Profit Changes Tone of Contract Talks

Oct. 3, 2006
For the first time since the late 1990s, union negotiators are going to the table with an economic breeze at their backs.

FORT WORTH -- The 21st century hasn't been good to the USA's airline workers, but their collective fortunes might be about to change.

A new cycle of airline labor negotiations is underway as three big airlines -- American, Southwest and US Airways -- hold contract discussions with their pilots. Though each faces unique issues, the outcome of the talks is expected to set the tone for future negotiations for other groups and other airlines.

For the first time since the late 1990s, union negotiators are going to the table with an economic breeze at their backs.

The nearly $2.6 billion in operating profit that the USA's 10 largest airlines collectively earned in the April-June quarter, and a similar profit expected from the quarter ended Saturday, is buoying the hopes that workers will regain at least some of what has been lost during five brutal years of cost-cutting across the industry. A third-quarter gain would give the industry its first consecutive profitable quarters since 2000.

What's more, Wall Street has been revising upward its earlier projections of a profitable 2007 for airlines, the result of falling energy costs.

JPMorgan's Jamie Baker told his clients to stop worrying about slight softening in travel demand. Declining oil prices alone could drive record profits in the fourth quarter and beyond, the analyst said. "Current fuel prices all but ensure meaningful industry earnings growth in 2007," he wrote.

Tania Bziukiewicz, a US Airways captain and union leader, says improving finances will color negotiations at her airline.

"We have expectations of pay raises, better scheduling and better retirements," she says.

Though formal negotiations at US Airways have yet to begin, the airline needs a new contract for all its work groups because of its 2005 merger, which combined America West with the old US Airways, which had been in Chapter 11 bankruptcy. The melding of the two carriers' workforces can't proceed until the two sets of pilots agree on a single new contract with the airline.

The two pilots groups at the Tempe, Ariz.-based carrier differ on matters related to seniority in a unified contract, but both are trying to leverage ongoing three-way talks with management to win higher pay and improved benefits.

Formal talks at Southwest and American started in September.

None of contract talks is expected to produce a new deal any time soon. But industrywide, workers in every job category are watching them closely.

Pay cuts of 34% at United

Though they continue to be among the best-paid unionized workers in the USA, the past five years were tough for airline employees.

About 120,000 airline jobs -- nearly one in five -- were eliminated, according to the U.S. Bureau of Transportation Statistics.

And despite improving economic conditions in the industry, the employment trend remains on a downward tilt. In July, the BTS said in its most recent report, the number of full-time-equivalent employees in the industry declined 5% from a year earlier. It was the 19th-consecutive month with employment down year-over-year.

At the big hub-and-spoke airlines, most workers saw their pay rates chopped by 15% or more. At the extremes, some captains who were bumped down to co-pilots as airlines eliminated jobs endured pay cuts of 70%.

Today, a senior Boeing 737 pilot at Delta Air Lines working a normal 65-hour month would make $116,200 annually, down 26% from pre-9/11 wages.

A comparable pilot at United makes $102,200, down 34% from before 9/11. At American, such a pilot would make $122,500, or 18% less than the days before 9/11.

The pilots are still a long way from food stamps. But they are experiencing considerable economic stress as a result of the big pay cuts, says Jerry Glass, a veteran labor contract negotiator and consultant to airline managements at F&H Solutions Group in Washington, D.C.

"Everybody lives at their means, or a little beyond," says Glass, who was senior vice president of labor relations at US Airways from 2003 to 2005. "So a $40,000- or $50,000-a-year pay cut for a captain making $150,000 a year is very painful."

But Glass says it's too early for labor to expect a return on what workers view as the "investments" they made in their carriers by taking pay and benefit cuts. The industry, after all, lost more than $40 billion from late 2000 through the first quarter this year.

Says Glass: "We've had exactly one quarter of profitability. Come back next year at this time, or the year after that, and if the airlines have ... sustained profitability, that argument will be a lot stronger." The airlines, he adds, are "only one terrorist event or one oil spike from being right back where we were."

Airlines' protests go unheard

But labor is ignoring such protestations. From their perspective, it's payback time.

"We're not going to watch investors and managers enrich themselves now at our expense," says Jack Stephan, chairman of the master executive council of the Air Line Pilots Association unit representing pilots for the pre-merger US Airways.

"We certainly know that we're not going to get it all back with one bite of the apple," he says. But while hedge funds invested capital to fund the America West-US Airways merger, "A $100 million here or there pales in comparison to the $6.8 billion our pilots contributed" in concessions during two bankruptcies.

And though Stephan's group has some differences, mainly over seniority and flying assignments, with the ALPA unit representing the pilots of the former America West, Bziukiewicz says the two groups are united in their demand for big pay improvements.

"We've made tremendous sacrifices, and now the airlines are doing well, and the forecast is that they will continue to do well," she says. "It's certainly justifiable that we should be getting some significant improvement."

Independent analyst Vaughn Cordle at Airline Forecast agrees, at least in the case of the merged US Airways, where, "You can make a good argument that (the pilots) are not getting their fair share."

But US Airways CEO Doug Parker doesn't seem like a man desperate to cut a deal. He'd like to get the economic synergies of a single pilots contract, "But those synergies aren't that big," he says. "We could continue to operate on two pilot contracts if we have to."

What's more important, he adds, is remaining "cost competitive with our major competitors. And we are at the market rate right now."

Outrage at executives' windfall

Circumstances are different at Fort Worth-based American, where pilot pay rates that three years ago were among the lowest are now among the highest in the industry thanks to big concessions at other carriers.

But that won't keep the union, the Allied Pilots Association, from pushing forcefully for a big increase.

In the formal opening of talks last month, APA President Ralph Hunter said the pilots want more money, profit sharing and more control over scheduling.

He says management is to blame for the confrontational tone. Pilots were outraged early this year when they discovered that American's top 48 officers were set to get "the largest compensation that American has ever paid to executives" because of an explosion in the value of stock options granted three years ago when their pay was cut.

"My membership's expectations have risen dramatically as a result of management's decision to reward themselves first," he said.

American officials declined to comment publicly on the matter. But Hunter says he's been told that they feel morally obligated to continue the controversial executive stock-option program because of promises made to management employees when their pay was cut in 2003. As a result, Hunter says his members believe "that what we gave up in 2003, and what we've given up every year since in the form of raises that didn't keep up with the rate of inflation, is going straight to management's pocket."

Benefits vs. pay increases

Even at consistently profitable Southwest, where pilots are, by some measures, the highest-paid, union leaders expect a better deal.

The union, Southwest Airlines Pilots' Association, is seeking improved benefits and pay. Big hourly rate increases are not a top bargaining objective, they say. But the pilots at the Dallas-based discounter do want more money. To get it, they're willing to increase their time in the air -- and on the clock -- as long as they don't increase the number of days they work each month.

Union chief Ike Eichelkraut figures that will improve Southwest's industry-leading productivity while boosting pilots' W-2 income. But management says experiments with new scheduling techniques like those sought by the pilots so far have been unsatisfactory. Legal limits on pilots' working hours and Southwest's fast-growing route system make it hard to schedule them to fly more than they already are.

Management had asked to delay negotiations for a year, but pilots voted not to go along.

Joe Harris, Southwest's chief contract negotiator, says the delay would have given the company and the union "the chance to get another year of experience of operating in these very uncertain times under our belts before we begin negotiating." Harris says the pilots' rejection of the proposed delay doesn't necessarily portend difficulty in negotiating the new contract. "We're ready to move forward," he says.

Costing more cash

But there's little doubt that a new pilots deal at Southwest will end up costing additional cash at a time when the low-cost leader is fighting a worrisome upward creep in virtually every spending category. Southwest expects to add about 600 pilots to make up for retirements and to staff the 35 or so new planes it will add to the fleet in 2007. The newcomers, Harris notes, will come in at the lower end of the pay scale, easing the cost creep. But it won't fully offset the carrier's rising labor costs.

Harris says Southwest pilots understand the need to control costs and improve productivity.

"Thankfully we have a willing partner in this," Harris says. "Our pilots want to achieve the same goals. But it's not going to be easy."