Airlines: "Cutting Off Their Nose"


These are dark days for the International Association of Machinists. On Jan. 6, a bankruptcy court judge tossed out the union's contract with US Airways (UAIRQ), enabling the airline to dump its pension plan for 4,450 mechanics and outsource almost half their jobs. In addition to the mechanics, the IAM has some 4,000 other members in so-called fleet services at US Airways. The judge's ruling came after the airline had slashed wages once again, dropping starting pay for baggage handlers to $7.17 an hour. That's down from $9.08 last fall and less than the hourly wage at many fast-food restaurants, a union official points out.

Meantime, at United Airlines (UALAQ), where the IAM represents nearly 20,000 airport personnel, another bankruptcy court judge imposed an immediate 11.5% pay cut on union members. And while United retirees still are collecting pensions, the airline has said it must shuck all of its pension obligations to emerge from bankruptcy. The IAM and other unions have until mid-April to come to terms. If no agreement is reached by then, the judge could cancel their pensions.

All of this is playing out amid a fare war that began on Jan. 5, when Delta Air Lines (DAL) reduced prices on unrestricted tickets, which are often bought by business travelers. Since then, Delta's competitors have all matched the lower prices. The cuts will cost the industry upwards of $2 billion in revenue in 2005, analysts estimate, putting even more pressure on US Airways, United, and other money-losing carriers to squeeze labor for more concessions.

What can the IAM do? On its own, it can only negotiate a graceful retreat. Robert Roach Jr., the IAM's general vice-president, recently talked about the union's straits with BusinessWeek Senior Correspondent Michael Arndt. Edited excerpts of their conversation follow:

Q: What are you doing at United Airlines today?

A: We're working to preserve our pensions. We've told the company, very publicly, that we will never agree to terminate our pension plan. To that end, we have hired an actuary company to review all the numbers. We've been in contact with the Pension Benefit Guaranty Corp. and are attempting to find various ways to protect our members.

A company like United with cash and assets talking about dumping its liabilities on the government -- it's unreal. It's unbelievable. We think that to terminate the pension plans involuntarily would be very detrimental to the carrier. I think that people would be so demoralized that the carrier couldn't survive.

Q: Is there anything else you can do? How about working with an equity investor to take control of United?

A: We're pushing United Airlines to look at equity investors, people with different ideas and experience who would put money on the table. We've talked to a number of people. Certainly, Texas Pacific Group should be looked at, along with a number of other people. Ripplewood Holdings, Madison Dearborn Partners, Carlyle Group, Landmark Partners -- these are four other groups that should be looked at.

Q: What's the latest at US Airways?

A: People are very demoralized over there, too. It's a situation between bad and worse.

The airline is at the point now where they can't even hire people at the wages they're offering. Entry-level wages are now down to $7.17 an hour. You work in the elements. You work weekends. You work in the evening. You can get a job at McDonald's (MCD) for $8 or $9 an hour -- and it's warm and you get free cheeseburgers. You can only cut so far until you get to the point where you can't operate.

Q: Do you see the airline industry shrinking? Will the pressure from Delta on fares force weaker carriers like US Airways to go out of business?

A: I've been in this industry 30 years. Since then, they've always said, "We'll kill off the weak sister, and the rest of us will be profitable." That has never happened. Eastern is gone. Braniff is gone. TWA is gone. Pan-Am is gone. It doesn't work. What's got to happen is some sense that they're running a business to be profitable, and they've got to charge fares that are commensurate with doing that. They've never done that.

Look at Delta. You're losing billions of dollars, so why would you cut fares? It seems like a desperate move by a carrier that's on the verge of bankruptcy and is trying to generate cash.

That has been the history of our industry: When carriers are in trouble, the first sign is they have one of these great fare sales to generate some cash. You cannot cut your way to profitability. You still have all the same bills. You still have to buy jet fuel. You still have to have buildings. You still have to pay landing fees. You still have to pay employees. You have to increase your revenue. They're cutting off their nose to spite their face.

Q: Let's turn back to United. Do you have faith in management at United?

A: We try to work with them. It isn't a war. But I think that the next month or so will determine things. You can't stay in bankruptcy forever. At some point they have to put together a realistic business plan. If they can't get that done very quickly, then it's time to bring somebody else in.


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