The Airlines To Labor: Buy In Or Get Bashed

It's finally Labor Day for the airlines. After months of posturing about the need to slash labor costs, industry leaders United Airlines Inc. and American Airlines Inc. now seem poised to act. United Chairman Stephen M. Wolf has warned his unions that unless they complete a deal to swap concessions for an ownership stake by Nov. 13, he'll proceed with drastic plans to overhaul the airline and chop thousands of jobs. American, meanwhile, has threatened to replace 21,000 flight attendants if they strike in November. And Robert L. Crandall, American's fiery chairman, is calling for the carrier's other unions to slash labor costs by up to 20%--the first time he has put a specific figure on how big a cut he wants.

There's no stepping back from this confrontation. Neither Wolf nor Crandall argues that labor is the cause of the industry's woes. But the companies are being hurt by continued weak demand for travel and hounded by rivals such as Southwest Airlines Co.--which has unit costs, at a mere 7.1 per seat-mile, up to 25% below their own. The carriers have little control over other big-ticket items, such as fuel and commissions, and they have been unable to halt their fare wars. So they want labor cost cuts at least as big as the ones Northwest Airlines Inc. recently won from its unions (chart). Declares Crandall: "The airline simply will not work unless we reduce our current labor costs."

Both Crandall and Wolf are trying a mix of threats and promises. Wolf is working with his unions to craft an employee buyout that would trade some $4 billion in cuts for up to 60% of the carrier. Crandall says he might do a swap, too, but his unions don't want to play.

SABER RATTLERS. In lieu of cooperation, Crandall is getting tough. In early October, American sent pamphlets to its flight attendants warning that it may permanently replace those who strike, as the union has threatened to do by Nov. 22. "If that's what we have to do, that's what we're going to have to do," says Robert W. Baker, American's operations head.

Crandall also laid out to American's managers for the first time just what he wants from labor: work-rule changes, plus the right to farm out union jobs to subcontractors. Donald J. Carty, American's planning chief, says such changes would save up to 20% of the company's $5 billion annual labor bill. He concedes, however, that it then would need 20,000 fewer workers--a stunning 21% reduction. In exchange, American would offer buyouts and job guarantees.

United's Wolf is rattling sabers, too. Insiders say the carrier has agreed in principle to sell the unions more than 50% of the airline, but only if they improve their initial bid of $3.345 billion in wage-and-benefit cuts over five years. The unions have offered to save $600 million more by helping to set up a new, low-cost subsidiary to compete with short-haul rivals. Management envisions a 7,000-employee carrier after five years with revenues of $1.6 billion and earnings of $206 million, negotiators say. But the talks have bogged down over work-rule changes for the new operation and over how big it should be allowed to get.

MORE BITE. With a chance that the buyout will fail, United has been cooking up alternatives. Wolf says to avoid more outsourcing, a buyout must be done before the carrier completes the sale of its 15 flight kitchens, which employ 5,200 workers, on Nov. 13. Now, he's adding teeth to his warning: United recently took bids to outsource work done by 2,800 mechanics in San Francisco, says President John C. Pope. It also has bids for the work of New York City-area ground crews and plans to hire lower-wage flight attendants overseas.

United, meanwhile, is also talking with bankrupt America West Airlines Inc. Insiders say the companies are examining whether United should buy America West or forge some other tie to allow it to operate United's short-haul routes should the union buyout falter. However, these backup plans could backfire. Already, the flight attendants left the talks after United opened a new base on Oct. 1 in Taipei, where it can hire lower-wage attendants to staff flights in Asia.

The big airlines seem sure to be overhauled. The question: Will managers and labor do it together, or will change be imposed from above and fought from below?

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE