As the US airline industry struggles to escape its impending financial crisis, attention is turning towards the need to reduce labour costs. But will carriers really be able to reverse a trend that has seen pay settlements soar even in the face of recession?

Within days of the terrorist assault, the US industry had announced a massive round of operational cutbacks. It took equally little time for 20% to emerge as the consensus benchmark. Along with aircraft and routes, the industry plans to ground jobs at the same unprecedented rates. In part, the cuts relate directly to the terrorist action and the uncertainties that continue to hang over aviation in its wake. But that crisis has also released a wave of restructuring that had already been building as the US industry headed deeper into downturn. The intent appears not only to weather the immediate storm but to make the overdue structural changes in the cost base needed to ride out a long recession. The question is how organised labour will react.

In the first few days after the attacks, labour leaders were low key but some were quite clear in making a distinction between immediate crisis management and concessions for the longer haul. "We are not going to make concessions in order to avoid layoffs," said Thomas Reardon of the International Association of Machinists at United Airlines. Layoffs would be "short-term while concessions tend to stay," he said.

At US Airways, Scotty Ford, general chairman of the International Associations of Machinists (IAM), told members that there would be no support for the government aid package being pushed in Congress by management "unless the airline intends to abide by our contracts".

The International Transport Workers' Federation (ITF), which covers 600,000 aviation employees around the world, was swift to issue a plea for partnership and "a new level of co-operation" between industry, governments and unions to upgrade security. It notes that ITF members are indeed paying the price for the terrorist action with their jobs - in the USA, Europe and beyond. However, the plea also seems to contain a warning or two about the likely level of cutbacks.

"Industry and government need to recognise the safety-professional role of crews and ground staff to ensure that the industry has the personnel equipped and motivated to deliver safety and security," runs an ITF statement issued ahead of the pending ICAO general assembly. "Secondly, we need to reassess the deregulation and restructuring of our industry which may have undermined the safety oversight capabilities of government airline regulators."

Uncontrollable cost

Well before downturn turned to outright crisis, the labour cost issue was threatening to undermine industry profitability. "Labour, along with fuel, has become an almost uncontrollable cost," said University of Portland (Oregon) finance professor Richard Gritta, speaking before the attacks. He noted then the anger among airline unions from the last recession when they made give backs and concessions. That, he argued, has propelled unions onward, "no matter what" the financial reality of the economic cycle this time: "They have heard management cry poverty before and believed it and, even if it's now true, they are not going to listen this time."

That process started with the September 2000 record-setting contract between United Airlines and its Air Line Pilots Association (ALPA) unit that gave an average 30% raise to members. In discussing negotiations at other carriers following United's pilot agreement, Joseph Schwieterman of DePaul University in Chicago says: "I have never seen the politics of envy more in action."

Airline unions have always engaged in pattern bargaining, notes ALPA president Duane Woerth. But in the past, the pattern was either internal or external: a union would bargain to make up for past concessions or to catch up with a recent contract elsewhere. Over the last year it has been based on both. The United pilot contract which set the pace was meant to catch its members up with the concessions they had made in 1994 as part of a stock ownership plan and to catch them up with the progress they had seen at other airlines. The failure of the now-expired stock plan to give the pilots the security they wanted intensified their desire to catch up with counterparts elsewhere.

United pilots were not alone in making concessions last time. According to the US Bureau of Labour Statistics, airline pilot salaries actually fell by 1.3% between 1991 and 1999.

What was also new in the latest US wage round is how negotiating patterns moved between different labour groups, such as pilots, machinists and flight attendants. "It began with the pilots but will spread," said Aaron Gellman, Northwestern University's Transportation Center director.

At Northwest Airlines, an "industry-leading" contract for the mechanics was signed in May, when a new union - the Aircraft Mechanics Fraternal Association (AMFA) - won a four-year pact that granted immediate raises of 24.4%. This was driven in part, say organisers, by the desire to come up with a richer contract than the old union - the IAM - had won.

The upward pay spiral had also been aided by the law of supply and demand. Pilots have been in demand with new applications not rising fast enough to keep pace with the number of those retiring. Kit Darby, head of AIR, a consultancy that monitors flight deck hiring trends, says that 1,300 pilots will retire this year. That number is expected to increase steadily, with about 2,300 to go in 2007. To combat this trend and to fuel growth he says, US carriers hired more than 19,000 pilots in 2000, and the total was expected to reach 16,500 this year before the crisis capacity cuts were announced. Darby believes that "it is still going to be a good year for pilot hiring when year-end totals are tallied" but little of that total will have come from the fourth quarter.

Supply and demand

So will the demand-supply balance now shift as cuts deepen? Darby believes that it could: "The earlier capacity reductions were not enough to stop hiring but these will." He believes that perhaps 10% of layoffs will be of pilots, although carriers have not detailed the job areas that will see the deepest job cuts, a fact that has provoked some union anger.

There was a growing sellers' market for mechanics, too. Figures from the Department of Labour suggested that the US airline industry needed 10,000 new mechanics a year to cover retirements and another 2,000 to fill vacancies created by growth. Since the FAA certifies only 8,000 new mechanics a year, the balance seemed in favour of demand. But that will swing dramatically if the 130,000 mechanic workforce does indeed suffer from the 20% axe.

Concerns had been growing over the summer that the industry could simply not afford the additional cost burdens that the pay deals were imposing.

Avitas consultant Adam Pilarski asks, and answers, what is no doubt the central question here: "Can the carriers pay for it? No, they will lose money." Before the attack, Salomon Smith Barney analyst Brian Harris saw industry labour costs as rising by 6.3% this year after an 8.3% increase last year. This followed relatively paltry 2.5% and 3.1% increases in 1998 and 1999, respectively.

American Airlines faced a $500 million hike in labour costs this year and $700 million next. That was based on what it expected it would have to pay its pilots after reaching agreement and what it knew it would have have to pay its flight attendants and mechanics. That figure compares with a group net profit of just over $800 million last year.

Delta Air Lines was looking at an additional $2.4 billion in pilot costs alone over the four years of its April contract. Delta - the least unionised of the big three US carriers - also faces other higher labour costs because of this aircraft-to-aircraft, carrier-to-carrier pay raise pattern.

Aware of the recent successful campaign by the little-known AMFA at Northwest, and facing an AMFA drive, Delta spontaneously granted its 10,000 machinists, who do not have a union, an unsolicited pay rise of as much as 18.2%, effective in October.

Delta faces an aggressive campaign by the Association of Flight Attendants to represent its employees, who draw their inspiration from the carrier's pilots. Delta flight attendant activist Joan Harvey says: "We work for the same company. We deserve the same pay increases -. We saw what the pilots got because they had a union." The organising drive, aimed at enlisting more than 20,000 Delta employees, is the largest union election in airline history.

While majors swore that they could handle this added expense, financial analysts were already sceptical. The only way, they argued, to cover these cost hikes would be through fare increases and that was proving near impossible.

Clearly the mood has changed in the light of the current crisis. Now there is an urgent need to cut back whether labour likes it or not. But while largely supportive through the crisis, labour nevertheless appears to be in no mood to give back its recent gains for keeps.

Source: Airline Business