The labor cost

May 18, 2012 on 1:00 am | In Airline News | 2 Comments

The bankruptcy proceedings of American Airlines are, to me, exceptionally interesting in the airline industry today with respect to labor.  It’s been a while since we’ve seen such a breakdown between labor unions and airline management (since United Airlines in the late 1990s and early 2000s) and this breakdown of trust and communication inside American Airlines is particularly bad at this point.

When I look at American Airlines as a company, I ask myself just how such a reasonably well run entity got derailed so badly over the last decade.  At the core, the airline industry is selling a service and within that industry, we have a marketplace that is fairly free market oriented in pricing.  However, pricing is generally determined by who has the lowest costs on a particular route.  When there are no or few barriers to entry on a route, the airline with the lowest costs will generally set the price for that route.

We often hear just how much price is the driver in a choice of airlines but I’ve never felt it was purely price and I believe that over the years, there is subtle but strong evidence to my belief.   Everyone thinks Southwest Airlines wins on price and while that might have been true in the 1980s and earlier, it really hasn’t been true for the past 2 decades.  They often do set the prices on routes but they’re generally matched by other airlines.  When you speak to loyal Southwest Airline customers, it generally comes down to it being very convenient, very predictable and generally a more service oriented experience.

Curiously, convenience, predictability and service quality are a function of labor more than any other input.  Labor is what makes those achievements possible.  Also curious is that the most successful airlines generally are the ones who manage a good relationship with their employees.  That doesn’t mean they give into labor demands over and over, it means they have a rapport, communicate well with each other and find common ground.

It’s notable that Southwest and Delta Airlines each have reasonably good relationships with their employees since these two airlines are the ones that are gaining more passengers, better revenues and consistent profits.  That’s no accident.

When I look at American Airlines and the actions its taken over the past five years to come to new labor agreements, I have to give them a grade of “F” in labor management.  Even if you strip away labor rhetoric, you find that AA really never did much to come to an agreement with their employees.  They kept their company line but they never sought to find some common ground and their communications all too often struck me as “Times are tough, work harder, do more.”   After a few years of that, the general response to that was “Times are tough for everyone, suck it up and find a way to make it more worth our while to work for you.

Since bankruptcy, AA has more often reminded me of a mafia strong man than a company trying to get its act together.  The steps its taken to reduce labor costs and the magnitude of those labor costs reductions is striking.  Again, even if you strip out the labor rhetoric in response to AA’s actions, the moves that American Airlines has made in the past 6 months just strike me as premeditated, heavy handed and stubborn. It smacks of accountants looking at financial numbers and never looking up from their desk to notice the human element involved here.

They can and likely will get what they want in court in terms of breaking labor agreements.  They may impose severe cost cuts unilaterally and may even exit bankruptcy as stand-alone company.   They may get exactly what they think they need from a financial perspective.

But how does that improve the revenue side?  How do you win business customers with a service model that is delivered by demoralized and angry employees?  How do you get  productivity to improve when your labor hates your guts and just wants their paycheck and to be left alone?

AA’s labor hates American Airlines management.  Hates them with a passion generally reserved for bad dictators.  It’s a seething, lingering hate that isn’t easily resolved.  And there is no movement to get it resolved.

If labor and AA management were a married couple, this would be relationship headed for divorce, not reconciliation.  Reconciliation doesn’t occur when you take all you want (not need but want) and then act as if the other party should be grateful for winning . . . nothing.

There is real damage happening here.  Enough that it calls into question whether or not AA can remain a viable company even with the labor cost reductions.  Viable comes from providing something someone wants to buy and from the ability to sell that something to a great many people.  How many people want to ride on Surly Airlines 2 years from now?  They will if they have to but they won’t if they don’t.

That stuff gets fixed when leadership is shown.  Leadership shouldn’t come from the unions.  It should come from the executive management of the airline.  I’ve tried hard to think of a real example of leadership that has happened over the past year at AA and I honestly can’t think of a single example of leadership being demonstrated.  Not one.

If I were a shareholder, that would scare the hell out of me.  I’d have a company exiting bankruptcy with the task of building new value and the inability to do so because no leadership exists.  Delta CEO Richard Anderson says that its time for airlines to return a responsible profit on investment.  I could not agree more.   And that does mean that more productivity and lower costs are probably called for.  But it never meant kick the employees into submission.  And Delta never really has done so.  It found common ground, got the deal made and ensured its employees were marching in the same direction.

Are we seeing that kind of leadership at American Airlines?  If you were an objective investor and saw that kind of dysfunctional behavior, would you be encouraged to invest in that business?  In any industry?

What’s the cost of angering and demoralizing your employees for the next 5 to 10 years?

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