Labor Not to Blame for Failure, Some Say

By Nancy Cleeland

Dec. 10, 2002 12 AM PT

Times Staff Writer

In Wall Street shorthand, what went wrong at United Airlines often comes down to two words: labor costs.

But was Monday’s bankruptcy filing really the fault of greedy pilots and unreasonable mechanics? Union leaders and at least some industry observers say labor has been unfairly singled out for blame.

Richard Gritta, a professor of finance and transportation at Oregon’s University of Portland who has followed the airline industry for 30 years, said poor financing and operating strategies were the real culprits in the airline’s failure.

United’s debt is too high, Gritta said, largely because the airline leases about 80% of its planes. That’s the highest rate among major airlines, all of which spend too much on leasing, he maintained.

Gritta also said the airline’s traditional hub-and-spoke operation is far more costly than point-to-point strategies used by smaller, more successful competitors such as Southwest. Other major airlines have made the same tactical error and are in trouble because of it, he said.

Wages don’t even factor into Gritta’s equation. “So a pilot makes $250,000 a year. I don’t begrudge them that,” he said. “They have a special skill, and if you have a family, you give up a certain amount. Maybe you could argue they’re overpaid, but that’s not the cause” of the bankruptcy filing.

Nelson Lichtenstein, a professor of labor history at UC Santa Barbara, said the focus on labor costs is partly pragmatic: They can be reduced quickly and relatively easily at a time of crisis, unlike fuel prices or leasing expenses.

But he said concern over high pilot salaries fits into a larger ideological trend, also demonstrated in the recent longshore labor dispute.

“At a time when unionization is the exception, a highly paid union worker is seen as completely egregious and weird,” he said. “It’s like the nail sticking out of the wood. The inclination is to smash it.”

Many airline analysts and consultants argue otherwise, however. They note that labor compensation at United has risen dramatically over the last decade and now accounts for 43.2% of operating costs. That’s the highest in the industry, although only a percentage point or two above most other airlines. (American Airlines is No. 2 at 42.9%.)

United employs about 82,700 workers, some 23,000 of them in California.

The Air Line Pilots Assn., which won industry-leading salaries for United pilots two years ago after staging disruptive job actions, is viewed as particularly burdensome -- pushing for compensation packages that critics say ensure red ink.

“That compounded an already existing cost problem, and it also polluted the industry” by encouraging other unions to demand wage hikes, said Jon Ash, president of the Washington-based consulting firm Global Aviation Associates. Pilot wages at United since have been surpassed by those at Delta.

Wages, which run into the $200,000-to-$300,000 range for veteran pilots who work international flights, tell only part of the story. Total costs also are raised by work rules and benefits that allow full-time pilots to fly as few as 55 hours per month.

Ash noted that under United’s employee stock ownership plan, pilots controlled 25% of the company’s shares and had a seat on its board. Thus they were partly responsible for approving the wage increases that he maintains ruined the company. “The pilots drove the stake into their own hearts,” he said.

United’s pilots were the first employee group that agreed to 18% cuts in pay to avoid Bankruptcy Court, but Ash said at least a 25% drop is needed.

Mechanics, represented by the International Assn. of Machinists, followed the pilots with their own lucrative contract, under which a seasoned mechanic can earn about $70,000 a year with generous medical and retirement benefits. Mechanics were set to vote on a proposed 7% wage cut to save the company. But they canceled the vote last week when the federal government refused to guarantee a $1.8-billion loan, triggering the bankruptcy filing.

Flight attendants are by far the lowest-paid union group at the airline, with veteran employees earning on average $32,000 a year. Represented by the Assn. of Flight Attendants, the 24,000 employees operate under a contract that automatically raises their pay to the industry average. Trying to avoid a bankruptcy filing, the union had agreed to a pay cut 4% below that level.

Despite the differences in pay, AFA officials defended the pilots’ wages, noting that they were negotiated when United was highly profitable.

“It’s really handy to be able to point to the pilots,” said AFA spokeswoman Sara Dela Cruz. “But if you start pointing at the pilots, the next step is the mechanics and then the flight attendants and everyone else.”

Employees unfairly are being asked to pay for poor management decisions made during the last decade by executives who left the company with lucrative severance packages, she said.

“We continue to give and give,” Dela Cruz said. “I wonder what would be enough. Would minimum wage be enough?”

Pay cuts almost certainly will be more severe as the firm moves through Bankruptcy Court, and employee groups have signaled that they are willing to accept more to keep the airline alive. Unionized employees at other troubled airlines are watching closely, concerned that their contracts could be next.

“We question whether any airline can just cut its way to profit and success,” said Gregg Overman, communications director at the Allied Pilots Assn., which represents American Airlines employees, who recently were asked to accept wage freezes for the next year. “There are more fundamental issues to be addressed than just trying to squeeze the labor groups.”

(BEGIN TEXT OF INFOBOX)

Rising labor costs

Labor costs for the major airlines have consumed a larger chunk of their operating expenses over the last dozen years, but United Airlines has gone from being among the lowest to the highest.

Salaries and fringe benefits as a percentage of operating expenses

1990

US Airways -- 40.8%

Delta -- 40.2%

American -- 34.7%

Southwest -- 34.5%

United -- 33.3%

Northwest -- 31.1%

Continental -- 24.7%*

2002

United -- 43.2%

American -- 42.9%