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North America’s airline unions come to grips with their employers' needs for profitability

North American airlines are the underpinning for a recent rise in IATA’s global profit forecast for 2015 from USD25 billion to USD29 billion. With a projected USD15.7 billion in profits, airlines in Canada and the US are driving the global airline industry’s profitability this year. 

Those airlines are reaping benefits from an industry reshaping driven by bankruptcy and consolidation, which have helped North American airlines to slash debt, bolster their respective balance sheets and, for many companies, exceed their stated ROIC (return on invested capital) goals.

But many North American airlines are in the midst of negotiations with various work groups that are aiming for favourable contracts in the new era of profitability.

That bargaining is resulting in some surprising rifts in management-employee relationships at airlines that have had historically positive labour relations, while other companies have made significant progress in repairing employee relationships soured by numerous concessions and general distrust.

Airlines in Canada are experiencing a role reversal in their relationships with labour

WestJet’s maturity and rapid business model changes during the last few years have created some tension in its generally positive employee relations. In the last three years alone, WestJet has created its regional subsidiary Encore that operated Bombardier Q400 turboprops, embarked on a plan to add widebodies to its fleet to expand its long-haul footprint, and introduced new fare families to further shore up its revenue. 

To the delight of investors, WestJet has remained profitable during that time, and recently marked its 40th consecutive quarter of profitability and recorded a 15.8% ROIC,  the 11th straight quarter in which it exceeded its stated goal of 12%.

WestJet’s employees are not unionised; instead, non-management employees are organised under the WestJet Proactive Communication Team, with sub-groups representing various employee segments. The airline has escaped unionisation drives among its flight attendants and pilots during the last couple of years, but during that time employees have grown more vocal, expressing concerns about the pursuit of corporate profits damaging its product.

The airline recently secured a five-year agreement with its flight attendants after an initial tentative pact was rejected in late 2014. WestJet’s pilots approved a four-year contract that same year.

Those new contracts give WestJet some level of stability as it still undergoes rapid changes to its business model; however, unions are still circling around the airline. CBC News recently stated that the WestJet Professional Flight Attendants Association (WPFAA) was working to collect union cards before a change in Canadian labour law due to take effect in mid-Jun-2015. Once the change is instituted, in addition to the 50% plus one of employees required to sign union cards to initiate certification, staff will also need to vote in a secret ballot in order to achieve certification, adding another layer to the process.

CBC News highlighted a statement from the WPFAA that concluded WestJet is not bound by the terms of the new flight attendant agreement, and the airline could change those terms at any time.

Even if the WPFAA is not successful in its current attempt to unionise WestJet’s flight attendants, the organisation has made it clear it has no intentions of disappearing, which means the threat of unionisation could be an overhang at WestJet for the foreseeable future.

Air Canada has been through a spectrum of union dealings

After work stoppages amid tense negotiations in 2012, the Canadian government ultimately imposed Air Canada’s preferred contracts on pilots and mechanics. The government intervention did little to help mend the strained relations between Air Canada management and its labour groups. But in 2014 the airline reached a major milestone when it forged a new agreement with pilots that included a signing bonus; a 20% increase in salary over the contract term; and an improved profit sharing plan.

The agreement also allows Air Canada flexibility in the fleet mix of its new low-cost subsidiary Air Canada rouge, whose initial creation was a huge point of consternation for pilots during the tense negotiations in 2012.

Since 2012 Air Canada has embarked on a cost cutting scheme to reduce unit costs excluding fuel by 15% over the medium term. Recently, the airline stated it was now trending to a 21% reduction by 2018. Its 15.8% ROIC as of 31-Mar-2015 also exceeded previous targets of 10% to 13%.

After posting annual losses from 2008 to 2012, Air Canada recorded a CAD6 million (USD 4.8 million) profit in 2013 and grew that to CAD100 million (USD 81 million) in 2014. It has upped its ROIC targets to 13% to 16%, and lowered its leverage ratio (adjusted net debt over normalised EBITAR) to 2.2x by the end of 2018, compared to a previous target of 3.5x set in 2013.

Even as its sets more ambitious financial targets, Air Canada regularly admits there is much work left to be done in its cost and revenue transformation, the agreement it reached with pilots was the first contract since 1996 reached without a strike or arbitration, according to the Globe and Mail.

At the time pilots voted in favour of the deal, the Air Canada Pilots Association declared: “This vote demonstrates that the relationship between Air Canada and its pilots is improving, which is good for both parties and bodes well for the future success of our airline.”

CAPA has previously concluded that a continuing warming of relations between management and employee groups is crucial for Air Canada to continue to build the sustainable profitability it seeks to achieve. Perhaps both management and unions have learned lessons that can be applied to future negotiations. If this is able to be maintained, the prospects for adaptation to new market conditions are improved.

Southwest Airlines meanwhile is encountering uncharacteristic challenges in its pilot negotiations

Just prior to the company’s May-2015 shareholders meeting, the pilots, represented by Southwest Airlines Pilots Association, declared their intent to fund a strike preparedness committee.

Although a strike by Southwest’s pilots is highly unlikely, the decision to create some level of strike preparations sends a clear message to management – the union aims to bargain for a contract that is economically on par with its US airline peers.

Negotiations between Southwest and its pilots have dragged on for roughly three years. During that time the airline’s profitability has increased significantly. Its profits jumped 79% year-on-year in 2013 from USD421 million to USD754 million. The airline’s USD1.14 billion profit in 2014 was roughly 51% higher than 2013, and its pre-tax ROIC in 2014 was 21.1%, well beyond its stated goal of 15%.

Airing its concerns to the media, SWAPA remarked that despite record profits, management at Southwest has not come forward with an economic offer that both sides can agree on. The union stressed it had made an offer that was affordable, and would not affect Southwest’s competitive low-cost advantage.

As the years-long negotiations continue, Southwest continues to field questions about pilot talks, in addition to negotiations with several other labour groups. Some of the queries imply that the longer Southwest engages in talks, the more expensive the contracts could become.

Even as Southwest’s pilots issue strong rhetoric, the reality is that most US airline pilot groups understand the responsibility publicly traded companies now have to produce adequate shareholder returns.

Speaking at the CAPA Americas Aviation Summit in Apr-2015 Flightpath Economics aviation economist Dan Akins remarked that pilots are more educated about airline business models than they were many years ago. That knowledge obviously helps during the negotiating process.

But negotiations at Southwest will continue to remain complex. Although the airline has turned a laudable financial performance during the last few years, it is no longer the leading low-cost provider in the US as ULCCs Spirit and Allegiant recorded unit costs excluding fuel of USD 6 cents or less during 1Q2015 (versus USD 8.2 cents for Southwest).

Southwest maintains that on a stage-length adjusted basis, its unit costs are lower than hybrids JetBlue and Virgin America. However, Southwest also faces pressure from the legacy airlines that have lowered their unit costs through Chapter 11 reorganisation and consolidation.

Southwest CEO Gary Kelly warned in early 2015 that Southwest’s low fare brand had come under pressure, and the airline must remain competitive in an evolved environment where “our legacy competitors are stronger than ever and it’s more important for us than ever to maintain our low cost position and preserve our low fare brand. That has been under attack as the other airlines have gone through bankruptcy”.

US ULCCs have also had their fair share of labour challenges

Allegiant during 2015 has had to fend off its own strike threat from pilots that largely stemmed from their anger over scheduling practices. Pilots charged in the courts that Allegiant violated the “status quo” work requirements by switching to a new scheduling system during contract negotiations with pilots, represented by the International Brotherhood of Teamsters. During Apr-2015 Allegiant’s pilots threatened to strike and eventually management won a court injunction preventing strike action.

Recently, Allegiant prevailed in a separate higher court ruling that reversed a previous decision rendered by a lower court that concluded Allegiant did violate the status quo. Under the latest decision, Allegiant is not obligated to maintain the current status quo while negotiations continue.

During the time that Allegiant was fighting for an injunction against a strike, the airline came under heightened scrutiny by the US FAA, which prohibited Allegiant from launching new routes and adding aircraft to its operating certificate.

With the stepped-up oversight ending, and the higher court ruling in favour of Allegiant, perhaps management and pilots can move forward in brokering a new collective bargaining agreement. As of early Apr-2015 the two sides had not participated in a bargaining session in roughly six months.

The lag in communication coupled with Allegiant prevailing in the legal wrangling, does not provide the most positive platform to resume bargaining. Like Southwest, Allegiant’s profits have grown solidly during the last three years. Its 2012 profit of USD78.6 million was a 59% hike versus the year prior. Its net income in 2013 increased 17% to USD92.3 million and grew roughly 22% year-on-year in 2014 to USD113 million.

Some US major airlines, like Air Canada also seem to have turned a corner in their labour relations

Delta Air Lines recently struck a tentative accord with its pilots (the only unionised group at the airline) ahead of a Dec-2015 amendable date, a stark contrast to the lengthy negotiations transpiring at Southwest. Delta’s latest tentative agreement follows a pact reached in 2012 after less than a year of negotiations, posting a pre-tax income in 2014 (excluding special items) of USD4.5 billion. According to the Delta Master Executive Committee of the Air Line Pilots Association, pilots would receive raises of 14.5% as of 2016. The agreement also entails subsequent increases of 3% in 2017 and 2018.

There are some profit sharing changes in the proposed deal, with the trigger modified from USD2.5 billion in pre-tax annual income to USD6 billion starting in 2017.

The union explained in a tweet that the 14.48% rise in pay can be viewed as an 8.74% salary increase and a 5.74% conversion of “at risk” profit sharing into a “no-risk” increase in pay. The 5.74% assumes a pre-tax income of USD6 billion every year, said the MEC. “This impact is reduced if the pre-tax is less than USD6 billion.” However, the union stressed that base pay rates would increase a total of 17.9% prior to the first payout using the new profit sharing formula.

Profit sharing has become a major discussion in the US airline industry in 2015 after American Airlines opted not to include profit sharing in new pilot and flight attendant contracts, that combined will cost the airline USD850 million in 2015. Airline CEO Doug Parker has concluded that profit sharing is a mechanism airlines used in previous decades to counteract wage cuts.

As American was declaring its stance on wage cuts, Delta was touting its profit sharing programme, which was approximately USD1 billion for 2014. Delta stated that its 2014 payout was a record for the airline industry, and among the highest of any US corporation. Although its profit sharing remains intact in the tentative agreement with pilots, it will be interesting to see if the rising thresholds will spread across the industry into other contracts. Work groups at other airlines might not be so willing to alter their current profit sharing formulas.

Legacy airlines in North America have made positive steps in labour relations 

Relations have often been disrputed by concessions during the last fifteen years that were in some cases necessary to keep those companies in business.

But as the latest rounds of talks shows, even the most venerable airlines are not immune from tense labour talks in a new operating environment where a few airlines control the majority of traffic, and competition among those airlines has intensified while ULCCs add a new layer of cost pressure. Even with a certain level of maturity and financial stability, labour relations in the North American market place can still take unpredictable turns.

North American airlines often declare that their journey to sustained profitability is not yet complete.

The same could be said for the albeit increasingly enlightened relationships between management and labour.

This report first appeared in Airline Leader journal, Issue 29

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