Rogue Missives - Friday, February 14, 1997

Rogue Missives

ROGUE ARCHIVES

Friday, February 14, 1997

American Plays Chicken
By Jim Surowiecki (Surowiecki)
It's been three years since AMERICAN AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> and the Allied Pilots Association (APA), the independent union that represents American's pilots, have negotiated a new contract. And still it seems more and more likely that the pilots' midnight Friday strike deadline will come and go without a new deal being inked.
At stake in the negotiations is much more than just a raise for the pilots, even if American has done its best to tell the story that way in the press. While the money is important -- particularly since a number of other airlines will be entering negotiations with their pilots this year -- the dispute is really about what most major industrial labor disputes are about today: job security and outsourcing.
The real sticking point in the negotiations is the question of who will fly the American Eagle jets that American Airlines increasingly wants to use on shorter routes. The regional business has boomed for the industry as a whole in the last few years, bolstered by the replacement of turbo-prop planes with small jets that seat 70 to 90 passengers. But while most major airlines have given those routes to smaller, independent companies that serve as their feeders, American wants American Eagle -- which it owns -- to fly those routes. And that, in turn, has brought it into conflict with its pilots.
The APA represents only American pilots, and is unaffiliated with any international union. (American Eagle pilots, who tend to be paid substantially less, belong to the Air Line Pilots Association, which is a member of the AFL-CIO.) The problem is that since American owns American Eagle, the pilots' union sees jobs going to the smaller airline not merely as jobs they're losing to competition, but jobs that they're losing in order to make American itself -- the company with which they're negotiating -- more money.
In addition, the pilots have a clause in their current contract that prohibits the kind of outsourcing that American would like to do. The airline, then, is essentially trying to take away privileges the pilots currently have. And that, in turn, explains why American has done its best to present this as a struggle over pay levels.
"It's not basically about the pay issue, but American has used this as a PR tactic, because it tends to keep the passengers on their side, and to bring out the attitude of, 'oh, the greedy pilots,'" says Motley Fool airline industry analyst Holly Hegeman (MF Wings). "American's pilots are basically the best-paid in the industry, so if you reduce it to the pay issue, it makes the pilots look like they should not strike. But what this is really about is that American wants to be able to bring on regional jets and have American Eagle pilots fly them. AMR owns both sides of the equation, and has played both ends against the middle."
Indeed, American has succeeded in keeping the public eye focused on the question of pilot salaries. The February 17 issue of Business Week ran an article on the potential strike and accompanied it with a pay chart that showed, unsurprisingly, that American's pilots earned more than any other airline's. Even industry analysts have spent more time writing about the potential impact of pilot pay raises on the company's bottom line than they have about the broader issue of outsourcing.
What's curious about this is that it's precisely on the question of pay that American's position seems weakest. After reaping tremendous profits last year and watching its stock rise, and while anticipating more than $900 million in profits in 1997, going to the wall with the pilots over the difference between a 6% and a 10% raise over four years hardly seems a sensible tactic. On the other hand, while the social benefits of outsourcing are dubious, as a business decision the desire to fly American Eagle jets with lower-paid pilots makes a great deal of sense.
It's precisely for that reason that Hegeman is skeptical that a deal will be reached before Friday. In fact, she suspects that even if American agreed to the pilots' demands for an 11.5% raise, no deal would be possible unless American made concessions on the question of the regional jets.
"I don't think even a substantial raise would do it," Hegeman says, "and that's why the money isn't the real issue. Yes, it's important. The pilots haven't had a raise in three or four years, while the airline has been doing very well. But jobs are what this is really about, and big carrier pilots just see this as another way of taking jobs away."
Across American industry, of course, corporations have been adopting similar tactics, outsourcing production to non-union plants, sending production abroad, and attempting to create more flexible, less permanent, work forces. The situation at American is somewhat different, both in the sense that AMR owns both American and American Eagle -- again, that means the corporation is not merely cutting costs -- and in the sense that American Eagle pilots are unionized as well. Which raises the troubling question of whether the American pilots are denying jobs to their union brothers.
The Air Line Pilots Association has been unstinting in its support for the APA, as one would expect it to be. But underlying the current negotiations must be the question of why there isn't a single union for all pilots working for AMR. The genius of the industrial union, after all, was its ability to prevent a company from playing off one part of the workforce against another. With AMR, we have the curious situation of the Air Line Pilots Association not only being less than an industry-wide union, but also not even being an airline-wide union.
Strikingly (so to speak), Wall Street appears not to have understood the potential gravity of the situation. Although the American Airlines stock has trekked slowly downward since the pilots announced their willingness to strike, AMR was up three points yesterday and was up slightly in morning trading on Thursday. Thursday's Wall Street Journal suggested that no one is really expecting a walkout.
"The Wise yesterday really felt that the pilots were going to approve the tentative agreement," Hegeman said, referring to American's offer of a 6% raise and a no-furlough clause. "But even if they thought that, there's already been economic damage done to AMR. People have re-booked. Friday's flights have been cancelled. It's already caused the carrier financial damage. And even if the strike is settled after a few days, American will come back in with extremely low fares to try to appease people."
The sheer amount of revenue American would lose in a strike is enormous, while the pilots stand to lose $10,000 a month plus a bonus based on stock price that promised to be larger than the one they received in 1996. These factors seem to have convinced the Street that both sides will realize that they have to settle. Indeed, Timothy Ross, analyst at SBC Warburg, raised his recommendation on the stock today from "add" to "buy." "It appears that despite the extreme posture the two sides have taken, the cost of a strike looks too horrible," Ross says. "That could lead to a settlement."
Curiously, Ross made his recommendation while simultaneously suggesting that AMR's price would drop as much as $12 a share on the first day of any strike. Underlying his analysis, as it underlies most of the discussion of negotiations, is the assumption that the federal government will step in if the strike nears a week.
President Clinton has the authority under the National Railway Act to create an emergency board, institute a 60-day "cooling off'' period, and force both parties into binding arbitration. This step is generally taken in railway strikes because they have a greater impact on the national economy. Alternatively, he could step in publicly, as he did during the American Airlines flight attendants strike, and push for arbitration. Either step will help end any strike, but neither will help in getting the underlying issues resolved.
It's for that reason, perhaps, that AMR has been calling for arbitration and asking the President to step in, while the pilots have said they prefer him to stay out. Not only is binding arbitration more likely to narrow the scope of any given contract, but it most likely would give the advantage to American because of its deeper pockets. It would also mean that any final settlement could be years away.
Hegeman, for one, thinks Clinton will step in, but seems unconvinced that it would be the best decision. At the same time, she thinks this is what the airline has been gunning for all along.
In an era of moderate growth and soaring corporate profits, labor's attempts to capture a reasonable part of the pie take on new importance. There has been nothing like the postwar consensus on labor's share for years now. But the picture today has grown increasingly complicated, precisely because the fights are no longer simply about pay, but also about the very existence of jobs. In a world in which capital no longer needs labor as it once did, struggles that for business are just about profit margins become struggles that for workers are about their entire lives.

-- Jim Surowiecki

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

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ROGUE ARCHIVES

Friday, February 14, 1997
American Plays Chicken By Jim Surowiecki (Surowiecki) It's been three years since AMERICAN AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> and the Allied Pilots Association (APA), the independent union that represents American's pilots, have negotiated a new contract. And still it seems more and more likely that the pilots' midnight Friday strike deadline will come and go without a new deal being inked. At stake in the negotiations is much more than just a raise for the pilots, even if American has done its best to tell the story that way in the press. While the money is important -- particularly since a number of other airlines will be entering negotiations with their pilots this year -- the dispute is really about what most major industrial labor disputes are about today: job security and outsourcing. The real sticking point in the negotiations is the question of who will fly the American Eagle jets that American Airlines increasingly wants to use on shorter routes. The regional business has boomed for the industry as a whole in the last few years, bolstered by the replacement of turbo-prop planes with small jets that seat 70 to 90 passengers. But while most major airlines have given those routes to smaller, independent companies that serve as their feeders, American wants American Eagle -- which it owns -- to fly those routes. And that, in turn, has brought it into conflict with its pilots. The APA represents only American pilots, and is unaffiliated with any international union. (American Eagle pilots, who tend to be paid substantially less, belong to the Air Line Pilots Association, which is a member of the AFL-CIO.) The problem is that since American owns American Eagle, the pilots' union sees jobs going to the smaller airline not merely as jobs they're losing to competition, but jobs that they're losing in order to make American itself -- the company with which they're negotiating -- more money. In addition, the pilots have a clause in their current contract that prohibits the kind of outsourcing that American would like to do. The airline, then, is essentially trying to take away privileges the pilots currently have. And that, in turn, explains why American has done its best to present this as a struggle over pay levels. "It's not basically about the pay issue, but American has used this as a PR tactic, because it tends to keep the passengers on their side, and to bring out the attitude of, 'oh, the greedy pilots,'" says Motley Fool airline industry analyst Holly Hegeman (MF Wings). "American's pilots are basically the best-paid in the industry, so if you reduce it to the pay issue, it makes the pilots look like they should not strike. But what this is really about is that American wants to be able to bring on regional jets and have American Eagle pilots fly them. AMR owns both sides of the equation, and has played both ends against the middle." Indeed, American has succeeded in keeping the public eye focused on the question of pilot salaries. The February 17 issue of Business Week ran an article on the potential strike and accompanied it with a pay chart that showed, unsurprisingly, that American's pilots earned more than any other airline's. Even industry analysts have spent more time writing about the potential impact of pilot pay raises on the company's bottom line than they have about the broader issue of outsourcing. What's curious about this is that it's precisely on the question of pay that American's position seems weakest. After reaping tremendous profits last year and watching its stock rise, and while anticipating more than $900 million in profits in 1997, going to the wall with the pilots over the difference between a 6% and a 10% raise over four years hardly seems a sensible tactic. On the other hand, while the social benefits of outsourcing are dubious, as a business decision the desire to fly American Eagle jets with lower-paid pilots makes a great deal of sense. It's precisely for that reason that Hegeman is skeptical that a deal will be reached before Friday. In fact, she suspects that even if American agreed to the pilots' demands for an 11.5% raise, no deal would be possible unless American made concessions on the question of the regional jets. "I don't think even a substantial raise would do it," Hegeman says, "and that's why the money isn't the real issue. Yes, it's important. The pilots haven't had a raise in three or four years, while the airline has been doing very well. But jobs are what this is really about, and big carrier pilots just see this as another way of taking jobs away." Across American industry, of course, corporations have been adopting similar tactics, outsourcing production to non-union plants, sending production abroad, and attempting to create more flexible, less permanent, work forces. The situation at American is somewhat different, both in the sense that AMR owns both American and American Eagle -- again, that means the corporation is not merely cutting costs -- and in the sense that American Eagle pilots are unionized as well. Which raises the troubling question of whether the American pilots are denying jobs to their union brothers. The Air Line Pilots Association has been unstinting in its support for the APA, as one would expect it to be. But underlying the current negotiations must be the question of why there isn't a single union for all pilots working for AMR. The genius of the industrial union, after all, was its ability to prevent a company from playing off one part of the workforce against another. With AMR, we have the curious situation of the Air Line Pilots Association not only being less than an industry-wide union, but also not even being an airline-wide union. Strikingly (so to speak), Wall Street appears not to have understood the potential gravity of the situation. Although the American Airlines stock has trekked slowly downward since the pilots announced their willingness to strike, AMR was up three points yesterday and was up slightly in morning trading on Thursday. Thursday's Wall Street Journal suggested that no one is really expecting a walkout. "The Wise yesterday really felt that the pilots were going to approve the tentative agreement," Hegeman said, referring to American's offer of a 6% raise and a no-furlough clause. "But even if they thought that, there's already been economic damage done to AMR. People have re-booked. Friday's flights have been cancelled. It's already caused the carrier financial damage. And even if the strike is settled after a few days, American will come back in with extremely low fares to try to appease people." The sheer amount of revenue American would lose in a strike is enormous, while the pilots stand to lose $10,000 a month plus a bonus based on stock price that promised to be larger than the one they received in 1996. These factors seem to have convinced the Street that both sides will realize that they have to settle. Indeed, Timothy Ross, analyst at SBC Warburg, raised his recommendation on the stock today from "add" to "buy." "It appears that despite the extreme posture the two sides have taken, the cost of a strike looks too horrible," Ross says. "That could lead to a settlement." Curiously, Ross made his recommendation while simultaneously suggesting that AMR's price would drop as much as $12 a share on the first day of any strike. Underlying his analysis, as it underlies most of the discussion of negotiations, is the assumption that the federal government will step in if the strike nears a week. President Clinton has the authority under the National Railway Act to create an emergency board, institute a 60-day "cooling off'' period, and force both parties into binding arbitration. This step is generally taken in railway strikes because they have a greater impact on the national economy. Alternatively, he could step in publicly, as he did during the American Airlines flight attendants strike, and push for arbitration. Either step will help end any strike, but neither will help in getting the underlying issues resolved. It's for that reason, perhaps, that AMR has been calling for arbitration and asking the President to step in, while the pilots have said they prefer him to stay out. Not only is binding arbitration more likely to narrow the scope of any given contract, but it most likely would give the advantage to American because of its deeper pockets. It would also mean that any final settlement could be years away. Hegeman, for one, thinks Clinton will step in, but seems unconvinced that it would be the best decision. At the same time, she thinks this is what the airline has been gunning for all along. In an era of moderate growth and soaring corporate profits, labor's attempts to capture a reasonable part of the pie take on new importance. There has been nothing like the postwar consensus on labor's share for years now. But the picture today has grown increasingly complicated, precisely because the fights are no longer simply about pay, but also about the very existence of jobs. In a world in which capital no longer needs labor as it once did, struggles that for business are just about profit margins become struggles that for workers are about their entire lives. -- Jim Surowiecki (c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.