At USD120+ barrel oil, it becomes a labour problem


Despite the fact that airline labour groups in the US have made considerable concessions over the last decade, it fails to recognise that rising oil is as much a labour problem as it is a management problem, according to MIT Research Engineer Bill Swelbar, who said labour’s basic negotiating philosophy must change to meet this new reality.

“The airline unions have used, and are using, promises and unrealistic expectations to persuade members that they deserve more than most airlines are able to pay,” he wrote in a recent blog.

"Some airline unions believe their pay and benefits can be restored if only the industry would increase ticket prices.  And that is a belief that cannot go on forever.Unions and management need to recognise the realities of the economic and competitive environment and let go of the power struggles of the past if they’re going to be able to survive in the future. In the midst of an incredibly difficult round of negotiations, this is a tough message. But it is not anti-union to make the point. It is ‘anti’ those who believe that nothing has to change. And that goes particularly for some union leaders who need to radically overhaul what a union is and does in 2011,” he said.

Mr Swelbar said oil is making difficult choices even more difficult, noting during the summer of 2008, airlines paid the equivalent of USD175.64 per barrel (price per barrel, plus jet fuel refining costs) prompting the wholesale abandonment of capacity by the US industry. Coupled with the fact airlines have already realised much of what they can from the cost cutting wrought from bankruptcy, restructuring and the introduction of ancillary revenues still conspire against unions

“So far in 2011, we’ve seen a similar surge in oil prices, but based on current geopolitical events, I am not expecting another USD117 drop in the price of a barrel of oil like we witnessed in 2008,” said Mr Swelbar, noting that some experts have already predicted USD200 per barrel crude. “In 2011, the industry has paid an average of USD89.15 per barrel of crude and another USD25.80 in the crack spread for a total cost of ‘in the wing’ jet fuel of nearly USD115 per barrel.  Since 22-Feb, the industry has paid more than the equivalent of USD120 per barrel for jet fuel. On 01-Mar-2011, the industry paid the equivalent of USD132.17 per barrel for jet fuel including the crack spread of USD32.54. For all of 2008, the industry paid the equivalent of USD25 per barrel to refine crude into jet fuel. [Between 28-Feb and 3-March], the crack spread paid by the industry is nearly USD30 per barrel."

Putting the price into perspective, Mr Swelbar indicated that the cost of refining oil into jet fuel equals the total jet fuel price per barrel between 1978, at deregulation, and 2001, the beginning of the wholesale restructuring of the US industry.

Airlines pulling back

Airlines are scaling back capacity growth with United, Allegiant, Delta, American and Frontier already having announced capacity cuts between one and three percentage points. With most other avenues for cost cutting and revenue raising already realised, labour can no longer expect to be made whole. Mr Swelbar suggests the pattern bargaining set when fuel was at USD30 per barrel is no longer sustainable.

Mr Swelbar noted there were 52 airline cases before the National Mediation Board. “I will wager few, if any, of the labour negotiating teams consider oil a major factor in a future contract,” he said. “They think it is management’s problem. Well, it’s also labour’s. While the industry has been creative in finding new revenue to address the reality of fuel costs, consumer pass-throughs generally lag behind the rise in the price of fuel. The bigger issue, the one labour has trouble admitting, is the size of the revenue pie is finite.”

No matter how much they are right in assuming they now deserve a share of the pie, it is impossible to get them to where they were at the pre-restructuring high-water mark when oil was USD30 per barrel.

Labour may have subsidised competition and fare wars but not oil

Mr Swelbar takes issue with labour claims they have subsidised oil in the past. Prior to 2008, he pointed out the price of oil was not much of an issue as labour gave in to concessions, although it should be pointed out that the 155,000 jobs lost since 2001 could contribute to the impression it had.

He cited MIT’s Airline Data Project when he said between 1978 and 2001, industry ASMs grew 2.5 times as traffic outpaced capacity, largely because of cheap fuel. Also during that time, yields dropped 39% and domestic yields fell by an inflation-adjusted 41%.

“This ultimately led the network carriers to refocus their operations on international flying because their high cost structures struggled to conform to the realities of the domestic market economics,” Mr Swelbar pointed out.

Between 1978 and 2001, employee productivity in terms of ASMs and enplanements per employee increased 44% and 30%, respectively, while the number of available seat miles produced per dollar spent on labour fell by 42%. In other words, while labour is producing more, the cost of production has continued to rise. He also pointed out that managements saved USD6 billion annually in commissions as they began to address costs. 

“Food and advertising expenses were also reduced,” he said. “Each of these cost areas, like labour, is considered controllable costs.  Oil is not.  What the industry did realise over the period was a 30% efficiency improvement in the consumption of fuel.”

New airline business model can’t sustain buying labour peace

The restructuring saw the leveling off of capacity increases at 2.5% mostly at regional and low-cost carriers, he noted, adding that since 2001, mainline carriers have shed nearly 24% of their previous domestic capacity, nearly a third of which was shed since 2008.

“Since 1986, the industry’s output (measured as Available Seat Miles) per labour dollar has decreased nearly 25% – a trend as applicable to United and American as it is to Southwest,” he said. “Even as output increased, the cost of that output increased more. According to the MIT Airline Data Project, in 2009 American paid more per ASM for labour than any other network carrier, while Southwest was, by a large margin, the most expensive among the nation’s low-cost carriers. This trend is not sustainable over the long term – either for those airlines in particular or any other airline that ramps up its labour costs to buy union peace only to price themselves above the competition. This is but one reason I believe that the job of restructuring how employees work is far from complete.

“In 2002, when the restructuring began, the average cost of a full-time-equivalent airline employee was USD74,910,” Mr Swelbar continued.  “Today, the average cost of a full-time equivalent employee is USD83,869. More troubling is the benefit and pension package for full-time employees in 2001 cost USD11,560.  Today, the cost of that package is USD18,195 reflecting seniority as well the country’s inability to reign in medical costs.” 

In calculating the profit/loss per enplanement using passenger revenue only, Mr Swelbar concluded that, after covering interests costs, the industry actually lost USD12.70 per enplanement during the 1980s, USD11.49 during the 1990s, USD21.28 in the 2000s and USD19.47 in 2010. He quickly added that offsetting the USD19.47 per enplanement was USD8.70 in ancillary fees, reducing the loss to USD10.76.

“Other sources of revenue made the loss a profit,” he said, acknowledging union claims that compensation has not kept pace with inflation since 1978. “Unfortunately, raising the base fare is not the answer.  Finding other revenue sources or diligently reducing costs is.”

He reiterated his contentions that work rules dictate head count and thus take away from individual employee wages.  “What airline unions are saying is pay workers more, but don’t touch benefits or work rules,” he said. “That cannot be done, not when the cost of benefits has risen at the cost of inflation plus 46%. It is the cost of benefits that is the biggest financial drain, an expense crowding out how much can be paid in wages. Labour doesn’t seem to acknowledge the fact that times – and oil prices – have changed.”

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