Blaming The Unions For What Ails The AirlinesBy
When Delta Air Lines Inc. announced its decision to mothball 28 planes and furlough 600 pilots on Mar. 30, CEO Ronald W. Allen claimed the move was unrelated to deadlocked talks with the airline's Air Line Pilots Assn. (ALPA). But Executive Vice-President Harry C. Alger chimed in with another opinion: Had the union worked with Delta last summer "and addressed the difficult situation..., some of this possibly could have been avoided," he said.
Ask around the airline industry, and you'll hear that stubborn unions are the obstacle to better times. United Airlines Inc. CEO Stephen M. Wolf lambastes labor for its failure to see "reality." Robert L. Crandall pins American Airlines Inc.'s health on labor, though he says he won't fight them for concessions: "We are in the service business. We want to keep mur people content." But he also sends a dark message: "At the labor costs we incur today, we cannot be in business long-term."
To be sure, unions are a factor in the industry's problems. Labor costs at the Big Three carriers and Northwest Airlines Inc. run much higher than at bankrupt carriers. At Southwest Airlines Co., flexible work rules mean higher productivity. But the big airlines' real problems go well beyond that. Critics say management is at fault for much of what ails airlines. "Blaming it on the unions is a red herring," says Michael J. Boyd, president of Aviation Systems Research Corp. "This industry has fundamental problems that can only be described as corporate structural failure."
HUB FOLLY? As Boyd and others see it, the big carriers have constructed top-heavy companies with too-expensive infrastructures. Even the hub-and-spoke system, built up in the 1970s and early 1980s, has backfired. Designed to minimize costs, it also minimized revenues after hub proliferation fed competition and price wars. So while major "fortress" hubs may remain, most smaller ones may have to be dismantled to boost profits. That would mean a costly shift to point-to-point flying. Fixing these problems means more than "laying off some skycaps and a few white-collar workers," says Boyd.
Such Cassandras say the big carriers will have to be turned inside out, with wholesale changes in the way airline tickets are processed, passengers moved, and planes maintained. And the $28 billion in capital-spending cuts announced over the past two years is just a beginning. "They're not addressing things to the extent that they need to," says Timothy P. Pettee, an analyst at Alliance Capital Management.
Acknowledging such fundamental problems would require a stunning about-face from some of the industry's top executives. American's Crandall, for instance, spearheaded the expansion of the hub-and-spoke system. And Delta's Allen, too, may have to admit that his airline overexpanded when it bought Pan Am's European operations.
Not everyone believes the business needs dramatic change. Salomon Brothers Inc. analyst Julius Maldutis predicts that by 1994, aircraft order cancellations and the grounding of aging planes will lead to a capacity shortage. Coupled with "what looks like a classic recovery in domestic traffic," he says, the balancing of supply and demand will save the airlines. That may be one reason industry executives are trying to pull concessions out of labor now. "If strength is coming back to the industry, it's going to make bargaining more difficult later," says former USAir Inc. Chairman Edwin I. Colodny.
Indeed, some investors are taking Big Air's tough talk with labor as a signal to load up on airline stocks. Pettee of Alliance, which has "significant" holdings in airline stocks, expects airline shares to begin creeping up soon--but mainly on the perception of happier days in 1994 and beyond. His money-management fund is buying airline stocks so it won't miss out. But he isn't predicting a permanent upswing. "I remain bearish on long-term prospects of the industry," he says. To turn such critics around, management has to do more than point the finger at unions.
WHAT BIG AIR WANTS FROM ITS UNIONS DELTA Pay cut of 5% from pilots. Delta also wants pilots to accept the cuts in health benefits and vacation pay already imposed on nonunion workers. UNITED Pay cut of 5% from major unions, plus a 10% increase in productivity. United also wants unions to pay more medical costs. AMERICAN Refuses to ask its union directly for concessions but stresses that the airline can't survive long term without them. NORTHWEST Wants $883 million in wage and benefit concessions over three years from union employees to avert a possible bankruptcy. DATA: BUSINESS WEEK
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