The air transportation industry in 2005 is facing the most difficult challenges in its 100 year history and no palpable relief is in the offing. Air carriers must seek out, like never before, cost containment and efficient operating methods. As legacy carriers hemorrhage red ink and low cost carriers return profits year after year, aggressive strategies are necessary in today’s environment to gain and retain competitiveness. As any airline CEO discovers early on, the fastest way to cut costs is to shed payroll. The success of the LCCs has shown that without labor costs that are commensurate with sales and revenue an airline is doomed to bankruptcy. With this in mind, the scope of this paper is to show how union labor costs have affected the airline industry.
Airline unions became a part of organized labor with the inclusion of the workers into the Railway Labor Act of 1926. As a fledgling industry, air transportation was lumped under the umbrella of the laws and regulations governing railroads. It wasn’t until decades later that it was shown to be a particularly unsuitable melding. Its chief drawback was that labor negotiations took place on a carrier by carrier basis, whereas the railroads always negotiated on a national basis. As the airlines evolved and more carriers entered the arena, this set the stage for a constantly rising cycle of wage and benefits gains in union contracts. Among unions in the airline industry each new contract negotiation sets the bar for the next carrier to match or exceed the last proposal. These increases are expected no matter what the financial health of the carrier. These wage and benefit gains in conjunction with restrictive work rules and arcane job classifications, which were a legacy of the railroad system, have contributed to bringing the industry to financial meltdown.
This system worked for the most part, prior to the Airline Deregulation Act of 1978, when airlines had tightly controlled routes and rate structures. All that was necessary, if more revenue was needed, was to apply to the Civil Aeronautics Board for fare increases. “There was almost explicit collusion where fares were fixed, said Todd Pulvino, an assistant professor of finance at Northwestern University\'s Kellogg School of Management. Under regulation, there was enough money to go around. This insulation against cost-based competition enabled the airlines to pay employees generous wages and benefits” (Manor, 2002).
It was only after deregulation and the ascendancy of the LCCs that the structural deficiencies inherent in the legacy carrier systems and their unions were exposed to the harsh economic realities of competition. This began the long slow slide of the United States major carriers into bankruptcy, mergers and disappearance. Management and unions denied the existence of fundamental legislative and regulatory changes in the marketplace, economic limitations, marketplace forces, new technologies and the empowered consumer among other vital portents. These elements all brought us to the point today, post 911, where bankruptcy, pension defaults, union decertification, replacement workers, two tier wage systems, elevated insurance premiums and elimination of all benefits for new workers are a business strategy, not a recovery plan.
So is all of this the fault of the union worker? A look at current wage rates for the big three of job categories in airlines by the Bureau of Labor Statistics shows that pilots earn approximately $135,000 as a mean annual wage. Mechanics will draw just under $48,000 and flight attendants will make a median salary of just over $53,000. (BLS 2005). To a casual observer these salaries might seem excessive, but a closer evaluation will yield some surprising facts. Using an inflation calculator (Friedman, 2005), a $135,000 pilots salary in 1965 works out to be about $22,658. The mechanics pay equals $8,056 per year in 1965 and finally the flight attendants pay calculates to $8,859 after removing the inflation factor. In the context of the time, these wages do not seem excessive. The most telling data is that an airline ticket from Nashville, Tennessee to Dallas, Texas cost $468 in 1965 and has fallen to $220 in 2005. (Ramachandran, 2005) The inflation adjusted price for the 1965 ticket is equivalent to about $2788 in 2005. Conversely the 1965 price of the $220.00 ticket calculates out to about $37.00 in inflation adjusted 1965 dollars. This type of inflationary data suggests that it may not be so much the greed of the unions, as the competitive pressures of the marketplace in reducing the value of a service.
I suggest that the air transportation is going through the “Walmartization” of the industry. Sam Walton began his conquest of retail American grocery and dry goods stores in the 1970s and by 2005 has decimated entire retail chains and innumerable “mom and pop” type operations. He did this without the barriers which exist in the airline industry and was essentially exempt from anti-trust laws since virtually no mergers and acquisitions were involved (Brown, 2005).
With deregulation only in effect since 1978 and substantial government barriers to free market capitalism in the industry, it is to be expected that the process will take longer in this industry. Airlines have staved off competitive pressures for a long time with government help, in the form of loan guarantees, lucrative government military contracts and favorable laws which dampen foreign competition. Had natural market forces been allowed to take place the airline industry would be a much different sector today. The once preeminent positions of labor unions in the automobile and steel industries come to mind when examining American industries. The effects of unionism in these industries are negligible in comparison to the debilitating effects of profit driven managers fixated on quarterly results.
But let us not diminish the role of the unions in this debacle. The major unions that represent the vast majority of air transportation workers are the Airline Pilots Association, Allied Pilots Association, Association of Flight Attendants, Association of Professional Flight Attendants, International Association of Machinists, Transportation Workers Union and the Aircraft Mechanics Fraternal Association. But all told there are three pilots unions, three unions for flight attendants and seven other miscellaneous unions representing ticket agents, machinists, air traffic controllers and baggage handlers. All of these labor unions have disparate interests and constituencies. To state here that most of what comes out these unions is completely devoid of any business sense or rational thought would be an overstatement, but just barely. The very nature of union negotiations, which is a long and arduous process, is laden with the type of business language and minutiae which would unnerve hardened negotiators, much less pilots, stewardesses and aircraft mechanics. It is important to remember that in 1978, and for the next 27 years, most of the rank and file union employees and their leadership were essentially products of the regulated industry and the attendant mindset. As a result of their particular unsuitability for the task, airline employees have voted for contracts that were ultimately detrimental to the financial health of the company. The unbelievably generous pensions, lavish medical plans, exorbitant raises and vacation plans were unsustainable even forecasting the most optimistic economic scenarios. It is an economic certainty that the generosity of these contracts did much in exacerbating the economic freefall of the majors. The problem of assigning blame to unions for the lion’s share of the problem is made difficult, however, by even the most cursory glance at Southwest Airlines.
Southwest Airlines is unionized and pays above industry average to its pilots and mechanics. Airframe & Powerplant mechanics at Southwest earn $32.00 per hour base versus $26.00 per hour base at American and Delta. United mechanics come in last at $24.00 (Terlep, 2005). A comparison of Pilot in Command pay for a Boeing 737 shows that Southwest pays more at $190 per hour and guarantees more hours, 78, than any of the legacy carriers. Delta pays $174 with a 65 hour guarantee and lastly American pays $156.00 with a 64 hour guarantee (Airline Pilot Central, 2005). Southwest has wages for flight attendants, customer service agents and ramp personnel that are commensurate with the majors (Southwest). It is noteworthy that Southwest has turned a profit for 96 consecutive quarters despite paying some of the highest wage and benefit packages in the industry.
It would seem to suggest that the problems may lie in the failures of management to implement a viable business model. The decision by the legacy carriers to incorporate as many as 18 different aircraft types into their fleets, as was in the case of Delta Airlines (Answers.com), was certainly no fault of the unions. Delta acquired some of the aircraft though the purchases of Northeastern and parts of Pan Am. But when it became necessary for Delta to segregate the aircraft by manufacturer and type, to comply with FAA flight rules and to bolster maintenance logistics systems, the unions took full advantage of the airlines vulnerabilities in these areas and exploited the situation. Similar scenarios occurred at other major carriers as a rapid series of mergers and acquisitions took place in the last 20 years. The mistakes of both management and the unions have led this industry into the untenable position of having labor costs at 38% (Phillips, 2005 September) and fuel costs for most carriers at approximately 25% percent of operating costs (Collis, 2005 September).
The extravagant contracts negotiated since deregulation and during the dot.com era of the 1990’s allowed for nothing like the events of 9/11 and the recent oil price spikes in the financial forecasting. For the unions it was nothing but blue skies ahead and when top management acquiesced, they both sealed their fate. Money and credit dried up during the dot.com bust and after the events of 9/11, forcing airlines to cancel aircraft purchases long planned for fleet modernization and expansion. The aging aircraft concerns of most large carriers were finally realized as the inefficient engines and airframes blasted the balance sheets. With labor intensive maintenance, horrendous fuel consumption of tri-engines, Stage III conversion costs, schedule impacts due to mechanical problems, falling ticket prices and a dwindling customer base solutions were in short supply. There seemed to be a cognitive disconnect between the union leaders and their management counterparts that prevented them from acting rationally. Unions were being asked to take draconian cuts in pay and benefits while American Airlines management was squirreling away for themselves millions in personal pension cash and bonus money outside the scope of bankruptcy laws (Meyerson, 2003 April). This was at a time when airlines were using government guaranteed bailout loans for operating expenses, filing bankruptcy on a yearly basis, idling aircraft by the hundreds and laying off workers in the tens of thousands. The unions’ memories were not so short that they could not remember the days of Frank Lorenzo, Carl Icahn and other corporate saboteurs. For their own part in this death spiral, the ALPA unions own president, Rick Dubinsky personified the arrogance and intractability of the unions when he said in a meeting with United management, “We don’t want to kill the golden goose. We just want to choke it by the neck until it gives us every last egg.”
Since 2001 American carriers in the aggregate have lost over $32 Billion dollars (U.S. House, 2005 September). I think they must look elsewhere for a culprit than the airline unions, if the American people want a scapegoat. The people who make up the unions and make the planes run on time did not enter into the industry with malice and an adversarial attitude. A decade’s long series of events created the acrimonious relations that are now part of day to day operations, as well as contract negotiations. These workers were never equipped with the basic knowledge or skills needed to transition from an essentially cradle to grave job within a very narrowly defined role, to a dynamic organization that requires a high degree of skill, cross-utilization, unorthodox solutions, cost cutting innovations and a driving desire to improve efficiency. There was never a defining corporate culture in the major legacy airlines that would have fostered that type of employee behavior. An excellent example of what would happen, if airline employees were allowed to run the company, is all too true in the case of the employee ESOP at United Airlines. Where we can see that as union members sat on the board and in senior executive positions, a complete lack of fiduciary responsibility and entrepreneurial spirit drove the airline into bankruptcy. The same behavioral patterns exhibited at the bargaining table were evident in the boardroom. Union officers/board members voted for pay and benefits now over the company’s long term interests (Manjoo, 2002 December).
It is not so much that the union acted upon the airline industry as it was acted upon. Then the fallout from much of management’s poor business practices was spun in the media as the unions fault. The most egregious offense against the unions has been the recent assault upon their pension benefits. The airlines management surmised correctly that given the billions of dollars in unfunded pension liabilities, a financial time bomb was ticking. The total amount is staggering. “Taken together, airlines face a total of around $31 billion in unfunded pension liabilities for their pilots, flight attendants, baggage handlers, mechanics and other unionized employees” (Richter 2005).
If these figures are even marginally correct then airlines would have no other choice than to declare Chapter 11 bankruptcy, disavow their debts, ask that unions be decertified and offload pension obligations to the pension Benefit Guaranty Corporation. This is exactly what has happened at United. Airline retirees and current employees alike are looking at greatly reduced pensions and in some instances no pensions after a lifetime of work.
Now here is where the unions are having a huge effect on the air transportation industry. Every airline executive in the country is now drooling over the prospect of eliminating their own unfunded pension liabilities and voiding their existing union contracts. It is extremely likely that the filings of United, Northwest and Delta will spur additional filings in order for carriers to remain on equal footing.
“Both airlines likely will use bankruptcy to slash labor and pension costs, following in the footsteps of No. 2 carrier United Airlines, which has been operating under bankruptcy protection for nearly three years. Together, Delta and Northwest employ nearly 100,000 people. The latest bankruptcies, which had been widely anticipated, could put added pressure on other carriers including industry leader AMR Corp., parent of American Airlines, by putting them at a competitive disadvantage as their bankrupt rivals shed costs and ditch pensions, analysts said.” (MSNBC News Services, 2005).
In summary the unions’ greatest effect on the industry has been an economic boondoggle of gargantuan proportions. Their own selfishness and shortsightedness, as a bargaining entity, has contributed to the short term demise of the worlds largest national airline industry. An industry that annually generates around $100 billion and employs approximately 435,000 people is now in a state of economic and social flux that will permanently change the way it is operated forever (BTS, 2005). The repercussions from pension fund defaults are already spilling over into the automobile and other industries.
Long the bulwark of unionism, the airline industry was singled out by business and industry leaders to be vilified and broken as an example to others. The result has magnified the ripple effect of anti-unionism feelings which now extend into all aspects of American business. The diminishment of union labor in the workforce to its current 13% has neatly paralleled corporate take backs of benefits and perks. While I am sure that the industry will survive its’ current troubles, as will union labor in a abbreviated form, the long term effects are likely to produce an industry with which I am no longer familiar with. Will managements’ insatiable quest for profit and personal gain decrease safety. Will outsourced maintenance and pilots take these good paying jobs offshore. And will foreign ownership make enough inroads to push most carriers into a foreign flag. The real effects of unionism are ultimately yet to be revealed.
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