with one of our public keys. Such correspondence will be stored offline and kept encrypted.

Our goal is to expose any fraud (should it exist) for the purposes of enticing the legal teams of the various entities that have been “haircut” during the various airline bankruptcy processes, including those representing the government, to pursuing civil and criminal charges (should the circumstances warrant) against the only group of individuals that have profited during the worst decade in civil aviation – executives.

Perhaps this is just a massive, bewildering coincidence, or that the only way to run an airline is to gut pilot compensation, repaint aircraft, and have 8-figure paydays for executives. Occam’s Razor, however, suggests this financial symphony has a composer, conductor, and players with sheet music.

We welcome information in whatever form you wish to send. We are offering our website to host your guest editorial, should you be able to put names and numbers to your theory. We will not publish your article until you approve the final edit.

This is not to distract from the overall mission of OPERATION ORANGE. This is nothing more than a relevant factor into the motivation for our primary goal – the restoration of the piloting profession and the protection of the flying public. Exposing willful fraud by those that have destroyed our profession and endangered the flying public just helps the cause.


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