Third in a series on deregulation.
It does not have to be the more things change, the more they stay the same.
Earlier this week, I promised to write my views on 30 years of deregulation, with a focus on where deregulation got it right; wrong; backwards and indifferent.
One area where the industry had it wrong and continues to say wrong is right is in the labor and management negotiations arena. Both sides are equally guilty of a communication and leadership vacuum. For this observer, there is no micro-“relationship” in this industry that better demonstrates this industry’s most significant issue to overcome. The word relationship is in quotes for a reason.
Fundamental to the strained relationships that pervade today has been an inability for management to communicate directly with its employees on the need to negotiate a more durable construct that can reward in the up cycles and manage costs in the down cycles. Labor leaders fail to communicate directly and clearly with their members that the system that breeds mistrust needs a major overhaul. Instead labor leaders perpetuate the overpromise and under-deliver cycles that dot the landscape of the past three decades.
For both sides, it is about economics whether we want to accept that or not. Tomorrow’s economics will be different from today’s, but unless management and labor really sit down and explain to the troops that a new system will be better than the one we work under because that is the one we know, then we will just write the same headlines every five years or so and do nothing more than change the date.
Economic and Negotiating Cycles Revisited
We cannot begin this discussion without a look back at history. The overall health of the economy has dictated much of the relationship between airline management and labor unions. More than many other industries, airlines have been roiled by fuel prices, strikes, new competition, wars, epidemics, terrorist attacks, new carriers and fuel again. Since deregulation, the industry’s cycles have followed a distinct pattern of profitability in which any up cycle has been more than offset by the subsequent down cycle. It is these boom and bust cycles that is the epicenter of the distrust between management and labor.
Think about it. Few carriers knew what to expect following passage of the Airline Deregulation Act of 1978, which brought new competition, new routes, new carriers and new rules to the skies. The industry made money in 1979 and 1980 but the euphoria was short-lived. There followed the PATCO strike and a recession as spiking fuel prices did the same damage to airline economic models they do today.
As the airlines fortunes turned – most lost money between 1981 and 1983 -- so, too, did the relationship between management and labor as many airlines turned to employees for concessions. Between 1979 and 1983, the economic instability led to some mergers, mostly among smaller, “Local Service Airlines.” Meanwhile, the “Trunk Airlines” like Eastern, Pan Am and United ended up in hostile negotiations with labor unions as deregulation reduced barriers to entry, ushered in new competition, and forced the old players into difficult decisions about how to ratchet down their costs to compete effectively.
Then came 1984 and advent of the B-Scale wage concept. TransAmerica first pushed through a lower wage scale for new workers in its union contracts, soon followed by American Airlines as the whole industry took notice. At the time, I do not think anyone envisioned the significance of these negotiations, or how divisive they would become in subsequent contract talks. Once American negotiated the provision and announced aircraft orders the rest of industry followed. Within two years, nearly every remaining major and national carrier had a B-Scale provision in place.
The industry was profitable throughout the 1984 – 1990 period, but it was a most uneven financial performance on a carrier-by-carrier basis. The consolidation boom that began in 1985 did more than anything since to build the networks and structure of the legacy carriers today.
It was also during this period, that bankruptcy was first used as a management tool to force cost reductions in ways that would become synonymous with “union-busting.” Frank Lorenzo led the charge, arriving on the scene when PEOPLExpress was the low-cost darling of the period and its success, along with New York Air and others, became the “boogeymen” for other airlines as they worked to extract concessions at the incumbents – some of them by abrogating labor contracts through the bankruptcy process.
This cost-cutting revolution led to 5 out of 6 years of profitability. More consolidation took place but the merger activity was largely done when US Air plunked down $1.6 billion for Piedmont – a stunning price when you consider that United Airlines is today valued at $1.6 billion.
As they watched profits grow, union leaders credited their workers’ concessions for funding the new profitability and set out to win those concessions back. They did, largely, with fat new contracts in place just as the country entered a recession in the early 1990s and soon thereafter entered the Gulf War.
Once again, the airlines again reinflated their cost structures with higher wages and limits on productivity that they could not afford in good times let alone in a downturn. Between 1990 and 1994, the industry lost nearly $13 billion. Eastern Airlines and Pan American World Airways, once among the proudest names in the skies, filed for liquidation. Carriers once again turn to employees for concessions, with both sides forced back to the table to wrestle over reducing the pay and work rules only recently offered up to buy labor peace.
This was the second time the carriers made the mistake, yet nobody was willing to call out the fact that airlines couldn’t afford the labor contracts in the first place. The result: an atmosphere of distrust and antagonism in labor relations that plagues the industry today.
By 1994, nearly every carrier had negotiated significant concessions from employees, just about the time the industry’s fortunes were beginning to change. The underlying economics of the industry was a tale of two halves. With their cost structures reduced and new concessions in hand, the industry earned more than $20 billion over the next five years – just long enough to persuade some that profitability was permanent. During the next round of contract negotiations , management capitulated and once again enriched contracts past the point of economic common sense.
By the turn of the century, lucrative contracts were in place at nearly every legacy carrier. Led by a record-breaking contract for ALPA pilots at United and Delta, labor won huge gains in 2000, creating high expectations and a false sense that “concession-plus” contracts could again be negotiated at exactly the time the industry was changing.
By the end of 2000, the economic forecast for legacy carriers had darkened significantly. Low Cost Carriers were claiming routes in all corners of the US domestic market. The revenue environment in the US had enjoyed a 60-year relationship with GDP. But no more.
Now there was significant new price competition and fliers discovered the internet as an easy way to compare fares, putting tremendous downward pressure on ticket prices throughout the industry. That year, the market produced nearly $25 billion less in revenue to feed all of the mouths. Then came September 11, 2001. Then US Airways’ first bankruptcy. Then United’s bankruptcy. Then US Airways’ second bankruptcy. Then Northwest and Delta filed on the same day. The result: yet another imperative to cut costs, but at a magnitude never imagined.
Management Communicating with Employees; Labor Communicating with Its Members: Managerial Leadership Needed
I have a lot of years spent listening to management presentations to labor when concessions are required. With few exceptions, the requests have been within reason, addressing what promised, and played out, to be significant threats to the financial security of the company in question.
The most scared I have ever been was in the early 1990s when I sat in a conference room in the basement of the Crystal City Marriott with the unions representing US Air employees and its then-CEO, Seth Schofield . It was following the carrier’s second crash in a short period of time and cash was short, real short. The financial package negotiated for employees as a quid pro quo would have made employees significantly better off in the long run in return for modest concessions. But once that deal was turned down by the pilots, it was clear to me then that US Air deserved to die.
And it did, except for the fact that that Stephen Wolf changed the name to US Airways. All the unions did for the ten subsequent years was ignore the competitive realities that ultimately deemed the carrier’s network irrelevant to the US air transportation system. US Airways became a classic example of an airline run for pilots and by pilots, and the “flying investment bankers” refused to make scope changes that ultimately killed it. I honestly believe that the US Airways employees were the poster children that were somewhere promised a life of entitlement.
Did management fail in this early 1990’s deal? Yes. This was not a complicated analysis. It was about cash and cash only. But it highlights management’s predicament created by years of its own actions. With few exceptions, management looked for ways to satisfy labor based on its legacy history rather than what was necessary to best dictate the future course of the US airline industry.
And it is still true today that, too often, union negotiators can’t trust management for an accurate picture of the company’s finances – a suspicion led in part by a belief that workers are too rarely rewarded during the good years. And too often, airline leaders fail to make their case to unions about the need for a cost structure and work rules that would provide long-term economic stability and the best opportunity for employees to see gains.
In the US Air case like others, management did not lead. Company leaders failed to take the time to bring labor on board and make the hard decisions and decisive actions necessary to right legacy ships that were headed for a resting place on the Arizona desert. Management merely appeased.
Frank Lorenzo was perhaps alone in seeking to challenge the way things had always been done for the overall good of his airline and its workers as he could see the ultimate end. But in that climate he succeeded only by taking on labor and winning in ways that have made him the poster boy of antagonistic management-labor relations in the airline industry. He did so in a way that preserves forever his place in every union office mailroom.
Today’s CEOs are now burdened with this legacy. Yesterday’s CEOs erred by opening the company’s books to labor only when times were bad and they needed capital. Today’s executives must do something differently. Hell bent on reforming this industry into something sustainable, today’s CEOs have the vantage point of hindsight and a 30-year case study of the economics of deregulation, something their predecessors lacked.
Today’s CEOs need to make labor part of the business, part of the decision-making and part of the solution. And if they are really, really smart, they’ll also make an attempt to calibrate management financial interests with that of all employee financial interests if they want to advance real change in the management-labor construct..
Labor Leadership Needed
Union leaders, on the other hand, would be well advised to stop the rhetoric. It creates a toxic environment, raises expectations unrealistically and does no strategic good for their members. They are politicians at the core and their constant attempts to overpromise typically result only in their inability to deliver as promised to their members. This is not 1990 or 2000 when Labor won big gains only to have members forced to give them back after a few years. Never did these rich contracts play out to the end date.
Whereas management fails to communicate, union communications leave a lot to be desired as well. The legacy contracts that were born into deregulation need to be totally rewritten. The system simply operates differently than it did in 1975, and those timeworn work protections and productivity constraints do little to position airlines to compete and succeed in today’s industry. This isn’t about removing a comma in a decade-old paragraph, it is about the need to rewrite from scratch.
Based on union rhetoric, one would assume that the past 30 years of boom and bust have been good for members. But nothing could be farther from the truth. The only people who have won are the lawyers, economists and pension experts hired along for the wild ride.
Concluding Thoughts
This subject is near and dear to my heart. It seems so obvious. As I write this, the 98th post on http://www.swelblog.com/, I really do believe that there is an opportunity to address the boom and bust relationship of US labor and management. But it is going to have to be management that does it I am afraid. Moreover, they are going to have to do the job without the hammer of a bankruptcy court judge. Articulating how and why the structure needs to change and how it will benefit the masses will be prove to be among the most significant events in this industry’s tomorrow if successful. Because if we do not prepare for the evolution from a regionally-focused industry to a globally focused one, then………
It is said in a recessionary economy that when the US catches a cold, the whole world sneezes. Since 2002, the US airline industry, particularly the network legacy carriers, has had chronic fatigue syndrome. While the US was fatigued, the world was energized and grew at its expense. As we conclude 30 years of deregulation in the US, the world has a cold.
There is an opportunity for the US industry to re-position itself vis-à-vis the global industry. But whereas the US industry has a relative operating cost advantage versus its global peers, its capital structure disadvantage remains. So the question will be as we enter the post restructuring negotiating cycle with labor: More of the same or finally something durable?