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Dec162011

« If History Is A Lesson – American’s Labor Cuts Will Be Large »

 

There is much anticipation regarding when American will file its petitions for labor relief under Sections 1113 and 1114 of the US Bankruptcy Code.  The clock is ticking in terms of the airline’s ability to get its network and costs in line generally and its labor costs specifically.  This needs to be done without undue rancor and in time to implement a workable plan. 

Further, the bankruptcy road has many unknown twists and turns as experienced by US Airways (not one filing but two), United (a three year stay and multiple approaches for concessions from labor) and Delta (an unsolicited offer to buy the company from US Airways).  American will face surprises along the way as well.

Let’s consider some facts.   Today United/Continental fly 39 percent more ASMs than American, yet its payroll is only 17 percent higher.  Delta flies 27 percent more ASMs than American, yet its payroll is only 7 percent higher.  US Airways is 53 percent smaller than American in terms of ASMs but its payroll is nearly 1/3 the size of American’s.  Any way you consider it, American pays significantly more for labor to fly its schedule than its network carrier peers.

I concluded a recent blog noting that American’s problems are bigger than any check labor could write outside of bankruptcy, but that employees will pay a much higher cost inside bankruptcy.   And that’s a painful situation that might have been avoided if all of the employee groups had the will and found a way to negotiate cost savings the airline requires to survive and prosper.

As APA President Dave Bates told The Wall Street Journal, "Sometimes in life it's easier to have something imposed upon a person than have them agree to it voluntarily." 

UNITED

The same story played out at United in 2002 and, sure enough, the toll on employees was much higher in bankruptcy than what the company originally sought in direct negotiations. Early that year, the company proposed a package of concessions totaling $9 billion over six years – or $1.5 billion per year.  The unions went back and forth for months and ultimately proposed a give of $5.8 billion over 5.5 years as a package they said employees could live with.  But as with the American negotiations, deadlines kept slipping as the unions sought more time to ratify the agreements. 

United, losing millions of dollars a day at a time the carrier was trying desperately to win a loan guarantee from the Air Transportation Stabilization Board (ATSB).  As it was, the ATSB was about the only potential source of capital then available to a company hemorrhaging cash and seemingly unable to control its labor and other costs.

As the clock ticked, the unions finally agreed to the $5.8 billion package, only to have the International Association of Machinists and Aerospace Workers (IAMAW) vote the deal down.  With the ATSB loan imperiled as a result, United filed for court protection 11 days later, on December 9, 2002.

US AIRWAYS

Four months earlier, inside of court protection, US Airways in its first filing asked for $950 million in labor relief per year on a total labor bill of $4 billion.  This was US Airways’ first bite at the labor apple as the company quickly emerged from bankruptcy number one and filed again in 2004 where a subsequent $800 million in concessions were granted.  By the time US Airways emerged from its second bankruptcy and was being merged with America West, the company was half its size in terms of employees and its payroll was 58 percent smaller.

DELTA

On September 14, 2005 Delta Air Lines filed for bankruptcy reorganization.  In the year before Delta’s filing, its payroll was $5.8 billion and it employed nearly 58,000 employees (down from 71,000 in 2000).  Through the bankruptcy stay, Delta shed nearly $2 billion in payroll and reduced the number of employees by an additional 11,000.

WHAT IS THE LESSON FOR AMERICAN?

First, the bankruptcy court proved to be a more effective means to achieving the cost savings than any airline is able to accomplish through traditional collective bargaining.  Remember, United asked for $1.5 billion per year from its labor groups prior to bankruptcy and the unions would agree to about two-thirds of that. Under Section 1113, United asked for, and received, $2.4 billion dollars of an annual labor cost savings over 6 years – for a total of $14 billion in concessions.  And this would only be United’s first of three bites at the labor apple.

The second bite occurred in early 2004 when United filed for relief from paying contractual retiree medical benefits under Section 1114 of the US Bankruptcy Code.  The third bite came in late 2004, with fuel prices beginning their march to $147 per barrel and clear recognition that the company had not cut enough while in bankruptcy, United went back and asked for an additional $725 million per year that would include the employees’ defined benefit pension plans.  These two additional bites at the labor apple cause American to stand out as having benefit packages significantly more rich than the industry and productivity constraints dictated by terms in the existing collective bargaining agreements more onerous.

According to the MIT Airline Data Project, if American’s contract with its pilots union allowed it to match the productivity of Continental’s pilot workforce, American would need 800 fewer pilots to fly its current schedule.  That amounts to $400 million in costs mostly attributable to a labor contract that puts artificially low limits on the amount to hours an American pilot can fly.

If American were to achieve the same flight attendant productivity as Delta, it would require 1,500 fewer flight attendants than it now carries to fly the schedule.

And had American relied even partly as much on outsourcing as does every one of its competitors, American’s maintenance operation, represented by the TWU, would be a fraction of its current size. American today outsources only 24 percent of its maintenance and related work, compared to an average of 40 percent outsourcing among all other carriers.  When United began its restructuring, it outsourced 17% of its maintenance.  By 2007, that had grown to 46 percent.  So it’s not unreasonable to expect something similar when all is said and done in American’s trip through the restructuring process, particularly as its maintenance-heavy Super 80 fleet is retired.

According to AMR, American’s labor cost disadvantage versus the industry now tops $800 million a year.  One of the he main questions outstanding is where the airline cuts, resizes and reconfigures its network to get to a place that it can compete and earn sustained profits.

That plan could, and probably should, contemplate significant outsourcing in the aircraft and traffic servicing department, particularly “under the wing” work in small stations with limited flight activity.

And as the airline rethinks its overall fleet and flight schedule under the watchful eye of its creditors, every position from the flight crews to ground workers to airport agents will be examined to determine how many employees will be necessary to support a resized operation.

How much power do the unions have to “protect” these jobs? If history is any guide, very little. Ultimately, the bankruptcy court will determine the viability of the company’s operating plan based on its ability to balance costs and revenues and return a profit. And if that means fewer jobs, then that’s the reality the court will consider.

This is an admittedly harsh portrait, particularly in light of the $1.8 billion in concessions granted in 2003 by American’s unions – alongside another $2+ billion in non-labor cost reductions that affected employees across the company. 

I have no direct knowledge of what American will ultimately ask of its employees or the other elements of its restructuring plan. But I don’t believe the ask will be light, or easy, and that is more a factor of the economics of the industry and the competitive marketplace than anything American could have done through other means.

 

Reader Comments (7)

Can we stop comparing American with other airlines in terms of labor costs? I'm sick and tired of reading everywhere how American's labor costs are significantly higher than the other airlines. Guess what, it is because they've declared bankruptcy! It's becoming the norm, rather than the exception, for bad management to correct their mistakes in bankruptcy, but not without extracting more money out of employees and passengers.

12.17.2011 | Unregistered CommenterGilberto A Rivera

I sure hope the bankruptcy judge considers all the assets AA has at the cost of the employees concessions. 30 million dollar building in London and all the millions of dollars executives have place in their pockets with bonuses at the expensive of their employees and passengers. Poor management decisions got them to chapter 11 not the employees. Easy to put the blame on the work force. If they want to survive someone's got to give and is time for corporate giving. Most of them took their millions and ran. It needs to stop. I am really sick and tired of hearing big companies like AA blame the work force. Enough is Enought.

12.18.2011 | Unregistered CommenterMary Diaz

I always chuckle when Big Labor criticizes management, when often Big Labor regularly bargains to limit management's ability to run the business effectively. I would love to hear Mr. Rivera's and Ms. Diaz' ideas as to specific decisions management made that helped to bankrupt the company. It is easy to throw out buzzwords like "bad management" and "executive bonuses" without the benefits of facts. Mr. Swelbar, for good or bad, right or wrong, presents the facts in a logical, clear way: American pays its employees signficantly more than other airlines for the same work. Hence, in a low margin business like airlines, a profit is not sustainable. This is not disputable. I am not saying management is infallible, but I would love to hear specifics rather than buzzwords.

12.19.2011 | Unregistered CommenterVisigoth55

Specifics for visigoth55

A study released this week examining 129 airline bankruptcies finds that only two new entrant airlines - Gull Air and America West [AWA] - cited predatory behavior as a reason for failure. Instead, authors of the study found that poor management was the major culprit. More than 97 percent of carriers filing for Chapter 11 in the 1990s were led by senior executives who had been involved in a previous Chapter 11.

http://findarticles.com/p/articles/mi_m0ZCK/is_27_8/ai_50125409/

12.21.2011 | Unregistered CommenterSpecifics

97% is an exceptional number. However it is bogus when logic is applied. I would suggest that an Airline Pilot = a highly specialized employee. What about an Airline Exec? Would labor prefer that an exec who has a proven record of success, could & should simply be able to apply that success to running an airline & presto-bingo-magic? I think the logistics & nuances of managing an airline, are probably best left to those that have been groomed & spent years working in various airline divisions/departments & ultimately taking that skill-set to the airline board room. Unfortunately for labor, the economics---especially the margins---are such that labor is amongst the first targets for $$ savings. Unfortunately for Mngmt, labor---via union contracts---is locked in @ a specific rate & work rules. This results in Mgmt having to work around Labor caveats to sharpen the edge on the razor thin margins. However the rates & work rules have just proven to dull the margin razor. Lastly, getting back to the 97%'ers....what do you think a malpractice study of America's top doctors would look like, if the only percentage taken was the number who have been sued for malpractice @ any juncture in their career? It would probably be 100%. Numbers lie, realities don't...AA was jetting towards a brick cloud...and drawing compo's to SWA or any other competitor is just fishy number fishing. AA landed where it ought to have landed 7 years ago, in Chap 11. The reality is that labor began to lose its potency once fuel skyrocted...they would have had to give back the farm, and their neighbors farm to make any sort of dent in costs. Solidarity is important, but not when its of the "just following orders" sentiment.

12.26.2011 | Unregistered CommenterDAF1019

bad management or executive bonuses are not really relevant at the moment, AA as a continuing concern is. A business with a track record of losses as AA has produced over the previous years places the company. the employees and the countless of third party beneficiaries (vendors, etc.) at risk. Will there be furloughs? Yes. Will there be paycuts? Yes. Will the pension be taken over by the PBGC? highly probable. Will there be a pension? Yes, but in a different form, ie. 401k style. Will dental, medical, vacation, sick leave, holiday pay, etc... be cut? Yes. Will contracts be abrogated? Yes. Will corporate real estate be sold, reduced, etc...? Yes. Will AA emerge with fewer aircraft and reduced ASM? Yes. But at the end of the day (emergence from bankruptcy) AA will once again be a healthy, albeit smaller, airline but with some assurance of a continuing concern.

01.4.2012 | Unregistered CommenterCW

I think this is becoming insane. They are destroying working position and destroying the respect for this job. Inside aviation the working position are becoming rare as many people stated on www.pprune.org or other pages llike www.pilotwork.net. Creating a job nowadays is a great act of confidence but many airlines manager they use and abuse the economical situation to enslave their employers.

10.27.2012 | Unregistered CommenterFernando

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