When Northwest Airlines Inc. wrested cutbacks of up to 15% from its pilots and machinists in early July, the ailing carrier did more than avoid a trip to bankruptcy court. The lucrative package also steps up the pressure on the industry's Big Three--United, Delta, and American--to slash their own swollen expenses. Either that, or watch lower-cost foes such as Southwest, Continental, and now Northwest sail past.
The result is likely to be an outburst of strife as the largest airlines struggle to match Northwest's new labor-cost standard. Wages and benefits consumed some 34% of industry operating expenses in 1992, up nearly two percentage points in two years, according to Transportation Dept. data (charts). And low-cost carriers such as Southwest Airlines Co. enjoy unit costs up to 25% lower than the Big Three, according to Morgan Stanley & Co. analyst Kevin Murphy. Add in the likelihood that the industry won't see any profits for the fourth straight year, and the outlook for clashes grows stronger. "We can't have losses like this and continue to run the business," warns John C. Pope, president of UAL Corp., which owns United Airlines Inc.
While airline labor leaders recognize the Big Three's woes, they disagree on the solution. Some say they would consider pay cuts or work-rule changes, but only for quid pro quos like those Northwest coughed up: three board seats plus up to 37.5% of the company's equity to be split among the carrier's six labor groups. However, United and other carriers, which worry about such issues as diluting shareholder equity, are sure to play hardball. "If I got $1 billion in concessions for $100 million in equity, I'd consider it," says Pope.
Still, the airlines have had little luck so far simply persuading their unions to accept cutbacks. Take United. Earlier this year, Chief Executive Stephen M. Wolf cut management salaries 5%, then asked labor to take 5% pay cuts and to increase productivity by 10%. Both the flight attendants and the machinists dismissed the appeal. Only the Air Line Pilots Assn. (ALPA) agreed to consider it. However, ALPA insisted on first examining the airline's books, which it has been doing for several months.
To step up the pressure, United has threatened to spin off money-losing short-haul routes to shareholders. This would allow the new company to hire less expensive, nonunion workers. The new carrier would be profitable, and United could pare its losses, says Pope.
But the idea is likely to hit turbulence. ALPA President J. Randolph Babbit argues that any short-haul company created by United would be effectively controlled by the airline--and ALPA's contract stipulates that any carrier owned or controlled by United must hire union labor. Pope insists that United wouldn't be in control. But last year, American dropped the idea of creating a short-haul carrier after deciding the effort would violate its similar union contracts.
ON NOTICE. Delta Air Lines Inc. and its pilot union haven't reached agreement, either. After the carrier imposed a 5% pay cut on nonunion employees, the pilots agreed to cuts for all but the most junior pilots. But Delta refused to accept anything different from its demands. Instead, it reduced its flight schedule and laid off 136 pilots. It plans to furlough 464 more starting in September.
With no carrier rushing to embrace a Northwest-style trade-off, the key question is whether the Big Three can come up with alternatives. American is shrinking and seeking alliances with lower-cost airlines that can fly some of its routes more profitably. It has declined to ask labor for concessions. But at some point, the two sides may conclude "that it's time for us to sit down and talk about doing something differently," says Thomas J. Kiernan, American's human- resources senior vice-president.
Where does all the maneuvering lead? Back to the bargaining table. Pilots already know what to expect when their contracts expire at the Big Three next year. "They've served us notice that we'll be held up to Northwest next time," says Richard LaVoy, president of the Allied Pilots Assn., which represents American pilots. Maybe so. But unless management finds space for a few new board members, matching Northwest's pay scales may be an elusive goal.