Labor Leverage and Other Thoughts
Since American’s filing for bankruptcy protection last week, I’ve received many notes asking why I am not writing about American - about a potential combination with US Airways or what I expect the company to win from the unions. I haven’t written because, frankly, I already talked about the potential consequences of bankruptcy for the airline, unions and the industry in my most recent piece.
On Monday, I intended to write about leverage and how the Allied Pilots Association was seriously misjudging the leverage it thought it had. Tuesday’s filing kind of made that point moot. As the Sections 1113 and 1114 negotiating process wends its way through a court supervised restructuring, the pilots and all unionized employees will either reach consensual agreements with the company or the company will look to the court to terminate the existing agreements. Whichever outcome, the new contracts will look nothing like the potential deals the unions could have negotiated at various times over the past five plus years.
I know, I know… “American could have reached a deal if it wanted.” It does take two to tango, but in this round of negotiations, American and its unions were listening to vastly different music. American’s offers provided cost benefits that would be realized over the long-term while still maintaining what can only be described as an industry-best benefits package. That wasn’t going to sit well with analysts and Wall Street types who fervently believed the airline needed immediate gains to remain viable.
The unions, seemingly, wanted everything to magically return to past patterns and routinely called for restoration of the pay and benefits they conceded in 2003 to stave off bankruptcy. A common refrain has been no union members have seen substantial increases in wages since 2001. Peers at other airlines did get raises, but American’s employees were – and are - still better off. It’s a simple, provable truth and it meant there was no going back to 2003 or 1993. It’s a different industry and a different world.
That’s key to understanding there is no leverage for either side in this round of negotiations. (Are you listening, United pilots?) It’s also why this negotiations cycle has been so difficult. Few agreements have been struck. American will likely get deals well before we see contracts – or even tentative agreements - at United and US Airways. As the bankruptcy process plays out, the American pilots and flight attendants will no longer have industry leading contracts among the network legacy carriers – Delta will.
And guess who comes up next for negotiation – the Delta pilots. Like American’s management over the past five years, Delta’s management will have to negotiate improved terms and conditions on the highest cost labor contract in existence. All the while, the United/Continental pilots will spend more time asking who is on first than they will spend at a negotiation table. Looks to me like all of that “leverage” being created by the United pilots alleging poor safety policies by management is NOT moving the parties quickly toward a deal.
While I expect the Delta pilot negotiations to be complicated and difficult for the company, at least the pilots enjoyed some benefit following the merger with Northwest and the bankruptcy agreements that preceded it. Delta’s pilots will have the richest compensation package in the industry after American completes its bankruptcy negotiations. That means they won’t have any leverage over the company even as pilots squawk about the liberal scope clause in the current agreement.
In this process, there is a different kind of “trickle down” theory. Case in point: The TWU employees at American. Talk about no leverage. The more removed from the flight deck, the more leverage dwindles. American’s below-the-wing employees currently earn a total compensation package of roughly $25 per hour. That work can be outsourced for 40 cents on the dollar. Add the fact American outsources the least amount of maintenance work in the industry, and that it has more ground workers than any other airline, well, you get the feeling things are going to change. If you’re a TWU worker, that’s probably no comfort.
All This Talk About A Merger With US Airways
I am surprised – no, blown away - by just how much attention the US Airways – American merger possibility is getting. In the first 36 hours after AA filed for protection it seemed the world was suggesting a merger with US Airways was the only viable exit strategy. I don’t believe it. American will have the exclusive right to file a Plan of Reorganization (POR) for 180 days – a right that is typically extended multiple times by the presiding judge.
Keep in mind, all three of American’s unions were appointed to the unsecured creditors committee. Any plan of reorganization by a party other than AA will have to convince the committee their plan is better for all stakeholders. Given the messy labor situation that remains at US – six years after its merger with America West – I sincerely doubt anyone would find a US bid credible… especially American’s unionized workforce.
That’s why, at least right now, I simply don’t see a merger happening, despite industry analyst Vaughn Cordle’s contention that, “regardless of the ugly nature of merging two suboptimal business models and different unions, American's best option is to merge with US Airways.” My first question is, why would you even think of merging two suboptimal business models in the first place? So that you can compete directly against balance sheet and network rich United and Delta?
There is another option I don’t think many analysts have considered. I could see a competing plan led by British Airways and other oneworld partners that would have the potential to win if the AA case gets to the point where outside parties are free to submit alternative PORs – even at today’s 25% foreign ownership limit. If you believe AA will become a smaller entity over the coming months, the one sure thing is AA’s network will be optimized to maximize revenue generation with its new joint venture partners. That’s precisely what STAR is doing through United and SkyTeam with Delta.
The Sky Is Not Falling
Over at Terry Maxon’s AirlineBiz blog is a letter from TWU President Jim Little decrying American’s filing with $4.1 billion in cash and thus a near term ability to pay its current obligations. I urge you to read the letter in full and the lack of reasoning throughout. What did Little expect the company to do when he refused on numerous occasions to step-up and tell his TWU members the cold truth that something is better than nothing? He has had a number of opportunities over the past five years to negotiate an agreement with American that the company could afford.
The bottom line is bankruptcy is not a big deal. This is not the industry’s first rodeo. American’s problems are bigger than a check labor could write outside of bankruptcy, but sadly, the employees will pay much more inside of bankruptcy. 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." Sad commentary indeed.