- - Wednesday, October 3, 2012

In recent decades, labor union leaders often have sowed the seeds of their own demise by overplaying their hand and overestimating their dominion.

Public-sector unions such as teachers and government employees — shielded from a competitive marketplace and protected by liberal politicians — continued to accrue unsustainable pay and benefit packages that exceed their private-sector counterparts. This began to change following the recession and the rise of the Tea Party movement. Today, a new generation of Republican leaders has galvanized the support necessary to at long last confront public-sector unions in states such as Wisconsin.

Meanwhile, private-sector unions have withered as outsized wage demands and pensions have gradually bankrupted domestic employers or driven them overseas.

Today, we’re witnessing a perfect example of destructive overreach — the Allied Pilots Association, the largest pilots union of American Airlines. After rejecting a generous contract offer, the union has resorted to sabotaging behavior that only serves to harm its members, its employer and consumers.

First, an explanation of what created the current situation.

Last fall, when American was operating at a loss without any clear path forward, it was forced to do what every other major legacy airline already had done: file for bankruptcy. Delta and Northwest filed for bankruptcy in 2005, United in 2002 and US Airways twice — in 2002 and again in 2004.

Each of those airlines recovered, but none as quickly as American already has. Less than a year after its filing, American has posted record corporate revenue and four straight months of leading industry metrics, like consolidated passenger revenue per available seat mile.

So how did American do it? There are two primary factors.

The first factor, confirmed by a recent analysis by Imperial Capital, is the set of decisions made by American’s new management team, including eliminating money-losing routes and shifting those resources to high-demand cities such as New York and Los Angeles, where American maintains dominant hub positions.

The second factor is that American is finally addressing its most significant competitive disadvantage — high labor costs. While American’s rivals expend 15 percent to 20 percent of their revenue on labor, American spends an astounding 28 percent. Over the past year, however, American’s management has negotiated with each of the nine unions that represent some portion of their workforce, including mechanics, flight attendants and pilots. As a result, fully eight of these nine unions have new contracts with American that will lower the company’s labor cost discrepancy while also providing stability for union employees.

The lone holdout? The Allied Pilots Association.

This brings us back to the central point raised earlier about some union leaders destructively overplaying their hand. In the simplest terms, the APA rejected a new American contract offer, their old contract subsequently was invalidated by a bankruptcy judge and now savvy investors — recognizing the pilots union has lost leverage — are looking to snatch up the equity that had once been offered to pilots.

Specifically, last spring American offered the pilots union a generous pay and benefits package, which had been supported by union president David Bates — not because of its merits, but because he believed it would hasten a merger proposed by US Airways. (Mr. Bates had negotiated a contract proposal with US Airways prematurely, never mind that US Airways hasn’t had a contract with its own pilots in seven years.) Mr. Bates’ union members rejected the contract by a significant 61 percent to 39 percent majority, prompting the APA board to fire Mr. Bates. Pursuant to bankruptcy law, Judge Sean Lane responded by giving a green light to American’s reorganization plan, which included invalidating the existing APA contract.

Keith Wilson, APA’s new acting president, says “pilots are mad,” but now they possess far less recourse than before. After all, the American offer included an equity stake with a value of $187,500 for each of the union’s 8,000 pilots, according to analysis reported in DebtWire.

Private equity investors, in contrast, immediately recognized that the pilots have rejected a valuable stake. They understand that American is profitable, growing and its management team is aligning supply, and they appreciate that American has reined in runaway labor costs with eight new contracts.

Beneath the heat of the August sun, the APA rejected a generous contract. A month later, the air has cooled and its leverage is frozen with its existing contract nullified and its legal recourse stymied (they cannot strike, per bankruptcy law, despite the strike threats). Worse yet, DebtWire’s sources speculate that the APA won’t see another offer as valuable as the last. After all, what brazen unions won’t accept, smart private-equity investors will gladly pursue.

The Allied Pilots Association has only itself to blame for its predicament, and it has no right to lash out in a way that ends up harming the well-being of consumers, American Airlines and, ultimately, its own members.

Timothy H. Lee is vice president of legal and public affairs at the Center for Individual Freedom.

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