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.