The NMB Finally Issues Its Representation Rule: What’s Next For The US Airline Industry?

Today, the National Mediation Board issued a new rule governing union organizing that is probably the most controversial thing this government panel has ever done.

So, after sifting through 103 pages of legal citations falsely hoping that the rule as proposed in December would have been changed to address at least some of the opposition’s concerns, I now realize the truth: The NMB has become a political body.

Don’t get me wrong – I’m a registered Democrat so this not a rant against all things Obama. But there are places politics shouldn’t figure so heavily and the NMB should be one of them.

The new representation rule comes as Delta and US Airways are suing the government over its proposed solution to the slot swap between the two carriers; and just a week or so since implementation of that visionary tarmac rule.  So yes, I am in a bit of a cynical if not downright snarky mood today.

In the final rule filed in the Federal Register, the National Mediation Board summarized:  “As part of its ongoing efforts to further the statutory goals of the Railway Labor Act, the National Mediation Board (NMB or Board) is amending its Railway Labor Act rules to provide that, in representation disputes, a majority of valid ballots cast will determine the craft or class representative. This change to its election procedures will provide a more reliable measure/indicator of employee sentiment in representation disputes and provide employees with clear choices in representation matters.”

In its proposed rule, the NMB is seeking to change the election process by which unions organize workers in the railway and airline industries. The new rule that will change 75 years of practice, would for the first time determine the outcome of union representation elections in the airline and railroad industries based on a majority of those who vote rather than current practice, where a majority of all eligible voters must support joining a union.

It doesn’t take a magnifying glass to read between the lines. The NMB is doing organized labor a big favor with this rule. So it is laughable to me that the Board describes the change as part of its “ongoing efforts to further the statutory goals of the Railway Labor Act.”  Funny, because the overarching statutory goal of the RLA is to minimize the disruption on interstate commerce stemming from labor-management disputes.  And this rule would likely do just the opposite, with unintended consequences, by increasing the likelihood of union activities that could yet be another destabilizing force in an industry that needs anything but -- a destabilizer that comes just as the industry tries to consolidate in order to stabilize.

The first 81 pages of the document were a little dry.  But starting on page 81 the dissenting opinion of NMB Chairman (and sole Republican member) Elizabeth Dougherty began: “I dissent from the rule published today for the following reasons: (1) the timing and process surrounding this rule change harm the agency and suggest the issue has been prejudged; (2) the Majority has not articulated a rational basis for its action; (3) the Majority’s failure to amend its decertification and run-off procedures in light of its voting rule change reveals a bias in favor of representation and is fundamentally unfair; and (4) the Majority’s inclusion of a write-in option on the yes/no ballot was not contemplated by the Notice of Proposed Rulemaking (NPRM) and violates the notice-and-comment requirements of the Administrative Procedure Act (APA).”

Ouch.  But no matter. The Final Rule will become effective on June 10, 2010, unless opponents use the courts to stop it.

Let the Lawsuit Begin

The industry, speaking from the Air Transport Association platform said:  "It is quite clear to us that the NMB was determined to proceed despite the proposed rule's substantive and procedural flaws, leaving us no choice but to seek judicial review." 

The unions, of course, took a different tack. The AFA-CWA, a big winner here as it seeks for the third time to organize flight attendants at Delta, made clear where it stood on any legal challenge. "We applaud the NMB for taking this historic and courageous step to bring democracy to union elections. By allowing workers to have a voice in these elections, whether it be yes or no [author adds: or by write in], will only bring benefits to all parties. We look to airline management and their third party supporters to respect their employees' voices and the concept that guides our country every day, and not to bog down this significant achievement in legal appeals."

Having now devoted four blog postings to this subject, I may qualify as one of those third party supporters. Not because I’m carrying water for airline management, but because I think this rule stinks just like the tarmac rule and decision by this administration on the slot swap.  The only hope I have with this rule is that the incumbent unions start to be smarter in their negotiation strategies.

Included in a statement by AFA-CWA International President Patricia Friend’s statement lauding the cram down rule is her insistence that job security is a union function.  What is job security in today’s world?  Is it contract language?  Or is it a strong company?  When I think of pilot scope language that is designed and negotiated for the sole purpose of protecting jobs I see 14,000 mainline pilot jobs lost and nearly 800 narrowbody aircraft taken out of service because the economics (largely unproductive labor) could not translate into profitable flying.  But that unproductive labor paid union dues – for awhile.

I have a lot of union experience.  I worked as a local union president.  I have experience as an advisor to labor in distressed negotiations.  I serve in a union-appointed Board of Directors position at Hawaiian Airlines. While I know there is strong flight attendant union leadership at Hawaiian, the same cannot be said around the industry and I note in particular American and United and US Airways.

From what I can see, airline unions are all about yesterday.  Bankruptcy did not fix the labor problems at airlines or the ability of many airlines to manage their costs with still-bloated income statements.  But still the unions want to look back, back when labor costs were even higher and productivity was at an all-time low.  If productivity was given in the restructuring negotiations, union-represented employees would be earning more today.  But I digress.

Let me be clear.  I am not saying that unions are all bad.  Good leadership on the union side and a willing management can make deals.  Look at the most unionized carrier in the US industry – Southwest – which thanks in part to a strong relationship with its unions has managed to pay well and do well in the marketplace by building a great corporate culture and making productivity and customer service a priority.

But unenlightened and parochial thinking pervades the leadership ranks of many other airline unions.  The industry will continue to face change and challenges. Unions that adapt and are able to let go of the past will flourish.  Unions that cannot adapt to the new direction of the global airline industry will struggle to deliver for their members. 

And Why Are We Changing This Rule?

It is pretty simple and transparent.  Neither the AFA-CWA nor the IAMAW believes that they have the votes necessary to win an election in their efforts to organize the combined work forces from the merger of Delta and Northwest.  So labor prompted a friendly administration to change the union representation process to help them pick up these coveted new members – particularly on the Delta side where the flight attendants and maintenance workers have never been union.  Imagine how happy those former Delta employees must/will be?

Or, as the union leaders have clearly calculated, if you fail to win hearts and minds at the ballot box (as they have not once but twice) then change the rules. And despite an outcry and outpouring from the industry about the rule as first proposed by the NMB, the Board made no changes to address the concerns expressed by opponents. Instead the rules were relaxed even more to the advantage of unionization. Decrease the barriers to entry (union representation) and leave the barriers to exit high (no direct union decertification procedure).  So off we go to court.

As I have written before, it is not so much the rule change as the way the "politically neutral" NMB went about it.  With the tarmac rule it is the arbitrary nature of the three hours.  With the slot swap deal it is denying the incumbent carriers the right to sell what they invested in over the years and determine an adequate return on that asset.

I understand that most things governmental are heavily political.  But politics have had too much influence over this industry, and not for the benefit of the airlines or the hundreds of thousands of workers they employ.

More to come.

Let’s Just Get It Out There: Would You Loan To a (Union) Labor Intensive (Airline) Industry?

In a post two weeks ago, a reader asked: “… are [you] just forgetting one thing about the "usury" that is the interest rate charged to United on what is in theory a very secured loan? The Obama administration pretty much threw out of the window centuries of legal precedent and destroyed the notion of secured credit with the Chrysler bankruptcy. Collateral is useless if you are not able to collect it in the event of a bankruptcy because someone in power favors the unions, and so the natural result is for all companies, across all industries, to pay higher interest rates (the law of unintended consequences is a pain in the ass, isn't it?). Frankly, 12.75% is a bargain for unsecured credit in a company with the creditworthiness of United.”

A Great Point

Similar questions were asked in recent months as Chrysler and General Motors teetered toward bankruptcy. In Chrysler’s case, the United Auto Workers ended up owning 55 percent of the company in a retiree trust following the automaker’s 42 day-stay in bankruptcy. Italian automaker Fiat ended up with 20 percent of Chrysler -- a stake that could grow to 35 percent under certain conditions [didn't the US Government insist on this foreign owner as part of the plan of reorganization?], while the United States and Canadian governments own the rest.

Was that deal fair to those who had loaned money to Chrysler thinking that their loan was secure?

In the final chapter of GM’s emergence from bankruptcy, the US government put $50 billion into the restructuring. In return, the US government got a 60.8 percent share of the new company, while the governments of Canada and Ontario hold 11.7 percent and a UAW retiree health trust holds 17.5 percent.

Was that deal fair to GM’s capital providers that thought their loan was secure?

What is wrong with this picture? How about the fact that secured debt is being relegated to Third World status to pay yesterday’s unsecured obligations before tomorrow’s capital providers and new shareholders get paid?

A similar story may be playing out in the airline industry, where unions are crying foul, demanding a return on the “investment” they made in concessions during restructuring in recent years.

And while several major carriers are already in negotiations with unions grappling with contracts that impose legacy costs and job protections that constrain their ability to compete, Teamsters President James Hoffa is marching on Continental, trying to convince the airline’s fleet service workers the Teamsters can offer them job security in an industry in the midst of a major competitive shakeout.

Will We Ever Understand?

Before long, the leaders of the major US airline unions will need to come to terms with the very financial realities faced by the US auto industry: a tapped out balance sheet isn’t going to provide much juice. For unions, the “unsecured debt” comes in the form of a two-tiered workforce in which younger or less-experienced members stagnate – unable to advance in the ranks – to protect the inflated wages, and generous benefits and working conditions bestowed upon senior employees at mainline carriers. Like all good Ponzi schemes, it works for awhile. But the bill is soon to come due. Airplane seating configurations have been downsized to the maximum extent and are now increasing. Furthermore, it is clear that the industry is not finished calibrating the right balance between mainline and regional flying, a necessary task for airlines that can only serve unprofitable routes for so long.

“Obamanomics” has been at play in the US airline industry since deregulation – manifest in the belief that the industry can continually borrow from tomorrow to pay for yesterday. First the “trunk” airlines bought up regional carriers – an easy decision given the better economics of flying smaller planes to smaller markets and in the process consolidating duplicated capacity that helped build regional dominance. Along the way, a pattern of cyclical bargaining played out, abetted by the Railway Labor Act which permits contract negotiations to continue for months and years.

Time and again, airlines would make unions “whole” for past concessions necessary in downturns, perpetuating an imbalance in which airline labor costs rose higher and higher – above the industry’s ability to bring in revenues to pay for them. As small jet technology improved, a new regional air industry took hold, creating a labor arbitrage game that made it all but impossible for legacy carriers to compete with labor costs too high to serve many markets. Finally, the lower-cost “upstarts” played their own arbitrage – taking advantage of their lower costs and workforce seniority to keep their costs down, and put yet more pressure on the legacy carriers.

We are soon approaching Judgment Day for airlines and their awkward and delicate relationship with the airline unions. In the airline industry, the “virtuous circle” that rewards success with more success has had a break in it for some time.

Something Different

I believe that we should be looking at this period of labor negotiations as an opportunity to find a better model. Employee morale is low, and that presents a real barrier to industry success in transforming today’s labor construct. But rather than trying to resurrect airline economics and models that are no longer relevant to the modern industry, labor should be working with airline management to find a way to rewrite legacy provisions that aren’t sustainable and won’t serve the long-term interests of their members.

Management Is At Fault

I’m tough on unions here, but you won’t find me congratulating management for labor's entitlement mindset created by decades of ill-conceived capacity growth. In the early 1990’s, American’s Bob Crandall began to close hubs at Nashville, San Jose and Raleigh/Durham, noting the important economic concept of fully allocated cost versus marginal cost of growth. In doing so, he acknowledged the error of his ways based on American’s growth during the 1985 – 1991 period in which growth was funded largely by lower marginal labor costs.

The recession of 1991 gave American and others pause. But it did not stop the growth. When the recession ebbed, that economic lesson was quickly forgotten and the industry continued to add capacity into early 2001.

By my calculation, until we get back to 1991 capacity levels, we’ve got another five years of shrinkage ahead.

Spreadsheet Analysis

It is a hard fact that, in its current construct, this industry only works for labor when it’s growing. Few airlines will be fortunate enough to avoid more labor trouble to come as they try to balance new industry economics against the expectations and demands of organized labor. It’s already messy at American, United, US Airways and Continental. Delta will only buy so much labor peace following its largely-successful integration of the Northwest operations, and Air Tran will be a new test now that its pilots have joined ALPA.

If I had money to invest, I would be staying far away from this industry unless a construct is put in place that will begin to allow airlines to manage the workforce with needed flexibility to match the direction of the business cycle.

Obama has promised airline labor that releases from mediation will be forthcoming – thus making the possibility of strikes a reality. Adding labor instability to today’s mix of economic, commodity and competitive instability should make any lender nervous. Then again, capital is already nervous about lending to this legacy industry as evidenced in the recent terms and conditions demanded for capital provided. What will labor instability, aided by this administration's promises to labor, add to the terms and conditions necessary to borrow scarce capital?

In any industry, there is no need for either labor or management if there is no capital.