By Mitchell Schnurman
mschnurman@star-telegram.com
In 2003, American Airlines staved off bankruptcy largely by cutting pay and personnel. This time, it's going after benefits and productivity.
To entice union workers to go along, it's offering job protection, signing bonuses and pay raises. In effect, American is willing to shore up the areas that it slashed before, so it can tackle the costs that went untouched last time.
Not that this strategy has won many converts. The Allied Pilots Association was expected to reject the company's latest contract offer, and American was so put off by the union's cool reaction to its ideas that it posted the proposed deal online Monday night, for all to see.
That was a slap to union negotiators, but American must be feeling desperate. Its board of directors is demanding progress, and Wall Street pummeled the stock again Tuesday.
Would pilots really study the details of the contract offer and lobby their union reps for an up-or-down vote? Seems like a long shot, but if American slips into bankruptcy, at least it will have tried a direct appeal.
The offer to pilots, combined with a recent tentative agreement with fleet and ground workers, provides insight into how American hopes to reboot the enterprise. It's impressive that it can offer any signing bonuses and pay raises. American has lost almost $12 billion in the past decade, and its cash cushion is eroding fast.
Yet pilots are complaining about a "concessionary" contract. Well, if the company doesn't cut costs in some way, it probably won't survive. The trick is to soften the pain and share enough goodness to make it palatable.
"American employees think they gave and gave," said William Swelbar, a research engineer at MIT's International Center for Air Transportation. "But the company really got just one bite at the apple, and it was big -- $1.6 billion. The airlines in bankruptcy got a second bite, on productivity, and a third bite, on pensions and retiree healthcare.
"American needs real savings now," he added.
The pensions are going to be history. Every contract offer so far calls for eliminating defined benefit pensions for new hires. Current employees have the choice of staying with the program until they retire or freezing the assets and converting to a 401(k) with a big company contribution.
Pilots would be required to fly more hours every month, but they have two options. Make the productivity change immediately, and the signing bonus and pay raises would be 1 percentage point higher (an average 5 percent when the contract is signed). Phase in the extra hours, and they get less money at every stage.
One option calls for freezing the pilot pension. The inducements: American would contribute 14 percent of pay to a 401(k), rising to 16 percent in Year 3. And it would pay much more of the pilots' health insurance costs.
Outsourcing plays a role in the company's plans. With fleet and ground service workers, American wants to outsource more than 1,200 cabin-cleaning jobs, along with some bus drivers and fuel-station staff. That's one way American can net enough savings to offer a 6 percent signing bonus, along with four raises, starting at 3 percent.
Workers would be transferred to other posts, and they'd keep their jobs and benefits. Along the same lines, American guarantees that no pilots would be furloughed because of productivity gains. It would simply wait for pilots to retire and let staffing levels fall gradually, and it plans to add planes eventually if new contracts come through.
Two elements of the pilots offer provoke an immediate reaction: increased code-sharing with other airlines and a much lower pay structure for pilots who fly smaller jets that the airline has ordered.
Code-sharing partners market each other's network and feed into it. Pilots have opposed the arrangements in the past, fearing that American would transfer business to lower-cost operators. But American says it can't grow in the Northeast without more code-sharing, because it's locked out of key landing slots at some airports. In the Northwest, American says its code-share with Alaska Air feeds more traffic into American's network, not the other way around.
On regional flying, American is proposing "a new paradigm." Rather than depend on American Eagle or other regional carriers (which have accounted for much faster growth in the past decade), American wants a new fleet of smaller aircraft flown by APA pilots. They would be paid much lower rates and have special work rules, so they could compete with the regionals and be part of American's system. That could grow the pie for everyone and create more jobs. American says it wouldn't displace current pilots, either.
American tried a similar approach to expanding the airline in the 1980s, creating lower "B-scale" wages so it could afford to hire a wave of pilots. The strategy helped American grow nationwide but divided the union.
Many other pieces of the labor contract are standard business matters in the nonunion world. Employees are asked to pay more for health insurance and retiree healthcare. Sick-day policies are revised to prevent abuses. New planning tools and work rules aim to reduce the pilots on reserve and save operating costs.
If this is a concessionary contract, American has masked it well. Signing bonuses, pay raises, job protection, a chance to grow, and pilots get to keep their pensions?
In bankruptcy, workers might get none of that.
Mitchell Schnurman's column appears Sundays and Wednesdays, 817-390-7821Twitter @mitchschnurman
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