Airline management is demonstrating renewed determination to achieve a radical shake-up of labour costs, with pay cuts and changes to working conditions on the agenda
In early February, American Airlines became the largest US carrier not in Chapter 11 to spell out the cuts it believes employees must make to keep the carrier in business. Having cut everywhere else, it now wants the workforce to help it find another $1.8 billion in annual cost savings.
American's plea will have a familiar ring to management at United Airlines and US Airways. Those carriers, both operating under bankruptcy court protection, have already won significant concessions from employee groups in their efforts to keep afloat, and made deep cuts in staff numbers. Other US majors are preparing the ground for their own attack on labour costs. "In addition to increasing productivity, airlines must exercise control over the single biggest cost category: employee cost," warns Fred Reid, president at Delta Air Lines.
What the US majors realise is that labour costs simply have to come down to make a major contribution towards stabilising their business today, and creating a sustainable model going forward. Their plight is the most acute among the world's network carriers, but European, and even some Asian airlines are feeling the need for fundamental reform to their labour costs and working conditions.
This renewed examination of the basic airline labour model comes at a time when the prospect of a further wave of liberalisation is again on the agenda. Discussions at ICAO's upcoming Worldwide Air Transport Conference in March will be watched nervously by the labour movement.
Union leaders already estimate that 400,000 jobs have been shed by airlines, and the supporting infrastructure, since 11 September 2001. "It is understandable that we are on the defensive," says Shane Enright, aviation secretary of the International Transport Workers' Federation (ITF), which represents over 750,000 employees in the airline sector, and has members at 70% of IATA carriers. "We are being asked to make more concessions against a background of previous concessions not given back when promised," he complains. "In addition, we are being asked to deregulate further when the evidence says it has only brought less stability and less choice to the industry."
But instead of the current crisis producing another see-saw round of cuts, concessions and later clawbacks of pay and conditions, there are calls for a more profound change in labour costs to match the fundamental changes many carriers are making to their cost structures and business models.
Productivity drive
"The simple truth is that for the legacy carriers, wages and work rules are out of whack with productivity and revenues," in the words of Carol Hallett, retiring head of the USAir Transport Association, addressing the Wings Club in New York in December.
Headline figures have tended to suggest that the airlines have indeed been raising productivity at a steady lick in terms of unit tonnes or seats per employee. However, Chris Tarry of the CTAIRA consultancy, has long argued that such traditional measures of productivity are suspect, too often reflecting a hike in capacity which may bring little extra revenue and do harm to profits.
A standard industrial measure of revenue per employee would provide a better test, although this still does not factor the rates at which employee costs are rising. Tarry instead argues that a truer test of productivity is to look at the revenues earned by a carrier for each dollar of labour expense. Such calculations can be instructive.
By the end of last year, US majors were earning less than $2.5 of revenue for each dollar spent on labour, and was only a little over $3 even at the height of the boom. United fell below the $2 mark as it headed into bankruptcy late last year. By comparison, a selection of the largest European majors suggests that their ratio of revenues to labour cost has been running at the 3.5-4 mark. The usual warnings apply about the variance in international accounting standards and the latest European figures are only for the first nine months, but it seems clear that the ratio has been more stable. Asian carriers appear to have fared better still, perhaps following the restructuring that took place after the 1997 Asian financial crash, but it is Europe's low-cost Ryanair that stands out head and shoulders above the pack.
For Prof Rigas Doganis, academic and former chairman of Olympic Airways, the motivation for management to begin to think of labour as a manageable rather than a fixed cost came after the 1991 Gulf War. "This is the most dramatic change over the last 10 years. Up until the 1990s, people thought of labour as a given cost."
At that time carriers made swingeing workforce cuts, obtained concessions and launched massive business-wide cost-cutting programmes to get themselves back to profitability. This time around, European and US carriers are not convinced this will be enough. "In today's new circumstances airlines are facing an unprecedented gap between the prices they can set in the market and their estimated cost structure," says Jan Ernst de Groot, until recently vice-president of labour relations at KLM and now heading government & industry affairs.
After the Gulf War, carriers were up to the challenge of adjusting their cost structure to the new market realities, he says. "This time around we see the same phenomenon, but there is hardly any belief that by traditional means airlines can bridge the gap." One area in which carriers made dramatic improvements in the 1990s was productivity. According to de Groot, there are still some gains to be made, but he notes: "Today productivity increases are stagnating, and at the same time labour costs are still outpacing inflation and fares."
It is in the USA where the most drastic action is needed on the part of the majors. To get expenses and revenues in balance American believes it has to take out at least $4 billion from its cost base. According to James Beer, formerly treasurer and now American's vice-president for Europe, the airline has already identified over $2 billion in savings without touching labour. "That is an impressive result, but the bad news is it gets us only half way to our goal. We need a renegotiation of our primary labour contracts," he told delegates at a recent conference hosted by The Economist in London. Thus American is seeking $1.8 billion from its workforce, although Beer stressed that "our people know that we did not go to them first" for cuts. Both Beer and Reid had to concede that the USmajors had indeed taken their eye off costs in the boom years of the late 1990s.
Low-cost impact
Both carriers have also publicly identified the rise of low-cost carriers as a key driver of change. Air Canada too is feeling the heat from domestic low-fares rival WestJet. That has led chief executive Robert Milton to open talks with unions to seek significant productivity gains and achieve annual labour cost reduction of C$650 million ($425 million). "WestJet is 40-50% below us in wages, benefits and work rules," he says. "C$1.3 billion would be dropped off our bottom line if we had WestJet's cost structure and work rules."
Hallet at the ATA points to the damage done to productivity at the US majors by the traditional cycle of union contract claims. "The constant push for industry-leading wages through pattern bargaining too often results in less productivity for more money," she warns.
It is a system that has yet to make much impact in Europe, where unions negotiate on a national basis with hardly any co-ordination on pay and working conditions. "In the USA, pattern bargaining produced a kind of accelerating system of wage increases that we have not had in Europe," says de Groot.
Unions recognise that the industry is at a critical point, but attitudes to change are considerably harder than they were during the early 1990s downturn, believes the ITF's Enright. "Airlines have not been good at managing capacity issues and developing policies to weather the business cycle," he says.
Patricia Friend, president of the Association of Flight Attendants, which represents 50,000 attendants at 26 carriers, says unions understand the need to work together with management. "If we are going to create a labour-management conflict out of this situation, then we will all fail," she says. But she questions whether management has stretched its thinking far enough to seek out successful business plans. "Where they always come is the easy way - to the workers. But critically what they are not doing is addressing the revenue side of the equation," she says.
Structural changes
While some carriers may be talking about radical cost cutting, Blair Pomeroy, director of global airline strategy at the Accenture consultancy, argues that there is still a long way to go. "Most carriers have not been very fast at restructuring their organisations. There are some strikingly vertically integrated companies where the management that runs these incredibly complex businesses is really reluctant to re-engineer the back office functions," he says.
New wage levels and working conditions will need to be built into any revised labour contracts instead of returning to the old cycle of concessions and claw -backs, he believes. "The industry will never resolve this issue if we only view the climate as producing a temporary fix, against finding a long-term permanent solution."
Part of that solution may require a cut in real wage levels. According to Hallett: "Today, average employee compensation for the six large, pre-deregulation network carriers is nearly $85,000 per year - compared to a US industry average of about $50,000. These levels cannot be sustained." Reid notes that, even after the wage and benefit cuts which will contribute to reducing the carrier's unit costs 15% by 2005, Delta's employees will still be in the top third of pay in corporate America.
Whether a real reduction in overall wage levels can be achieved is debatable, but of more importance is increased productivity, believes Doganis. "It is the productivity-cost relationship that is the key," he says. Talk of management and unions pulling together in adversity may sound like spin, but many believe that it is badly needed. "To overcome the increasing external difficulties, airlines first need internal stability, and a partnership with unions," says de Groot. "But we do need flexibility when it comes to labour conditions," he adds.
This will mean many carriers taking a long, hard look at the raft of working practices and conditions that has built up over the years. Many will need changing and some will be axed altogether. As US Airways president David Siegel told a Senate committee in January: "Work rules and productivity are another area ripe for rethinking. Decades of collective bargaining and trade-offs have resulted in work rules that are out of date, inefficient and sometimes just plain beyond belief."
Some executives are trying to depersonalise the issue. When Air Canada's Milton went to his airline's unions about cuts: "I told them, this is not about Bob Milton. This is not about me. This is about the changed world we are in."
The dire state of the domestic market is forcing North American carriers to take steps quickly to stop them haemorrhaging more money. For European carriers, labour is at the top of agenda too, but is not generally a do-or-die issue just yet. A flexible and constructive approach will be needed on both sides, says de Groot. "It is important that management does not see staff as a cost item only," he adds. "Labour is a cost factor, but at the same time airlines cannot do without motivated and smart people to get through these tough times."
Labour is not only burdened with some fundamental questions about pay and conditions, it is also worried about moves toward greater liberalisation of air transport and the relaxation of national rules for the ownership of carriers.
For Enright, states should be more upfront about what they intend to achieve by liberalisation. "Consolidation is a key mechanism for stripping out capacity - we have seen it in industries like telecommunications and pharmaceuticals - and if this is what they really want then they should say so. But they must tell us how they intend to ensure merged airlines are stronger. The evidence of mergers is that they haven't generally increased shareholder values or the operational strength of the carrier concerned," he says.
Deregulation failure
For Linda White, the assistant national secretary of the Australian Services Union, which represents 13,000 non-flight crew workers across the country's airlines, Australia is an example where deregulation failed. "If the government gets it wrong and thinks liberalisation and competition is somehow going to be the panacea, then someone always pays - in Australia it was the Ansett employees," she says, referring to the collapse of Ansett in September 2001.
She is worried the same mistakes will be made again in the proposed Qantas-Air New Zealand tie-up. "If the Australian Competition Commission puts on Qantas a whole range of increased competition, history will repeat itself. If international airlines are allowed to fly domestically there will be price competition for a while and then someone will hit the wall again."
Airline experts recognise labour's concerns about restructuring, but feel it is inevitable that one day the air transport industry should be allowed to operate as any other business sector. "There is a threat to labour in the sense that the survivors will be different," says Doganis of a liberalised market. "That will mean job insecurity and job losses for a lot of people, but the total industry activity should be an improvement, profitability should improve and the potential for improved wages and conditions should get better."
Regardless of the pace of liberalisation there is no doubt that the issue of labour costs is here to stay, with a profound restructuring now inevitable. There is still some tough talking to come, but management is being forthright about the need for change, and labour is getting the message. As Pomeroy of Accenture notes: "There is no illusion of love here."
Source: Airline Business
