By Mitchell Schnurman
mschnurman@star-telegram.com
How can American Airlines afford to give anyone a raise?
It lost $884 million in the first nine months of the year, after losing more than $4 billion from 2008 to 2010. And much of the red ink comes from having the highest labor costs in the industry.
Yet American has offered a new contract to its fleet service workers that starts with a 6 percent signing bonus and has annual raises of 2 percent for three years. The contract would double the number of paid holidays to 10, including Columbus Day and the day after Thanksgiving. Holiday pay would increase from time and a half to double pay, and workers would get three more sick days a year.
Sounds like a sweet package, considering the company's wobbly finances -- even though American workers haven't had a new contract since 2003.
So how does American make this work? By attacking the benefits side of compensation, starting with its traditional pension and including health insurance and retiree healthcare.
Those expenses are the legacy albatross at American, accounting for much of the company's higher costs. American pilots, for instance, were paid only 2.4 percent more than the average for their peer group last year. But their pensions and benefits were 40 percent higher, costing an extra $16,000 per pilot per year, according to the MIT Airline Data Project.
The gap is smaller with the rest of American's workforce, but the trend is the same, with benefits totaling 25 percent more than the industry norm, the MIT data shows.
If American is to get competitive, this is where changes have to start. What's impressive is that American is willing to continue the pension for current workers without any cuts in benefits. Only new hires are locked out.
Many private employers have frozen their pensions. American's major rivals used bankruptcy to break those contracts and jettison their pension obligations.
At American, new hires will get a 401(k), with a pretty generous match: 5.5 percent of pay, compared with an average of 3 percent at many employers.
Most companies switched to a 401(k) long ago, because volatile stock market returns and longer-living retirees created unfunded pension liabilities in the billions of dollars.
American has spent more than $2 billion to fund its pension since 2002, and it expects to pony up $511 million this year.Maintaining the pension was a key reason that employees agreed to make deep cuts in pay and benefits in 2003, when American restructured to avoid bankruptcy. So they rightfully expect the company to keep that promise.
Pilots, the big-ticket item on the labor front, are urgently negotiating a new contract, in the hope of again helping American avoid bankruptcy. Last week, American unveiled a menu of choices on the pension, and one detail didn't change: New pilots would get a 401(k) only.
Their pilots' retirement plan is unusually rich. American would contribute 12 percent of pay after one year on the job, and the company's contribution would rise to 16 percent after 12 years of service. Pilots aren't even required to pitch into the account.
For many years, companies have continued to shift more of the costs for health insurance, retirement and other benefits to employees. But American is limited on that front, because of collective bargaining agreements, even while its leading competitors revamped those expenses in Chapter 11.
To get new contracts with its labor unions, American has to find a way to increase wages for employees while narrowing its disadvantage on costs. After the pension and health benefits, the next focus is on productivity gains.
With the pilots, that means getting them to fly more hours per month, with more flexibility. With the 10,350 fleet service workers, part of the answer is to outsource 1,200 jobs in the cabin cleaning crews.
Those employees will be offered work elsewhere at American. But ultimately American will pay a third party to provide the cleaning service, and it won't be on the hook for expensive benefits.
Pilots and flight attendants also pay a much smaller portion of their health insurance costs, compared with most large companies. So expect American to propose a change there.
At the Transport Workers Union, it's not just about the differential on pay and benefits. American also employs more mechanics than Delta and United combined, because it doesn't outsource its maintenance.
Cutting benefits is a small price to pay, if it helps keep more jobs.
Mitchell Schnurman's column appears Sundays and Wednesdays.817-390-7821
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