Heritage: Big Labor Drags American Airlines into Bankruptcy

by Nick Stone: 


In the wake of the 9-11 terror attacks and the ensuing aviation industry downturn, every major American airline filed bankruptcy to reduce costs and reorganize their balance sheets. Every airline that is, except American Airlines. 

American Airlines takes pride in its position as America's defacto flag carrier and reputation for innovation, like the first frequent flyer program. The company is also known for good relations with employees.  American's website proudly boasts, "For our progressive and fair-minded policies and employment practices, American Airlines is the only airline in the nation to earn a perfect 100% score four years in a row by the Human Rights Campaign for its Corporate Equality Index (CEI)."

Management has moved heaven and earth to work in good faith with employees while achieving productivity and cost containment goals. Indeed, wages and benefits for AA employees significantly exceed their counterparts.  But financial analysts have urged the airline to do more to bring labor costs down in the face of flat revenues and high fuel prices.  AA has been in stalled contract negotiations since 2006 and recent talks have found the union unwilling to help avoid financial disaster. In need of a game changer, yesterday American's holding company (AMR) declared Chapter 11 reorganizational bankruptcy. 

According to PBS Nightly Business Report, the move was "brought on by the carrier's sky high labor costs." Bankruptcy gives the carrier muscle in negotiations with unions. 

American Airlines employees are in for a rude awakening put off for too long. Unable to avoid sacrifices faced by their counterparts at other airlines, American's unions decided they would rather take down the company than agree to sacrifices for their members. Unfortunately, those employees may go down with the ship. 

Of course, airlines and autos are the two go-to example industries where union intervention has strangled companies and resulted in disaster. For a few extra bucks and slightly looser work rules, unionized employees often face unfortunate consequences. When high labor costs force their company into bankruptcy, massive pay cuts and layoffs are often the result. Worse yet, the company may dissolve leaving everyone jobless. 


The Heritage Foundation summed up the situation at AA perfectly: "American’s unsustainable losses forced bankruptcy, which in turn could have a negative impact on creditors, employees, retirees, shareholders, and consumers. And though American may emerge stronger after bankruptcy, it will not be without a steep price paid by all parties involved."

In a hard hit industry and a poor economy, the notion that the union would hold American Airlines hostage is reckless. It is reckless because their decisions will result in more drastic pay cuts and layoffs than would have been required through cooperation. It is also reckless because it permanently tarnished the final legacy airline in America.  

New Australian CO2 Taxes Hit Travelers

Australia recently passed a new carbon dioxide tax on air passengers in an effort to combat what the Labour government sees as an epidemic of climate change. Rather than hurting the bottom line of airlines, Qantas has already led the way in passing those costs along to consumers. According to Air Transport World, the emission tax "will cost Qantas up to (U.S. $124 million) a year and passengers will foot the bill."

Qantas said in a statement, “In the context of the significant challenges facing the global aviation industry, the Qantas Group will be unable to absorb the additional costs associated with the carbon price and there will be a full pass-through to customers.” Those costs are expected to add between A$3.50 and A$8 per flight segment, further burdening the Australian visitor with additional travel costs.

What effects the new carbon tax will have on air travel demand remains to be seen, though European air passengers have already altered travel arrangements to avoid German carbon taxes. Australia's center-left government will either prevail in expanding taxation into a new frontier, or be forced into an embarrassing retreat.

There are a lot of stupid ideas out there, and many of them become reality... but one of these in the news today really stood out to me as an awful possibility.

"Alaska Airlines Won't Discount Merger Plans"

This is not just about airline mergers, it's a referendum on the concept of "too big to fail".

As we've seen with banks and investment firms, hedge funds, and companies of all shapes and sizes, the idea of "too big to fail" is laughable. If you haven't noticed, most of these companies have failed. The ones that didn't, only didn't, because they had an emergency injection of capital.

Think back over this past year alone. This is where the term "bailout" became part of the American kitchen table dialect. Bear Stearns was considered too big to allow to fail, so begrudgingly we allowed a bailout and purchased by JP Morgan Chase. Countrywide was in trouble because of poor business practices, and was swallowed by Bank of America. Both companies alone were considered too big to fail and both had toxic assets already. Allowed (actually pressured) to unite, they are one toxic cesspool and hemorrhaging fast. Check their stock price if you don't believe me. Their cash on hand situation is scary. Thank God the FDIC temporarily doubled the limit of federal insurance on deposits, or people would be switching banks quick. Chase went on to swallow Washington Mutual when it called an S.O.S., and now Wells Fargo has swallowed Wachovia, which is forcing that bank to tank as well.

When times are good, mergers can be equally bad. This is especially true in the airline industry, where regardless of the financial health of the airlines involved, mergers rarely turn out to be pretty or helpful in the long run. More often than not, less money is saved by combining assets than previously estimated. Routes are cut drastically, which cuts revenue. Labor disparities are unresolvable without mediation, and even then serious grudges continue. Layoffs commence. Costs often skyrocket, even though a competitor has been neutralized.

Yes, huge airline mergers are a bad idea.

Yet, they continue. Not only do we see them continuously, but bigger and bigger mergers are being allowed every year. Have we learned nothing from "too big to fail" companies being allowed to merge, and ultimately being forced to decide the lesser of two awful options? Either we end up saving them by injecting capital at taxpayer's expense (and if you haven't noticed, Uncle Sam's pockets aren't lined with dough these days) or we let them fail and allow a major vacuum in our economy, not to mention the loss of service.

So while I firmly believe that a laissez-faire approach to business is - in general - the best way to operate a capitalist economy, there are some areas of our economy where Uncle Sam has got to stop hitting the snooze button and praying for disaster to happen on somebody else's watch. Big corporate mergers constitute one such area. Wake up, Washington! Nobody is benefiting by companies being brought under each others' wings.

For years, US Air faltered and it fell into bankruptcy. It's failure was considered inevitable. In 2005, America West gobbled up US Airways and took its name. It took an entire disastrous year of follied attempts to merge their incompatible reservations and operating systems, and although they operate under one certificate, you'd be appalled to know how separately the crews still work. Why? Because they can't agree on labor terms. This cost-saving merger left the combined airline with the highest Cost-per-Available-Seat-Mile (CASM) in the US Industry of network carriers. Ouch! How's US Air doing?

In the 1980s, PanAm bought up National Airlines when it was in trouble. PanAm absorbed so much in the way of cost centers that the airline was forced into a decline and massive liquidation, followed by bankruptcy, and finally cash injections by Delta Airlines. Ultimately, Delta bought up the profitable portions of PanAm's network, and the skeleton that was left of America's legendary airline was unable to put together a profitable business model. It was grounded in 1991, along with Eastern, which had over expanded, and was ultimately forced to liquidate after having too much debt.

TWA was in trouble at the beginning of this millennium, and like a White Knight, American Airlines swooped in to buy them up. They promised to keep the St Louis heart-and-soul of the TWA operation alive and to keep seniority for crews based in STL. How did that work out? After only a few years, most TWA planes had either been sold off or redeployed to American's Chicago and DFW hubs. Routes were massively cut from St Louis, despite its proximity to O'Hare, a completely over congested disaster of an airport that the FAA had to threaten to regulate before American (and United) thought twice about their impossibly high flight loads. Now, after being the most profitable legacy carrier post-9/11, even American Airlines has had their share of trouble. Swallowing TWA made American our largest air carrier, but ultimately their size was not enough leverage their way out of trouble. Over the past year, labor troubles, maintenance troubles, and increased fees passed on to passengers have led to major cutbacks, layoffs, and a grounding of several of their planes. They've closed their Nashville, San Jose, and Raleigh-Durham hubs already, and are shrinking service at all but one hub- Miami. Is this the good news that we expect from a company so large that its failure is considered unthinkable? Already, American has been dethroned from the "Number 1" title. What's coming down the pike?

Enter Southwest Airlines. This standard-bearer of low cost, efficient travel finds itself in trouble every bit as much as its competitors, if not in a worse place than many of them. Southwest Airlines has few mergers in its history, but each of them has ended disastrously. Google Muse Air to read more. For decades now, Southwest has silently but steadily grown under its larger competitors' noses, all the while finding ways to maintain low costs and keep their employees happy. One major way they have been able to leapfrog over 'legacy carriers' and recently attain the number one carrier position is by hedging their fuel supplies so that no airline can compete on price point. In other words, because American Airlines was buying fuel at $3.50 a gallon and Southwest Airlines was buying it at $2.75 a gallon, only one airline could actually afford to sell those beloved $99 seats. The problem - both airlines had to sell them at that price, or the planes would fly empty. So only one company was turning a profit, while everybody else was posting massive losses. As you can imagine, this isn't terribly great business practice, and often leaves the airlines in ashes - especially the big ones.

But now, with market rate fuel prices plummeting, Southwest's fuel hedges have turned against the airline. They may still be paying $2.75 a gallon, but what happens when now the market rate is $2.25? Now who has the upper hand? And Southwest is such a huge airline that their disappearance would be a devastation to the US Airline market. Yet, there they are, locked into oil price increases over the next several years, regardless of whether or not the price goes back up. Already, they have reported their first quarterly loss in 17 - that's SEVENTEEN - years. They've stunted their growth plans, and have been forced into out-of-the-box ideas to regain their footing which fly in the face of their historic corporate strategy. They announced a few months ago their purchase of ATA's (another failed airline which was once quite big) slots at LGA. LaGuardia is one of the highest cost airports in the country, and Southwest (the standard bearer of low cost airlines) is going to fly there. Being number one under a waning sun is cause for panic, obviously.

If there is one example of a wonderful marriage in the airline industry, it is ironically an open marriage of sorts. Recently, United Airlines announced that after seeking a suitor for nearly a decade, it had decided to cozy up with Continental Airlines. Incidentally, Continental Airlines is yet another go-to airline from which to pick awful merger examples. People Express damn near bankrupted the airline. So did the purchase of the original Frontier Airlines. But now, United and Continental have agreed to quite possibly the best concept around - a close alliance. Since the creation of the Oneworld Alliance in 1997, and SkyTeam and Star Alliances closely following, the concept of alliances rather than mergers has caught on like wildfire. More likely than not, no matter what part of the world you are in, your favorite airline is in an alliance.

Most commonly this means that the airlines reap many of the rewards of a merger - more flight destinations, a virtually neutralized competitor, and no sweating major holes in your coverage areas - without the disastrous liabilities. The airlines don't have to try to merge fleets and maintenance, cabin and cockpit crews. The cost savings are palpable, and many times the companies are granted Antitrust Immunity so that they are legally able to collaborate on schedules and fleet planning while selling seats on each others' planes. This makes for a better traveling experience, a better long-range projection for the airlines, and the savings of the public which now won't have to bail out a massive company when it inevitably finds itself in trouble in the wake of a shotgun wedding.

The entire purpose of this is to circle around to one major point.

Alaska Airlines should not merge with Delta. Not only does Delta already have it's over-leveraged hands full with the Northwest merger on top of a bad economy, but more importantly, Alaska Airlines is one of those rare mid-sized airlines that is turning a profit, and has for a while. They don't need a suitor, but might be dazzled by the dollar signs in the short term.

As a traveler that doesn't want to pay higher fares when flying to the west coast, as an American who is horrified by regulators asleep at the wheel of corporate mergers, as a reader who can't stand to hear the term "too big to fail" anymore, and perhaps most of all as a taxpayer that can't afford to send another huge check to someone promoting poor business practice, I implore someone to talk some sense into Alaska Airlines.

Don't do it! Meet Delta at the altar and tell them, "I don't!"