USA Today
Jul. 14, 2004 08:29 AM
Dan Reed
Low-cost airlines may be losing some of their advantage over larger competitors as their workers seek - and win - better compensation.
At airlines like Southwest and AirTran, organized labor is pressing for more pay, better benefits and bigger shares of the profits. Depending on how the labor unrest plays out, low-cost airlines could lose the ability to dictate the ultra-low fares that air travelers in the United States have enjoyed the past few years regardless of which carrier they fly.
No. 5 Southwest, the leading discounter, last month settled a long-simmering standoff with its flight attendants, giving them an average 31 percent pay increase over the next four years. Nobody is saying the settlement will push the consistently profitable Southwest into the red. But the big raise for flight attendants indicates that low-cost carriers have begun to feel the kind of labor cost pressure that their higher-cost competitors have been feeling for years. Labor is the biggest expenditure for any airline.
Ironically, it's happening at a time when the big, brand-name airlines are slashing their own costs to survive and compete with the game-changing low-cost carriers.
Simultaneous cost cutting by the big network carriers and the rising cost pressures on the discounters lead some industry watchers to predict that the two may, in a few years, meet somewhere in the middle.
That, they say, could lead to further blurring of the distinctions between fuller-service network carriers and no-frill low-cost carriers. And average airfares could end up much higher than they are today.
All the low-cost carriers are growing rapidly. Most are profitable, led by category king Southwest. Collectively they've captured nearly 30 percent of the domestic market, seemingly overnight, and their market share appears certain to grow.
In contrast, the six big network airlines - American, United, Delta, Northwest, Continental and US Airways - lost a total of nearly $25 billion since 2000. To stay afloat, they've gone deeply into debt and mortgaged assets. They've laid off workers, grounded airplanes, dropped or reduced service on dozens of routes and contracted out lots of small-market flying to regional partners.
Now, as they look for ways to lower costs even more, network carrier executives - and their union leaders - also are counting on rising costs at their low-cost rivals to help narrow the cost gap and to make them more competitive.
Executives at the low-cost carriers dismiss that as wishful thinking. AirTran CEO Joe Leonard said at a recent industry conference in Phoenix that the advantages of the low-cost carriers go "way, way beyond" their lower labor costs.
"We do things operationally that save us money that the guys at the big airlines can't even conceive," Leonard said.
Low-cost carriers, for example, focus on a small number of high-traffic markets. Simpler service networks allow them to fly only one or two aircraft types, keeping training and maintenance costs low. Crew and aircraft scheduling is more efficient because people and planes move point-to-point, not through a crazy-quilt hub-and-spoke network. And they've pioneered lower-cost sales channels such as the Internet.
AirTran's Leonard acknowledges that low-cost carriers' labor costs will rise over time. And, he says, the network carriers that survive will do so by reining in their costs. "But we'll still have a big, big operating cost advantage for a very long time."
Pat Friend, president of the Association of Flight Attendants, agrees. That's why, she says, AirTran can afford to pay its attendants the higher pay they've been demanding for two years.
Cost creep
Yet there is growing evidence that labor cost creep is becoming a problem for the low-cost carriers. Southwest is the prime example.
While competitors cut back after the Sept. 11 terrorist attacks, Southwest continued growing and extended its streak of annual profits to 31 years in the process. That success made it possible for Southwest's heavily unionized workforce to win big pay and benefits increases while many of their counterparts at the network airlines took huge cuts, or lost their jobs.
All 10 of Southwest unionized work groups - 85 percent of its 34,000 employees - have negotiated new or extended contracts with more pay and better benefits. In 2003, 41 cents of every dollar Southwest spent went for labor. Only network carrier Delta spent a bigger percentage of its budget on labor. A senior Southwest captain flying the maximum number of hours on the airline's standard Boeing 737 would earn about $150,000 a year. But extra compensation from the best pilot stock-option plan in the industry and a lucrative profit-sharing program make them the top paid for their type of narrow-body aircraft, says Kit Darby, president of AIR Inc., an Atlanta-based aviation career consulting firm.
Compensation for other Southwest workers has moved into the upper tier of the industry as well. Most recently, the Transport Workers Union, the flight attendants' union, demonstrated the kind of clout workers at low-cost carriers now have. Negotiations grew so acrimonious this spring that CEO Jim Parker called in Chairman Herb Kelleher, still an almost god-like figure within the company. Parker hoped Kelleher could persuade TWU negotiators to back off demands for a deal that would have increased flight attendant costs 40 percent. Kelleher limited the damage somewhat, but the attendants received far more than the 20 percent increase in compensation the union claimed management had been offering.
Labor cost pressure is growing at other low-cost airlines, too.
- AirTran flight attendants have complained bitterly about low pay and the inability to reach agreement on a new contract in two years of negotiations. They picketed the company's Atlanta shareholders meeting in May. They say they are particularly upset top executives' pay grew 25 percent in 2002 and 13 percent in 2003 while their pay and benefits lag behind the industry average.
- America West, reconstituted as a low-cost carrier over the past three years, had to give its pilots 11 percent pay increases, improved benefits and larger bonuses tied to productivity in order to win narrow approval in December of a new contract. Flight attendants, mechanics, dispatchers and bag handlers are all seeking big increases in current talks. And the Teamsters union has collected the signatures of more than half of the airline's 3,400 non-union customer service representatives to force a representation election in August.
- ATA Airlines, the second-largest low-cost carrier, is already feeling the pain of rising costs, including rising labor costs. Faced with a possible default on its debt and a potential bankruptcy filing, it asked pilots and flight attendants to forgo large raises their union had negotiated. The pilots agreed to the request and won't get raises that were due this month and in July 2005 that together would have given them $43 million more over two years. ATA's flight attendants are voting this month on pay and benefits concessions worth $8.9 million over two years.
Continental Airlines CEO Gordon Bethune told reporters at a conference in Fort Worth last spring that labor unrest at low-fare carriers should be expected.
"When their companies are making more money than the competition, people expect to be compensated better," Bethune said.
Consultant Darby agrees: "I've never seen a (successful) airline where labor costs didn't increase over the long term."
Convergence
Labor cost creep isn't the only threat to the low-cost carriers' advantage over the big network carriers.
The big airlines that survive their present financial difficulties are likely to emerge as more competitive. That has many experts predicting a near-convergence of labor costs in the airline industry over the next decade.
American Airlines CEO Gerard Arpey told investors at a New York conference in June that "most of the so-called new models are as simple as paying lower wages, providing fewer benefits and capitalizing on the "juniority' effect of a new workforce and fleet." Arpey excluded Southwest, which, he said, is unique.
American, the world's biggest airline, recently studied cost structures of its low-cost competitors in an attempt to isolate their cost advantage. The study showed that the biggest reason, by far, for the cost gap is the difference in labor costs. Differences in operations, services and marketing approaches generate smaller advantages for the low-cost carriers.
If American had the same seniority, wages, benefits and work rules as discounter AirTran, the study said, it would save about $2.7 billion a year. American would save nearly as much if it had the labor cost structure of JetBlue or Frontier, the study said.David Neeleman, CEO of low-cost leader JetBlue, calls studies like American's a comparison of apples and oranges. The big airlines can't get close to those of low-cost carriers unless they're willing to change their operations, he says.
The big airlines would have to junk their global hub-and-spoke networks, cut back to just one or two jet models, trash most of their costly marketing programs and learn to operate with far fewer workers per jet if they want to even get close to JetBlue's costs, Neeleman says. But, he adds, if they do that, the big airlines would have to live without the higher unit revenue their powerful global networks now generate. "They're saying, "We'll take our revenues and your costs.' But it doesn't work that way. If they had our costs, they wouldn't get their revenues," he says.
Former Air Line Pilots Association national president Randy Babbitt, now head of Eclat Consulting, says that the big airlines don't fully appreciate the low-cost carriers' worker productivity and asset utilization.
"The low-cost carriers are ... just a whole lot more efficient producers. They get a lot more work done and serve a lot more passengers, with fewer people and planes than the big carriers," Babbitt says.
In addition to lower average pay, workers at the low-cost airlines typically get fewer paid days off, work more hours each month and have less valuable health and retirement plans, he adds.
That's why Darby expects the big airlines to transition from their defined-benefit retirement plans - currently underfunded by more than $20 billion - to 401(k) plans like most low-cost airlines offer.
Darby says the best way for management to switch to the lower-cost retirement plans is through negotiating with unions. A unilateral decision by management to make the switch, he says, would anger workers and make matters worse.
Such cuts might not have to be as drastic as it now would appear, thanks to improving benefits at the low-cost carriers. Says Darby: "The two groups are both moving to the middle. It's the marketplace at work."
Copyright 2004, azcentral.com. All rights reserved.
Low-fare airlines may be losing their edge in worker pay
Moderators: sky's the limit, sepia, Sulako, North Shore
Re: Low-fare airlines may be losing their edge in worker pay
Rebel wrote: No. 5 Southwest, the leading discounter, last month settled a long-simmering standoff with its flight attendants, giving them an average 31 percent pay increase over the next four years. Nobody is saying the settlement will push the consistently profitable Southwest into the red. But the big raise for flight attendants indicates that low-cost carriers have begun to feel the kind of labor cost pressure that their higher-cost competitors have been feeling for years. Labor is the biggest expenditure for any airline.
Ironically, it's happening at a time when the big, brand-name airlines are slashing their own costs to survive and compete with the game-changing low-cost carriers.
In with the Unions for one and out for the other..
