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News: Analysis & Commentary: Airlines
The Industry Will Pay for United's Deal with Pilots
Wage hikes will spread to other carriers, raising costs
United Airlines Inc. may have reached a truce with its pilots. But in the end, the price of the new proposed contract is likely to fall on the shoulders of beleaguered customers, who have already wasted countless hours waiting for delayed United flights because pilots refused to work overtime. Why? Because to make peace with 10,000 pilots, United promised the stars.
The concessions, which include immediate wage hikes of between 21.5% and 28.5%, will likely force United to try to raise fares. That is, unless the company settles for lower profitability instead. And don't look to the competition for a cheaper alternative: In the next few months, AMR Corp.'s American Airlines Inc. and Delta Air Lines Inc. will also face unionized pilots looking to match the financial gains at United, which has now agreed to the highest pay in history. "There is pattern bargaining in this business," notes Glenn D. Engel, an airline analyst with Goldman, Sachs & Co. "And [United] has set the bar higher than people had thought."
Besides the substantial wage increase, which would be retroactive to Apr. 12, when the previous six-year deal expired, the tentative contract settlement with the Air Line Pilots Assn. would give pilots annual 4% raises through 2004--on top of the one-time double-digit hikes. It also raises pensions greatly, lifting United's contribution to 11% of pay from just 1% under the old contract. In the first year alone, analyst Samuel C. Buttrick of PaineWebber Inc. estimates, the four-year accord would add $400 million to the airline's costs, which run about $6 billion annually.
The pressures don't end there. Management now fully expects similar demands from the International Association of Machinists. The union, which represents nearly 50,000 mechanics, baggage handlers, and ticket agents, also wants increases approaching 30%.
Why would United put itself in such a tight squeeze? First, it desperately needed to subdue a customer revolt and get pilots back into the cockpit. Just as important, the airline wants to move forward with its planned $11.6 billion acquisition of U.S. Airways Group.
United also suspects that it won't be alone in jacking up salaries--or fares. After seeing the hefty pay increases United's pilots have won--a 747 captain now earns more than $290,000 a year in base pay--pilots at Delta and American are talking tough. Delta, in particular, wants to reclaim the industry lead, and American pilots are threatening to scuttle a one-year contract extension that promises a measly 5.5% pay increase. In most cases, the percentage increases would not be as large as the United settlement, but experts expect some double-digit jumps. Altogether, PaineWebber's Buttrick estimates that if other carriers match United's new wage rates, industry labor costs for pilots could rise by a whopping $1 billion.
Executives at the UAL Corp. subsidiary won't say what the airline will do to offset its generosity. It will have saved some money from the termination of the Employee Stock Ownership Plan; last year alone, UAL had to set aside $756 million to fund the ESOP. But industry analysts still think the carrier will boost fares."UNITED OR NOTHING." There's a risk, of course, that flyers will opt for discount airlines. But business customers often are locked in with big airlines because of corporate contracts or geography. "To go to San Francisco or Los Angeles, it's United or nothing," laments Ed Perkins, the consumer advocate for the American Society of Travel Agents. Leisure travelers could get hit, too. Airlines will likely reduce the number of seats available at cut-rate prices.
For their part, United pilots insist they're only getting what they deserve with their new deal, which will be sent out for ratification later in September. They point out that they took a 25% cut in pay and pensions in 1994 in exchange for UAL stock under the company's now-lapsed ESOP. Their compensation snapped back to 1993 levels only last Apr. 12, leaving them significantly behind pilots at other carriers.
But how much more are passengers going to shell out for United's last-in-class on-time performance? If the answer is not much, then United pilots may not have to decide whether or not to accept overtime: There may not be enough passengers to warrant any.By Michael Arndt in Chicago