UALX727
Well-known member
- Joined
- Nov 26, 2001
- Posts
- 234
Into Thin Air
February 17, 2002
By ROGER LOWENSTEIN
On the evening of Sept. 10, negotiators for the C.E.O. of
United Airlines, James Goodwin, huddled in Washington with
union officials representing United's 30,000 baggage
handlers, customer-service representatives and reservation
agents. They were putting the finishing touches on an
agreement for a hefty double-digit wage increase, and
Goodwin, a tall, likable West Virginian who had been with
the company 34 years, was waiting for a call to give his
O.K. It didn't matter that United, which had lost $605
million in the first half of 2001, was in a financial
tailspin: when airline unions are due for a raise, they get
one. If you don't understand why, then you don't understand
the airline business.
As it happened, the talks dragged on, and at 5:30 on the
morning of the 11th, the negotiators trudged off to get a
few winks. Randy Canale, a union negotiator, returned to
his hotel, the Capital Hilton, not far from the Pentagon,
figuring they would sign later that day. He awoke earlier
than expected, to the sound of sirens. ''Boy, it sounds
awful close,'' Canale murmured. Someone was banging on his
door, and puffs of smoke were visible from the hotel
window. Two of United's jets were down, the wage hike was
history and so was the 57-year-old Goodwin's career. Seven
weeks later, he was dismissed by United's board. It hardly
mattered that United's directors would have approved the
agreement and were as much to blame as Goodwin. They were
letting him go for a way of doing business that has
tormented United and the entire industry for decades.
Since 1978, when commercial aviation was deregulated, no
fewer than 137 carriers have filed for bankruptcy
protection. And from the end of World War II, when aviation
started to become big business, through 1994, the sum of
the industry's profits and losses was less than zero.
Warren E. Buffett once remarked that it would have been a
blessing for shareholders if someone had thought to shoot
down Orville Wright at Kitty Hawk.
This is the industry that Congress has rushed to save, and
this is the record that -- failing basic changes -- it will
have helped to perpetuate. Indeed, even as it reels from
last year's record $3.8 billion operating loss, United is
facing the possibility of a strike by its mechanics,
pending a vote on a proposed 37 percent wage hike this past
week. If this rings faintly of ''Alice in Wonderland,''
well, that is because airlines are not like other
businesses, where competition breeds variety and choice for
consumers and profits for business. They are more like
flying utilities. As passengers, we demand quality service
-- on-time takeoffs, edible food, plenty of leg room -- and
don't much care who provides it, as long as they make it
cheap. That leaves the airlines with the dubious honor of
competing to be the Ma Bell, the Con Ed, of the sky.
One reason the major airlines find themselves in this
predicament is that they use huge amounts of fixed capital
-- wide-body jets go for $100 million each and can't be
readily liquidated. They also depend on a skilled labor
force. The two problems exacerbate each other. Since
airlines cannot afford to let planes sit idle, they can ill
suffer strikes. That makes their unions unusually powerful.
Consider some other businesses for a moment: Microsoft has
highly skilled programmers but little invested capital.
Merrill Lynch has both, but its assets -- stocks and bonds
mostly -- could be liquidated overnight. Steel has high
fixed capital, but it can replace its workers more easily.
Airline pilots (and mechanics too) are not so replaceable.
Stringent safety codes strengthen the unions further by
introducing a stickiness into the rules that govern hiring
and firing. Any other industry would compensate by raising
fares, but air travel is a commodity, so the temptation is
always to cut fares to fill seats.
None of this was caused by the attack on the World Trade
Center. But until then, it was possible to believe that
airlines were turning a corner. Even though they were
losing money in 2001, they had recently enjoyed some good
years, thanks to genuine improvements in their operations.
They had learned to manage their fleets more efficiently,
they had structured their routes better and they had cut
overhead.
United was emblematic of the airlines' ephemeral
prosperity. In the late 1990's, it reported $4 billion in
profits, and its route map, stretching over four
continents, was the envy of the industry. Most strikingly,
it had ventured a daring solution to the industry's
thorniest problem -- labor -- by selling a majority of its
stock to its employees.
But despite this groundbreaking arrangement, United was
never able to fully align the interests of its employees,
particularly the pilots, with its own. Rick Dubinsky,
longtime head of the AirLine Pilots Association at United,
made this clear when he and Goodwin began a recent wage
negotiation. ''We don't want to kill the golden goose,''
Dubinsky told Goodwin. ''We just want to choke it by the
neck until it gives us every last egg.''
On Sept. 11, the goose ran out of eggs.
In five months,
United's traffic has shrunk by, on average, a quarter,
fares are down and two of its fleets lie mothballed in the
middle of the Mojave Desert. Meanwhile, it has been begging
senior pilots, who can earn close to $300,000 a year, to
sit home and collect a full 80 percent of their pay for
doing nothing; otherwise, they can remain on the premises,
though inactive, at full pay. This is why by the end of
2002 United stands to lose every penny it made in the
previous five years -- and why bankruptcy for one of the
nation's largest and most venerable airlines looms as a
real possibility.
United's modern history started in 1985, when Richard
Ferris, the C.E.O. at the time, boldly challenged his
pilots. The underlying issue -- then, and in every
subsequent dispute -- was management's desire to break the
contractual stranglehold inherited from regulation. Before
1978, fares were set by the Civil Aeronautics Board, which
generally let carriers pass along their costs. Such a cozy
set-up naturally bred inefficiency (banks were similarly
slothful in the days of managed interest rates), and
airlines got used to rubber-stamping union demands.
Eventually, they approved a byzantine system of work rules
sought by pilots and other employees. Come deregulation,
competition intensified, air fares dropped and more people
started flying. But the stifling work rules remained and
so, of course, did safety constraints and also antitrust
concerns preventing mergers. In effect, aviation became
deregulated only on one side: free competition for revenue;
costs largely immovable.
February 17, 2002
By ROGER LOWENSTEIN
On the evening of Sept. 10, negotiators for the C.E.O. of
United Airlines, James Goodwin, huddled in Washington with
union officials representing United's 30,000 baggage
handlers, customer-service representatives and reservation
agents. They were putting the finishing touches on an
agreement for a hefty double-digit wage increase, and
Goodwin, a tall, likable West Virginian who had been with
the company 34 years, was waiting for a call to give his
O.K. It didn't matter that United, which had lost $605
million in the first half of 2001, was in a financial
tailspin: when airline unions are due for a raise, they get
one. If you don't understand why, then you don't understand
the airline business.
As it happened, the talks dragged on, and at 5:30 on the
morning of the 11th, the negotiators trudged off to get a
few winks. Randy Canale, a union negotiator, returned to
his hotel, the Capital Hilton, not far from the Pentagon,
figuring they would sign later that day. He awoke earlier
than expected, to the sound of sirens. ''Boy, it sounds
awful close,'' Canale murmured. Someone was banging on his
door, and puffs of smoke were visible from the hotel
window. Two of United's jets were down, the wage hike was
history and so was the 57-year-old Goodwin's career. Seven
weeks later, he was dismissed by United's board. It hardly
mattered that United's directors would have approved the
agreement and were as much to blame as Goodwin. They were
letting him go for a way of doing business that has
tormented United and the entire industry for decades.
Since 1978, when commercial aviation was deregulated, no
fewer than 137 carriers have filed for bankruptcy
protection. And from the end of World War II, when aviation
started to become big business, through 1994, the sum of
the industry's profits and losses was less than zero.
Warren E. Buffett once remarked that it would have been a
blessing for shareholders if someone had thought to shoot
down Orville Wright at Kitty Hawk.
This is the industry that Congress has rushed to save, and
this is the record that -- failing basic changes -- it will
have helped to perpetuate. Indeed, even as it reels from
last year's record $3.8 billion operating loss, United is
facing the possibility of a strike by its mechanics,
pending a vote on a proposed 37 percent wage hike this past
week. If this rings faintly of ''Alice in Wonderland,''
well, that is because airlines are not like other
businesses, where competition breeds variety and choice for
consumers and profits for business. They are more like
flying utilities. As passengers, we demand quality service
-- on-time takeoffs, edible food, plenty of leg room -- and
don't much care who provides it, as long as they make it
cheap. That leaves the airlines with the dubious honor of
competing to be the Ma Bell, the Con Ed, of the sky.
One reason the major airlines find themselves in this
predicament is that they use huge amounts of fixed capital
-- wide-body jets go for $100 million each and can't be
readily liquidated. They also depend on a skilled labor
force. The two problems exacerbate each other. Since
airlines cannot afford to let planes sit idle, they can ill
suffer strikes. That makes their unions unusually powerful.
Consider some other businesses for a moment: Microsoft has
highly skilled programmers but little invested capital.
Merrill Lynch has both, but its assets -- stocks and bonds
mostly -- could be liquidated overnight. Steel has high
fixed capital, but it can replace its workers more easily.
Airline pilots (and mechanics too) are not so replaceable.
Stringent safety codes strengthen the unions further by
introducing a stickiness into the rules that govern hiring
and firing. Any other industry would compensate by raising
fares, but air travel is a commodity, so the temptation is
always to cut fares to fill seats.
None of this was caused by the attack on the World Trade
Center. But until then, it was possible to believe that
airlines were turning a corner. Even though they were
losing money in 2001, they had recently enjoyed some good
years, thanks to genuine improvements in their operations.
They had learned to manage their fleets more efficiently,
they had structured their routes better and they had cut
overhead.
United was emblematic of the airlines' ephemeral
prosperity. In the late 1990's, it reported $4 billion in
profits, and its route map, stretching over four
continents, was the envy of the industry. Most strikingly,
it had ventured a daring solution to the industry's
thorniest problem -- labor -- by selling a majority of its
stock to its employees.
But despite this groundbreaking arrangement, United was
never able to fully align the interests of its employees,
particularly the pilots, with its own. Rick Dubinsky,
longtime head of the AirLine Pilots Association at United,
made this clear when he and Goodwin began a recent wage
negotiation. ''We don't want to kill the golden goose,''
Dubinsky told Goodwin. ''We just want to choke it by the
neck until it gives us every last egg.''
On Sept. 11, the goose ran out of eggs.
In five months,
United's traffic has shrunk by, on average, a quarter,
fares are down and two of its fleets lie mothballed in the
middle of the Mojave Desert. Meanwhile, it has been begging
senior pilots, who can earn close to $300,000 a year, to
sit home and collect a full 80 percent of their pay for
doing nothing; otherwise, they can remain on the premises,
though inactive, at full pay. This is why by the end of
2002 United stands to lose every penny it made in the
previous five years -- and why bankruptcy for one of the
nation's largest and most venerable airlines looms as a
real possibility.
United's modern history started in 1985, when Richard
Ferris, the C.E.O. at the time, boldly challenged his
pilots. The underlying issue -- then, and in every
subsequent dispute -- was management's desire to break the
contractual stranglehold inherited from regulation. Before
1978, fares were set by the Civil Aeronautics Board, which
generally let carriers pass along their costs. Such a cozy
set-up naturally bred inefficiency (banks were similarly
slothful in the days of managed interest rates), and
airlines got used to rubber-stamping union demands.
Eventually, they approved a byzantine system of work rules
sought by pilots and other employees. Come deregulation,
competition intensified, air fares dropped and more people
started flying. But the stifling work rules remained and
so, of course, did safety constraints and also antitrust
concerns preventing mergers. In effect, aviation became
deregulated only on one side: free competition for revenue;
costs largely immovable.
