Labor Unions Face Uphill Battle
In 2008, Economist Says
Labor unions have been advised that a looming recession and rising fuel costs could tip the scales in favor of management at the bargaining table this year, and managements will want to drag out negotiations on new contracts as long as possible. The Association of Flight Attendants (AFA-CWA) is hosting a bargaining summit in Washington this week in conjunction with the Association of Professional Flight Attendants, International Association of Machinists and Aerospace Workers and the Transport Workers Union in hopes of unifying their negotiating strategies. The unions realize that as soon as one airline lowers wages or reduces benefits in a contract, the others tend to follow (DAILY, Jan. 9).
Dan Akins, transportation economist, told the unions the bad news is that even though labor costs have fallen in the past few years, unit costs at U.S. airlines are up about 20%-30% and fuel prices continue to set records. Many airlines also have more cash on hand than they are worth, so they are acquisition targets, he said. This comes at a time when flight attendants are working longer hours for less pay due to past concessions. However, he informed attendees, which included some pilot representatives and perhaps other labor groups, that he believes the cost reductions sought during the past two years of restructuring are complete and will not reduce labor costs further.
One thing labor can demand is that airlines hike their fares to cover raises for employees. He notes that a 1% increase in revenues for an airline covers a 4%-5% increase in fuel costs. “At Southwest, a 1% increase is $100 million. That covers about a 10% increase in fuel,†Akins said. Labor, therefore, should not be daunted by management’s cry over fuel costs, all of which have been covered by passing the costs on to the consumer, he added. Unions must use the fact that they are sharing best practices as leverage. “The worst contract that comes out of this era is going to be precedent-setting,†he said. It will be in management’s best interest to draw these negotiations out right now as carriers post profits and the cyclical nature of the business returns
to the point where labor has given enough and wants to get back its fair share. In fact, Morgan Stanley analysts yesterday ranked labor risk as one of the top three important themes to watch in 2008. “Open ne-gotiations and histories of poor labor relations will likely be overhangs on a number of stocks throughout the year, and investors should position themselves accordingly,†the Morgan Stanley report said.
Akins also told union negotiators to watch for net margins hitting 5% and operating margins 10%. As a rule of thumb, anything above that is gravy, and anything below that goes to “pay the mortgage.†In 2001, airlines spent $14.8 billion on fuel. In 2006, the fuel bill was $38.4 billion. But airlines reported profits in 2006. The reason is they raised their fares, he said. “Make people pay for service,†he said, referring to employees believing they are overworked and underpaid.
Flight attendants at JetBlue have seen their block hours rise 58% from 2001 to 2006, he said, because they must work more to maintain the pay and lifestyle they are accustomed to. During that same period, the block hours flown by American flight attendants are up 40%, and at United and Delta 36%. And because the majors are shifting to more international flights, which pay better, and cut so many junior flight attendants, the pay increases cited by management do not truly reflect the pay cuts and work rule changes, he said. Continental is the only airline that has given pay increases that match inflation, Akins said. Many legacy carriers also are allowing regional partners to fly more domestic block hours by a substantial margin. But paying for that service instead of flying it themselves is more costly. Akins said a large part of a major’s core costs is paying for its affiliates, which is why airlines, such as American and Delta, want to separate from their regional affiliates. Once that happens, those costs will go down, he said.
Another big question in this game of negotiations is looming consolidation. Looking at the current market value, he notes that AMR, which is worth $2.9 billion, paid down $1 billion in debt last year — about the price it would have to pay to buy Northwest. He told the labor summit that United, Delta and American are the “actors.†The answer to American’s domestic problems is to buy Northwest or Delta, and its international solution is to buy Northwest. For Delta, purchasing Northwest or United is its domestic solution, while buying Northwest is its international solution. And for United, acquiring Continental or Delta would serve it well domestically, and buying Continental would be its international solution.
He adds that Continental “is the pretty girl at the dance sitting on the sidelines. It doesn’t have to dance†but can sit back and wait for the best offer. US Airways, however, is “poison†because of labor strife, among other reasons. [email protected]
In 2008, Economist Says
Labor unions have been advised that a looming recession and rising fuel costs could tip the scales in favor of management at the bargaining table this year, and managements will want to drag out negotiations on new contracts as long as possible. The Association of Flight Attendants (AFA-CWA) is hosting a bargaining summit in Washington this week in conjunction with the Association of Professional Flight Attendants, International Association of Machinists and Aerospace Workers and the Transport Workers Union in hopes of unifying their negotiating strategies. The unions realize that as soon as one airline lowers wages or reduces benefits in a contract, the others tend to follow (DAILY, Jan. 9).
Dan Akins, transportation economist, told the unions the bad news is that even though labor costs have fallen in the past few years, unit costs at U.S. airlines are up about 20%-30% and fuel prices continue to set records. Many airlines also have more cash on hand than they are worth, so they are acquisition targets, he said. This comes at a time when flight attendants are working longer hours for less pay due to past concessions. However, he informed attendees, which included some pilot representatives and perhaps other labor groups, that he believes the cost reductions sought during the past two years of restructuring are complete and will not reduce labor costs further.
One thing labor can demand is that airlines hike their fares to cover raises for employees. He notes that a 1% increase in revenues for an airline covers a 4%-5% increase in fuel costs. “At Southwest, a 1% increase is $100 million. That covers about a 10% increase in fuel,†Akins said. Labor, therefore, should not be daunted by management’s cry over fuel costs, all of which have been covered by passing the costs on to the consumer, he added. Unions must use the fact that they are sharing best practices as leverage. “The worst contract that comes out of this era is going to be precedent-setting,†he said. It will be in management’s best interest to draw these negotiations out right now as carriers post profits and the cyclical nature of the business returns
to the point where labor has given enough and wants to get back its fair share. In fact, Morgan Stanley analysts yesterday ranked labor risk as one of the top three important themes to watch in 2008. “Open ne-gotiations and histories of poor labor relations will likely be overhangs on a number of stocks throughout the year, and investors should position themselves accordingly,†the Morgan Stanley report said.
Akins also told union negotiators to watch for net margins hitting 5% and operating margins 10%. As a rule of thumb, anything above that is gravy, and anything below that goes to “pay the mortgage.†In 2001, airlines spent $14.8 billion on fuel. In 2006, the fuel bill was $38.4 billion. But airlines reported profits in 2006. The reason is they raised their fares, he said. “Make people pay for service,†he said, referring to employees believing they are overworked and underpaid.
Flight attendants at JetBlue have seen their block hours rise 58% from 2001 to 2006, he said, because they must work more to maintain the pay and lifestyle they are accustomed to. During that same period, the block hours flown by American flight attendants are up 40%, and at United and Delta 36%. And because the majors are shifting to more international flights, which pay better, and cut so many junior flight attendants, the pay increases cited by management do not truly reflect the pay cuts and work rule changes, he said. Continental is the only airline that has given pay increases that match inflation, Akins said. Many legacy carriers also are allowing regional partners to fly more domestic block hours by a substantial margin. But paying for that service instead of flying it themselves is more costly. Akins said a large part of a major’s core costs is paying for its affiliates, which is why airlines, such as American and Delta, want to separate from their regional affiliates. Once that happens, those costs will go down, he said.
Another big question in this game of negotiations is looming consolidation. Looking at the current market value, he notes that AMR, which is worth $2.9 billion, paid down $1 billion in debt last year — about the price it would have to pay to buy Northwest. He told the labor summit that United, Delta and American are the “actors.†The answer to American’s domestic problems is to buy Northwest or Delta, and its international solution is to buy Northwest. For Delta, purchasing Northwest or United is its domestic solution, while buying Northwest is its international solution. And for United, acquiring Continental or Delta would serve it well domestically, and buying Continental would be its international solution.
He adds that Continental “is the pretty girl at the dance sitting on the sidelines. It doesn’t have to dance†but can sit back and wait for the best offer. US Airways, however, is “poison†because of labor strife, among other reasons. [email protected]
