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Aug282010

« Time to Rethink the Virtuous Circle »

You know how it goes in the U.S. airline industry: improved economic conditions lead to increased demand for air travel which leads airlines to grow and increase employment.  And so the virtuous circle goes – ‘round and ‘round.  At various times in an economic cycle certain stakeholders tend to do better than others – usually at other stakeholders’ expense.  Front and center in the airline industry rent sharing game are labor and management.

Dan Reed, writing in the USA Today this week, reminded us of the numerous labor and management conflicts out there.  That much is true. But it was the subtitle that gave me pause:  “Unions want pay, benefits restored,” it said.  Not improved – restored.  Nice dream, but it’s just that: The restoration of wages and benefits to 2001 levels is a dream.  Reed quotes long-time industry observer Mike Boyd saying labor has to walk away with something.  Boyd says: “Labor has been on hold for the last seven years.”

Boyd is absolutely right.  Labor has to walk away with something – and they will.  However the airline industry is no position to write the check that would restore wages and benefits to pre-restructuring levels.  Furthermore, the shape and size of the industry today requires that certain work provisions contained in collective bargaining agreements need to be changed in return for improved wages, benefits and working conditions.  This necessary trade gets lost in the mainstream discussion.

Industry Eyes on American

This past week, three of the employee groups represented by the Transport Workers Union (TWU) at American voted on tentative agreements reached months ago.  Two of the three groups rejected the terms and conditions bargained for in those tentative agreements.  Initial rumblings cite provisions contained in the tentative agreements deemed “concessionary.”  Yes in “non-crisis” collective bargaining you trade one thing for another.

I, however, can make a case that the agreements reached were too rich in favor of the TWU.  American resides in a most fragile position in this round of negotiations because its labor costs already are the highest in the industry, even as it goes first among the legacy carriers to negotiate new contracts following restructuring..  The TWU members walked away from structural pay increases, leaving money on the table many in the investment community might have argued against offering in American’s financial position. And I’m among those critics. And while the company would have got increased productivity in certain areas of the contract in return, any savings generated from work rule relaxation is only as good as it’s ability to implement change.

One group that rejected the tentative agreement was the Mechanics and Related employees – a group that has worked closely with the company over the past decade to improve operations and attract third-party work. In part because of those efforts, AA outsources less maintenance work than any legacy carrier. 

Now look ahead.  Can American ignore that most of their competition is paying far less similar services? And without better productivity, can American bring in enough work to justify the current headcount within the Mechanics and Related group?

Just as with the pilots union at American, maybe some in Maintenance really believe that the company can pay labor costs that far exceed the company’s ability to pay.  Everyone points to the industry’s single quarter of terrific profits and suggest – somehow – that a secular trend is underway.  Has anybody been paying attention to the stock market this week?  The market which serves as the barometer guaging expectations for tomorrow?   Or maybe the mechanics are just taking an old trick out of the hat that was popular in the late 1990’s and in 2000 and 2001 when everyone rejected the first agreement assuming that a return to mediation would pressure the company to enrich the agreement, too often without any expectation of giveback.

If that is what happens this time around at American or at any airline for that matter, then the management team making those agreements have no one to fault but themselves.  Overpaying rent has been tried in the past and while it may help mollify labor for the short-term, it does nothing to promote the long-term sustainability of the agreement. Labor, too, is complicit in this short-sightedness, primarily because unions are not structured to manage the responsibility they possess. Unions are highly simple political organizations that too often have only have a short-term view, with leaders looking only to the next contract negotiation and the next leadership election.  

In his 2010 State of the Air Transport Industry speech, IATA Director General Giovanni Bisignani said, “Labor, out of touch with reality, is the next risk. We cannot pay salary increases with our $47 billion in losses. Pilots and crew must come down to earth and strikes at this time are shortsighted nonsense. Labor needs to stop picketing and cooperate.”

Concluding Thoughts

I am not naïve enough to suggest cooperation is a possibility everywhere.  It is not.  For both labor and management it will be tough to manage expectations set by those with short-term mindsets.  And those expectations collide with the need to manage for the long term.

Yesterday’s virtuous circle was largely predicated on plentiful and dumb capital willing to chase failing companies, jet fuel that was roughly one-third the cost it is today, and a general view that the only way a commodity industry could increase revenue was to add capacity.

In the U.S., we should be modeling a better path. Today’s virtuous circle in the U.S. is less about growth and more about making the kind of change and creating a model that will maintain and marginally enhance an airline’s ability to compete globally.

Reader Comments (17)

I'd like to open this topic up to scope clauses, because I think you're on to something I haven't been able to articulate. I like to think of wage concessions over the past 10 years as top-down pressure, and scope relaxation as bottom-up pressure. Using this methodology, the two are at odds with one another, and if you think about it, that's the case. You trade one for the other, although in concessionary agreements it's less obvious since you're trading scope relaxation for less of a wage cut, but you get the idea.

The reason I think this is key is because you're hearing rhetoric from UA/CO pilots about taking back scope while raising pay. I think this is impossible, and once again one will give for the other. Which one will give? Just like every agreement so far, scope has been easier to give up for mainline pilots than wages. I do give ALPA credit this time, though, in that they seem to be successfully aligning the stars for at least not allowing further relaxations. But to take it back? How much is that going to cost in terms of wages on the top side?

Could they be successful in negotiating 70-seat jet rates? Sure. Why not. But don't expect the regionals to have to give up their current fleets. The mainline pilots can't afford that, no way, no how. What's more, I wouldn't expect the new airline to ever place mainline pilots in regional jets. Pay scale or not, mainline pilots just make the aircraft too uneconomical. What is missing entirely from the discussion is that mainline pay rates would have to be lower than regional rates to achieve the same costs. Why? Work rules, overhead, flight attendant rates...you get my point.

Not to completely hijack the post with scope, but it's been on my mind, and you've scratched the itch just enough for it to drive me nuts. Thoughts? I bet Mike Boyd would ;)

08.29.2010 | Unregistered CommenterCourt

Excellent points, Bill. I would add, too, that the TWU in particular has -- or should have -- less leverage than other AA unions (i.e., pilots) because TWU members can more easily be replaced. Anyone who doubts that need only look at how AMFA overplayed its hand with NW back in 2005.

Thanks Seth. I did stop short of the replacement issue. In addition to the TWU groups that voted, the one that did not vote - the Fleet Service Group - is the one group most out of market when considering the subcontracting firms out there. Now back to the NMB but will be fun to watch - unless you are AA of course.

08.30.2010 | Unregistered Commenterswelbar

Most airline executives are paid well above wages they made in 2001. When they reduce their pay as the rank and file workers have done, I will agree that pay can't be restored to 2001 levels. As long as the executives receive huge raises, the rest of the employees should also.

08.30.2010 | Unregistered CommenterDon H

Amen Don H, you beat me to the punch.

How does the old saying go?

That's right; "Lead by example"

Well, step up to the plate managment and cough up. This actually applies to all US style upper managment compensation. Starting first and foremost with the banking industry...

08.30.2010 | Unregistered CommenterRick W

Most Airline executives are paid well above? Point in case, USAirways! The CEO and top management of this company are paid well above any other CEO and management in the Airline Industry. Yet, the employees are the at the bottom of the pay scale of the Airline Industry and have not only loss pay and benefits, but their retirement plans. If you have recently flown USAirways, it is quite obvious how this has affected the morale and work ethics of the employees of this company! Maybe the Airline Industry should be re-regulated and this type of inequity and excess would not be condoned. The rape of airline employees have only returned to haunt the management of our airlines. Case in point, date of retirement? Pilots are now able to fly to 65 rather than 60. This alone will place a burden to the airlines due to the new rules that govern this change which would not have been necessary if retirement plans were still in place! Remember the old saying, "What goes around, comes around"!

08.30.2010 | Unregistered CommenterJohn B

Those pesky labor costs...with college tuition increases far outpacing inflation, maybe it's time to re-think tenure...

08.30.2010 | Unregistered CommenterD Reade

yes those pesky wages geez if we could just get those people to work for less and less maybe we CEO's could stuff more money in our pockets

08.31.2010 | Unregistered Commenterdc10tech

If one were to argue that the cost is just too prohibitive to return to 2001 wages, then please explain the increase in fuel cost that has far exceeded labor cost, but miracuously ! has been met !! ??
Cost can be met if required !
expedia.priceline.travelocity.hotwire....all- sell tickets ( due to bean counters market share pshyche ) below cost !

08.31.2010 | Unregistered CommenterJames B

IMHO the US airline industry has big problems and they are not just labor costs.

First, there is the economy that is in a deep recession that looks like it will be lasting a very long time. Airlines are only now receiving revenues large enough to offset costs. Significant fares increases now will only reduce load factors and probably result in reduced revenues.

Second, with the fuel economy of the current fleet, it it very difficult to make money at the current price of fuel.

Third, technology changes have allowed customers to have nearly transparent pricing information and electronic meeting technologies are causing a small decrease in business travel - a trend that will most likely get worse.

Fourth, pay increases for employees are going to take a back seat to other costs until the day flights are canceled due to lack of a pilot or mechanic or other worker. Airline employees have endured a decade of huge losses in pay, retirement and work rules. It is not right, but it isn't going to change anytime soon. Frankly, I don't know how a mechanic can raise a family in high cost cities like NY, LA and San Francisco at their current pay.

Fifth, there has been no return for long-term shareholders in most airline companies.

IMHO the industry is nearly at the breaking point. You couldn't get me to invest one dollar in the airline industry!

08.31.2010 | Unregistered CommenterBob M.

Two things...
One...in order to establish some credibility, perhaps you should have started by stating your own personal income ratio for the past few years. Were you doing the same job in 2001? Have you had increases or decreases? You might be better able to opine with regard to how much airline workers deserve in compensation by making public what you have in your wallet.
Two...as several posters have stated already...you cannot make an argument for holding back labor compensation without stating that CEOs and management have seen increases while their work force has suffered.
Quid pro quo.

09.2.2010 | Unregistered Commentergerosete

I find your article so biased on the side of airline management that it's almost laughable.

To quote your article:

"Just as with the pilots union at American, maybe some in Maintenance really believe that the company can pay labor costs that far exceed the company’s ability to pay."

I wonder if the excessive compensation given to executives at these corporations has anything to do with the fact that there's nothing left to give to labor?

Take for instance United Airlines. In 2008 the company posted a $5.4b loss followed by a $651m loss in 2009. However, instead of being pared down, CEO Glenn Tilton’s compensation increased to $3.9m in 2009, versus the $1.7m he received in 2008.

It's going to be pretty hard to sell any workforce on the fact that there isn't enough to offer raises after they've witnessed CEO's receiving this type of compensation for poor performance.

Might I suggest you write an article on the high cost of executive compensation within the airline business and the toll it's taken on the industry as a whole.

09.3.2010 | Unregistered CommenterJennifer W.

My comments will be extremely brief!!! Since concessions were implemented in 2003, American Airlines excecutives and lower management personel have received over $400 million in executive bonuses while all the employees have received nothing!! When you can justify the reason for receiving bonuses when the economy has been in a slump for so many years then you can have an intelligent conversation concerning labor costs and unions asking for too much! Just think, if AA would have returned all of those bonuses and reinvested them back into the company, nobody would be asking for single dime and we would gladly continue with status quo until the economy begins to show signs of recovery.

Please dont insult my intelligence!

Thank you,

Ed Fosman
AA/AMT

09.3.2010 | Unregistered CommenterEd Fosman

Labor costs have been the reason given for financial losses by Ameican management, and the cause for all it's woes throughout the years. That is the corporate stance. While it is just good business to get labor as cheap as possible, the groups currently voting are not the problem.
The employees covered in these agreements (maintenance, stores and tech services) are not the most highly compensated in the industry. There are other airlines that pay their employees better wages and benefits, and manage to make a profit. as the author noted This is the one group that has worked with management over these difficult years to increase productivity and cut costs.
This particular contract proposal did offer some wage increses, and some concessions. The concessions are not ones that will change any major work rules or increases in productivity, but only take away benefits.
It would seem to me the labor costs are high because of poor management of the employees, and not their salary. The upper management apparently is doing well enough job to attract large bonuses and compensation packages, yet the rank and file workers need to take pay cuts.
It would go a long way with labor relations if the upper management would take the reighns and lead by example instead of pillaging the corpoate till, and blaming all thier troubles on the workers. Bring a contract that brings work rule changes that will modify the way the company does business, and will bring security and longevity to the company, not to just themselves.

09.3.2010 | Unregistered CommenterJetA

You're a management wonk, Swelbar. I have one message to my airline management: FUPM.

09.4.2010 | Unregistered CommenterMichael

But of course....Bill Swelbar is on the Board of Directors of Hawaiian Airlines...His bias is enormous. Remember, guys like him, I believe, think in terms of class (of course, they will go to their deaths denying it...somewhat like an elected official denying their racism)...and his class deserves MOST of the money....while labor, well it should just be content to get a paycheck..ANY paycheck....because their class is sooo low compared to a genuine Board of Director.....anyway, that is what I believe after listening to their words and watching their actions.

09.16.2010 | Unregistered CommenterGH

GH

Your commentary is interesting. I guess you did not research the details of the HAL board position did you? And you have not read my words very carefully, have you? They say very clearly that money should go into the pockets of workers but there are productivity improvements that are also necessary for that to happen. There is a tradeoff, not a one way road at the table. You also might want to take a closer look at my career. It is all here on the site.

09.17.2010 | Unregistered Commenterswelbar

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