Inspired by some recent news articles about airline unions trying to negotiate raises (example) now that the industry is recovering slightly, I’ve drafted an article on how unionization affects the U.S. airline industry and would appreciate comments/corrections.
16 thoughts on “Unions and airlines”
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That’s pretty succinct and factual. The US airlines have collectively destroyed capital since their inception. Though your focus is “labor”, the industry also uses the most expensive and narrowly sourced capital equipment and is heavily exposed to energy costs, so its kinda remarkable when ANY profit occurs.
PS: There was a time when the growing airline could own airplanes and depreciate them rapidly, creating a cushion for the lean years. When a couple of losing quarters loomed, sell off $20 to $50 Million in used planes, 90 percent of the sale dropped to bottom line, and voila – break even! In a biz where 2% margin is typical, $40M cap gain is like the profit on $2 BILLION in tickets.
The post-9/11 dive pretty much liquidated balance sheets, except maybe Southwest.
Good article.
It took me 3/4 of the way through the article to remember who Captain Sully was. You might want to explain who he his.
“The stakeholders who suffer the most are public equity shareholders (the “widows and orphans”), who get wiped out with every bankruptcy filing.”
I work with a woman who’s in bad health, mid-60’s. She was supposed to be retired from the airlines, with pension. She was originally a stewardess, then worked at the check-in counter. Airline went bankrupt and her pension was wiped out.
Article sounds a bit slanted, greedy union reps vs. honest hardworking investors (widows and orphans?). Seems like everybody is trying to get the best deal under a system where the incentives are poorly structured.
My son is reviewing books and music for his school paper and I send him all your book reviews as examples.
Still scary to think first year Regional Jet pilots are making half as much as me, in my dinky web development slacker job, with considerably worse hours and conditions.
Phil,
You state that a good pilot negotiator will start out with a position that demands 100% of the profits. Can you cite any case (either pre-or post-deregulation) where this was achieved?
You also make the case that senior pilots control the distribution and therefore allow a $300,000 to $19,000 per annum may disparity.
First of all: The lowest pay at a major/legacy carrier is about $35,000 on the first year scale. Further there is currently no-one at first year pay at any of the legacy carriers. Second year pay typically jumps into the $50,000 range.
The $19,000 regional pay that you cite is at a carrier with a typical maximum pay of $80,000 to $90,000 per year. (You must still have a copy of your contract. What was the max may at the regional where you flew?)
Second; your contention that the process is controlled by the senior pilots is patently false.
Every pilot gets an equal vote on a contract. Typically the negotiating team will be made up of pilots representing each tier of the seniority list. Further FOs and CAs are equally represented by their own elected officers. Their are an equal number of captain and first officer reps. This is done in part to ensure that the situation you allege is occurring does not in fact occur.
The only way to support your conclusions regarding senior v.s. junior pilot pay would be to directly tie pay at the major to their regional partners.
This is also not possible. While most majors must earn or lose money at the mercy of the market most of the regional players are paid a fee per departure by their major partners. Typically they are profitable regardless of their load factor. (And in many cases regardless of the price of fuel as their major partner is often paying the fuel bill.) Though some legacy managers are coming around to the unworkability of this system it still largely persists.
You also overstate the complexity involved in replacing pilots. A current and qualified captain can, in fact, move from airline X to airline Y without simulator training. All he /she needs to do is demonstrate proficiency and familiarity with carrier Y’s operational procedures. This can, and has been done, by taking an oral with the FAA. This was done both at Eastern Airlines and at United Airlines in the 1970s and 1980s.
You also overstate the threat of a strike. Unlike most unions who are controlled by the NLRB all airlines are governed by the RLA.
It is painfully difficult to get released into self-help by the NMB under the RLA. Talk to the flight attendants at American. They have been negotiating for over three years and the NMB has indicated it has no intention of allowing the flight attendants to strike.
The pilots of American have also been in negotiations for over three years and their new leadership recently announced that they expect the NMB will soon “park” them. That is suspend mediated negotiations indefinitely. These are not uncommon occurrences.
You might want to address how a junior pilot becomes a senior pilot. Do the junior pilots outnumber the seniors? If so, and if the union is rigged in favor of the seniors, why can’t the juniors just vote out their union’s leadership and put in people who will represent their interests?
Folks: Thanks for the corrections (the moderator forwarded me some that didn’t get approved because they were fixable easily).
Brian: Thanks for the feedback. I didn’t mean to paint the unions as greedy. If I were a negotiator for a pilot’s union in the U.S., I would insist on 100 percent of expected profits. Given the interaction of labor law and FAA regulation, that is the correct share for the pilots.
Jon: The distinction that you draw between regional and “major/legacy” is itself an artifact of unionization. If not for high costs imposed by union agreements, the majors would operate regional jets directly. Similarly the successful regional airlines, if not hamstrung by union contracts that prevent them from operating planes with more than 76 seats, would grow into bigger planes. In a market economy you would not see a pilot’s salary varying dramatically with the number of seats in the plane. An Airbus A320 is no harder to fly than a regional jet and the FAA-required qualifications are the same, so you’d expect the market-clearing wage to be the same for an Airbus pilot and an RJ pilot.
To answer your question about my airline employer… the pay range was roughly the $20,000 to $80,000 range that I gave as an example for the two carriers in the article. The folks on the various union committees tended to have been with the company for many years, just as the managers on the opposite side of the table had been with the company for many years. As a new employee, my opinion on how things should be arranged was never solicited by anyone in either the union or in management. Our union struck the company and shut the airline down for 89 days back in 2001 and won the most lucrative contract in the industry. The parent airline went bankrupt in 2003 and a judge reset the contract terms to more or less what they had been before. Even the post-bankruptcy terms of the contract result in higher pay than at other regional carriers, which may be one reason that the company has announced plans for 2011 to sell half of its remaining fleet and lay off an additional 50 percent of the pilots. The surviving employees will be few in number, extremely senior, and paid much more than the average regional airline pilots.
rglovejoy: Do junior pilots outnumber seniors? As seniority is determined by longevity with the company, the answer by definition is that there are always an exactly equal number of junior and senior pilots. If an airline is shrinking, both junior and senior pilots may have 10 or more years of experience at the airline, but in terms of relative seniority there will always half who are more senior than average and half who are less senior.
Could you explain why some airlines like WN can be consistently profitable in the system as you describe it?
Do they hire pilots who vote in less competent union bosses? Maybe they have more leverage because they have only one kind of jet and their internal procedures are simpler for outsiders to qualify with.
I’d also like to hear about why international routes seem unusually profitable for legacy carriers and domestic operations lose money. I’m curious why I can fly LAX-JFK for $200 but LAX-MEX, half the distance is always $500+. LAX-GUA is short also but $600+. Taxes and airport fees only explain at most $50 of the difference. Europe and Asia have similar ticket price issues.
Has an crew-owned airline ever been attempted? Seems like it could be a tremendous advantage if high and inflexible labor costs are the predominant challenge to airline profitability. Is that the case? I don’t know enough about airlines to judge whether they would be screwed anyway for other reasons.
I don’t get why the long pilot commute issue has anything to do with union agreements or management practices. If I lived in the SF exurbs and accepted a lucrative job with the understanding that the position would be based in Charlotte, NC, then guess what? I and my family would MOVE to the Charlotte area. So would the vast majority of the employed, I’d wager. In Phil’s parable, Capt. Sully could solve his transcontinental commuting problem by relocating to Charlotte. Thus it is entirely Sully’s choice to maintain his home in SF and, as a consequence, show up to work fatigued.
Its a well done piece. You clearly set out that the pilots collectively own a regulatory asset co-equal to the Air Carrier Operating Certificate.
Unlike the ACOC, pilots own their regulatory asset without having incurred large, ongoing capital costs (like debt service), which puts them in a stronger negotiating position relative to the carrier. Breaching a covenant on public debt is worse that being a couple weeks late on rent.
Its really good quality and novel analysis. With the exception of the advantage that accrues to newer airlines vs. older, I’ve not read it elsewhere.
Markl: Why does the fact that changing jobs may result in a 90 percent pay cut lead to long commutes? Consider a pilot whose spouse has a well-paid job in City X and the pilot is based in City X. The airline closes the base, but the pilot’s seniority enables him or her to get a job at the airline’s base in City Y, on the opposite coast. The spouse cannot move. Unless the pilot wishes to get divorced, he or she will thus commute to City Y from City X.
Newt: How does Southwest survive and prosper? Since they are constantly growing they don’t have as high a percentage of senior pilots as their competitors. Also, their union may be taking a longer/smarter/more realistic view about maximizing its compensation. A union does have some incentive to avoid bankrupting an airline since if the airline goes Chapter 7 (liquidation) rather than Chapter 11 (reorganization), the senior pilots may have to start over at another airline at 1/10th of their former hourly compensation.
Why are international routes so profitable? Governments restrict competition on international routes, typically to benefit a state-owned or state-affiliated (run by cronies) airline. If not for U.S. government restrictions, for example, probably nearly all of our flying would be done on Ryanair (about 25 percent lower costs than Southwest; absurdly lower cost than U.S. legacy carriers) or Emirates (lower cost of capital in the United Arab Emirates than here ever since we decided to send all of our money to the Persian Gulf; Emirates directly owns many of its planes, saving money compared to airlines that lease). In a free worldwide market, U.S. companies plus U.S. labor regulations would result in about the same competitive situation that we have with the Asians in manufacturing electronics.
Shimon: United tried an employee stock ownership plan for a while, but they ended up in Chapter 11 eventually anyway (see http://en.wikipedia.org/wiki/United_Airlines ). FAA regulations give any group of airline employees a lot more power to shut down the operation than at a standard business. So if the pilots owned the airline, the mechanics or flight attendants might strike to shut it down (though it is easier to replace mechanics and flight attendants than pilots). If all the employees together owned the airplane it might work, assuming that they didn’t start fighting amongst themselves and have one group of workers form a union to negotiate against the remainder.
does the existence of persistently failing airlines invalidate efficient market hypothesis? In spite of your essay on investing, I’m tempted to short some United stock…
There’s considerable validity to the points made in the article, but I’m amazed that the author was able to write it without using the d-word, deregulation, a single time. The airline industry requires regulation in the interest of stability; instead, we have ruined a great American industry just so we can save fifty bucks on a roundtrip to Milwaukee.