Did Clinton Scramble American's Profit Picture?

It was a powerful show of Presidential persuasion, all right. In a highly unusual intervention on Nov. 22, President Clinton achieved what five days of a crippling strike had failed to do: bring American Airlines Inc. and its flight attendants' union together.

Clinton's dramatic action, persuading the reluctant airline to accept binding arbitration, relieves the immediate woes of thousands of Thanksgiving travelers. It also may have given American a face-saving way to end a dispute that likely would have cost the company more than it stood to save in the short term.

In the long run, though, the outcome could create labor headaches for American and other major carriers, all of which are struggling to reduce their costs. Starting next year, American must negotiate new pacts with its pilots and machinists unions--and both are capable of inflicting more damage in a strike than the flight attendants.

"SIMPLY UNTENABLE." Certainly, American's 21,000 flight attendants did damage enough. "We shut down the world's largest airline for five straight days. We commanded the attention of a nation," boasts Denise Hedges, president of the Association of Professional Flight Attendants. Indeed, to the surprise of the carrier's management, the union grounded nearly two-thirds of American's flights after Nov. 18. The airline lost some $15 million to $20 million a day, ensuring a loss for the year--its fourth straight. Even in the face of such red ink, American Chairman Robert L. Crandall had resolved not to give in to the union's demands for higher pay. Just one day before Clinton's phone call, Crandall had said he was prepared to hunker down for a drawn-out dispute to hold the line on expenses. American, he said, must be able to compete with lower-cost rivals such as Southwest Airlines Co. (chart). As it was, the contract American wanted to impose on its flight attendants would have raised costs "well north of $100 million" over four years, according to Crandall. Arbitration, he said, "could result in a contract that is simply untenable for the long term."

So why the change of heart? "When the President chooses to involve himself in something, his request is due a great deal of deference," Crandall said. In fact, though, Crandall may have been happy to have a way out of his bind. Weathering the full 11-day strike threatened by the union would have cost the airline at least $200 million. That's probably slightly more than American would have had to add to the pot to meet the union's demands in the first place, according to figures provided by both sides.

By taking up the President's offer, Crandall may have put a stop to the strike-related losses before they surpassed the savings from his imposed contract. Now, the arbitrator is likely to split the differences between the two sides, so that the airline won't absorb the full brunt of the union's demands. In the end, Clinton may have helped Crandall out of a tight spot. "I think some people can see it that way," concedes American CFO Michael Durham.

DIS-UNITED? But the arbitrator's decision, expected within 60 days, likely will set the tone for American's bigger battles with its pilots and machinists. American executives have said in recent weeks that they want to cut 20% from the carrier's $5 billion labor bill, mostly by changing work rules and boosting productivity. For now, the flight attendants won't share in the cuts--putting more pressure on Crandall to wring the savings from the carrier's other unions.

The outcome could well influence labor talks at United, Delta, and USAir, all of which are struggling to win concessions. "The arbitrator is going to have to recognize that whatever he does is going to set the tone for negotiations with all the other unions," says Ralph P. Craviso, a Dallas labor consultant and former head of employee relations at American. United Airlines Inc. is threatening to break up the airline and spin off short-haul routes unless it can put a union buyout back on track. Already, though, some labor leaders are sounding cockier. Crows a union negotiator at United: "If the flight attendants can do this to American, imagine what pilots or machinists can do to United."

Such talk suggests that Clinton's intervention has shifted the balance of power in the airline industry at a critical juncture. Was that his intent? Industry officials in Washington think so, suggesting the move was a sop to labor, which is still smarting from the President's support for theNorth American Free Trade Agreement. Labor Secretary Robert Reich denies there is any NAFTA connection, arguing that the Administration's desire was simply to help smooth labor-management relations. But in the long run, that will take more than one Presidential phone call.

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