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Labor Relations at U.S. Airlines Begin to Show Cracks

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Labor Relations at U.S. Airlines Begin to Show Cracks

Labor Relations at U.S. Airlines Begin to Show Cracks
July 01
08:00 2016

MIAMI — America’s airlines would be forgiven if their executives were to ape Leonardo DiCaprio in Titanic and proclaim themselves kings of the (airline) world. After all, the supposed low season of the first quarter (q1) of 2016 saw U.S. carriers report a cumulative $3.37 billion net profit according to figures compiled by Airline Weekly, racing far ahead of carriers from any other region including China and Southeast Asia (ASEAN) for whom Q1 is the peak season tied to the Chinese New Year and other drivers of leisure travel.

Based on the same Airline Weekly figures, U.S. carriers represented six out of the top twelve (and four out of the top six) most profitable airlines in the world on an absolute basis. The table for operating profit margins encompassed more of the world’s low-cost carriers (LCCs) and ultra-low-cost carriers (ULCCs) but even there U.S. carriers represented seven out of the world’s thirteen leading airlines by that metric.

Suffice to say that the U.S. airlines are enjoying something of an unprecedented financial windfall, at least unprecedented since the days of regulation prior to the 1970s oil crisis. But our optimism in the face of this unrepentant financial dominance was somewhat tempered last week by a series of stories surrounding labor negotiations for U.S. carriers. The first news to drop was that ULCC Allegiant Air had finally reached a tentative agreement (TA) with its pilots after three years of contentious negotiations. This was followed in quick succession on the same day by Southwest pushing back delivery of 67 737 MAX orders with at least a partial justification being tension with the airline’s pilots.

On Friday, it emerged that United Airlines had made substantial progress towards a contract with its flight attendants, which would combine them into a single work group, building upon the carrier’s success in extending its pilot contract earlier this year. But on the same day, off-duty pilots at Delta Air Lines, the world’s most profitable carrier, began picketing at eight airports around the country, agitating for higher base pay.

United trends towards relative labor harmony under Oscar Munoz


Probably the most impacting development is the United flight attendant contract. After languishing for more than six years after the United and Continental merger as separate workgroups, United’s flight attendants (along with several other labor teams at the carrier) were more than due for a combined contract. The uncertainty affected not only the flight attendants (for obvious reasons) but also the company’s productivity, as it was unable to schedule flight attendants with maximum efficiency across pre-merger fleet types and orders (for example ex-United flight attendants still cannot fly 787s). United will see an increase in top line labor expenses for the flight attendants in terms of compensation, but that will be partially offset by increases in productivity.

And frankly United’s flight attendants, who work for the world’s fifth most profitable airline, deserve this raise. Part of what made the contract negotiations so lengthy was the insistence of the management team, led by deposed CEO Jeff Smisek, on driving a hard bargain down the throat of the combined carrier’s flight attendant team (and really all of its workers). We have always erred on the cautious side on issues of labor compensation, and even to us, United’s management went overboard.

Of course the situation was not helped by internal discord within the flight attendant group, particularly between ex-Continental flight attendants who preferred less expansive work rules in favor of more work and higher compensation, with ex-United flight attendants prioritizing lifestyle considerations instead. But United’s flight attendants now have a contract, and eliminating that uncertainty (and getting back to the business of improving United’s revenue performance and operations) is another notch in the belt of CEO Oscar Munoz.

Allegiant pays for stringing along its pilots


Allegiant’s settlement with its pilots is also a positive development for the Las Vegas based ULCC, but the path that the airline and union took to get there has set a dangerous precedent. On management’s side, they simply went too long without giving the pilots a contract. This should have happened years ago, and our sense is that before getting strung along for years, Allegiant’s pilots would have accepted a reasonable pay increase of say 15-20% over their existing contract which would have been more than affordable for a wildly profitable airline that made a ridiculous 35% operating margin in Q1 of this year.

Instead, we understand the new contract that the pilots are going to vote on contains pay increases in the range of 40-50% at the top end, a figure also reiterated by Holly Hegman over at PlaneBusiness Banter. This is an aggressive pay increase that will tangibly affect Allegiant’s bottom line, and that rests largely at the feet of management.

However Allegiant’s pilots have not necessarily bathed themselves in glory during this process either, particularly in how they sought to gain leverage with management. To recap, Allegiant has spent the last nine months or so under siege over its safety record from the press and the Federal Aviation Administration (FAA), as well as under the scrutiny of the media.

The effects of such scrutiny from both FAA and the media were driven in large part by the hyperbole that Allegiant’s pilots engaged in, abusing the situation in a manner that deserves rebuke. Is it realistic that the airline was wildly dangerous that suddenly became the picture of safety and harmony once its pilots got a 45% raise? Indeed, we don’t expect to hear a peep from Allegiant’s pilots about safety moving forward.

Regardless of one’s view on the motivation behind the actions of Allegiant’s pilots, the more dangerous result of this battle is that its pilots have set a precedent of playing a dangerous game of chicken. It is understandable that the pilots wanted leverage in negotiations with a recalcitrant management team, and we are sympathetic to the notion that the pilot group needed some sort of shock and awe to get management’s attention.

But safety is the wrong issue to up the ante with — it’s not even in the interest of the pilots. Embarking on a lengthy strike, holding a sickout, or even filing a cavalcade of lawsuits against Allegiant all would have been in order. But an airline’s reputation for safety is the single most important piece of brand collateral in this industry, and by tarnishing that (whether justly or not) Allegiant’s pilots are harming their future interests (passengers booking away would render their contracts financially unfeasible.)

If there are real issues then absolutely report them to the FAA and make sure they get corrected. But fanning the flames of hysteria in an all to eager press for the purpose of gaining PR leverage over management is both dangerous and explicitly against the long term interests of Allegiant’s pilots.

Trouble in paradise for Delta and Southwest


Delta and Southwest are arguably the two premier airlines in the world right now when it comes to financial and operational considerations. Both airlines have built rabidly successful, if very different business models that have allowed them to prosper to the tune of billions of dollars annually in the U.S. market. Southwest is the historical champion of the U.S. airline industry (and the only consistently profitable airline post-deregulation though Allegiant and Spirit post its ULCC makeover also theoretically qualify), while Delta is held up as the gold standard today for financial performance (particularly cash flow) and operational excellence, and has led the U.S. carriers in reinvesting profits to improve its onboard product.

Until recently as well, both airlines also represented the gold standard for management – labor relations. Southwest historically has had one of the best track records in this area for any company period, let alone any airline, while Delta’s team members have always taken a fierce pride in their airline despite occasionally tumultuous relations (e.g. “Keep Delta My Delta”) and recently prospered in the post-2010 boom for U.S. airlines as management granted them industry leading total compensation inclusive of profit sharing.

But the news items last week were added confirmation that even massive compensation increases over the past six years might not be enough for Delta’s pilots and that industry-leading pay for narrow body captains is insufficient for Southwest’s pilots. Look, both carriers are wildly profitable and labor should absolutely get a larger share of that money. But the history of this industry illustrates the frequent folly of locking in overly generous base pay rates and work rules during periods of profit margin expansion. That’s precisely what drove the U.S. carriers to bankruptcy in the last decade.

Instead we would propose tying increased pay to the exact mechanism that Delta has used in the last five years — profit sharing. Increased rates at Delta and Southwest (and their peers) would be a good way of giving pilots a larger share of the company’s riches without tying down the business model with contracts that are financially unfeasible in times of high fuel prices or recession. We would also add that management at all U.S. airlines should consider granting some of the stock that they have spent billions on buying back from shareholders to their pilot groups.

Airline pilots and management are forced, by nature of a seniority based labor model, to be partners for 30+ years. For employees with that level of importance (top level pilots are better compensated than most analysts and middle management at airlines), tying more of their compensation to stock in return for added flexibility on salary concessions during recessionary periods or fuel spikes would be an excellent way of aligning long-term incentives.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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9 Comments

  1. Rich Clarke
    Rich Clarke July 01, 15:46

    Great article, although the notion that a “sick out” would be an acceptable way for any pilot group to deal with stubborn management is a bit off.

    Sick outs and other like-minded work obstructions are a violation of The Railway Labor Act and will most likely result in a court issuing an injunction against the pilot group who participates. Injunctions are killers to progress when your labor group is in contract negotiations.

    Just ask the American Airlines pilots who were negotiating under an injunction in the 90s. That work group paid dearly for their illegal work obstruction.

  2. Justin
    Justin July 01, 19:08

    I appreciate the authors insightful articles in general. I have two remarks.

    Number one, the “massive compensation increases” over the last six years still do not make up the “massive compensation losses”, that Delta pilots took post 9/11 and bankruptcy.

    In addition, to solely blame labor costs for bankruptcy is short sighted. While yes, fixed labor costs were higher, the industry suffered unprecedented drops in revenue post 9/11 that took these companies to the brink of death. Coupled with high fuel, all of these items contributed to BK.

  3. anon
    anon July 02, 14:10

    Vinay,

    There were multiple factors which drove the bankruptcies in the early 2000s. I’ll list a few and hopefully your readers can have a more thorough context regarding that period. Unfortunately, your article and many others over the years have pointed at labor cost growth in the early 2000s as a primary, if not singular, cause of the bankruptcies. This notion that labor costs lead to the bankruptcies is patently incorrect and is a tired talking point that has been recycled over and over.

    Here is the list of items that contributed to early 2000s bankruptcies:

    1. Multiple major airlines were still trying to establish a foothold in the post deregulation era in the late 1990s and were apt to throw capacity on the market at below-cost levels in order to gain market share, essentially undercutting. By the mid 1990s, the economy had recovered from the early 1990s recession. Of note, there are now in 2016 fewer major airlines and those that remain after several years of mergers (American merged with US Airways-American West, Delta merged with Northwest, Southwest and AirTran, United with Continental) have well established domestic and growing international route networks. Airlines are much more financially viable with less competitors on the market. The threat of undercutting competitors is much reduced due to the robust networks which offer more options for the customer.

    2. Load factors at many airlines were in the 60th percentile in the late 1990s and early 2000s as a result of the rapid growth which exceeded demand in the late 1990s and early 2000s. Nowadays, load factors are running in the high 70th and mid 80th percentile. Additionally, airlines have upguaged to larger airframes allowing for more revenue.

    3. The dot.com bust, SARS outbreak, rapid steady rise in oil from 2002 thru 2008, and drop in demand from the events of 2001 all combined to a worst-case financial scenario in 2002-2004 which will not likely be repeated. This combination of financial shocks to the industry was the scenario that no enterprising company would even think to plan for. Companies immediately had to adjust their primary controllable costs (labor) and reorganize to effect reductions of their less controllable costs. If airlines are concerned about the potential for future worst case scenarios, then they have not let those concerns hold them back from record stock buybacks. The same should be true with respect to rewarding labor unions, especially those that sacrificed deeply to emerge from bankruptcy.

    Labor always shares in the sacrifices during times of economic turmoil in order to keep an airline afloat and it is time for companies to share in the successes which have been sustained at record levels across the industry.

    For some more perspective, below is the 2016 inflation adjusted pay for an MD-88 Captain at Delta Air Lines going back 20 years over several contracts. It wasn’t labor costs that lead to the bankruptcies, it was the combination of spiraling oil, drop in international and domestic demand, and the years of rampant unprofitable capacity growth which lead to much of the early 2000s financial turmoil for the industry. Doing the simple math, you can see that a

    1985: $293/hr
    2000: $242/hr
    2001: $280/hr
    2004: $299/hr
    2005: $198/hr
    2006: $163/hr
    2007: $160/hr
    2008: $157/hr
    2009: $160/hr
    2010: $159/hr
    2011: $156/hr
    2012: $185/hr
    2013: $198/hr
    2014: $201/hr
    2015: $207/hr
    2016: $207/hr

  4. Soccermom
    Soccermom July 02, 17:41

    “Embarking on a lengthy strike, holding a sickout, or even filing a cavalcade of lawsuits against Allegiant all would have been in order.”

    As the guy above stated, sickouts are illegal under the RLA, in order to strike the pilot union would of had to be released by the Govt to strike—not likely under this administration, and what lawsuits are you proposing? They sue for the management not negotiating in good faith?

    The real issue is the current labor laws under the RLA hamstring the labor groups and strip most forms of leverage from the them. Without any leverage what drives the management to negotiate in good faith? They simply don’t. Check out the pay rates from pre-9/11 vs today and raises given to the management of these airlines listed vs the labor groups. That is your article to be written.

  5. Vern
    Vern July 02, 19:13

    I wonder why he had no comment on management compensation relative to peer groups? What CEO works without a contract for a month, let alone for years?

    Airline CEOs take advantage of employee groups behind the skirt of the railway labor act, eventually the time comes to pay the piper. They need to own it.

  6. William Rouse
    William Rouse July 03, 01:05

    Your contention that safety will not continue to be priority for the pilots on the front lines at Allegiant now that they have a tentative agreement is hyperbole and amateurish. Look into and mention statistics in your piece if your intention is to produce a balanced article.

    Though I fly for a different airline, I’m aware of the abnormally high engine failure rate pilots at Allegiant endure. It is an issue separate from their abysmal pay. Your ability to tie them together without fact is appalling.

  7. Tim c
    Tim c July 03, 11:57

    To suggest that Delta’s bankruptcy was caused by labor contracts is wildly innacurate. The company was grossly mismanaged by former ceo’s Allen and Mullin. Their lack of leadership and ignorance of how to run an airline drove Delta to bankruptcy.

  8. Jack Lew
    Jack Lew July 07, 19:25

    Very irresponsible comments stating safety was used as bargaining leverage at Allegiant.

    Will you post a retraction when the pilots “peep” regarding safety? Doubtful.

  9. Bob C.
    Bob C. July 08, 11:08

    And just to add a little more to the bankruptcy fallacy, as far as Delta is concerned, Delta management wasted 5 billion dollars buying stock back at rediculous prices (dot-com rise) and overpaying for two commuter airlines that were later sold for pennies on the dollar. In other words, had these three purchases not occurred, Delta would have had 5 billion in the bank, and NO bankruptcy. Labor was not the issue.

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