Why United Is Putting Pilots On The Gravy TrainKevin Kelly and Aaron Bernstein
When labor's attempted buyout of United Airlines Inc. collapsed last fall, the company's unions knew that tighter lending practices were largely to blame. But they still were furious with UAL Corp. Chairman Stephen M. Wolf, whom they accused of undermining their bid. The pilots' leader, F. C. "Rick" Dubinsky, swore that he would exact huge wage hikes from United. No way, said Wolf.
Surprises never cease. On Apr. 10, after months of what appeared to be little progress in bargaining, the Air Line Pilots Assn. (ALPA) said it had reached a tentative agreement with Wolf. Although several points remain to be ironed out, the new contract will make United's pilots among the industry's highest paid within three years. It also will boost the airline's total pilot costs by almost 30% over the next three and a half years, according to calculations by ALPA economists. This will put Wolf at a significant cost disadvantage to his archrival, Chairman Robert L. Crandall of American Airlines Inc., who recently faced down his own pilots after they demanded increases like those United has granted.
HUGE ORDERS. Why did Wolf cave in? United officials say only that the agreement is "competitive in the marketplace." But it seems clear that Wolf is counting on fast growth to help him afford the higher costs. Since last fall, he has placed orders for $22 billion worth of new planes and snapped up Pan American World Airways Inc.'s routes to London. As American closes in on Trans World Airlines Inc.'s London routes, one Pan Am executive says he expects United to bid for more of his company's assets, probably its Latin American and remaining European routes.
In this context, Wolf may think expensive union deals are worth the price if he can put United's troubled labor relations to rest and get on with building the airline. "It would have been a bad summer had he opposed us," says Dubinsky.
Wolf had a good argument for resisting the big pay hikes his pilots wanted. Even though ALPA officials said all along that they wanted to match the high rates Delta Air Lines Inc. pilots won last July, that was before the economy soured. And after Crandall fought off his pilots' demands for Delta's pay scales earlier this year, United pilots expected Wolf to say that he couldn't give them anything more than what American had granted. Instead, ALPA says, Wolf agreed to raise his pilots to American's levels immediately and to pay them Delta's rates by 1993. This means raises of more than 15% to senior pilots and of 30% to 70% for lower-paid junior pilots (table). The company also agreed to shell out $52 million in retroactive pay.
The contract has United's other unions drooling. Machinists and flight attendants, who are currently negotiating their own expired contracts, want to match Delta's pay scales, too. And Wolf will have a difficult time refusing them. "It should make it easier for us if they want to pay those guys all that money," says John F. Peterpaul, the head of the airline division of the International Association of Machinists. Says Bobbie Pilkington, an official of the Association of Flight Attendants: "Our wages are 17% behind Delta's, and we shouldn't be paid any less for the same job."
STICKING POINT? Wolf will need all the growth he can get to meet such demands. Delta gets away with an expensive labor bill because it has some of the highest productivity levels in the industry. American already enjoyed lower pilot costs than United even before the new pilot deals each have agreed to. Now, Crandall will gain an added cost advantage totalling some $300 million through 1994, according to Robert W. Mann, the vice-president of SH&E Inc., a New York transportation consulting firm.
United's new rates may leave it more vulnerable to future upsets in the industry, such as another spike in oil prices or a longer-than-expected recession. But if everything goes smoothly, United could be raking in the cash by next year. Indeed, Morgan Stanley & Co. airline-industry analyst Kevin Murphy figures the carrier could make almost $600 million on operations next year, up from $376 million in 1988, its peak year.
The pilot deal could fall apart at the last minute. The main sticking point is a clause that ALPA wants to guarantee that the contract remain in force if the company is bought. The pilots also want the right of first refusal should the airline end up for sale again. As the prime mover behind the buyout drive, Dubinsky hasn't given up hope: "I'm always interested in a buyout."
Yet in the end, the basic wage hikes are almost certain to remain intact. That may suit United's pilots as much as a buyout. But for Wolf, it means that he, not the unions, must worry about how United will pay for the fat new salaries.
UAL'S NEW PILOT PAY RATES Job Current annual pay Pay as of Oct. 1993 Increase 737 FIRST OFFICER $56,000 $95,000 69% 5 YEARS' SERVICE 747-400 CAPTAIN $193,000 $226,000 17% 12 YEARS' SERVICE DATA: AIR LINE PILOTS ASSN.