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« 03. It’s Airline Deregulation Bday Week: Management & Labor; Boom & Bust »

Third in a series on deregulation.

It does not have to be the more things change, the more they stay the same.

Earlier this week, I promised to write my views on 30 years of deregulation, with a focus on where deregulation got it right; wrong; backwards and indifferent.

One area where the industry had it wrong and continues to say wrong is right is in the labor and management negotiations arena. Both sides are equally guilty of a communication and leadership vacuum. For this observer, there is no micro-“relationship” in this industry that better demonstrates this industry’s most significant issue to overcome. The word relationship is in quotes for a reason.

Fundamental to the strained relationships that pervade today has been an inability for management to communicate directly with its employees on the need to negotiate a more durable construct that can reward in the up cycles and manage costs in the down cycles. Labor leaders fail to communicate directly and clearly with their members that the system that breeds mistrust needs a major overhaul. Instead labor leaders perpetuate the overpromise and under-deliver cycles that dot the landscape of the past three decades.

For both sides, it is about economics whether we want to accept that or not. Tomorrow’s economics will be different from today’s, but unless management and labor really sit down and explain to the troops that a new system will be better than the one we work under because that is the one we know, then we will just write the same headlines every five years or so and do nothing more than change the date.

Economic and Negotiating Cycles Revisited

We cannot begin this discussion without a look back at history. The overall health of the economy has dictated much of the relationship between airline management and labor unions. More than many other industries, airlines have been roiled by fuel prices, strikes, new competition, wars, epidemics, terrorist attacks, new carriers and fuel again. Since deregulation, the industry’s cycles have followed a distinct pattern of profitability in which any up cycle has been more than offset by the subsequent down cycle. It is these boom and bust cycles that is the epicenter of the distrust between management and labor.

Think about it. Few carriers knew what to expect following passage of the Airline Deregulation Act of 1978, which brought new competition, new routes, new carriers and new rules to the skies. The industry made money in 1979 and 1980 but the euphoria was short-lived. There followed the PATCO strike and a recession as spiking fuel prices did the same damage to airline economic models they do today.

As the airlines fortunes turned – most lost money between 1981 and 1983 -- so, too, did the relationship between management and labor as many airlines turned to employees for concessions. Between 1979 and 1983, the economic instability led to some mergers, mostly among smaller, “Local Service Airlines.” Meanwhile, the “Trunk Airlines” like Eastern, Pan Am and United ended up in hostile negotiations with labor unions as deregulation reduced barriers to entry, ushered in new competition, and forced the old players into difficult decisions about how to ratchet down their costs to compete effectively.

Then came 1984 and advent of the B-Scale wage concept. TransAmerica first pushed through a lower wage scale for new workers in its union contracts, soon followed by American Airlines as the whole industry took notice. At the time, I do not think anyone envisioned the significance of these negotiations, or how divisive they would become in subsequent contract talks. Once American negotiated the provision and announced aircraft orders the rest of industry followed. Within two years, nearly every remaining major and national carrier had a B-Scale provision in place.

The industry was profitable throughout the 1984 – 1990 period, but it was a most uneven financial performance on a carrier-by-carrier basis. The consolidation boom that began in 1985 did more than anything since to build the networks and structure of the legacy carriers today.

It was also during this period, that bankruptcy was first used as a management tool to force cost reductions in ways that would become synonymous with “union-busting.” Frank Lorenzo led the charge, arriving on the scene when PEOPLExpress was the low-cost darling of the period and its success, along with New York Air and others, became the “boogeymen” for other airlines as they worked to extract concessions at the incumbents – some of them by abrogating labor contracts through the bankruptcy process.

This cost-cutting revolution led to 5 out of 6 years of profitability. More consolidation took place but the merger activity was largely done when US Air plunked down $1.6 billion for Piedmont – a stunning price when you consider that United Airlines is today valued at $1.6 billion.

As they watched profits grow, union leaders credited their workers’ concessions for funding the new profitability and set out to win those concessions back. They did, largely, with fat new contracts in place just as the country entered a recession in the early 1990s and soon thereafter entered the Gulf War.

Once again, the airlines again reinflated their cost structures with higher wages and limits on productivity that they could not afford in good times let alone in a downturn. Between 1990 and 1994, the industry lost nearly $13 billion. Eastern Airlines and Pan American World Airways, once among the proudest names in the skies, filed for liquidation. Carriers once again turn to employees for concessions, with both sides forced back to the table to wrestle over reducing the pay and work rules only recently offered up to buy labor peace.

This was the second time the carriers made the mistake, yet nobody was willing to call out the fact that airlines couldn’t afford the labor contracts in the first place. The result: an atmosphere of distrust and antagonism in labor relations that plagues the industry today.

By 1994, nearly every carrier had negotiated significant concessions from employees, just about the time the industry’s fortunes were beginning to change. The underlying economics of the industry was a tale of two halves. With their cost structures reduced and new concessions in hand, the industry earned more than $20 billion over the next five years – just long enough to persuade some that profitability was permanent. During the next round of contract negotiations , management capitulated and once again enriched contracts past the point of economic common sense.

By the turn of the century, lucrative contracts were in place at nearly every legacy carrier. Led by a record-breaking contract for ALPA pilots at United and Delta, labor won huge gains in 2000, creating high expectations and a false sense that “concession-plus” contracts could again be negotiated at exactly the time the industry was changing.

By the end of 2000, the economic forecast for legacy carriers had darkened significantly. Low Cost Carriers were claiming routes in all corners of the US domestic market. The revenue environment in the US had enjoyed a 60-year relationship with GDP. But no more.

Now there was significant new price competition and fliers discovered the internet as an easy way to compare fares, putting tremendous downward pressure on ticket prices throughout the industry. That year, the market produced nearly $25 billion less in revenue to feed all of the mouths. Then came September 11, 2001. Then US Airways’ first bankruptcy. Then United’s bankruptcy. Then US Airways’ second bankruptcy. Then Northwest and Delta filed on the same day. The result: yet another imperative to cut costs, but at a magnitude never imagined.

Management Communicating with Employees; Labor Communicating with Its Members: Managerial Leadership Needed

I have a lot of years spent listening to management presentations to labor when concessions are required. With few exceptions, the requests have been within reason, addressing what promised, and played out, to be significant threats to the financial security of the company in question.

The most scared I have ever been was in the early 1990s when I sat in a conference room in the basement of the Crystal City Marriott with the unions representing US Air employees and its then-CEO, Seth Schofield . It was following the carrier’s second crash in a short period of time and cash was short, real short. The financial package negotiated for employees as a quid pro quo would have made employees significantly better off in the long run in return for modest concessions. But once that deal was turned down by the pilots, it was clear to me then that US Air deserved to die.

And it did, except for the fact that that Stephen Wolf changed the name to US Airways. All the unions did for the ten subsequent years was ignore the competitive realities that ultimately deemed the carrier’s network irrelevant to the US air transportation system. US Airways became a classic example of an airline run for pilots and by pilots, and the “flying investment bankers” refused to make scope changes that ultimately killed it. I honestly believe that the US Airways employees were the poster children that were somewhere promised a life of entitlement.

Did management fail in this early 1990’s deal? Yes. This was not a complicated analysis. It was about cash and cash only. But it highlights management’s predicament created by years of its own actions. With few exceptions, management looked for ways to satisfy labor based on its legacy history rather than what was necessary to best dictate the future course of the US airline industry.

And it is still true today that, too often, union negotiators can’t trust management for an accurate picture of the company’s finances – a suspicion led in part by a belief that workers are too rarely rewarded during the good years. And too often, airline leaders fail to make their case to unions about the need for a cost structure and work rules that would provide long-term economic stability and the best opportunity for employees to see gains.

In the US Air case like others, management did not lead. Company leaders failed to take the time to bring labor on board and make the hard decisions and decisive actions necessary to right legacy ships that were headed for a resting place on the Arizona desert. Management merely appeased.

Frank Lorenzo was perhaps alone in seeking to challenge the way things had always been done for the overall good of his airline and its workers as he could see the ultimate end. But in that climate he succeeded only by taking on labor and winning in ways that have made him the poster boy of antagonistic management-labor relations in the airline industry. He did so in a way that preserves forever his place in every union office mailroom.

Today’s CEOs are now burdened with this legacy. Yesterday’s CEOs erred by opening the company’s books to labor only when times were bad and they needed capital. Today’s executives must do something differently. Hell bent on reforming this industry into something sustainable, today’s CEOs have the vantage point of hindsight and a 30-year case study of the economics of deregulation, something their predecessors lacked.

Today’s CEOs need to make labor part of the business, part of the decision-making and part of the solution. And if they are really, really smart, they’ll also make an attempt to calibrate management financial interests with that of all employee financial interests if they want to advance real change in the management-labor construct..

Labor Leadership Needed

Union leaders, on the other hand, would be well advised to stop the rhetoric. It creates a toxic environment, raises expectations unrealistically and does no strategic good for their members. They are politicians at the core and their constant attempts to overpromise typically result only in their inability to deliver as promised to their members. This is not 1990 or 2000 when Labor won big gains only to have members forced to give them back after a few years. Never did these rich contracts play out to the end date.

Whereas management fails to communicate, union communications leave a lot to be desired as well. The legacy contracts that were born into deregulation need to be totally rewritten. The system simply operates differently than it did in 1975, and those timeworn work protections and productivity constraints do little to position airlines to compete and succeed in today’s industry. This isn’t about removing a comma in a decade-old paragraph, it is about the need to rewrite from scratch.

Based on union rhetoric, one would assume that the past 30 years of boom and bust have been good for members. But nothing could be farther from the truth. The only people who have won are the lawyers, economists and pension experts hired along for the wild ride.

Concluding Thoughts

This subject is near and dear to my heart. It seems so obvious. As I write this, the 98th post on http://www.swelblog.com/, I really do believe that there is an opportunity to address the boom and bust relationship of US labor and management. But it is going to have to be management that does it I am afraid. Moreover, they are going to have to do the job without the hammer of a bankruptcy court judge. Articulating how and why the structure needs to change and how it will benefit the masses will be prove to be among the most significant events in this industry’s tomorrow if successful. Because if we do not prepare for the evolution from a regionally-focused industry to a globally focused one, then………

It is said in a recessionary economy that when the US catches a cold, the whole world sneezes. Since 2002, the US airline industry, particularly the network legacy carriers, has had chronic fatigue syndrome. While the US was fatigued, the world was energized and grew at its expense. As we conclude 30 years of deregulation in the US, the world has a cold.

There is an opportunity for the US industry to re-position itself vis-à-vis the global industry. But whereas the US industry has a relative operating cost advantage versus its global peers, its capital structure disadvantage remains. So the question will be as we enter the post restructuring negotiating cycle with labor: More of the same or finally something durable?

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Reader Comments (7)

Great article and I agree there needs to be a structural change in the industry, but before we elect Swelbar for president what can be done specifically to change the course of the past 30 years? All the concepts of transparency, accountability, labor reform, pay structure change sound great on paper but making making it happen in the real world might just be a fairy tale.

10.25.2008 | Unregistered CommenterAnonymous

Sadly, this seems a three part synopsis of denial, antiquated industry reasoning, and the affirmation of a philosophical misunderstanding of an industry in transition.

PART 1 - SMALL COMMUNITIES: Bill, are you seriously suggesting that increased government involvement is merited as a solution for this troubled segment of our industry? Perhaps the old farmer's co-op model might be a better solution.

The truth is, demand in these small markets already exists without a government's involvement. Perhaps these markets are unprofitable with today's aircraft technology or by the current measure of our managerial efficiency. But the fact is these latent markets do exist and at some point, innovation will find a way to tap this wealth. But it is NOT the role of any government - whether local or federal - to directly interfere with this very natural free market development.

PART 2 - SOUTHWEST AIRLINES: Now we're speaking near and dear to my heart, for Southwest is an intimate friend of mine. You write as though Southwest is part of the problem rather than what Southwest truly represents - the leading edge in a coming wave of competently managed airlines which will eventually dominate, revolutionize, and aggressive prepare our industry and our country for true globalized competition. Perhaps as a defeated airline manager you might despise our company, but as an American and a capitalist you should be proud.

You write as though LUV's marvel is that of a disease:

" This is the concept that the unionized work forces of the network legacy carriers struggle to comprehend. Traditional hub and spoke carriers with vast operations cannot achieve Southwest’s level of productivity." and...

"Through its efficient and methodical approach to building a company, Southwest puts pressure on incumbents to be just as efficient. We see this most recently as network legacy carriers have reduced wages and increased productivity. But the process has been supremely painful and, in some cases, required a trip or two through the bankruptcy courts..."

Bill, this is the process of change. In a free market, you innovate or you die. Southwest is supposed to be pressuring its competitors. It is a painful process, but we at LUV are operating and innovating as our broader capitalist system has enabled us to do. We in essence have done what is right and if our competitor's business model is broken then the burden remains for their leadership to lead, repair, and innovate rather than cast blame.

3. PART 3 - BILL'S SOLUTION: LABOR MUST SUBSIDIZE THE LOSSES: Since 911, we've studied the legacy's new concessionary contracts and to be frank, there's not much more blood in that turnip. For years airline leadership has cited labor costs as the sole contributor to their airline's ills. In some cases they were right, in other's it was just bunk. But one thing is for certain - post 911, the concessions were realized. They came fast and they came in a big way. And the result? Continued losses, missed opportunities and greater losses than in the pre-911 world.

Look at any other industry and ask yourself how these companies would have behaved if their traditional markets were no longer yielding sustainable revenue...

Did IBM stick to its old mainframe model, refuse to innovate, and instead blame its ills on its own workforce? No, they pressed forward and innovated change from within their dynamic market.

Did General Electric adhere to the production of the large steam turbines from years ago, ignore the changing times, and press its unionized employees for concessions in order to subsidize their survival? Of course not.

Bill, you're missing the fluid nature of change. We at Southwest see it. That little triangulation theory you formulated? I'll give you a hint: I suspect it might be gone. MSP opened with only a connection to MDW and no more. Why? Because our markets are changing and we're changing our airline with it.

It is our role as industry leaders to mine cash from a changing market and not from the pocketbooks of our own workforce. The later must be tempered, but not exploited. That's the miracle of Southwest, Bill. And that's the miracle of capitalism and our free market.

I know "comment moderation" is enabled. I hope you'll do the right thing and publish comments such as mine. After all, free discussion can be just as powerful as the free market. Thanks for the time you've put in here, and I wish your site the best of luck: )

To My Friends in Dallas

First rule of swelblog: every comment gets posted. The only time I moderate if I believe it is an unnecessary attack on someone else that commented.

I am sorry that you construed the pieces the way you have. I actually agree with most of your comments and your take. I plan to write 2 more pieces, one of which is largely in the can and is more personal. Another on where a deregulated market has it right.

The next piece will address what I think is right about deregulation. Maybe I should have asked you to draft it. My hope is to have it done Monday.

As for your take on my views of Southwest, I am more tired of the view that the LCCs are responsible for the entirety of the success of the industry. I fundamentally do not believe that. I agree that tough competitors make other competitors better.

Thanks for taking the time. By the way, I do know that labor cannot do much more. But going forward, we should not go back and do what we have done in the past either and that is to agree to something that cannot be fulfilled.

Otherwise we just keep riding the same roller coaster again and again and again.

Swelbar

10.25.2008 | Unregistered CommenterSwelbar

Bill,

Just to be clear, I am NOT in any way speaking for Southwest and am in no way affiliated with that airline's leadership. The views I've expressed here are that of my own. My title caption should have read "your friend from dallas" - the "s" a force of typing habit.

I did reread my post and you have my apologies if the tone seemed excessively direct. I've enjoyed many of your past posts and am happy to report your views are generally very well respected. When I wrote thank you for maintaining this blog, I meant it - its a great source of exchange.

What struck a nerve this morning (pre-coffee) was this passage in your summary:

"Frank Lorenzo was perhaps alone in seeking to challenge the way things had always been done for the overall good of his airline and its workers as he could see the ultimate end..."

From your tone, it seemed as though you were taking a sympathetic, almost pro-Lorenzo position, and that somehow he was a misunderstood man, ahead of his time, etc.

It seems to me that even today most airline leadership struggles with a latent credibility problem through no fault of their own. I suspect this distrust was largely created at the Continental and Eastern Airlines of the mid to late '80s. And there's a similar problem playing out today on Wall Street in the brokerage community. In both industries, I think its very sad. My own view is it could take a full generation of airline employees to fully mend this dysfunction. But what's done is done right? Our industry struggles on.

Part 1's proposed solution to the small community debacle does have some merit, but I just don't think the answer is through a government entity. A local co-op of the private sector perhaps? Just a suggestion.

We work in interesting times, and I'll be looking forward to your take on it all. Again, thanks for a great blog, no offense, and best regards.

American comes to mind when a company picks the wrong way to do things...achieve concessions to avoid bankruptcy (good), then reward management based on stock price instead of profitability (bad) and then turn to your workforce after marginal profitability has been achieved (prior to last year's spike in oil prices) and ask them for concessionary contracts, right after awarding management bonuses based on the stock price (very bad.) Oh, and design a profit-sharing plan that does not reward the rank and file employee if profits are less than $500 million per year. All this has led to the current climate of labor/management relations at AA, where each side appears to openly despise and distrust the other. I'm not saying that labor is correct on all issues...it seems they have lost the desire to compromise in the slightest way...but management is just as much at fault for the current state of things for creating a climate in which labor is not motivated to compromise at all, even when it would seem to be in the best interest of themselves and the company.

10.26.2008 | Unregistered CommenterChuck

To My Friend in Dallas

One of my faults is to reply too quickly and as a result may have come across as defensive. My bad. Direct should be the style we all use. I very much appreciate your well articulated and educational background - for me.

I do not think government should be engaged. Over time I have thought that the calculation seems a bit backward and the birthday discussion seemed like a good time to write what I had been thinking.

As for Lorenzo. I do think he was a misunderstood man. The last thing I would ever suggest is that today's CEOs are somehow connected to Lorenzo and the symbol for which he is made to stand for.

But I do view today's CEOs as agents of change. We are making progress and your point on taking a generation to work through it all.

Thank you for your interest in what I have to say from time to time. Much appreciated.

10.26.2008 | Unregistered CommenterSwelbar

Not once in this whole article did you mention the fact that airline executive pay grew by over 425% since deregulation...totaling in the Billions. Nor did you mention in your worship for Frank Lorenzo that this is the first person EVER to be banned (by an act of Congress) from ever doing business in aviation.

Clearly, you have an agenda otherwise you would have presented a neutral analysis.

11.12.2009 | Unregistered CommenterJuan Tripp

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