The Business of America/Unions Fly High
Stelzer, Irwin M.
THE BUSINESS OF AMERICA UNIONS FLY HIGH by Irwin M. Stelzer C o New York realtor-Atlantic City casino operator Donald Trump has won the battle for Eastern's shuttle. Or has he? In fact, the...
...So any favored buyer could quite legitimately borrow more, and therefore offer more for the airline, than could a buyer the unions dislike...
...Given America West's plan to run the shuttle with its own staff, it came as no surprise that Joseph Guerrieri, Jr., an attorney for the machinists' union, told the press: "If the shuttle has to be sold, and it's between Mr...
...And they were unhelpful to America West, a Trump rival...
...travelers can choose from a huge range of price/ quality combinations...
...Unless airline operators fear fare competition more than they do the unions—the case since 1978—they will be inclined to buy labor peace with higher wages...
...Near-bust Pan Am (its bonds are so cheap that they yield almost 19 percent, the highest of any non-bankrupt security traded on the New York Stock Exchange), backed by the Bass brothers and others, would like to merge with Northwest to create America's third largest carrier, serving sixty-two countries...
...When the machinists walked out on Eastern rather than grant the $150 million in concessions Lorenzo felt he needed to keep Eastern flying, the pilots joined in—and found themselves the darlings of the trade union movement...
...Some, but not all, of this information now must be made available to all carriers...
...Unfortunately, union control of takeovers means more than that—it is a return to a form of competition-stifling regulation, with the unions acting as the regulators...
...And this just when airlines are expanding rapidly and upgrading their fleets...
...Are we more militant...
...Deregulation spawned the hub-and-spoke system, which funnels most traffic through large, now-overcrowded airports such as Atlanta, Denver, La Guardia, and Chicago's O'Hare...
...Why let your boss save some money by flying on New Competition Airlines when you and your wife can go to Hawaii, free, if you choose Old Incumbent Airways...
...calls him "the typhoid Mary of union busting...
...After Ronald Reagan broke the air-traffic controllers' strike, and Frank Lorenzo the strike against Continental, most observers thought the unions had been permanently neutered...
...What is certain is that the two carriers' unions will have a great deal to say about the final result: only the bravest money man would finance a takeover in the face of possible strikes and other disruptions to the cash flow needed to cover financing costs...
...Moreover, the unions realize that the competition that has forced real (inflation-adjusted) fares down since 1978 has also forced wages down...
...Indeed, there is more here than the pilots' nostalgic recollection of the golden days of regulation, when generous wage settlements could be passed on to airline customers...
...Frequent flyer bonus systems make it difficult for newcomers to compete with established carriers...
...Eastern's unions have turned militant...
...The unions were a decisive factor in preventing Carl Icahn's Trans World Airlines from bidding...
...The Eastern strike demonstrates this graphically...
...Favored status is conferred on the buyer most willing to guarantee seniority rights and to refrain from demanding more from the unions in the future...
...While complaints about crowded airports, lost baggage, and less comely flight attendants abound—indeed, surveys suggest that public enthusiasm for airline deregulation is waning—former Transportation Secretary James Burnley was probably not wide of the mark when he described airline deregulation as "America's most successful populist reform since World War II...
...So TWA said it won't bid "unless and until TWA's unions agree that this is acceptable...
...Even more important, it has concessions to put on the table...
...Such concessions make the airline much more valuable to the favored than to the disfavored buyer...
...Because of reduced service on Eastern's routes, load factors (the portion of all seats filled) have risen...
...Just as Carl Icahn can't do very much at TWA without the backing of his pilots' union—after all, their clout enabled him to win control of the airline in a bidding war with Lorenzo—so other operators will soon find themselves under the thumbs of, or at least forced to deal with, the unions on matters far removed from wages and working conditions...
...But there is more here than mere hatred of Lorenzo...
...Union leaders knew that the Arizona-based airline, one of the few carriers started (with three airplanes) in the post-regulation era that is still around, has no unions...
...And good for efficiency...
...True...
...More often than not, a potential newcomer can only get gates if the incumbent he is planning to challenge will make them available...
...If this merely meant that the unions ultimately decided which of several entrepreneurs ended up running the Eastern shuttle, or extracting monopoly fares from passengers in the Midwest, or competing on the Atlantic routes with formidable foreign carriers, it would be of no real interest to policymakers...
...After all, hatred of Lorenzo is not confined to airline unions: AFL-CIO president Lane Kirkland Irwin M Stelzer is chairman of the Regulated Industries Group, Harvard University, and an American correspondent for the London Sunday Times...
...That sum, which other bidders less congenial to the unions would have to pay as wages, could be used by the unions' choice to pay interest on perhaps some $1.4 billion in debt...
...For one thing, it has the power to promise or to withhold stable, continuous operations...
...airlines now seem capable of earning reasonable profits...
...It's a sign of the times...
...Consider, too, financially robust Northwest Airlines...
...But the work force, too, has assets...
...Trump and America West, we'd go with Mr...
...Eastern's unions reportedly offered one of their favored buyers, former baseball commissioner Peter V. Ueberroth (whose group dropped out of the bidding at an early point), some $200 million in concessions...
...They fear that the burden of meeting interest payments forces managements to be stingy when it comes to wages, and compels them to demand increased productivity from workers...
...Not so...
...So pressure from potential competitors to keep costs down has been reduced at precisely the time when the unions are flexing their muscles...
...The unions, for example, can offer to accept changes in work-rules and wage cuts worth hundreds of millions of dollars to some potential buyers, but deny them to others...
...Fake the case of Eastern...
...asks Captain Henry Duffy, president of the pilots' union...
...If all lines operating on a route raise wages, 30 THE AMERICAN SPECTATOR JULY 1989 none need fear: all will have to raise fares...
...Newsweek reported "talk" that the strike against Eastern "might serve as an air-traffic controllers' strike in reverse—a dramatic event that signals the comeback of organized labor...
...irlines have many assets that dealmakers find attractive: airplanes, landing slots, gates at airports, and a, presence on some lucrative routes...
...Since the 1978 Airline Deregulation Act, passengers have saved between $10 and $15 billion per year...
...It seems that everyone in the airline business is bullish—except for those who have gone or are about to go bankrupt...
...Anyone who still doubts the crucial role of the unions in the airline business should consider the following simple arithmetic...
...Much of the real decline in airfares since 1978 has come out of the bloated wages of the unionized work force (Eastern's ramp workers still make $15 per hour...
...Computerized reservation systems (CRS) give airlines that own them (not all airlines do) the advantage of immediately knowing their competitors' fares and seat availability, and of discovering quickly what incentives are required to discourage travel agents from booking passengers onto competing airlines...
...That success is now at risk...
...In fact, the unions have won the battle—and may be on the verge of winning the larger war for control of America's deregulated airline industry...
...Deregulated fares have been so attractive that today three-quarters of all Americans have traveled by air...
...Sure we are...
...Surely the unions, which have become as expert in airline finance as the airlines themselves, can see that some of the extra $396 is likely to trickle down to them...
...Unless they can get the unions to go along, it's probably not doable," says Aetna Life's Frank McGann...
...With fewer empty seats the airlines havereduced the number available at discount rates...
...This is no small matter: Delta's full round trip New York-Atlanta coach fare is $674, its discounted (nonrefundable) fare is $278...
...o appreciate the character of that threat, one must recall the advantages consumers have reaped from airline deregulation...
...before 1978 that figure was only one-third...
...The only constraint would be the threat of new entry...
...But Yale University's Michael E. Levine, a former Civil Aeronautics Board member and an old airline hand, argues that CRS owners still have "preferential access to information and . . . advantages both from immediacy of availability and from the difficulty to non-owners of gaining access to information not in reports...
...But not a good THE AMERICAN SPECTATOR JULY 1989...
...Whether such an agglomeration will come about is not certain at this writing...
...Leaders of organized labor see the strike against Eastern as a turning point, not only in the fortunes of the airline unions but in the prospects for the union movement as a whole...
...Among the cheerful set must be included the unions...
...31 T hese and other barriers to entry are so substantial that Levine concludes that the emergence of a major airline "will be a rare, and not routine, event...
...All they have to do is work out the wage-optimizing schedule on each route, impose it on the separate airlines whose work forces they represent, count on gate shortages and other barriers to keep out newcomers, and happy days will be here again—for pilots, who now earn $150,000 per year flying 747s, if not for the grandmother who thought she might fly up from Atlanta to see the grandchildren...
...For one thing, the unions are against airline debt, sometimes taken on to finance mergers, sometimes used to buy planes, sometimes used to lower capital costs...
...But barriers to new entry are mounting...
...If you have the employees siding with one buyer, that buyer can affordto pay more," notes consultant Mary V. Budgyk...
...Indeed, so great is the demand for new airplanes that Boeing is struggling to meet customers' orders without sacrificing the production quality for which it has long been famous...
...thing from the unions' point of view...
...In addition to its growing and lucrative transpacific business, it operates as a near-monopoly on the routes that somnolent regulatory authorities allowed it to grab when it took over Republic Airlines...
...More significant is the emergence of the unions as king-makers in an industry still in the process of restructuring...
...Our pilots' union is concerned about us bringing Eastern pilots in . . . working for less than our pilots...
...Gates and landing slots are in short supply...
Vol. 22 • July 1989 • No. 7
