Free «Have Unions Made the Airlines Unprofitable» Essay Paper

For decades, numerous discussions and debates have taken place worldwide regarding the viability of a 'marriage' between the airlines and the workers' unions, but despite huge losses and tragic unforeseen occurrences within the airline industry, disputes still continue to rage on, and endless legal battles have become a battleground in which the U.S. legacy airlines have suffered significant casualties.  Public opinion voiced in various media, reflects the growing concern that the unions have in part played a role in contributing serious challenges to an industry that is already faced with ongoing financial uncertainty.   Yet public opinion may not be the only 'yardstick' by which we determine the seriousness of the problems besetting the airlines, because there are many other factors that come into play. Supply and demand is never constant and can change in an instant by the delicate touch of a shift in public perception, or by an unimaginable catastrophe such as was experienced in the 9/11 attacks.  Who can predict and take the proactive steps to counteract the unpredictability of supply and demand, and who can ensure that adequate reserves are in place to counteract the over-supply of suppliers to a vulnerable marketplace in which ever increasing labor costs prevail.  In the event of a terrorist attack as was experienced in September 2001, or a huge loss of life erasing an airline's excellent safety record, the airline's financial sustainability may be pushed to the brink of collapse, and it is at this point that an unsustainable mixture of escalating labor costs can make or break the airline. A union-free SkyWest Airlines encounters many of the same risks and threats as well as its unionized competitors, but their playing field is a safe haven of negotiation and cooperation as their opponents play by the rules, ensuring that everybody wins the ultimate prize, a viable and profitable asset that provides benefits for all participants.  A union-free airline has the flexibility to adapt quickly to a crisis or market changing conditions because it is not tied up in the complex rules and regulations negotiated by the unions.  How many times have the 'headline' news been dominated by repetitive 'turf' wars between beleaguered airlines and intransigent unions, both seeking to protect their interests.It is at these times, the consumer may opt out of the uncertainty of an ongoing dispute, following which the price ceases to be the prevailing consideration.  The balance of reason swings unerringly in the direction of a relatively stress-free environment.  Added into this arena of combatants and non-combatants, the traveler may elect to fly with an airline that has a track record of trust and goodwill with its entire staff.  An airline embroiled in a war of attrition can inadvertently compromise their safety record, and once breached can take years of painstaking effort to rectify, and require significant financial expenditure to 'heal' a damaged brand.             Another disadvantage that a unionized airline encounters when analyzing safety issues is regarding its maintenance budget.  Assuming that an airline allocates a certain budget to maintain its aircraft's airworthiness based on miles traveled and hours flown, it can also be assumed that its total expenditure per mile / hour is higher due to the higher labor costs including pensions, health insurance and many other 'perks' negotiated by the unions that at some time in the future, become unsustainable.  Logic will prevail that despite the union's claim that they have their members' best interests at heart, the reality is that they can only negotiate for resources from the airline, that it is available to give.  The difference between negotiations by the staff of a unionized airline and a non-union airline is that the negotiation by a unionized airline may be undertaken by 'forced' persuasion rather than by cooperation and mutual benefit. In addition, the airline has to contend with a third party (a union), which is a business entity that has a bottom line profit to consider, regardless of the outcome of negotiations, so the issue arises regarding a third party business that has an obligation to maximize its income.  Can any union business be expected to sacrifice its own interests in favor of its clients and members? Likewise, can it be expected for the same third party union business to refuse or negate income in order to assist the airline?  If loyalty was applicable, it would surely be focused towards their members (the airline staff), not the airline which was the original source and provider of the income.  There is also another dimension regarding this 'in-house', triangular business structure.  If one had to compare this 'relationship' to a marriage between husband and wife, a married couple would normally only request a third party to facilitate as a negotiator on their behalf, in the event of a breakdown in communication or a serious problem in the relationship.  Whilst it is true that a marriage guidance counselor can provide an essential service as a last resort, the request for help by either partner within the marriage relationship would imply that they could or would not solve the problem by themselves, but required an 'outsider' to mediate.  For a union to be an essential part of a very important relationship existing between employer and employee, implies that the employer and employee are not capable of solving their own problems and challenges as and when they arose.  In addition, utilizing a third party slows down the whole process of communication, as certain additional rules and protocol need to be observed because of the lack of confidence and trust.  Information communicated via a third party is also exposed to a risk of miscommunication or a misunderstanding, which may lead to a further breakdown in the relationship between the employer and employee.  The reality is that if the union's role is so necessary to ensure harmony, the union assumes a degree of power and control that it will be reluctant to give up. So, following this line of thought, it is in the union's business interest to ensure that they are needed, in other words, an environment of conflict is good for their business, but adversely influences the airline's business. In further support of this line of reasoning, it would be prudent to consider how much the union adversely influences the stability and growth of an airline.  Following is an chart, Weissmann, Chart of the Day: Why American Airlines Is in Bankruptcy (2011), illustrating just how such a large U.S. legacy airline as American Airlines is so disadvantaged, carrying such extraordinary high costs and producing just 2 years of very marginal profit, 1 year breakeven and 8 years showing a loss, all from a 11 year period (¶).                      

 

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If the chart is analyzed, it is evident that American Airlines' income has followed its competitors until 2009, at this point the trends change in 2010 as the other airlines showed a profit, but American Airlines suffered yet another loss.  In 2010, there were many factors that contributed to the overall upward trend towards making a profit in the U.S. airline industry.  The most significant factor was the dramatic fall in fuel prices, which constitutes a large part of an aircraft's daily running costs.  The collapse of the oil price was triggered by a worldwide economic downturn, but ironically, as many other industries were struggling to stay afloat, almost all the airlines enjoyed a welcome respite from the high fuel costs, hence the favorable profit margins. However, American Airlines broke away from following the upward industry trend, and again it made a loss, so it became the only one of the so-called legacy airlines that wrote 'failure' on its 2010 balance sheet.  Another startling fact emerges that since 9/11, all the original so-called legacy airlines have filed for Chapter 11 bankruptcy, except American Airlines, and therein is the 'injustice'.  By refusing to take the easy way out, the airline inadvertently 'shot itself in the foot'.  By filing for bankruptcy, the other airlines walked away from their top-heavy labor costs and accumulated debts.  By seeking to take the 'honorable' route, American Airlines became uncompetitive in a competition driven market, leading to its inevitable slide into bankruptcy. Could it have avoided bankruptcy proceedings if its bloated labor costs had been cost effective?  Also, could the other airlines have stayed above water, if the unions had not demanded such a high price for services rendered?  Maybe the elusive answers to these and other questions posed earlier in this paper can be looked at, albeit in hindsight.                        

Discussion

            The first part of this paper has been largely focused on some problematic areas within the U.S. airline industry, including a closer look at the role that the unions play, and some of the consequences that have been resulted from their participation within the so-called legacy airlines.  It is doubtful if the definitive answers and solutions can be found easily, due to the inherent complexity and sensitivity that surrounds the relationships between these airlines and their employees. However, it is important that whatever decisions are taken to create workable solutions, the public, government, airline regulators, airline associations and federations, airline executives, airline staff and the unions work proactively together, so that a cohesive and mutually acceptable program of steps is enacted to prevent further confusion and turmoil in the airline industry.          

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              This paper now turns to the question regarding the unprofitability of the U.S. legacy airlines whether the unions were and still are responsible.  It would be unfair to lay all the blame at the union's door as they cannot hold responsibility for issues relating to the fuel costs, current market conditions, airline management and regulatory policies.  Also, it would be naïve to assume that by removing the unions from the airlines, profitability would return.  Theoretically, unions can be an influence for good, an essential attachment to the airline's management structure.  However, the reality is far removed from the ideals and original concepts of why unions came into existence.  Many years ago, unions became the part of worker's security due to unethical and unsocial practices enacted by unscrupulous companies and employers.  Today, the power has in part shifted, and in an industry that is so vulnerable, any added imbalance creates risk.  So it would be reasonable to say that the airline unions have contributed to making the U.S. legacy airlines unprofitable by exceeding their responsibilities of the 'fair play', and sought to extract the maximum benefits for their members, and sometimes this has been done regardless of the consequences, both for the airlines and the consumer.  This can be validated by an excerpt from an article titled, SkyWest Airlines: Non-Union Success Story (2011) which stated the following:                   

“History has taught us that powerful unions, particularly in our industry, do not hesitate to place their companies in financial peril – ultimately costing thousands of hardworking     men and women their jobs.  Understand, this is not "just a pilot" issue.  Union activity affects every single employee.”  This unsustainable practice has seen an airline company’s splitting into two camps, employers and employees.  Earlier in this paper, the point was raised about a third party creating many communicational and operational problems between the airlines and their staff.  This paper would submit that the unions have not made the airlines unprofitable, but rather they have contributed to their unprofitability, especially during periods of emergency such as a 9/11 attack or a dramatic rise in fuel costs.  The next question that needs to be looked through concerns the possibility of these U.S. legacy airlines to return to profit with unions at the airlines.  To pursue this investigation, reference needs to be made to the chart depicted earlier in this paper, Weissmann, Chart of the Day: Why American Airlines Is in Bankruptcy (2011).  In this chart it has been found that almost all the airlines had made profits periodically, and it should be noted that most of them had filed for Chapter 11 bankruptcy during the period depicted.  As was previously discussed in this paper, almost all of these airlines had re-negotiated their contracts with the unions after they had filed for bankruptcy, thus enabling them to reduce their operating costs, including the costs pertaining to the worker's hourly rates of pay, retirement benefits and many of the other 'perks' that they enjoyed, but were not sustainable, hence contributing to the eventual demise of these airlines.     

              From the chart, it is apparent that these restructured airlines were producing significantly higher profits than American Airlines were.  At the time of the survey and subsequent publication of the chart, American Airlines had not filed for bankruptcy, had not restructured, and were therefore in a perilous financial situation, whilst for the others there was a significant difference in their performance, thus the possibility for their economic survival was vastly improved, both in the short and long term.                                                                                     

           Based on the evidence given in the previous paragraph, a conclusion is reached that airlines can return to profit with unions still involved in their operation, but this subjects to the cost effective strategies in place, so as to ensure that the labor costs are kept within the certain parameters, and that the unions have to consider not just their members, but also the airlines and the airline industry in its entirety.  For profits to be consistently maintained, the unions will need to adopt a constructive team-working, pro-airline industry policy rather than operating through a narrow and perhaps irresponsible viewpoint.  Following is the further discussion concerning the union motivated wage structures. The consequences of excessive wage demands can be catastrophic for an airline.  By addressing this issue, unions would be prudent to consider the wage concessions for any airline that is in a loss-making mode, as the failure renders a loss for all parties; the airline, employees and also the union.  So, theoretically, wage concessions should help to ensure jobs and profit, but wage concessions are normally negotiated in times of conflict or when survival is in question.  By inference it can be assumed that a union will seek to reverse the wage concession when the crisis has passed, so it calls into question if wage concessions are just a temporary measure.  For the wage concessions to be effective, they need to be implemented for the medium to long term, so that the airline could make a profit when the crisis is no longer an issue.  Company growth and expansion of the capital assets is an attribute of profit, a win-win for all parties.                                               

               However, the wage concessions as a stand-alone issue is unlikely to significantly increase the chances of an airline returning to profitability.  To realize the full benefit of wage concessions, non-wage issues, such as retirement benefits, insurances, health and safety need to be enacted.  If there are wage concessions, but high non-wage costs, it becomes almost self defeating.  So, union wage concessions can return the U.S. airlines to a profit, but the reality of its happening will be more likely, if it is combined in a 'concession package' comprising of non-wage benefits. Moreover, there are other opportunities that can be attached to the issue of wage concessions which can further realize the objective of returning these airlines to making a profit.        Another option for an airline to pursue in in quest for profit is to consider the outsourcing. By analyzing its entire cost structure, especially of that related to labor costs, the airline can contract out by inviting bids with certain criteria attached to ensure the compliance and safety.  If, during the analysis, there are specific segments of operational duties which are not directly related to critical safety procedures, these duties can be contracted out thus removing the full responsibilities of employing staff for non-safety duties.  In addition, less staff translates to the less union involvement, a double bonus.  In addition to outsourcing, other possibilities arise.                    

              Profit sharing can be another economic way to motivate and invite cooperation with the unions and its members.  Incentives can be put in place that will reward the participants, if the goal of reaching a profit is achieved.  This strategy can motivate a profit orientated partnership. In order to gain further insight and understanding regarding the validity of this study, it      

should be accepted that research can never be perfect as it is based on an evolving industry,  so the validity of this paper is subject to possible compromise.  Moreover, opinions expressed by individuals are only a reflection of their views at the time of publication. Events occur rapidly in a world where technology and human aspirations drive corporate innovations and progress.  In addition, this paper points to the inevitability of gaining wisdom in retrospect. As has been documented in this paper, American Airlines continued persistence in ignoring their competitors strategically terminating one business model for another. Perhaps future studies can be undertaken with the research expanded to include the relationships of unions and airlines within a global context and application, both long haul carriers and the 'budget' airlines, thus gaining more balanced understanding and maybe a more definitive conclusion.  Furthermore, if some or all of the findings submitted in this paper were implemented, it would be reasonable to expect that the past 'union versus airline' problems would cease to be an issue that the 'problems' become a challenge of cooperation and mutual benefit.            

            In summing up, the effect of constructive relationship building within the industry may have been sidelined, due to policies and strategies that historically have been bereft of the long term planning, because focus has been on the maximizing volume and profit.  This has inadvertently invited the unions to induce loss making strategies with the cooperation of vulnerable airline workers.  The psychological theory regarding the unions' responsibility for being the cause of the past financial losses lacks validity. This paper submits that consideration should be given to these findings, which suggest that unions, employees and the principal  airlines all contributed to non-profitable strategies, and based on the evidence, making profit attainable by these three key participants referred to above, utilizing strategies that have been suggested herein.