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US airline labour challenges as profits continue to soar. CAPA Americas Summit (VIDEO)

The record profitability of US airlines is creating a new set of dynamics for management–labour relationships of those companies. As various management teams work to stress their respective airlines are now run like high-grade industrial companies, and they aim to bolster shareholder returns, labour groups understandably believe that some caution needs to be exercised in capital deployment. Drivers of that logic include putting the theory of a transformed industry to the test during the next down cycle, and restoring employee pay rates to acceptable levels.

The new reality is that while management teams urge stakeholders, including labour, to embrace new industry paradigms, some airline employees are still feeling reverberations from concessions agreed during the last 10 to 15 years when most major US airlines reorganised under Chapter 11 of the US Bankruptcy Code. Memories of those sacrifices still run deep, and some employees feel they need to recapture fully what was lost in order to enter a new phase of labour-management relations.

In the meantime, many labour groups at various US airlines remain lodged in years-long negotiations with management teams, attempting to craft collective bargaining agreements to withstand the perpetual cyclicality in the airline business.

VIDEO: “We Want A Piece Of The Action”: Unprecedented Airline Profits Create Expectations In All Stakeholders

Labour groups urge balanced capital deployment by airline managements

In 2015 the four largest US airlines – American, Delta United and Southwest – collectively delivered USD9.1 billion in shareholder returns, the majority of which was achieved through stock buybacks.

2015 shareholder returns issued by the four large US airlines

American USD3.9 billion
Delta USD2.6 billion
United USD1.2 billion
Southwest USD1.4 billion

As labour groups observe the rewards that shareholders are reaping, the obvious question becomes how much is too much, and if there is a fair distribution of profits between employees and shareholders. Those were among the topics contemplated during a recent panel discussion at the CAPA Americas Aviation Summit.

The Air Line Pilots Association (ALPA) managing director, David Krieger, has stated his concern is that airlines are in a rush to prove they are stable companies that can provide dividends and “buy back a bunch of stock”. However, the reality is that the industry needs to navigate the next down cycle to prove the theory that the airline business has transformed.

Mr Krieger offered United Airlines as an example, noting that in the past the airline has bought back billions of stock only to turn around two years later and borrow at outrageous terms.

ALPA understands that some level of shareholder return is warranted, but the union also wants to see capital invested in products and employees, said Mr Krieger. He also remarked that if airlines are transitioning to more stable companies, then there should a be focus to attract more long-term investors.

The Association of Flight Attendants International president, Sara Nelson, stated that, “fundamentally I’m going to say yes, shareholders are getting way too much”. She cited the feeling among some employees of sacrifice during harder times, and in the minds of labour groups — market rates have not been reset to account for those concessions.

Profit sharing proves to be tricky in an environment of record airline profits

A recent decision by American Airlines to reverse course and offer employees 5% profit sharing has cast a light on the most favourable compensation packages for employees. Part of American’s logic for opting to engage in profit sharing was that employees gain more benefit from higher wages, and that profit sharing was a by-product of a much weaker time in the industry when the sharing of profits was used to dull the pain of concessions sought by management.

Indeed, Mr Krieger of ALPA stated that profit sharing does not work when employees have given up a “lot of pay” in the past and management uses profit sharing to make up for prior concessions. If there is a contract in place with satisfactory base pay rates then “profit sharing is a nice piece to have on top of that,” he concluded.

The theory of strong base pay plus some form of profit sharing seems reasonable. But in practice that logic does not always dictate a logical outcome. In Jul-2015 pilots at Delta Air Lines, represented by ALPA, rejected a deal on a tentative agreement that included an immediate 8% pay raise, a 6% increase on 1-Jan-2016 and a 3% rise in Jan-2017 and Jan-2018 (according to the Wall Street Journal). But the profit-sharing formula was also altered.

Previously, employee profit share was 10% of the airline pre-tax income of up to USD2.5 billion, and 20% of profits above that amount. Under the the formula in the rejected contract, the 20% profit share cap was moved to USD6 billion and above, and 10% for any pretax profits below that level.

In Jan-2016 Delta’s pilots opened another round of negotiations with a proposal for a nearly 40% increase in base pay by 2018. The union characterised the proposal as market-based. It would surpass pay levels at rivals American and United, which each negotiated new pilot contracts in 2015. Delta management and pilots are now in mediated talks with the US National Mediation Board.

Myriad factors can lead to contract rejections — including incorrect messages in social media

The dynamics of Delta’s recent pilot negotiations show the complexities of collective bargaining, which in the US is driven by record profits and a desire by labour groups to reach pay levels enjoyed prior to Chapter 11 reorganisation.

But even airlines with historically favourable labour relations are caught up in drawn-out collective bargaining. Southwest management and pilots have been in contract negotiations for four years, and in late 2015 the pilot group rejected a tentative agreement that included a 17% pay rise. One element that the larger pilot group was unhappy with was the loosening of restrictions on codesharing. 
 
In mid-2016 Southwest’s flight attendants also rejected a tentative agreement that included wage increases, but also included work rule changes.

Both Delta and Southwest have well-run unions that handle collective bargaining, which begs the question as to how these high-profile contract rejections occur. Southwest Airlines' senior director of labour relations, Naomi Hudson, told the CAPA audience that many factors can lead to rejections of tentative agreements. Even if unions poll their members to determine the most important issues, if an employee wants a certain item that was not included in the contract, than that individual will reject the contract, said Ms Hudson.

In more recent times, social media can also have an effect on the interpretation of tentative labour deals. Ms Hudson remarked that social media spreads good news, bad news, “but most certainly incorrect news”. She explained that after negotiators and management reached a tentative flight attendant deal, some interpretations that were completely wrong appeared in social media .

Management and employee negotiators also spend a lot of time at the bargaining table understanding each other’s perspective, said Ms Hudson. But in some instances the larger union membership get the shorter version of a much longer story, so if there is something unclear — a rejection could ensue.

As Southwest management and flight attendants prepared to resume negotiations in 2016 Ms Hudson stated that union leaders have told the attendant employee group everything they are asking for, and she remarked, “the expectation bar is high”.

Labour is entering the latest round of negotiations in the current profitable environment with a different set of expectations. ALPA’s Mr Krieger stated that with airlines making billions in profits and also giving back billions to shareholders, employees are still suffering the effects of 40%- plus paycuts hat they took a decade ago, coupled with the termination of pensions. “Now the tables have turned, airlines have a lot of money and expectations are higher,” he stated.

Although imperfect, some argue the US collective bargaining system remains preferable to Europe's,

The Railway Labour Act governing US airline collective bargaining was established in the early 1900s, and in some ways could contribute to drawn-out contract negotiations. Ms Nelson observed that the major challenge with lengthy collective bargaining is the diminished right to strike. “I think the Railway Labour Act has been interpreted to mean there should never be a strike again,” she stated.

If everyone recognised the value of a strike, said Ms Nelson, then perhaps negotiations could be accelerated. The logic is that employees do not want to strike and airline managements do not want to sustain strike action, so heightened ability to strike would encourage both sides to reach an agreement.

Members of the panel were queried about adopting some elements used by European labour groups, such as the announcement of a strike date and the length of the work stoppage.

Overall, the general consensus was a preference for US labour law. However, Ms Nelson said that in lengthy negotiations employees could mature in their positions, or their experience on the job could change. Often, by the time an agreement is reached, the priorities of unionised employees may have changed. Ms Nelson remarked that drastic moves away from US labour law are not necessary, but there is something to be said for addressing those shifting dynamics in real time.

The Allegiant SVP of planning and COO, Jude Bricker, remarked that there are some favourable aspects of labour laws in the UK and Germany, “most significantly that unions in general are brought into the ownership and leadership structure of the company at higher levels”. But Mr Bricker remarked that France has labour disruptions frequently, and (for example) that creates challenges for the group of passengers buying a ticket 120 days in advance: to have assurances that a given airline will be operating at the time of travel.

Labour seems to be the final frontier in a successful industry transformation

One of the challenges facing US airline management teams as they examine options for capital deployment — in the midst of growing pressure from Wall Street for even greater shareholder returns — is the importance placed on human capital.

It is easy to rattle off the investments dedicated to onboard product, airport lounges and other improvements in passenger amenities. But investment in employees is definitely a more complex proposition, and for various reasons not so easy to quantify or qualify publicly. Perhaps the last and most important element in achieving a transformed industry is a new dimension for relations between management and labour.

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