Staying Legal: Mergers & Acquisitions

When times get tough, costs rise, and profits tumble, it is very popular in the corporate world of air carriers to think about mergers and acquisitions in a search for some profits and lower costs. The theory being the economies of scale that are gained by joining forces. Of course, the danger to the traveling public is that fares will rise, there will be less competition, and therefore fewer options for the public; also, there is always the threat of layoffs where there is a surplus of employees created.

For example, one might think that the ongoing merger talks of Continental and United, would provide great expectations for these large legacy carriers. History however may prove otherwise. Since mechanics and most other employees at United are union and Continental’s are not, many see an upcoming conflict of major proportions when labor moves to bring into its fold a combined non-union employee base. At this late date this continues to prove difficult for Delta’s merger with Northwest.

Of course no one believes that employees will leave unions and go non-union but anything is possible. There is a system in place in most contracts to de-certify a union but this is certainly not a likely result in this merger if it is successfully completed and approved by the government. The more likely result, considering the weight behind labor’s push, will be that the merged units would be considered a single operating unit for the purpose of an election. This will allow for all the employees to participate in any union that is ultimately certified at a merged entity. Many believe that more unionization will lead to further labor difficulty not less. The various unions of course say otherwise.

Higher costs

Dealing with the expected combined labor efforts of several airlines will almost always result in the merged airline suffering significant increased costs. More union activity will clearly increase the costs of dealing with labor and bring them more in line with other carriers, who pay dearly to support their activities with their unions.

The Delta merger with Northwest for example in 2008 was touted as a smooth transition. However, flight attendants are still without a contract and pilots continue to dispute a seniority system that is not yet finalized. Delta has in the past enjoyed a longtime labor peace of sorts with its employees by simply paying them well and providing benefits close, if not equal, to their labor union brothers without the additional overhead of dealing with the union hierarchy. This may be a legacy of its former history as Delta-Chicago and Southern Airlines, Delta-C&S as it was titled. Also, the smooth merger with Western Airlines in the recent past also shows the strength of its management of the labor issue. The plan seemed to simply provide union-like benefits and thus try to avoid any contact with unions. This will not be possible in the future.

So why would such a successful company like Continental decide to merge with shaky companies that have a long history of problems like United and its two bankruptcy filings? Outside of the obvious economies of scale that come from combining various aspects of their operations, there seems to be scant advantage outside of calling itself the largest domestic carrier. Many mechanics and other employees are keenly aware of the possibilities of their being laid off in the wake of a merger, a common result seen many times in similar situations.

In addition, we have already seen difficulties surface in the merger of US Air and America West. They are still suffering great pains in merging their pilot lists regarding seniority and still maintain a certain separation of the operating entities.

The cause of it all

The airline deregulation act of 1978 49 USC 1301-1552 was designed to promote more competition in the industry, bring down fare prices, and provide more convenient travel options for the public. This was the case for the short term after deregulation. Mergers and acquisitions however tend to do exactly the opposite. We have seen how airline schedules are built around major hubs and the traffic problems it creates. I believe many of the current major airlines would welcome re-regulation in the hope that it would solidify their market and profits. The fact of the matter is that there is little profit and some would say none, in carrying passengers, especially when operating costs go out of sight. Like the railroads, who finally went to the government, the air carriers may someday go the same way. Look also at the car manufacturers and perhaps the oil business among other candidates for what might be called semi-nationalization.

One commentator said that the act was … “ a revolution as profound and far-reaching as the revolution upon which our nation was founded …” There is little doubt, at the very least, that the airline business was changed forever. Many now feel that there should be some re-regulation to stabilize the business.

Some history

In 1926 the Railway Labor Act (RLA) (45USC 151-163) was enacted by an almost unanimous Congress. Later, railroads were encouraged to consolidate in order to maximize economies of scale and eliminate wasteful duplication of services. This of course has finally developed into the establishment of a single passenger carrying railroad, paid for by the U.S. taxpayers. Eventually, we may see an Amtrak of the Air, if costs keep going the way they are.

I would not be at all surprised to see a single passenger airline carrying all domestic and maybe foreign traffic, supported by the taxpayers. Perhaps the present Administration may have an opportunity to propose “the Air Passenger Service Act” and consolidate most if not all domestic air carrier activity … all we need is another so-called “crisis” like we have had in the automobile industry … and now in the oil business, with the obvious threat of massive layoffs.

Labor costs and contract provisions have in the past become so costly where mergers are concerned that they tended to outweigh the economic benefits of the merger. Sometimes the intent of the merger has been to acquire new and broader route structure … or in some cases to acquire a larger and mixed collection of aircraft and or gates. It could well be that the acquired additional employees and their unions might be considered to be negative assets rather than positive.

The change in voting

A significant method to advance labor’s cause is to make changes in the way air carrier employees, including mechanics of course, vote for union representation. A key issue is how the vote is accomplished. The National Mediation Board, which is the RLA created governing body that handles this issue, has recently decided to effect a change in the way these elections are held.

The board now has two labor-oriented members and one management-oriented member. Presently, the system allows for a 50 percent plus one vote to decide the election and the vote of those who do not vote are counted as “no” votes. So under the present rule, simply by not voting an employee casts an automatic no vote. The proposed change in voting by the two labor members, does not appear to be a drastic change. It simply says that only the votes that are cast can be counted. Simple enough. This means that employees who do not vote would not be counted. Pretty logical. But, the reverse has been the rule for the past 70 years or so and has been seen by both political views as a way of keeping the railroad and airline business stable.

Although there is the usual opposition to any change in the rule it would appear that it is going to be changed. This new rule will be scheduled to go into effect on June 30. This date will have already passed by the time these comments are in print, but nonetheless, I believe it will pass with little difficulty.

The objections to the change cite that there was no evidentiary hearing process held as is required by the rules, and also that the notice of proposed rulemaking was published improperly. These are common objections that are routinely ignored.

In addition, the Air Transport Association (ATA) has filed a complaint with the D.C. Circuit Court of Appeals in order to get the court to declare the change in voting invalid. No decision on this complaint has appeared to date.

Airline RLA jurisdiction

One has to remember that labor issues at airlines have been under the Railway Labor Act since early 1938 following its application to the railroads. This act was established for the railroads because of the grave necessity for stability within the most important transportation system we had at that time. Along came airlines and it was seen as important to apply to the airline transportation system as well.

When Congress passed the Civil Aeronautics Act of 1938 it subjected all the air carriers to the provisions of the RLA. Again, as in the application to the railroads, the act established formal rules for negotiations between employer and the union-represented employees. These rules allowed for long time periods in which to seek a solution to their labor problems, by design, in order to create long-term stability in the airline system, free from the threat of immediate strikes, at least during the negotiation period.

We have just seen an example of this in the recent strike by Spirit Airlines pilots. They have been in “negotiation” under the rules of the RLA for almost four years. Only now are they given the green light to go forward with the strongest weapon in their quest for higher wages and more favorable work rules — the strike. The airline was shut down at the time I submitted this article.

The act however is significant in what it does not expressly address. The act, as originally set out, did not provide for any labor protection provisions when airlines merged. There were no job security provisions provided for employees. These were added later by the Civil Aeronautics Board. Now it may be that the government may step up again and guarantee job security by simply taking over. Take a look at Air France if you want to see the result.

Although the merger of Delta and Northwest progressed smoothly through the government approval process it appears that the merger of United and Continental and any others may see increased opposition from our Justice Department. Congressman Oberstar and other members of Congress see no great benefits for the traveling public with another merger and will attempt to slow down and stop the approval of this merger and any others that come along. Mechanics and others should prepare with Plan B in case things go wrong or another “crisis” appears. Let’s wait and see. Comments to aerolaw@att.net. AMT

Stephen P. Prentice is an attorney whose practice involves FAA-NTSB issues. He has an Airframe and Powerplant certificate and is an ATP rated pilot. He is a USAF veteran. Email: aerolaw@att.net

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