Rottweiller
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- Nov 26, 2001
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Too long for one post, had to split it up.
SALVAGING UNITED
United's Attempt to Cut Costs Could Force Rivals to Follow
If Workers Don't Approve Concessions,
Carrier Will Turn to Bankruptcy Judge
By SUSAN CAREY and SCOTT MCCARTNEY
Staff Reporters of THE WALL STREET JOURNAL
It's crunch time for United Airlines, and much of the rest of the airline industry. United faces a crucial deadline in three weeks: Unless its workers agree to huge cost cuts, the carrier intends to ask a federal bankruptcy judge to void the unions' labor contracts so United can impose new terms.
Either way, United must slim down to survive in a devastated market. And if it succeeds, the industry's other cost-crippled dinosaurs will be forced to take knives to their own bloat.
To see the scope of the radical restructuring the nation's airlines could face, look at United and an airline that has what United wants, thanks to two trips through Chapter 11.
The most-senior United flight attendants get 51 days of vacation annually. At Continental Airlines, flight attendants top out at 37 days. At hub airports, United aircraft are waved in and pushed away from gates by its highly paid mechanics. Continental uses ramp workers and baggage handlers to do those jobs. In 2001, United pilots flew an average of only 36 hours a month -- the lowest in the industry -- while Continental pilots logged 49 that year.
Such inefficiency at UAL Corp.'s United, the industry leader in staff costs, stands at the heart of the showdown between the airline and its workers. Last year, United, the world's No. 2 carrier, spent almost 50% of its revenue on wages and benefits, and ended up with a net loss of $3.2 billion. AMR Corp., parent of American Airlines, spent nearly 49% of its revenue on labor and tallied an even larger net loss of $3.5 billion. Continental spent only 35% of its revenue on salaries and benefits last year and incurred a 2002 net loss of $451 million.
No. 1 American has raised the possibility of bankruptcy proceedings and on Feb. 4 asked its workers for $1.8 billion in annual labor savings -- 21% of total labor costs last year. Delta Air Lines, Northwest Airlines and US Airways Group Inc., which filed for bankruptcy-court protection last summer, all spent more than 40% of their revenue on labor. Delta and Northwest also have given notice to their employees in recent days that changes must be made. Without fast and deep surgery, any one of these carriers could be extinct in a few years.
The industry has suffered an unprecedented decline in revenue driven by the poor economy, terrorism jitters, the Internet -- which makes it much easier to find cheap tickets -- and the specter of war. Making matters worse, the big airlines are being swamped by expanding competition from low-cost carriers such as Southwest Airlines, JetBlue Airways and AirTran Airways.
Facing these travails, United is pushing for lower costs. "I am here to introduce United to the harsh, brutal realities of competition in the new marketplace," UAL Chief Executive Glenn Tilton said in response to a pilot angered by the prospect of making major givebacks. "Our labor costs are the highest in the industry. Unsustainable. Our productivity is not competitive with competitors. Unsustainable."
Cuts Both Ways
Yet United's workers have already felt some pain. The pilots voluntarily agreed to a 29% pay cut on Jan. 1, and the flight attendants gave up 9% of their pay. The bankruptcy judge granted United's request last month and ordered members of the machinists union to give back 13% of their pay. A senior United flight attendant earned about $45,000 last year, a senior mechanic more than $70,000 and a 10-year captain on a narrow-body jet about $186,000. Pilots have pointed out that while they make up 28% of payroll expenses, they are being asked to shoulder 44% of the total savings sought.
Organized labor has had two seats on UAL's 12-member board since 1994, when the pilots, machinists and some other workers bought 55% of UAL in return for six years' worth of wage concessions. The experiment with employee ownership has been criticized as a disappointment by both labor and management since it never succeeded in changing the culture of the company or repairing decades of mistrust between the two sides. And although the two labor directors have special powers, they also face potential conflicts between their roles as elected union leaders and their roles as board members with fiduciary responsibilities to look after the good of the entire company.
United, which filed for bankruptcy protection in December, wants its unions to agree to longer-term cost cuts voluntarily. But if they don't, the carrier can emulate Continental in using Chapter 11 and the power of a federal bankruptcy judge to rewrite its labor contracts. United aims to pare its employee costs by nearly $2.6 billion a year -- or 36% from 2002 levels of $7.1 billion -- with a combination of lower pay, reduced benefits, higher productivity and more leeway on outsourcing. It also wants to form a separate subsidiary with even-lower costs to compete with low-fare carriers.
The other big carriers don't yet have the cudgel of Chapter 11 to wield over their unions. But they may not need it. American's pilot union, the Allied Pilots Association, says it believes it is "absolutely necessary" that workers agree to contract changes. Capt. John Darrah, APA president, wrote to members last week: "We must become competitive in this new environment, or die." American has said Chapter 11 remains a possibility if it doesn't win the savings quickly.
The temporary wage cuts United already has won, pending further negotiations, are valued at $840 million annually. The savings were needed to help UAL meet strict cash-flow targets required by the lenders providing interim financing to keep the company aloft in Chapter 11. United wants to lock in the temporary pay cuts and other belt-tightening steps by early May, when its interim financing targets get tougher.
If the company gets there through a court process, the unions might be angry enough to strike -- although that's a remote possibility since a strike would push the company into liquidation. Even a slowdown or a sick-out would cause irreparable harm at a time when each passenger counts more than ever.
It wasn't just overly generous labor contracts that got the big carriers into this mess. Other mistakes range from too many types of planes, which boosts maintenance and training costs, to reckless expansion and inefficient schedules. Struggling carriers have since corrected many problems, but their plight has still worsened with the current squeeze of higher fuel prices and lower bookings as war jitters increase.
Labor costs are their single largest expense, however, and represent the best opportunity for change. Simply cutting pay won't be enough. The key is stamping out archaic work rules. These limit the big airlines' flexibility to use cheaper subcontractors to do some jobs, build more-efficient flight schedules and make employees perform multiple tasks. And the key for the industry's big carriers may be United.
"It's a domino game" among the major network airlines, says Dan Kasper, an airline consultant for LECG in Cambridge, Mass. "The first little domino was US Airways," which has cut its labor costs by 27% while in Chapter 11. United, he adds, "is the big kahuna."
Pilot contracts represent the biggest variance and the most opportunity for savings from improved productivity. Gary Chase, a Lehman Brothers analyst, estimates that if United got all that it wanted from its pilots alone, the new labor agreement could save the company nearly $1 billion a year.To long for one post
SALVAGING UNITED
United's Attempt to Cut Costs Could Force Rivals to Follow
If Workers Don't Approve Concessions,
Carrier Will Turn to Bankruptcy Judge
By SUSAN CAREY and SCOTT MCCARTNEY
Staff Reporters of THE WALL STREET JOURNAL
It's crunch time for United Airlines, and much of the rest of the airline industry. United faces a crucial deadline in three weeks: Unless its workers agree to huge cost cuts, the carrier intends to ask a federal bankruptcy judge to void the unions' labor contracts so United can impose new terms.
Either way, United must slim down to survive in a devastated market. And if it succeeds, the industry's other cost-crippled dinosaurs will be forced to take knives to their own bloat.
To see the scope of the radical restructuring the nation's airlines could face, look at United and an airline that has what United wants, thanks to two trips through Chapter 11.
The most-senior United flight attendants get 51 days of vacation annually. At Continental Airlines, flight attendants top out at 37 days. At hub airports, United aircraft are waved in and pushed away from gates by its highly paid mechanics. Continental uses ramp workers and baggage handlers to do those jobs. In 2001, United pilots flew an average of only 36 hours a month -- the lowest in the industry -- while Continental pilots logged 49 that year.
Such inefficiency at UAL Corp.'s United, the industry leader in staff costs, stands at the heart of the showdown between the airline and its workers. Last year, United, the world's No. 2 carrier, spent almost 50% of its revenue on wages and benefits, and ended up with a net loss of $3.2 billion. AMR Corp., parent of American Airlines, spent nearly 49% of its revenue on labor and tallied an even larger net loss of $3.5 billion. Continental spent only 35% of its revenue on salaries and benefits last year and incurred a 2002 net loss of $451 million.
No. 1 American has raised the possibility of bankruptcy proceedings and on Feb. 4 asked its workers for $1.8 billion in annual labor savings -- 21% of total labor costs last year. Delta Air Lines, Northwest Airlines and US Airways Group Inc., which filed for bankruptcy-court protection last summer, all spent more than 40% of their revenue on labor. Delta and Northwest also have given notice to their employees in recent days that changes must be made. Without fast and deep surgery, any one of these carriers could be extinct in a few years.
The industry has suffered an unprecedented decline in revenue driven by the poor economy, terrorism jitters, the Internet -- which makes it much easier to find cheap tickets -- and the specter of war. Making matters worse, the big airlines are being swamped by expanding competition from low-cost carriers such as Southwest Airlines, JetBlue Airways and AirTran Airways.
Facing these travails, United is pushing for lower costs. "I am here to introduce United to the harsh, brutal realities of competition in the new marketplace," UAL Chief Executive Glenn Tilton said in response to a pilot angered by the prospect of making major givebacks. "Our labor costs are the highest in the industry. Unsustainable. Our productivity is not competitive with competitors. Unsustainable."
Cuts Both Ways
Yet United's workers have already felt some pain. The pilots voluntarily agreed to a 29% pay cut on Jan. 1, and the flight attendants gave up 9% of their pay. The bankruptcy judge granted United's request last month and ordered members of the machinists union to give back 13% of their pay. A senior United flight attendant earned about $45,000 last year, a senior mechanic more than $70,000 and a 10-year captain on a narrow-body jet about $186,000. Pilots have pointed out that while they make up 28% of payroll expenses, they are being asked to shoulder 44% of the total savings sought.
Organized labor has had two seats on UAL's 12-member board since 1994, when the pilots, machinists and some other workers bought 55% of UAL in return for six years' worth of wage concessions. The experiment with employee ownership has been criticized as a disappointment by both labor and management since it never succeeded in changing the culture of the company or repairing decades of mistrust between the two sides. And although the two labor directors have special powers, they also face potential conflicts between their roles as elected union leaders and their roles as board members with fiduciary responsibilities to look after the good of the entire company.
United, which filed for bankruptcy protection in December, wants its unions to agree to longer-term cost cuts voluntarily. But if they don't, the carrier can emulate Continental in using Chapter 11 and the power of a federal bankruptcy judge to rewrite its labor contracts. United aims to pare its employee costs by nearly $2.6 billion a year -- or 36% from 2002 levels of $7.1 billion -- with a combination of lower pay, reduced benefits, higher productivity and more leeway on outsourcing. It also wants to form a separate subsidiary with even-lower costs to compete with low-fare carriers.
The other big carriers don't yet have the cudgel of Chapter 11 to wield over their unions. But they may not need it. American's pilot union, the Allied Pilots Association, says it believes it is "absolutely necessary" that workers agree to contract changes. Capt. John Darrah, APA president, wrote to members last week: "We must become competitive in this new environment, or die." American has said Chapter 11 remains a possibility if it doesn't win the savings quickly.
The temporary wage cuts United already has won, pending further negotiations, are valued at $840 million annually. The savings were needed to help UAL meet strict cash-flow targets required by the lenders providing interim financing to keep the company aloft in Chapter 11. United wants to lock in the temporary pay cuts and other belt-tightening steps by early May, when its interim financing targets get tougher.
If the company gets there through a court process, the unions might be angry enough to strike -- although that's a remote possibility since a strike would push the company into liquidation. Even a slowdown or a sick-out would cause irreparable harm at a time when each passenger counts more than ever.
It wasn't just overly generous labor contracts that got the big carriers into this mess. Other mistakes range from too many types of planes, which boosts maintenance and training costs, to reckless expansion and inefficient schedules. Struggling carriers have since corrected many problems, but their plight has still worsened with the current squeeze of higher fuel prices and lower bookings as war jitters increase.
Labor costs are their single largest expense, however, and represent the best opportunity for change. Simply cutting pay won't be enough. The key is stamping out archaic work rules. These limit the big airlines' flexibility to use cheaper subcontractors to do some jobs, build more-efficient flight schedules and make employees perform multiple tasks. And the key for the industry's big carriers may be United.
"It's a domino game" among the major network airlines, says Dan Kasper, an airline consultant for LECG in Cambridge, Mass. "The first little domino was US Airways," which has cut its labor costs by 27% while in Chapter 11. United, he adds, "is the big kahuna."
Pilot contracts represent the biggest variance and the most opportunity for savings from improved productivity. Gary Chase, a Lehman Brothers analyst, estimates that if United got all that it wanted from its pilots alone, the new labor agreement could save the company nearly $1 billion a year.To long for one post
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