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  • Big Labor Drags American Airlines into Bankruptcy

    American Airlines announced today that it has filed for Chapter 11 bankruptcy protection, making it the final large U.S. full-fare airline to seek court protection from creditors. One of the primary reasons? American is at a disadvantage because of high labor costs, proving that in a competitive economy, unions can’t do much for their members without sending companies into bankruptcy.

    American had struggled after 9/11 to avoid heading to bankruptcy as its rivals did in the hopes of securing favorable contract agreements with labor unions. The unions though, had other ideas. Among their demands: Pilots wanted a 10 percent signing bonus followed by 7 percent raises in each of the next three years–massive raises in the midst of a miserable economy.

    Meanwhile, Delta, United, and US Airways are all operating with huge concessions on wages, benefits and work rules for pilots, flight attendants, mechanics and ground workers won through bankruptcy proceedings, as The Wall Street Journal reports.

    In the most recent negotiations, American offered job protection, signing bonuses, and pay raises to the tune of a 3.21 percent raise in the first year—taken as a lump sum, a structural rate increase, or a combination—followed by three annual boosts of 1 percent each. In turn, American asked for changes to pension benefits and increased productivity. But that wasn’t enough. As Bloomberg reports, union negotiators sought not to help keep the company afloat but to win back earlier concessions:

    American was embroiled in negotiations with unions for all of its major work groups as far back as 2006, seeking to boost employee productivity and erase part of what it said was an $800 million labor-cost disadvantage to other carriers.

    The airline’s pilots, flight attendants, mechanics and baggage handlers wanted to use the contract talks to regain some of the $1.6 billion in annual concessions they gave in 2003 to help the company avoid bankruptcy.

    In the end, American’s efforts didn’t work. Last year, it was the only major U.S. airline to lose money—$471 million in net losses—whereas Delta had net earnings of $593 million and United earned $854 million, according to the Journal. Now, because American couldn’t cut labor costs and remain competitive with other airlines, it has no choice but to enter bankruptcy protection. In short, labor leaders ultimately forced American’s hand, and their behavior—and the resulting consequences—are entirely consistent with how unions work. Heritage’s James Sherk explains:

    Unions function as labor cartels. A labor cartel restricts the number of workers in a company or industry to drive up the remaining workers’ wages, just as the Organization of Petroleum Exporting Countries attempts to cut the supply of oil to raise its price. Companies pass on those higher wages to consumers through higher prices, and often they also earn lower profits … [but a] cartel can charge higher prices only as long as it remains a monopoly. If consumers can buy elsewhere, a company must cut its prices or go out of business.… With competition, the union cartel breaks down, and unions cannot force consumers to pay higher prices or capture higher wages for their members.

    In this case, American’s unsustainable losses forced bankruptcy, which in turn could have a negative impact on creditors, employees, retirees, shareholders, and consumers. And though American may emerge stronger after bankruptcy, it will not be without a steep price paid by all parties involved.

    Posted in Economics [slideshow_deploy]

    19 Responses to Big Labor Drags American Airlines into Bankruptcy

    1. No shock. The industry has changed, and their Unions have not allowed American to change with the marketplace.

    2. WillieGreen721 says:

      All the airlines will continue to get squeezed, not only by labor costs, but also by steeply rising fuel costs. Unlike automobiles and trains, there are no alternative fuels available for airline travel to offset the global price of oil.

      This is especially true in the short-hop commuter market with flying distances less than 500 miles or so. Planes burn a lot of their fuel just to get off the ground and up to altitude. They don't have time to efficiently cruise for much distance before they have to come right back down.

      That's why we need to develop more efficient regional passenger rail service between cities that are between 150~450 miles apart. Airline fuel costs just don't make short-hop flights practical anymore.

      • Average_JoeMN says:

        No, we don't need taxpayer funded choo-choo's. We need the US gov't to get out of the way of drilling oil. We have plenty of supply but this administration shows it's hate for the American people with its rigid ideology over people policies.

    3. Bobbie says:

      AMERICAN GOVERNMENT BIAS FOR UNIONS OVER THE FREEDOM OF THE PEOPLE: who's protecting who? WHO'S PROTECTING WHAT??? what is the government purpose for costs when they work against we the people they are paid to serve? when are arrests going to be made for the violations of the code of conduct and ethics? America does not want whats WRONG to be made RIGHT! PLEASE CONGRESS! BRING BACK AMERICA!! CORRECTIONS WILL REVIVE HER!!!! ACCOUNTABILITY WILL BUILD HER STRENGTH!!!! PLEASE GET THE ILL INTENDED UNIONS OUT!!

    4. Patty says:

      Glaringly omitted from this report is that while American Airlines demanded concessions to keep the company solvent following the terror attacks of September 11th, management awarded bonuses to executives. How did AA justify crying poverty in one breath and promising bonuses with the next? "Retention". Yes, the company thought it was critical to retain the same masterminds in place who adopted the strategy that has lost millions of dollars a year every year since … and now seeks to punish its workforce for that blunder. I can't speak for the pilots or flight attendants, but this is a gross injustice to the mechanics who have struggled to support their families on their slashed wages.

      • Bob says:

        You claim that that info was left out. Are you aware that in the private sector within the last twenty years wages have decreased by a degree that is nearly unbelievable. Case in point would be the following. The company truck driver in 1985 made over $ 30.00 per hour, that same job today is just under $13.00 and yet cost of living in that same period increased 650%. Auto mechanic in 85' made better than $45.00 an hou with A.S.E certifications. Now is lucky to make $12.00 in extreme cases maybe $20.00 but highly doubtful. Of the top 100 position of a presume meanial category virtually everyone has lost better than 50 – 80% of their former wage while cost of living steadily increases. I understand and somewhat agree with your point. However one must inter all pertinant info. Not just what is handy, trendy or agendized!

        • Denis Breslin says:

          You are suggesting that somehow one sector's capitulation should lead to another's march to lower standards? At some point, someone (employees?unions?) need to hold their companies accountable for managing responsibly. In American's case – that's what unions tried to do after the infamous "PUP" bonuses of 2005. Was AA really "embroiled" in negotiations since 2006? No, they were treading water, specifically NOT managing the airline to a profit, until conditions were right to reorganize and get what they wanted from labor through the courts.

      • john says:

        Hey Patty, Spoken like a true union hack. I notice you do not mention numbers so it sounds as if you are spewing the same rhetoric that unions alway spew, class warfare. What about those suppliers that are not going to be paid until the courts decide how much they should get and their families. Think Christmas is going to be a little thin for them?? Perhaps if you did not have to pay so much in union dues and assessments just to keep a job then there may be a little more on the paycheck every month.

      • Jack The Groove says:

        Patty…you are spot on. To add to your posting – All three Unions (TWU, APA and APFA) currently still are paying $1.62 million anually since 2003. The 2003 concessionary contracts were supposed to save the airline from filing for bankruptcy. What happened to all this money? American squandered away all of these sacrifices at the employees expense and now they get another bite at the apple in court. They should be ashamed of themselves. They (the VP'S and CEO and CFO – and so on) are the real reason for AA'S demise – not the Unions!!! Get educated people!!!

    5. Jane says:

      I wonder truly where the problems lie with AA…the executives and management of money, or the backs the company steps on? Now, more than ever, we have a need for unions. Never perfect, but at least someone is looking out for the blue collar worker in a world where their bosses make 6 figures+ and then let the company collapse. Is this what happened with AA? Seems a bit more research needs to be done on both sides before throwing the union under the bus. We are gaining on a world where the employee is becoming synonymous with slave labor. By the way, isn't this how capitalism works? Companies who can, do. Those that can't, file for protection and/or government help. Our welfare system for billion dollar companies.

      • Bobbie says:

        the problem lies where the attitude of people don't realize today, they can speak for themselves and by themselves to negotiate salaries or abide the policy the company has set that is spoken and explained during the interview process. unions aren't doing any good when they get paid for doing what you can do for yourself. Find a better paying job before you agree to one you decide isn't good enough for you. businesses can only do so much and unions demand they do more which when irrational union demands are met, the company eventually collapses. there is alot of selfishness all around. someone has to rise to be the bigger person. we'd rather it was someone on the side of good will.

        • Jane says:

          So basically I agree to a job, then when I receive furlough days and pay cuts, I just sit back and take it…an employee can't negotiate that. You truly believe the company has our best interest at heart? And have you seen unemployment lately? There are not a lot of choices out there. I have worked corporate management…they are tring to take advantage of the situation…managers receive bonuses for paying the least they can for the job they offer. At least with a union, they can't just cut pay…they have to prove the need and show what they can do. Or at least that's how it's supposed to work…again, nothing is perfect. The union does not want the company to collapse…they need them so they can keep their union. Ceo's on the other hand will take all the money and run…or start a new company…or whatever.

    6. Jane says:

      Hello! Of course its the union! Management has degrees in running billion dollar companies, and they know how to create budgets, and keep to them. They are wise, and generous, and would never harm the people whose backs they ride on to the top. It's those ignorant workers, selfishly demanding more, who brought this company to their knees. But that's okay…it's capitalism, right? Those who can, get away with it, and those who can't, ask for protection from our government. I know, that sounds like welfare, but it's different, because companies are not people.

      • Denis Breslin says:

        You're joking right Jane? Managers at AA are a joke. Just look at what executives at SWA, UAL/CAL, DAL/NWA were able to do. They merged, they expanded, they ordered new fleets and they managed. At AA they sat on their hands, pulled out of lucrative routes (with full airplanes), set up "code shares" with foreign airlines that resulted in less profit than if they flew it themselves, bought and liquidated 3 airlines while keeping the employees and the debt – but not the planes or routes – and worst of all, they paid themselves in multiple millions of dollars while the employees who kept them out of bankruptcy in 2003 suffered through ever-eroding pay rates without any progress towards even cost of living increases since the "cram down" of 2003.

    7. Bob says:

      In my work life I have met enumerous people that have siad to that reguardless of my opine unions could do no wrong. In the last score the entirety of the air lines system in this country, two thirds of the rail system and many other companies have had to go belly up entirely or severely restructure do to unions forcing wages so high that said companies cannot afford to opperate. So why just abolish said PROTECTION RACKET. Protect in business form is supposed to be unlawfull.

    8. Denis Breslin says:

      The headline MUST have been planted by a disgruntled America Airlines manager who just lost millions of dollars in "bonuses". Why? Because the unions didn't "drag" AA down. Corporate greed and mismanagement did. In 2003, aft 2 years (since 9-11) of losses AA was at the brink of bankruptcy. They came to unions with a "Paycut or Bankruptcy" deal. Unions gave $1.8B in pay, benefits and work rules up. Pilots took 25% pay cuts and over 2500 pilots were laid off. The unions and management initiated a cooperative, corporation-wide "PLI" program (performance leadership initiative) to determine "best in class" practices with the slogan – share the pain, share the gain. this unprecedented union-management effort was celebrated and AA had the potential to transform itself into the best airline operating. BUT, on the cusp of success, this program was shot in the head, killed dead cold, when managers took $250M in "performance bonuses" even as AA was losing $800 for the year. Employees were left out in the cold – operating under work rules and pay rates equivalent to the early 1990's. The greedy, me-first, selfishness began the downward spiral of incompetent management that could not turn a profit – while other airlines were making over $1B per year. Unions had been unsuccessfully negotiating some kind of pay raise for over six years with not one single contract approved. So when Tom Horton filed Chapter 11, it was his dream-come-true to abrogate even-ancient labor contracts, screw the very employees that kept him and his company solvent (resulting in tens of millions in PSP bonuses over the years), and screwing vendors, shareholders and financiers alike. NO, it isn't the unions that brought AA down, it was plain and simple incompetence and selfish greed. Best example of why this is so – South West airlines – they pay top dollar and are thriving…

      • Ken Badziak says:

        A voice of reason in all this insanity.

        I'm NOT a fan of the unions; in fact, I hate them to the very core of my being. That being said, however, AA's bk CANNOT be laid at the feet of Big Labor.

        This was incompetent management, coupled by unfair business practices practiced by their competitors, namely, UAL, DAL, etc etc all declared bk years ago, wiping their slates clean.

        So while American was the only major airline to emerge from 9/11 without declaring bankruptcy, they put themselves at a disadvantage against their competition who were allowed to restructure their debts and obligations.

        It's really a shame when Fox News and the Heritage Foundation automatically jump on the anti-union bus; most of the time (the auto industry comes to mind) they're correct, but this time you guys couldn't be further from the truth.

        As a lifelong republican, I'm bothered by this.

        American's Union, more specifically their pilot group, were NOT the cause for the bankruptcy. It was management all the way.

        • Bobbie says:

          I'm kind of bothered by what you wrote. why would any business put themselves at a disadvantage unless it was motivated? Is it because they used their own finances to take on the challenge without infringing their costs on tax payers? Is it because they stood on all accounts to pay their rightful expenses like honest businesses? unions disrupt business practice and their management…

          • Denis Breslin says:

            Bobbie, I'm not sure what bothered you about Ken's post… And most of what you wrote doesn't make sense, but your last sentence (unions disrupt business practice…) begs for comment. Remember this, companies get the unions they deserve – in other words, if corporations take advantage of employees by working them too far into fatigue, refusing to negotiate industry standard wages/benefits, maintaining an unsafe workplace etc. – then unions are the ONLY force powerful enough to push back. Corporations quash individuals who are powerless to force change. (Thus the Whistleblower legislation) Individual workers are simply punished or fired. Unions can be too extreme, but in most cases – especially the airlines they help BALANCE corporate power and are responsible for a safer, more habitable workplace.

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