February 24, 2003
From the desk of Jane Galt:Can Airlines Ever Make a Profit?
A friend who works closely with the airline industry alleges that there is an office pool on when the remaining major airlines will go bankrupt. No one's taken any dates later than six months. American, the strongest of the airlines, is spending down their cash and apparently has no prospect of improving their profits before it runs out.
What's up? Why can't the airlines make any money?
Well, obviously, there's this recession. And the travel industry has been hit hard by terrorism fears, particularly the airlines. But there's a recession all over. And the entire hotel industry isn't declaring bankruptcy en masse, even though they have many of the same structural problems as the airline industry: high fixed costs, a product that can't be stored for later when demand is low, and a high percentage of financing by debt. What's the difference?
I know I'm pasting a big fat target on myself, but the answer's not all that controversial: the difference is in the labor costs. Airline unions have repeatedly pushed their carriers into bankruptcy since the government stopped fixing the price of air travel artificially high, providing margin cushions to pay lavish wages and ensuring that no one but the affluent would be able to fly.
This is not to say that airline unions are evil. I don't know anything about airline unions in particular, and I've no reason to think that they have some diabolical desire to drive their employers out of business. The problem is, the structure of the airline labor arrangment aligns incentives so that such an outcome is inevitable.
Airline unions have an extraordinary amount of power. If any one of them strikes, the planes don't fly, and the airline loses a lot of money. Positions are not readily subsititutable -- pilots and mechanics won't scab, and being a flight attendant requires training, believe it or not. In negotiations, this power translates to extremely high salaries.
In theory, this is just a battle between shareholders and labor for their share of the profits. There are a couple of problems with this theory, however. For one thing, the unions bear little downside risk; after a bankruptcy, the union employees generally still have jobs, while the shareholders lose everything. There is thus a strong incentive for the unions to be overoptimistic about the airline's potential profits over the life of their contracts, and the power they wield to shut down the airline allows them to extract salaries in line with those optimistic expectations.
But the problem is even worse. Theories about value claiming posit a single force, labor, negotiating with a single employer. Both parties are fighting for a share of the pie, but both parties have an incentive to make sure the company stays in business. But airlines don't have one powerful labor force; they have five or six, any one of which can shut down the airline.
Negotiations are thus not a simple bi-lateral calculations. In single-union negotiations, money left on the table now can be partially reclaimed by demanding higher wages in the next round of negotiations. Not so with multi-lateral arrangements. Any money left on the table by one union will be picked up by another one, since negotiations with different unions are staggered rather than simultaneous. Unions thus have incentive to pick up every last dime. The fights to claim value at the expense of the other unions are quite bitter. Because each union has the power of a bi-lateral union to shut down the company; but the value-maximizing incentives of a multi-lateral arrangement, the unions end up claiming too much value in the good years. When the bad years come, the airlines go broke. It's almost impossible to extract sufficient concessions any other way, since the unions all hold out hoping the other guys will give something back first. We witnessed this with United, where the pilots and mechanics were still fighting over who should make concessions as the company filed in bankruptcy court.
So why should we care? The concessions are made, the airline's burdens are eased, and everyone makes their flight. What's the big deal?
Well, bankruptcy pretty much erases the shareholders' money. It also erases much of the creditor's money. That money has to be gotten back from somewhere, in the form of higher interest rates. Those higher interest rates slow down investment and raise the cost of air travel. Next thing you know, you're driving from New York to Arizona with three kids in a Subaru. On the plus side, you have to stay somewhere while you're driving, and the hotel industry could use your support.
So what should we do about it? Aside from easing the federal regulations that give flight attendants and ticket agents the same power to shut down an airline as the pilots have, I don't have any easy answer. My best advice is to get one of those beaded seat covers and a whole lot of books on tape.
Posted by Jane Galt at February 24, 2003 9:38 PM | TrackBack | Technorati inbound linksWell, your piece suggests one fairly obvious answer: have all the unions for an airline group together into one big union. Then they would negotiate with management for an overall slice of the pie, which they would then fight amongst internally. This would not prevent the problem of unions taking more than their fair share of profits. But it would cut down on the tragedy of the commons you describe.
Another answer would be for airlines to not permit their employees to unionize. Of course, we'd have to revoke the Norris-LaGuardia Act and most of the other New Deal labor laws. But that was, and is, bad law.
I read a few years ago that the total profits of the industry over its entire life was....zero.
Of course, that was a few years ago, so today the total all-time profit is surely negative several billion dollars. Pretty good record!
There are other industries with high fixed costs and strong unions, so I'm not sure that's the whole story. Another big factor is that the competition in the industry is a little *too* perfect. Fares and routes have been online forever, and pricing has always been enormously complex (since deregulation, anyway), which means it's virtually impossible over time to charge fares that make money. If there's any spare capacity at all, the prices come down and everyone has to follow because the fares are right next to each other on the SAFRE screen and the product is identical. That's not true in the hotel industry.
Don't forget arrogance, UA had a lot of that over the years. And general mismanagement.
"What's the difference?"
Hotels also don't have any alternatives; if you're going, you stay in a hotel. For getting there, it's planes, trains, and automobiles.
I'm also curious; is there statistical information that show airlines have really sucked at profits since the end of regulation, or is all this based on the latest downturn?
Isn't there also some sort of controversy about the efficiency of the hub/spoke system?
No, it's pretty clear that it's the labor rigidity. They can't alter their costs in any meaningful way when a downturn hits: the price of slots is fixed by government regulation, their capital costs are highly long term, and the price of fuel is the price of fuel. The only place they could look is labor, and labor isn't having any. Labor argues that it's unfair that they should have to give back, which is possibly true but irrelevant because they're the only major cost that isn't either fixed or commodity. The most obvious way to see that labor is the problem is to look at teh airlines that are profitable: they use the same airports, the same planes, but non-union labor. Southwest has other great business practices, of course, but a lot of those innovations can't be innovated at teh majors because of the unions; no union is going to countenance 30 minute turnarounds on the plane.
It's not true that hotels don't have substitutes; there are short term apartments, staying with family and friends, camping (not any worse than driving to California), etc. Those substitutes are more perfectly substituable than a five day train ride is for a six hour flight.
It's also true that the only time that airlines were profitable was during regulation, when they could collude to fix prices to cover their high labor costs.
There might be controversy, but the hub and spoke system wasn't in effect the first time the airlines went bankrupt. Labor likes to blame poor management, but when every company in the industry repeatedly goes bankrupt, with the only exception being companies that don't employ union labor, that's unlikely to be true.
Out here in California the Soviet Monica folks are working hard on making the hotel business equally unviable by creation of 'living wage laws' which force employers to pay minimum wage employees at least double what they would otherwise earn.
Why should illiterate immigrants work to achieve the qualifications for better jobs when those nice lefties will simply mandate them into the middle class, although wage inflation will only assure that their earning will not grant them that status as the market adjusts.
Kevin Drum says the product is identical. True enough, but under inventive management it wouldn't be. And griping about union stubborness ain't gonna cut it; look at what Mike Walsh did at heavily unionized Union Pacific.
The real reason these businesses suck is because there's no reason not to.
I think Brian makes a good point. Union power does make management's job harder, but there has been a real lack of creative strategic leadership in the industry.
Jane, Southwest does have unions. The relationship between the company and unions is not antagonistic like the other major carriers, but to say they don't have unions(or imply) is a falsehood.
Although I don't make my living at it, I am a pilot. We have a saying: The fastest way to make a small fortune in aviation is to start with a large one.
Umm... does anybody here have any idea what percentage of the major airlines cost are associated with labor? Lately, that would be about 35%. How does that compare to other industries? That would be comparing apples & oranges, but you get the drift. Blaming labor for the airlines staggering losses just won't do.
The problem with all the generalizations about the airline industry is that Southwest stands apart - profitable and successful and with good relations with its unions.
If it weren't for Southwest then the generalizations might hold water . . . . . If there is a good answer for why all but one major airline have become financially unviable, I've never heard it.
I would say that a hidden part of the problem has been the unusually low cost of financing aircraft, which has helped capacity grow at uneconomically rapid rates over time. Most aircraft have been financed with highly complex cross-border leveraged leases, with economics that don't work without lots of international tax arbitrage.
That doesn't make any sense. Capacity is constrained by slots, not demand, and there hasn't been any noticeable change in the cross-border tax situation that would cause these bankruptcies. These aren't semiconductor firms, and they didn't massively overexpand until everyon lost money; they expanded as far as they could, made profits doing so, and then got hit by a shock.
Most people I know who worry about airline bankruptcy have a range of explanations from unions to flaws in the hub and spoke system to fuel costs to over-expansion to competition from specialized new entrants to Sep 11th but Jane is the first I have seen to lay it all on the unions. After all she says
“But there's a recession all over. And the entire hotel industry isn't declaring bankruptcy en masse, even though they have many of the same structural problems …... What's the difference?” the answer to which, according to Jane, is the rents extracted by unions.
As someone who find the theory plausible but not terribly convincing I would find it very helpful if Jane could provide us with some of the following facts, which she must have known in coming to her conclusion.
a) What are these outrageous salaries labor unions are getting for their employees? How much does a pilot, a co-pilot, a ticket agent, a mechanic, a baggage handler and a flight attendant make at say United or American?
b) How large are labor costs as a percentage of the total costs of the airline? And in comparison to some other major costs?
c) How much have these costs changed in recent years to drive the airlines into bankruptcy?
d) How does the change in labor costs compare to some of the other shocks such as the fall in demand, the debt financing costs of past over-expansion etc?
Answers to these will really help me stop subscribing to the belief that United died (and deserved to die) because from top to bottom (the CEO to the ticket agent) they were a shitty company who did not care about their customers and ran a terrible business.
a) Pilots average over $200K at the majors and work 14 days a week for a job which has no shortage of skilled personnel willing to work. Last time I looked, all other workers were getting at least double their private sector equivalents. And union seniority rules mean that the most expensive people are the last to go.
b) Labor is the single largest cost an airline has.
c) They haven't changed. The cycle is consistent; the airlines have a couple good years; labor demands their share; the good years return to normal; the airlines go broke. We're in our third or fourth iteration of it now.
d) The problem isn't that labor costs spike prior to the bankruptcy; the problem is that as soon as profits go up, labor claims a lot of the extra -- not merely when the profits are good, but with contracts that run 3-5 years. When a recession hits, their wages are very high. The other major costs are slots, prices for which are set by law; leases, which run on very long term contracts and are thus even less flexible than labor costs (also, the leases are secured borrowing, and it's very hard to run an airline when the bank takes your plane away); and fuel, for which the airlines are price takers. Once you've cut capital expenditure, as the airlines have done, the only thing left is wage concessions or bankruptcy. You just can't grind a lot of savings out of cocktail peanuts and complimentary sodas, and high executive salaries are mostly in stock, which doesn't help you make your bank payments.
There are many arguments over how the airlines can run more cost effectively. However, as long as the unions continue to claim the excess value generated, which I think it's pretty obvious that they do, generating savings will not help them long run.
"It's not true that hotels don't have substitutes; there are short term apartments, staying with family and friends, camping (not any worse than driving to California), etc. Those substitutes are more perfectly substituable than a five day train ride is for a six hour flight."
If you say so, but I can't imagine a business traveler staying at anywhere but a hotel in a million years.
Something I haven't seen much mention of is the way the monopoly nature of industry works out - American practically owns DFW, for example.
"Pilots average over $200K at the majors and work 14 days a week for a job which has no shortage of skilled personnel willing to work."
Well if they work 14 days a week I don't begrudge them anything ;)
I think pilots are going to have serious bargaining power and there is no way to overcome it. One plane crash due to pilot error can cripple an airline, and two will pretty much destroy it, so airlines have no option but to play it safe and hire the most experienced pilots they can and give them favorable work conditions. Its tough to argue that $200k for the most experienced pilot is too much, especially since the compensation model is akin to medicine where you make very little money at the outset, and reap the rewards as you become more senior. In the overall cost structure of airlines, pilot salaries have got to be a drop in the bucket.
What are the wages for those other jobs though. TWICE the market rate? Flight attendants and ground staff surely don't make more than 20k at the entry level and 40k at the most? An airplane mechanic make twice what a skilled auto mechanic does? I am somewhat skeptical about that claim and if you have some hard evidence would love to see it.
And also can you direct me to a source that shows that 'labor costs are the single largest cost an airline has'?
Hell, achilles, a senior unionized pilot at United or American makes twice as much as one at unionized Southwest, and Southwest has about the best safety record in the business. This is why, among other reasons, that Soutwest makes money, and the others don't. As to why Southwest and it's employees have been more successful in maintaining a profitable relationship, I haven't the foggiest, but it would be an interesting line of inquiry.
"Hell, achilles, a senior unionized pilot at United or American makes twice as much as one at unionized Southwest, and Southwest has about the best safety record in the business."
Thanks for the info Will. I knew there was a gap, I did not know it was this big!
It is indeed interesting how wage differentials of this magnitude for doing similar jobs exists. Especially sicne SW pilots must work more hours too. What is the Southwest pilots' union getting out of this? Stock options, more job stability? implicit employment guarantees? You are right that it would be interesting to hear from someone who worked in the airline industry, or even better two people: one at Southwest and one at United.
I know very little about the industry except by flying. And its hard for me to shake the fact that the airlines which have the worst customer satisfaction ratings (United, Valuejet, US Air) are the ones that have gone bankrupt. Continental is great now but they too were horrible before going bankrupt. This is why I was skeptical that it was all labor issues going on here. American is the potential exception to the theory though, since I have usually had good experience with them.
Profit sharing has been an integral part of the labor relations at Southwest since day one, and it seeems to work much better than labor actually having equity in the company; the unions at United never seemed to actually behave like shareholders. I don't think it accounts for all the differences, however.
I don't have the wage rates in front of me, but starting for a flight attendant is a hell of a lot higher than 20K, and they max a lot higher than 40K.
"I don't have the wage rates in front of me, but starting for a flight attendant is a hell of a lot higher than 20K, and they max a lot higher than 40K."
Really? I just talked to someone who had a relative who was a flight attendant and was told that for the first two years they make between $13k and $18k because they have to start out at the regional airline first before working up to the main airline. This is of course third hand data so I don't know how typical an experience it is.
Hopefully someone else can give us the right info. And can you at least give an approximate number from your study of the numbers, 'hell of a lot higher' meaning flight attendants make $25-$50k or flight attendants make $35-$80k? If it is the latter, I may need to think about a career change, union or no union.
Just found the answer thanks to a helpful tip.
http://www.avjobs.com/table/airsalry.asp
has the info.
Some highlights:
Maintenance workers $10-$25/hr
Baggage handlers $14k-$32k
Flight attendants $23.7k - $69k
Ticket agents $18k-$32k
Pilot (major) $23k - $260k
Pilot (regional) $16k - $60k
Unpacking the numbers
Flight attendants start at around $15k, the median wage is $38,820, the top 10% earn over $83,000. The entry wage is very low as my friend confirmed. Pilots for commuters make an average of $20k. Pilots for majors make an average of $70k(also says the average pilot works 16 days a month and about 100 hrs a month, not much less than rubes like me, who at least don't kill anyone when they screw up)
So I guess now I don't see how they are making twice the private sector wage as you were claiming. The benefits are pretty good and the perks for those who have no commitments to keep them from traveling are high.
It seems like the problems are either in terms of the airlines being forced to hire way too many employees or wages being too high at the top end for both pilots and flight attendants,
On th eother hand, the wage structure could be a mutual backscratching arrangement with the unions. This type of arrangement is very common in industry where skills are transferable between firms, because you don't want to pay a pilot $50k a year to train and then lose him/her to your competitor after they get some experience. So they work out a deal whereby wage increases with tenure.
So the interesting question seems to be not whether unions are bleeding airlines dry but why United can't strike the same deal with the airlines that Southwest can, because the wage differences that Will indicated for pilots seems to be pretty drastic and Southwest pilots are well in the low range of the distribution.
Southwest actually has the highest percentage of it's workforce unionized. One of the ways they have kept their unions happy, especially the pilots, is through stock options. (Another way is it's just a great place to work. You can't believe it until you try it. No, I'm not a pilot.) The senior management at SW is an exceptional group of people that genuinely care about the employees (yes, I have met them all). The management philosphy is to manage in good times like bad times. After 9-11, there was about a two week hiring freeze, and then they started hiring again. There was no talk of a layoff at all. The other airlines were announcing layoffs before the planes were even back in the air. Loyalty goes both ways, you know. I read sometime around that time that the airlines that were laying off had doubled their workforce in the 90's. They saw 9-11 as an excuse to trim fat.
There is no doubt that most/all of the airlines except for SW has very antagonistic attitudes toward their untions (mgmt views the union as the enemy). Delta's flight attendants have been trying to unionize for years, but mgmt is fighting it tooth and nail. I don't know the whole salary structure for pilots, but somebody said that pilots at AA and UAL make twice what a pilot at SW makes, but that's not a fair comparison. Pilots at AA and UAL that are rated for 737's don't make twice what SW's pilots make (SW flys 737's only). That salary difference is relatively small (don't recall the numbers, but I have seen them before). However, I don't doubt that pilots at AA and UAL that are rated for 747's or 767's make twice what a 737 pilot makes. Besides, I am willing to bet that the SW pilots stock options right now are worth a lot more than the AA or UAL pilot's stock options! (Yes, I know this for a fact.)
well if you compare regional to real airline, then yeah, they get paid less at the regional.. hint hint the regionals make money!!! (or at least lose less
according to deltaafa.org/paybooklet.html
circa 2001:
rates for united are 19.43/hr 1st 6 mo, 41.84 in 19th year
delta: 1475/mo, 44.18 (60.31 incentive after 50 hours a month)
sw: 16.86, 47.43
so if you base on 2000 hour year, they stand to make almost 40k in their first year, and 90+ in 19th year rates are higher for interational, and they get on call pay of around 1:4...
lots of info on the site...
not exactly minimum...
Thanks for the insider perspective Glen, especially about the didfference between 737 pilots pay and 747 pilots pay. And Libertarian, thanks for Delta info, but I don't think flight attendants work a 2000 hr work year. In fact if you look towards the bottom of the site you gave, the maximum number of hrs they can work ranges from 1000 to 1200 hrs/year so you have to cut your numbers in half, ending up with the numbers I posted from the other site.
achilles,
If you want to know why United & US air went under, go check out usaviation.com, flyertalk.com, and us-cockroach.com.
usaviation.com has comments mostly from employees. United's employees were also majority owners. The attitude from the vocal posters (United) is tale the last dollar until the last day, then close the place up. And this is from owner/employees.
Flyertalk gives the perspective from the frequent flyer community, who tends to want more, for less. They also have a reasonable business perspective on the airlines, such as getting rid of the insane pricing variations and rules that are killing the majors, and making Southwest & JetBlue profitable.
us-cockroach (for disclosures sake, I am involved) is trying to show the airlines that you can't mistreat your best customers and still expect them to come back.
Bottom line, a combination of over-the-top union greed and stupid management that cannot adapt fare and rules to changing envirnments has produced oversupply, huge fixed costs and pissed off "best" customers.
No other industry in history has managed such a "perfect storm" screwup and survived, and this will be no exception. Jane has hit most of it on the head. Give management their due, Jane, and you will be batting 1000.
Okay, but if they're only working 1000 hours a year that's still a pretty sweet deal, plus the airline pays for their overnights, which means not just free travel, but the ability to have a cheap apartment and/or a lot of roommates. If I could make 50K working 1200 hours a year, I'd be pretty happy.
I think the scale premium even on the same equipment is still around 50%, which is why the majors fly the biggest jets they can.
Jason -- business travelers don't stay at friends, but they also don't substitute away from flights except in two markets: New York/DC and New York/Boston. They definitely don't drive 24 hours to save on airfare. The business market has been crushed not by substitution -- Amtrak is still losing money -- but because companies are keeping their travelers home. The hotels are suffering just as badly. Like the airlines, they're trying to make up their volume on discretionary travel such as conventions and tours, which is a losing battle, as they're very price sensitive. While trains and automobiles may be meaningful competition for air in Europe, they just aren't here except for the least desireable market segments, the same segments that the hotels lose to substitution when prices rise.
"If I could make 50K working 1200 hours a year, I'd be pretty happy."
Sounds like an opportunity you should take up then. :)
In reality though it's not as good a deal as you make it seem because you are not going to be able to do another job for the remaining 700 hrs, so you are pretty much looking at a $15k entry / $38k median / $80k salary if you can stick it out for 10 years, plus benefits. Steady but not spectacular income.
Ira, thanks for the info, I will take a look at the site. I really enjoyed untied.com so I am sure there will be solace here as well. By the way the union's desire to fight for every large penny also must be correlated with the management-union relationship, no?
Anyway, Jane, interesting problem, in the end even if I disagree with you and think you were exaggerating your case against the unions, it was good to think about the issue.
I'm getting 20K entry, not 15K -- are you trying to suggest that stewardesses live under the poverty level? And that $20K only lasts through the probationary period, as with most unions.
Also, the issue of whether we think what flight attendants make is fair is separate from whether the labor costs remain structurally too high for airlines to make a profit. I might not think it's fair that burger-flippers make $5.15 an hour, but I'm pretty sure that if they made $15.00 an hour, no one would want to buy a hamburger at the resulting price -- labor and real estate are already by far the largest component of fast food prices. Achilles, you seem interested in proving that the flight attendants aren't wealthy, but that's irrelevant. One need only prove that their wages are too high for the airlines to turn a profit to answer the question I posed affirmatively. At which point I suppose the liberal has to decide whether they prefer high flight attendant wages, or to kick the least affluent consumers out of the market, those being the two available answers. We have no control over the price of Avgas, planes, or interest rates.
The economics of flight are very tricky, for reasons I've outlined elsewhere. But when you see every carrier in an industry repeatedly go bankrupt, there's something more than difficult economics going on. You, flyer, complain about the major carriers, but most of the things that they do to alienate their customers, such as charging wildly different ticket prices, are designed to help ease those economics. Many consumers imagine that if they could just stop that, the airlines would have to charge one low price -- on the contrary, it's the low fares you're agitating to eliminate. The random fares adn tricky rules are designed to fill up the last few seats on the plane == to generate gravy revenue on top of the passengers that already covered the flight's costs. If you were successful in getting them to simplify their fare structure, you'd see everyone paying around the fare you get for booking a month ahead unrestricted -- a much higher price than most of them are paying now. The majors have repeatedly tried to emulate Southwest, and they've been repeatedly stopped from doing so by the unions.
Also, I'm not sure flying with your oldest, most experienced pilot is actually such a good thing -- I'm told pilots peak before 40. Yet the younger pilots are the first laid off while the guy making $300K stays on.
And I disagree that pilot wages would stay sticky. I have a cousin who's a pilot, and there's just enormous competition for those jobs at the majors. Enormous. In fact, you see exactly what you see in any industry where the price of labor is set above the market -- there are a fantastic number of people desperately hanging on, trying to get their hands on one of those jobs. So I have to believe the price of pilots would fall absent the union.
Jane,
A few responses.
a) The entry figure for flight attendants came from the site I mentioned. http://www.avjobs.com/table/airsalry.asp
Probably covers more airlines than just the majors. At the majors the starting salary is $20k according to the Delta site.
b) Its a little disingenuous for you to claim that "Also, the issue of whether we think what flight attendants make is fair is separate from whether the labor costs remain structurally too high for airlines to make a profit" given that you were the one to claim that the employees' "lavish wages" were at least "double the private sector equivalents" and were therefore the major contributor to bankruptcy. I was merely trying to establish how much these workers made and how high the rents that unions were extracting was.
I am perfectly aware that what I think is fair is not what the firm should pay but thanks anyway for that particular unneeded economics lesson. I was just looking up numbers to see whether their wages were way out of line since you had made some sweeping claims about how high wages were relative to the private sector without any numbers to back them up, and I (who knew nothing about the cost side of the industry) needed those numbers to be convinced that labor unions were extracting large monopoly rents from the airlines. I was merely pointing out that your statement seemed to be true only at the top end of pilot and flight attendant salaries.
c) I have never argued that airlines should charge one price so I don't know where that little rant came from. Price discrimination is a good thing, and I have no problem with that at all. Southwest price discriminates as well, they know they are not a serious option for the high end business traveler so they don't need to price discriminate to the same degree. I have no idea how your claim that "The majors have repeatedly tried to emulate Southwest, and they've been repeatedly stopped from doing so by the unions." has anything to do with the revenue side. The majors don't want to emulate Southwest on the revenue side by charging flatter ticket prices (not should they), they want to emulate Southwest on the cost side. Their union-management relationship may not be conducive to getting to such a cost structure, but hey, that's a labor-management problem not a labor problem, given that some airlines have figured it out better than others.
d) Its also not very convincing to say that 'airline economics are very tricky' therefore the problem is really simple: its the labor unions. This is especially true if instead of numbers only sweeping verbal generalizations are provided to back up the claim. You may be right, but I am not convinced easily by "prrof by assertion". It does not matter anyway because you don't have to prove things to my satisfaction, and in any case appreciate all the answers you have given to my questions.
e)Finally, of course I have no doubt that pilot salaries will fall at the majors absent the union. Otherwise it would be a pretty shitty union wouldn't it? That does not necessarily mean that the pilots union is a bad thing, just as much as the AMA's decision to license doctors raises doctors wages above what they would be under free entry is not per se a bad thing. I am not a big union flag waver but just because unions give pilots a more effective voice at the bargaining table doesn't mean its bad. And as I said, in medicine as in being a pilot, there is a implicit wage structure that those entering the business are keenly aware of: make shitty wages when you are young, and reap high wages when you are more senior. The highest wages in piloting may come a little after their peak, but they have pretty early retirement ages anyway and have to pass pretty serious physical tests to do their job. So looking at the high end pilot wages is misleading because in some sense the higher wages are a reward for artificially lower wages at some earlier point in their carrier. The bottom line is that it is hard for me to believe that $2000,000 salaries paid to the senior pilots of 747 and 767 aircraft is a major part of driving United Airlines out of business.
I may be wrong, but it is my understanding that Southwest employees benefit from profit sharing, not stock options. The difference between the two benefits seems to have considerable impact on employee behavior. United's experience with employees owning stock was not positive.
What remains an interesting question is whether the time will come that airlines that are NOT organized along the lines of Southwest or Jet Blue will no longer be able to attract capital. Will people finally conclude, 25 years after deregulation, that is is rather silly to invest in entities that have unworkable business models, other than as purely speculative plays? Will their business models then change, with subsequent change in union behavior?
Achilles, 18k/38k/80k are pretty impressive numbers when you consider that there is no schooling requirements for flight attendants. From a professional's standpoint, maxing out at 80k after spending four years undergrad and mayber another three in grad school seems low. But to a person that has no degree higher than high school, it is a pretty damn good career path. Same for baggage handlers. Mechanics probably have a junior college degree, or an equivalent from time spent in the Air Force. Once again, not bad money for the competition for those slots. The training that they complete/receive would be comparable to what most professionals go through in a year, but the barriers to entry are just not there.
If anyone has the time, I would recommend 'Nuts! Southwest's Crazy Recipe for Business and Personal Success'. It is a case study/history of the company and what they do that makes them successful. The biggest thing they do is focus on making money, not maintaining market share. When you read the book, you realize that the company does the polar opposite of its competition in almost every aspect of the business.
Joe, it is definitely a good career path! I was questioning whether it was outrageously (twice as) good. The minimum requirement is high school + 2 years of college or customer service experience, but I have NO idea what the typical profile is. I agree that the top-end 80k is on the very high side for high-school experience workers. On the other that's the 20 years of experience rate, and I have no idea how hard it is to be a flight attendant for 20 years.
But I think the issue you & Will Allen raise about the different business models is the real key story here. Some of these airlines clearly believed that higher market share would get them the top-end business market and eventually lead to higher profits. United and American clearly being the leading examples. The evidence seems to be that business model won't work, whether it be due to unions, Sept. 11th's impact on business travel, hub and spoke inefficiencies etc. Business schools over the country must have studied Southwest and Jet Blue to death by now, so hopefully we will be seeing some innovative new ideas enter into the industry, either at the old airlines or with new entrants.
Achilles, I was talking to someone else about price discrimination, not you. Nonetheless, I have it on good authority that the majors have tried to emulate Southwest in any number of ways, and failed because union negotiators stripped away the innovations that make Southwest work. They can't have flat ticketing models because that would leave union ticket agents unemployed. They can't turn around the planes in 30 minutes because the baggage handlers and mechanics won't let them, and the other unions go nearly as nuts. They can't fly smaller planes because the pilot's union goes ballistic. What's left is taking away the airline food, which shaves about $2.00 from the cost of your flight.
The lavishness of the salaries is relevant in comparing the majors to their competitors, who pay non-union salaries.
If you want to refute my proposition, please explain what other factor you think it is that makes the airlines consistently and universally unable to project the economics of their business. It isn't capacity, which is constrained by slots, not demandin the way that semiconductors and telecomms are, so what is causing this repeated failure despite multiple management models? My model makes sense; yours consists of saying "It could be something else." Which is true of any model, but not useful. You've offered no criticism of my model which in any way refutes its effectiveness at explaining the outcomes.
With all due respect Jane, you and I will have to disagree on how to prove something. I was not claiming to offer a comprehensive explanation of airline bankruptcy, you were. Your claim may be correct, but you provided no numbers at all to back it up, just sweeping assertions. Any numbers that have been talked about here came from my digging around to educate my ignorance.
I am more likely to trust numbers which is why I was skeptical about your proposition.
So my saying 'it could be something else' is not a model, just a reflection of my dissatisfaction with your model.
In addition the fact that in your first comment you claimed that airlines that were profitable used non-union labor, a statement that subsequently several others have pointed out is false in that Southwest has unions shows me that you had not really done much deep analysis into the issue before issuing your very confident claims. At that point, the alternative possibility that banrukptcy was not simply a unions vs. non-unions issue had acquired much more validity. For instance, what type of union-management relationship an airline may have became important, as Will's post about profit sharing at Southwest indicated.
Also, the argument that unions 'pushed' United into bankruptcy is simplistic. Yes, when push came to shove, United's unions did let the airline go into bankruptcy but United had done a hell of a lot before then in terms of management mistakes, terrible customer relations and labor relations mismanagement to get them to that position. Unions may have been the straw that broke the camel's back, but ignoring the initial load and focusing on the straw is not terribly compelling. In my mind that load is composed of many things and your confidently asserting that it was the cost of unions is not convincing to me. That's my sole point, and I want to reiterate that proving to me is not necessary since i am sure your regular readers are much more sympathetic to your economic analysis.
Achilles, I look at FAs as the equivalent of a server at a restaurant. If that doesn't work for you, how about customer service reps. In either case, the pre-reqs are the essentially the same, while neither of these alternatives will yield a similar result in salary by remaining in the same position. A CSR will continue to get raises, but won't see their wages quadruple over 20 years. At best I could see a doubling of the salary over that time frame, assuming a 3% annual raise. So Jane's assertion of two times the pay for comparable work seems to hold true at the top end, if I did the math right(no guarantee there). I guess it matters what one considers to be a comparable position.
The big problem is that each union sees the other as competition in a zero-sum game. It is almost a tragedy of the commons scenario, where there is disincentive to leave something behind for later use which was the biggest part of Jane's post. In fact, when you do look at Southwest closely you realize that they don't fit the union model that Jane states is creating the problems in the airline industry. There, unions negotiate seperately, but see each other as co-equals. For instance, it is not unusual to see a pilot throw on a pair of coveralls to load baggage into a plane if the ground crew is short a person so they can keep their schedule. Can you imagine that happening anywhere else? If I had read the post more carefully the first time, I would have made this point when I said that Southwest does have unions.
"Hell, achilles, a senior unionized pilot at United or American makes twice as much as one at unionized Southwest, and Southwest has about the best safety record in the business."
For the safety thing, Southwest also has low-volume slots and incredibly good weather. And as achilles pointed out, the between-carrier price differential for piloting the same plane isn't much.
"Achilles, I look at FAs as the equivalent of a server at a restaurant."
How often are restaurant servers required to fly all over creation, and spend x days/hours away from home?
I have no idea what the problem with airlines is, but as achilles has pointed out, Southwest has unions, Southwest's unions pay about the same, and blah blah blah, so it's hard to believe that it's all the fault of the unions (outliers like United's employee ownership expected.) Maybe there's some sort of systematic overbidding problem for the highest volume slots; this would only effect the majors, and lead to a high rate of company turnover (new company appears, has a few good years, gets locked into an unprofitable bidding war, goes bankrupt, new company takes assets. Wash, rinse, repeat.)
"Jason -- business travelers don't stay at friends, but they also don't substitute away from flights except in two markets: New York/DC and New York/Boston."
True, ok.
Joe,
I think server in restaurant and customer service rep are decent assumptions but I think the latter is more akin to ticketing agents (whose salaries are a lot lower). The former is better as a comparison, with Jason's caveat about lifestyle and travel (which is attractive at the outset but may become a drag as one ages). Waitstaff do make good money at top end restaurants and crap at lower-end restaurants so it is a good comparison. If you buy that, I don't think the gap between a 20 year veteran in a good restaurant and a 20 year veteran FA would be as different as Jane suggests.
And I also completely agree with you that the union model at Southwest is different from the union model at United. And that difference plays an important role in Southwest's profitability.
But that was not Jane's point, she was arguing this purely as a union/non-union issue. As I learn more (from you, Will and Glen) it increasingly seems to be more an issue with how management and unions relate to each other, and the way the company is structured to align union incentives with overall profitability. That to me is VERY different from blaming airline bankruptcy on the behavior of greedy unions, but you may see it differently.
Jason, the skills required to fly a 767 are not appreciably different than the skills required to fly a 737; it is merely a matter of time spent in the simulator. 767 pilots get paid more than 737 pilots at the majors simply because their union has been successful in having that demand met. If Southwest had found it economical to fly an all-767 fleet, it is likely that their pilots would be be receiving the same pay as they do now. Again , I could be wrong, but most major airline pilots do their flying on one type of plane. It is not inaccurate to say that pilots at the majors get paid more, for less work. As has been noted above, it is not uncommon for a Southwest pilot to unload luggage in a pinch. I can almost guarantee that such a thing has never happened at American since the dawn of the jet age. The pilots at Soutwest are simply far more economically productive, in terms of services delivered for wages paid. I think this also likely of Southwest's management, also. Why anyone has bought major airline stock, other than as a purely speculative, short-term cyclical play, in the past 20 years, is beyond me. Of course, even the wisest minds can fall prey to ignoring fundamentals to theirdetriment. Warren Buffetthas long used the airline business as an example of an industry with fundamentally poor models, but even he bought U.S. Airways a couple years back. Whether he got out in time is something I don't know.
Southwest is not the only profitable airline, Achilles; other profitable ones are non-union. I didn't bring up Southwest, although I should have been clearer about the difference in their labor model. But I'm pretty sure that they don't pay their staff as well as other airlines.
Jason: Southwest flies in a lot more places than the Southwest. Weather has nothing to do with their success; the weather isn't better in Long Island than New York, but that route is profitable. And I believe that slots are allocated by FAA fiat, not competitive auction, in the major markets. Southwest's cost advantage at regional ports has more to do with fees and reduced congestion than slot charges.
Y'all are the ones framing the issues as "unions bad". The issue to me isn't unions per se; it's the structure of the labor agreements that makes it difficult to maintain profitability, and has to do with value claiming. The automakers aren't bankrupt and they have powerful unions; the issue is multiple extremely powerful unions negotiating with one company, not unions per se. There seems to be an emotional response to the idea that there might possibly be suboptimal labor structures in any industry.
Jane, its your site and I don't like being rude to a host, but I have to say you are being disingenuous here.
Your initial post made no distinction between good airline unions and bad unions.
You initially categorized all profitable airlines as non-union. Now you are saying that some or most are non-unionized but that you forgot to brng up the most profitable airline of them all, Southwest, which is unionized! Well, that makes a big difference in backing up a sweeping verbal assertion. Southwest's unions may take lower pay, but clearly their interests have beel aligned much better to the overall interest of the airline as Will and Joe said. So unions per se don't always act like a parasite that bleeds airlines dry.
And saying that "we'all" are having an emotional response to the idea that unions may be sub-optimal labor structures is also misleading. There is a world of difference between the two arguments "airline unions are sub-optimal" and "airline unions are so sub-optimal that they inevitably drive airlines into bankruptcy". You posited the second, I said I was not convinced. Now you are claiming that some (me mostly) of being too wedded to the first. Nope, sorry. I don't believe unions are optimal labor structures, but that doesn't prove the second claim. There were way too many things sub-optimal about the way United ran its business to blithely blame it all on one particular sub-optimal structure.
So yes, I agree with you that the relationship between labor unions and management contributed gretaly to United's downfall. I don't agree that United's unions do anything other than share the blame with United's managers and I certainly don't believe you have proven your claim that airline unions inevitably drive airline unions into bankruptcy. That about all I can contribute on this topic.
Tell your friend about Southwest Airlines...
"Jason, the skills required to fly a 767 are not appreciably different than the skills required to fly a 737; it is merely a matter of time spent in the simulator. 767 pilots get paid more than 737 pilots at the majors simply because their union has been successful in having that demand met."
This isn't what the person with direct knowledge of the issue said in here.
"Jason: Southwest flies in a lot more places than the Southwest. Weather has nothing to do with their success; the weather isn't better in Long Island than New York, but that route is profitable. And I believe that slots are allocated by FAA fiat, not competitive auction, in the major markets. Southwest's cost advantage at regional ports has more to do with fees and reduced congestion than slot charges."
True, but doesn't Southwest have a disproportionate amount of flights in low-volume, good weather locations? I thought that was conventional wisdom.
A quick spin around google says that slots are allocated by lottery, but can be sold. So I guess theoretically they have imputed prices.
Jason, I don't know what you are referring to, but I know pilots who have flown everything from commercial airliners to single engine planes above the Arctic Circle. They tell me that flying a widebody commercial airliner is far from the largest challenge a skilled aviator can face, and does not require appreciably greater skill than a 737.
The basic problem here is the combination of high fixed costs, low marginal costs, and a very competitive market. Since competition tends to drive price down to the marginal cost, in any industry of this type companies will have trouble charging enough to cover their fixed costs. Thus profits will be hard to come by.
This logic holds regardless of what the unions do. If the airlines are successful in reducing their labor costs, those cost savings won’t result in higher profits. They’ll be passed on to consumers in the form of lower prices.
It also doesn’t matter how those cost reductions come about. If there are certain airlines that have above market labor costs because of unions, they’ll either succeed in getting concessions from unions, or they’ll go bankrupt, and their business will be taken over by lower cost competitors. But either way, the result is the same: consumers benefit, but industry profits as a whole do not increase.
From an economic point of view, how profitable a particular industry is just isn’t very important. What is important is that the industry provides consumers with what they want at a low price. On that score, the airlines seem to be doing as well as they ever have.
All the comments are technically correct-high wages, high capital costs, low marginal costs, eyc. etc. However, the over-riding problem is simply Management's inability to understand the "cause and effect" phenomena on the product life-cycle. Cause can be any of the following events (normally beyond the airline's control) such as "deregulation, Sept 11/01, technology, etc.
Deregulation was the largest and most significant change affecting the airline business. Rather than pleading for the right to change its labor agreements, airlines did nothing. Eventually ( 20 years later) bankruptcy allowed for labor changes, but for many, it was too late. Furthermore, airlines should have insisted deregulation should impact and reducelabor at airport and air traffic control.This didn't happen.
Technology? Another cause. The airline rushed to bring on internet websites and booking engines so as to quickly quickly dispose of travel agents, and their 8% commission. TA's knew they would eventually have been replaced but the speed in which the major carriers were trying to eliminate them was catastrophic. By 2001, TA's loyalty (80% at one point) to the majors virtually disappeared. Any airline that would have stuck with TA's might be in better shape today.I could go on with "cause and effect" and mangements' ignorance thereof but the point has been made. Anthony Henry Kuiper.Former Executive.
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