December 2, 2004 10:33 a.m. EST
NEW ROUTES: AMR Finds A New Business Partner - Labor
By ELIZABETH SOUDER
December 2, 2004 10:33 a.m.
Of DOW JONES NEWSWIRES
NEW YORK -- Beleaguered employees of major airlines, facing more wage cuts and possible pension terminations, are taking extreme measures to protect their livelihoods.
Some employee unions are taking legal action. Some at bankrupt airlines are threatening to strike. And employees at AMR Corp.'s (AMR) American Airlines are taking an almost unheard-of approach: They're collaborating closely with management.
It's an approach almost untested in the airline industry, where hard times like these, with high oil prices and stiff competition leaving most airlines in the red, usually pit managers against employees in public confrontation as airlines cut costs to survive.
The world's largest airline has been quietly building a structure of committees and regular meetings among managers and employee groups to address problems together. During the past year, the collaboration has cut $100 million in costs and produced revenue-generating deals.
"The nice part is that we have the opportunity to have those negotiations. Other people will have a judge decide," said Jim Philpot, president of the local pilots union in Dallas/Fort Worth. "There is a much simpler way to cut costs in this industry. Taking responsibility is a very difficult thing."
Experts say collaboration may be the only way to unravel entrenched labor costs, like underfunded pensions and retiree medical benefits, which put major airlines' balance sheets at a disadvantage to those of low-cost rivals. Low-cost airlines never offered defined retirement benefits in the first place.
Now that low-cost carriers are the only U.S. airlines turning profits, some major airlines are attempting to dump those expensive retirement benefits in bankruptcy in order to compete. But a few carriers are taking a new route, forming partnerships with unions to address costs collaboratively in order to remain competitive. American is leading the movement.
"When partners develop a more collaborative relationship, what they've really done is expand their menu of choices. They're no longer constrained to deal with each other in the more confrontational ways," said Dan Petree, dean of the business school at Embry-Riddle Aeronautical University in Daytona Beach, Fla., and an expert on airline labor relations. "I think collaborative approaches are probably the only solution" to the current environment.
Two other Texas airlines are also cementing union relations. Houston's Continental Airlines Inc. (CAL) recently signed a formal partnership agreement with pilots. And even Dallas low-cost carrier Southwest Airlines Co. (LUV), among the only examples of successful union collaboration in airline history, is formalizing its employees-first culture with a labor relations department.
At American headquarters in Fort Worth, executives are going a bit further than their Texas rivals, meeting with labor leaders monthly and tapping an outside consultant to mend relations. The airline is currently forming a structure of committees that will involve every employee at the airline, giving folks a forum to suggest ideas and create ways to work together efficiently.
"We have not recognized that unions are a business. We saw them as something difficult we had to deal with, rather than legitimate business partners," said AMR's head of human resources, Jeff Brundage. "Instead of the employee simply as an expense item, it's the employee as a competitive advantage."
A Fresh Start
In the spring of 2003, American Airlines was in a common airline predicament. Executives said the only way to avoid bankruptcy was to cut labor costs. Unions resisted, but eventually agreed to wage cuts of around 20%, saving the airline from Chapter 11.
In the summer of that year, American reported it had set up special financial perks for some top executives that would have been shielded during bankruptcy. Union members were angry, and some even considered revoking their wage cut deal. They didn't, but the situation culminated in the resignation of then-chief executive Donald Carty.
Carty wasn't the only airline executive to lose his job recently due to union complaints; executives with both Delta Air Lines Inc. (DAL) and US Airways Group Inc. (UAIRQ) recently resigned when unions called for their heads.
American Airlines promoted Gerard Arpey to chief executive last year. Arpey, whose first job at an airline was loading baggage during his summer vacations from college, made collaboration a tenet of his turnaround plan, and hired outside consultant Overland Resource Group to create a formal collaboration structure.
Arpey has said recently he'll rely on the collaboration to address any labor cost issues that may arise as competitors attempt to dump pensions and retiree benefits in bankruptcy.
"We recognize that if these carriers achieve a lot of what's being talked about now, but hasn't been achieved, that has implications for us and our future. And we're going to work collaboratively with our organized labor groups to address that," Arpey said at an investor conference in October.
Results
Arpey likes to brag about the money-saving ideas his employees have proposed, like conducting a reverse Internet auction for bids to supply plastic cutlery, or finding ways to reuse expensive airplane parts.
The collaboration has also allowed airline executives to address some situations that traditionally would have made union leaders testy. Pilots and executives worked together to negotiate a revenue-enhancing code-share deal with Alaska Air Group Inc. (ALK). Unions traditionally have been skeptical of code-share deals, concerned the airline will outsource routes - and jobs - to another carrier.
Further, as rival airlines outsource maintenance work, American has decided not only to do the work in-house, but to try to take on maintenance work from other carriers. Mechanic committees have come up with ways to boost their productivity with the hope of one day generating profit, which some mechanics say is their best hope for job security.
"Up until last April, I think there was a feeling that those (collective bargaining) contracts were job security," said AMR human resources head Brundage, who once worked for the pilots union. But as the airline goes through another round of layoffs, employees are recognizing that profit is the only job security.
Further, employees have been part of American's plans to cut domestic capacity and simplify routes, even though the changes result in moving some jobs to new locations, and even cutting positions.
"It is very frustrating. You know people are going to lose their jobs," said union boss Philpot. On the bright side, he said, American is finally implementing ideas that pilots have long suggested, such as keeping crews on the same airplane all day long.
Like many union members, Philpot said collaboration is the pilots' best hope of keeping their jobs and working for a profitable airline. He likes having a say in the changes, and he said understanding why managers do things cools the usual employee complaints and resistance.
"Is it the answer? In this economic environment, I don't think anyone has the answer. I know some of the other systems proposed, and I reject them," said Philpot, a 767 captain.
The main concerns Philpot hears from pilots is that change isn't happening quickly enough, and that managers might roll over union leaders during the next round of contract negotiations, set to begin in 2006.
But Philpot and airline executives say the new collaborative structure is separate from the contract negotiations, which will be done in the traditional manner.
"There's a difference between working together and being able to stand up to each other," Philpot said.
"Do I think we're going to have tough negotiations? You bet," he said, adding that, right now, "there's no point in storming the Bastille because the Bastille is empty. We want the Bastille to be filled with gold."