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Tue, Mar 15, 2005

Stonecipher's Take On The Airline Industry

Flying And The Bottom Line

By ANN Senior Editor Pete Combs

(This is the second in a series about Harry Stonecipher and the legacy he leaves the aviation industry after a 50-year career. -- ed.)

Read Part One

Harry Stonecipher, the Boeing president and CEO ousted earlier this month in an embarrassing sex scandal involving another Boeing executive, is undeterred in his criticism of the airline industry -- and his suggestions about what that industry needs to fix itself.

In short, he says, airlines need to cut the costs associated with their workforces.

Speaking to the Naples Forum, a Florida civic organization made up of both active and retired business executives, Stonecipher Friday put them on the spot.

"How many people own stock in an airline?" he asked. The crowd broke out into snickers. Airline stock has been notoriously volatile over the past two decades, since the federal government deregulated the industry.

Of more than 300 people, only a couple raised their hands. "Everybody's got rotator cup problems here?" He joked amid the laughter. "It's hard to get a lot of people to admit they own stock in an airline today." No one airline, he said, is immune to the financial woes that have seen one airline after another collapse -- some in the US, some in Europe.

"You know what the problem is?" he asked. "Cost."

That's a little different than the line we've been getting from Wall Street and the airlines themselves lately. "It's not fuel," Stonecipher said, referring to the macro-jumps in fuel prices over the last 18 months. "Everybody says, 'oh, it's oil causing all this.' Well, oil doesn't cause that.... If you're in the plastics molding business, [the rising cost of] oil probably affects you more than it does the airlines."

If it's not oil, or 9/11 or the outbreak of SARS that grounded travelers a couple of years ago, then what is it?

"Right now," Stonecipher said, "if you look at the majors in this country... Delta, United, Northwest, American, US Air... you have a cost up here that 47-percent of is labor cost."

That's the kind of talk that will make Machinists, SPEEA and ALPA members mad. But Stonecipher was perseverant in his argument. "All the airplanes are the same anymore. You can go buy yourself a good airplane. Fuel is the same, depending on how you hedge it. It's labor.

"Forty-seven percent up here," Stonecipher said, gesturing around his own neck. "That's where United was [before bankruptcy].... And you've got JetBlue, Southwest, [AirTran} -- those guys are down to 27-percent of their cost. If you're going to succeed, you have to get that cost  down there."

That, said Stonecipher, is why airlines are so eager to shed their high-flying pilot salaries and the even more costly pensions for all sorts of workers. "If you're sitting there as a high-cost producer, you're not going to survive forever."

Even as Stonecipher was speaking, the company he once led was shedding 9,300 jobs and three manufacturing plants in the Midwest, having sold those facilities to a Canadian investment firm called Onex. Many of the laid off workers will probably be hired back -- but there's a chance they'll be back at much-reduced wages.

FMI: www.boeing.com

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