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Thursday
Apr302009

Capital, Labor and Seniority in the News 

We awake this morning to reports that Chrysler will file for Chapter 11 bankruptcy . Despite efforts by the Obama administration to force Chrysler stakeholders to find an out-of-court solution, certain debt holders would not agree to the haircut they would have to take in forgiving debt to the auto giant. What they seem to be saying is that, under the terms of the proposed solution, labor would receive a disproportionate share of equity in the restructured company.

Where seniority for airline workers is earned through longevity, capital structure seniority is a bit different. In a bankruptcy, there are different classes of capital. Debt secured by company assets is the most senior on the list of creditors who will be paid. Unsecured debt capital is next in the pecking order, followed by preferred stock and, lastly, common equity.

Nowhere is “sweat equity” reported on a company’s balance sheet. However, worker concessions have been recognized as capital in a restructuring scenario and have been currency accorded a stake in a reorganized enterprise. Moreover, it is the sweat equity at Chrysler held by current and retired workers that might appear to some as being unduly enriched through the deal that gave them a 55 percent ownership stake in a restructured Chrysler.

A very different scenario played out in the airline industry. There, in bankruptcy cases that resulted in either a termination or freezing of pension plans and/or alterations to retiree benefit plans, creditors made it clear that they would not pay the bills from the past by forgoing profits in the future. For airline companies to emerge from Chapter 11, they needed public capital to fund their exit from bankruptcy. For car companies, the government is the source of exit capital.

This morning’s New York Times, quotes a statement from GM’s bondholders that applies to Chrysler’s issue as well: “We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another.”

As the article notes: “The U.A.W. members at both automakers stand to lose some of their pay and benefits, but the cuts are not as deep as those faced by airline and steel workers when their companies went bankrupt. Under proposed deals devised by the Treasury Department, U.A.W. pensions and retiree health care benefits would largely be protected”.

 

Airline Seniority In The News

On Tuesday, Terry Maxon of the Dallas Morning News wrote about the former TWA flight attendants and their dissatisfaction over their treatment from the flight attendant union when American purchased the assets of the troubled and iconic carrier in 2001. Also Tuesday, the four-year seniority battle between the merged group of pilots at US Airways got underway in US District Court in Phoenix, Arizona. Read Dawn Gilbertson’s reporting in the Arizona Republic and on the paper’s US Airways blog.

Whether it is in the airline industry or in the automobile industry, there clearly is something wrong with the seniority system. My question: should seniority really be sacred? The current seniority system does not work for shrinking industries like airlines and autos.

I am in stark agreement with the actions taken by the Association of Professional Flight Attendants, the union that represents AA flight service crews, which in protecting the seniority rights of its members decided that former TWA flight attendants would be put at the end of the seniority list when they joined AA ranks. The fact is this wasn’t a merger of equals. At the time of the purchase, TWA had sold most strategic assets and had reached its tipping point. There was nothing left to borrow and no hope except American’s offer to buy its assets.

I am in stark agreement with the America West pilots in their disagreement with the former US Airways [East] pilots who had little hope of a career absent the reorganization plan that involved a merger with America West.

Given that the economy will continue to call into question the future viability of any number of US airlines, this seniority issue is far from over. Plain and simple, it is about economics and the viability of individual carriers. US Airways [East] was not going to survive in its 2004 form for long. TWA would likely have died of natural causes as the effects of 9/11 ravaged the industry.

 

Concluding Thoughts

Given that the airline industry will likely get smaller before and if it gets bigger, it is high time that organized labor puts down its swords and constructs a national seniority list. Employees should have the right to move within the industry should their carrier cease to exist. Seniority should not be a shield for some to hide behind. Rather it should promote stability for those experienced workers that choose to offer their services for hire in an open market

The economic crisis and its impact on corporate America highlight the need for thoughtful analysis of labor issues. Seniority is only the first of the “third-rail” topics we shouldn’t be afraid to discuss. Another is the “legacy costs” like pension and retiree benefits and whether they should be the sole responsibility of the employer in today’s world. Best that I can tell, this growing financial burden on employers may serve only to stand in the way of active employees working to maximize their earnings.

Time will tell what ultimately will emerge from Chrysler’s bankruptcy; GM’s prospects for the future and whether the deal at Ford positions that company to compete for the long term. The same day might be coming for airlines which would be wise to learn lessons from the industries that come before them.

I make that final statement after reading through Obama’s statements. The US government is constructing a safety net for Chrysler and its workers. Some will fall through and others will be saved. Airline labor should be thinking about the same.