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Buried Alive: Signed Tentative at American Declared Dead

As Gilda Radner on the old “Saturday Night Live” might say, “It’s always something.”

Less than a month ago, the Transport Workers Union (TWU) representing the Fleet Service Group at American Airlines (baggage handlers, freight service workers, aircraft fuelers/de-icers and aircraft cleaners) said it was “suspending” a tentative agreement (T/A)  reached with the company after more than two years of discussion.  Yesterday, after a meeting between American, TWU and the National Mediation Board (NMB), the union pronounced the agreement dead and asked the NMB to release the 11,000 workers in the group into a 30-day cooling off period.

But it’s been a twisting road to this point. When the TWU first announced the agreement, the union said it was strong armed into signing a T/A by NMB member Harry Hoglander.  In a May 28 press release, the TWU said:  “Although the committee cannot recommend the T/A, we believe the membership should have the final say. The decision to bring the T/A was made based on the NMB's premise that there would not be any other meetings scheduled until the end of year or possibly later.” 

The union then went on to say:  “The committee also took into serious consideration that the NMB would not look favorably upon the negotiating committee not allowing the membership to vote on the Company’s final offer.”

By June 3, 2010 the TWU bargaining team had decided to send the agreement to the membership with a “no” recommendation. President Jim Little then jumped in and said that the union would not send the agreement out for a vote without a recommendation to ratify the agreement.  At this point, the union “suspended” ratification of the agreement citing “unresolved Issues.”  

Yesterday the TWU used the same phrase, claiming that ”unresolved issues” with the agreement have created an “impasse” – a legal term under the Railway Labor Act to signal that the sides can’t reach agreement. The release quoted TWU International Administrative Vice President John Conley: “We are now at an impasse with AMR,” Conley said. “We no longer have a tentative agreement and no ballots will be presented to members for a ratification vote. We urge the NMB to promptly grant us release so that we can begin the self-help process.”

My Simple Question

So what exactly changed in the last month? By my read of it, nothing. It appears to me that the NMB won’t likely schedule any new mediated negotiations until 2011. 

But there is no evidence that the two sides are at an impasse.  Rather they are immersed in a political quagmire in which one side cannot convince its members that there must be some “give” in the agreement to make possible the “gets” the union wants in terms of wage increases and other contract enhancements. An impasse is declared only when the two sides cannot agree after exhausting the mediation process.

In this case the sides agreed to the economics – that was the basis of the tentative agreement that, if ratified by TWU members, would result in a new collective bargaining agreement.

A Conundrum in This Case

Let’s be clear: the company’s proposal would put more money in the pockets of fleet service workers. Now they will be forced to wait until negotiations are scheduled to reconvene yet again.  I do appreciate that there was a perception of layoffs associated with the agreement.  That is simply not the case – rather AA agreed that no TWU employee would be furloughed as a result of the company’s efforts to be more competitive, much the same guarantee AA has made in negotiations with other workgroups.

The conundrum is twofold.  First, the concessionary negotiations concluded during the restructuring round has resulted in a "mark to market" scenario that is no longer uniform among employee groups.  Remember that the bankrupt carriers took multiple "bites at the apple" by first reducing cash compensation; then achieving productivity gains that reduced headcount; and then reducing pension and health and welfare expenses.  American’s 2003 concessions were based mostly on that first bite, which means American’s labor costs remain higher than those airlines that restructured through bankruptcy - and it is different by work group.

Second, current negotiations are complicated by the increased use of outsourcing throughout the airline industry, which serves to fundamentally alter the comparisons of similar work from one airline to another.  This fact is most prevalent in “below the wing” work that most other airlines now outsource at significantly lower wages.

Today’s market for fleet service employees is not the fault of the Transport Workers Union per se.  But the union does have a responsibility to read the marketplace and negotiate an agreement that takes into account the economic realities out there. This is no impasse.  Rather it is a union’s misguided act in taking a live proposal that includes improved economics for its members and burying it alive.  Once again, the line workers see nothing in their pockets while the union lets a business agenda of maximizing headcount win the day. 

This is one tough round. 


Fuel Up, Forecasts Down and Labor at American Airlines Drills a Dry Hole

Crude Oil/Jet Fuel 101

There will be a time down the road when we will all stop talking about the high price of oil and thus the high cost of jet fuel and the resultant impact on the US and global airline industry’s ability to sustain profitability. But that time is not now.

I will put the impact of fuel costs in some historical perspective. During the second quarter of 2000, the industry paid 1.25 cents per available seat mile (ASM) for fuel and 3.50 cents per ASM for labor. By the fourth quarter of 2007, the industry was spending 3.50 cents per ASM for fuel and 3.00 cents per ASM for labor. At 1 billion plus available seat miles flown in 2007, you can do the math.

John Heimlich, the Chief Economist of the Air Transport Association, keeps us up to date on ATA’s website, http://www.airlines.org/, on energy/fuel issues facing the US airline industry. For serious industry watchers, if you don’t have a link to John’s work on your list of favorites then I suggest that you add it now.

It Is More than the Price of Crude

On the site, Mr. Heimlich regularly updates the presentation entitled: “Coping With Sky-High Jet Fuel Prices” in which he points out very clearly that the price of crude oil is only part of the cost for the airline industry. Heimlich reminds that the industry pays a premium, known as the “crack spread,” which is the difference between the cost of a barrel of crude oil and what the industry pays for crude oil refined into jet fuel. Until, hurricanes Katrina and Rita, the industry historically paid a crack spread price of $5 per barrel. In his initial forecast for 2008, Mr. Heimlich forecasts a crack spread price of $25 per barrel.

That $25 of crack spread forecast for 2008 is roughly equivalent to the cost of a barrel of crude in each 2001 and 2002. Simply stated, at a cost of $110 per barrel crude oil, the industry would pay an all in, or “in the wing,” cost per barrel of as much as $135. According to Heimlich, just last week the New York Harbor price of jet fuel topped $145 per barrel, including a crack spread nearing $35 per barrel.

So the pain the average driver feels at the pump is even worse for the airline industry. Heimlich points out the difference in his analysis comparing gasoline to jet fuel. Whereas the difference between the two was $2 per barrel in July 2007, today jet fuel is $29 per barrel more expensive than gasoline. Even with the many industry efforts to improve fuel efficiency, Heimlich forecasts that airlines will pay in excess of $55 billion for fuel in 2008 -- more than $14 billion more than the industry paid in 2007, without consuming so much as a single gallon more.

Many believe that raising fares will fix all. Yes, fares have increased some. But Heimlich shows that, all told, fares for the first two months of 2008 are 2.4 percent less than the average fares for the same two months in 2000. Over the same period, fuel costs have risen 198 percent.

Revised Forecast

As Heimlich was updating his fuel analysis, Brian Pearce, Chief Economist for the International Air Transport Association, was revising his 2008 global forecast – for the second or third time. Mr. Pearce’s initial outlook, issued early last year, predicted that the global airline industry would see a profit of nearly $10 billion in 2008. In September 2007, Pearce revised his profit forecast downward from $9.6 billion to $7.8 billion, citing both fuel costs and the beginnings of the credit crisis.

Only a few months later, in December of 2007, IATA revised its global forecast down yet again. But that revision caught many by surprise based on its sheer magnitude: in less than a year’s time, the IATA forecast a global airline profit of $5.0 billion – a 36 percent reduction from the previous forecast. Now, only yesterday, Pearce again revised his outlook downward by another 10 percent to $4.5 billion in his report “Stagflation Threatens The Outlook.” It is worth a complete read, but his first three points are powerful:

Our previous forecast in December projected a downturn in traffic and profitability for the airline industry this year. Since then the situation in the US economy has deteriorated and jet fuel prices have risen sharply. Stagflation has returned, a damaging combination of forces to which the airline industry is highly exposed over the year ahead.

The uncertainties facing us are far greater than usual. If central banks fail to reverse the credit crunch the outlook, particularly for the US industry, could be far worse. Our next forecast in June will be able to take a clearer view on the extent of the economic difficulties. In this forecast we have taken a conservative approach to cutting our profits forecast. We now project net profits of just $4.5 billion this year.

US consumer confidence slumped in March to levels consistent with a serious recession. The bursting of the housing market bubble leading to falling house prices and sub-prime mortgage defaults has led to a deepening crisis in the financial sector. The resulting credit crunch is now damaging the wider economy.

Now Let’s Turn to American Airlines’ Labor Issues . . . Yet Again

At this point, AA is in negotiations with all three of its unions, so it’s no longer only the Allied Pilots Association attracting news coverage. This week, it was Transport Workers Union, which represents maintenance, ramp and other workers. Yesterday, Trebor Banstetter of the Ft. Worth Star-Telegram reports on his blog that the union placed John Conley, Air Transport Division Director, on administrative leave. This questionable decision apparently stems from a comment Mr. Conley made at an aviation conference in which he suggested that the meteoric rise in the cost of fuel might impact the negotiating outcome in contract talks between the TWU and American.

I have met Mr. Conley and have listened to him in other public forums. I have always been struck by his thoughtful approach, his knowledge of the industry, and the care he shows for the people he represents. In this case, he simply stated the obvious. The reaction by TWU International President Jim Little is unfortunate, but it is likely one we will see more of.

Tracking the news and managing the expectations of the workers they represent is what union leaders do, or should do. But that has not been the case of late in the airline industry, where zealots and ideologues have set completely unrealistic expectations in their rhetoric surrounding contract talks. The TWU’s overheated reaction to Conley’s comments may have more to do with an ongoing campaign by a rival union, AMFA, to organize AA’s M&E shop. But if that’s the case, workers will face the unappealing choice between one union that attempts to silence one of its key officers for speaking the facts, or another that did a less-than-respectable job in representing its members at Northwest and United.

It has been said in the comment section on this blog a couple of times that I have a disdain for airline employees. As a former airline employee (and union steward) myself, nothing could be further from the truth. But I don’t have much patience for union leadership that overpromises and thus sets unrealistic expectations for members when the industry is under enormous financial and competitive pressure. Actions like this are precisely why I believe that this will be the toughest period in labor history since deregulation.

Since posting this piece this morning, I note that Holly Hegeman of Planebuzz.com wrote on the subject of John Conley’s demotion last evening. It is well worth a read.

Watch Alitalia as it is a precursor. In the US, we are witnessing happenings at Aloha and ATA. And we are still on the A’s.