There have already been signs of how airline recovery is being accompanied by fresh wage demands. In reality, labour costs are still too high, writes Chris Tarry of CTAIRA.

No sooner have the first tentative shoots of recovery begun to appear than the wage claims are going in. Take the cases of British Airways and its oneworld partner Qantas. BA's finances emerged in more encouraging shape last year albeit well short of the long- term target. Qantas has just posted record results for its year to June, with operating margins within a whisker of 10%. In both cases, the immediate reaction from part of the workforce, at least, has been to put in for their share of the cash.

For BA, a reasonable profit improvement for its June quarter was shortly followed by the threat of strike action from two unions representing ground handlers and check-in staff. The threat was lifted after the conclusion of a deal in which the benefit appears to flow mostly one way. BA traded wage rises for a scheme designed to cut sick leave. Disruption nevertheless took place at London Heathrow in August due to "staff shortages" and technical problems.

Globally the industry is now likely to lose $4-6 billion in 2004. If future forecasts for the oil price are even close, it will lose money in 2005 too. A reasonable observer might think that there must surely be a recognition on the part of labour, organised or otherwise, that the ability of airlines to pay is more important than some long established notion of wage differentials. But it seems that life is not like that. However, ultimately the world does not owe anyone a living any more.

While it is undoubtedly the case that there have been significant reductions in labour at a large number of airlines, the relative position is little changed. The US General Accounting Office issued a report in August arguing that "legacy carriers must further reduce costs to restore profitability". It points out that while the US carriers had cut costs by $12.7 billion or 14.5% compared with 2001, this was somewhat short of the $19.5 billion target. The report adds, for good measure, that revenues have fallen by 14.5% over the same period too. Within this total, labour costs have been cut by $5.5 billion, representing around 43% of the savings. We estimate that despite the cuts made so far, the US majors need to take a further $5 billion out of their labour cost base to begin to generate returns in the new environment - a target that looks unattainable.

Some airlines have managed to force change through "precipice management" - winning concessions in the teeth of clear and present danger of collapse. Aer Lingus is an example of where hearts and minds were focused by the very real prospect of failure. The result was a 33%cut in staff, although it will be interesting to see if the management is able to push through its latest proposals for a similar further cut now that the carrier is back making money.

Elsewhere, the comfort factor that a government will provide support, come what may, has tended to blunt the perception of the need for change.

The reality for many airlines is that they are in somewhat of a cleft stick. They cannot afford to pay more as labour costs are already out of line with the likely revenue stream; but failure to pay more would inevitably result in some disruption and financial damage to the business. A major constraint is that most airlines cannot afford the costs that would be associated in changing long-established working practices. In most cases this would amount to paying off the old less efficient practices. It all tends to look a little bleak.

The reality, however, is that there might not be a clear win for labour either. As costs increase, so the need to reduce staffing grows. Indeed, there are still clearly more activities where the application of technology can and will reduce employee numbers, while also bringing customer benefits too.

But unless management is willing and able to confront the difficult issues, particularly involving changes in working practices, then it is hard to see much upturn in terms of financial performance. Yet change will require cash to fund it, either through buying out practices, or paying the price of union confrontation. Pressures on cash, unfortunately, are likely to increase, and so "jaw-jaw" is probably seen as a less expensive option than "war-war".

But what then of the current situation? The prospect of at least four and maybe five consecutive years of losses at an industry level will inevitably leave more managements and workforces looking over the edge. But the extent to which this translates into a widespread and fundamental change in the cost structure of the industry remains open to question.

For many airline managements, although the key issue relating to labour is how much more cost still needs to be cut, a major constraint is the relative weakness of their bargaining position. So rapid change is unlikely and ironically in an industry where the only constant is generally said to be change, some things may end up remaining depressingly the same.


Source: Airline Business