Editorial Chapter 11: The stick when unions refuse the carrot

By Karen Walker | January 1, 2012

Gerard Arpey famously once said while he was American Airlines chairman and CEO that he was “looking under every rock” to find the savings necessary to keep the company from having to file for Chapter 11 bankruptcy protection.

In the end, the rock-searching quest failed. For many observers, AMR Corp.’s fall into Chapter 11 was no surprise. The company has lost more than $11 billion since 2001 and has seen its rivals merge into mega-carriers that outsize and outcompete American.

But there was one rock that was most obstinate of all and which ultimately forced Arpey’s hand, making him deal the Chapter 11 hand even though he refused to play this game (Arpey was asked by the AMR board to remain as chairman and CEO, but chose to resign, reportedly stepping down without any severance).

AMR’s labor groups were the immovable obstacles. And it was not only about money; unrealistic work practice rules were a particular sticking point. American said that its labor costs were $800 million a year higher than its rivals, mainly because its pilots operate under less flexible, fewer-hour contracts.

It must be pointed out that US legacy airline management—including American’s —is partly to blame for this situation. Back in the heyday 1990s when business was booming, US airlines did generous deals with their unions which now seem, albeit with hindsight, recklessly neglectful of the need to prepare for harder times. Management failure to strike tough but fair bargaining agreements created a double-headed problem. First, these high labor costs were unsustainable in the post 9/11 era—and even without 9/11, they could not compete with the new and growing wave of low-cost carriers. And second, they fueled a misperception by unionized employees that every new contract would improve on the last one, while also securing jobs for all.

Nevertheless, AMR’s union leaders must be held to task for not seeing the stick that was most assuredly coming in the form of Chapter 11 if they refused the carrots that Arpey and his team spent years attempting to make palatable. Given the evidence all around them—every other US legacy carrier has resorted to Chapter 11 at some point and American is bleeding money in a weak economy that may worsen before it turns around—then it was foolhardy to think the AMR board would not follow the same path.

The failure of legacy carrier labor groups to wake up to the new economic reality is not unique to the US. Witness the ultimate showdown that Qantas CEO Alan Joyce eventually had with his airline’s unions in October when he ground the fleet to force to a head a long and costly dispute.

For American, Chapter 11 is neither as dramatic a step nor is it as traumatic for customers. But that does not mean it will be easy. CEO Tom Horton has warned of a tough, unpredictable path ahead that will result in unpopular decisions and, of course, job cuts. Management now has much less control of where it slices and dices; and union leaders have done neither their company nor the employees they represent any favors by their stubbornness.

Discuss this article 15

03 Jan21:21

Well done, Ms. Walker! Your

By Old Salt

Well done, Ms. Walker! Your reputation as a management shill is greatly enhanced by this hack job. Of course, Arpey bears no responsibility for AA's troubles, I mean after all, he was just a lowly CEO. And he was so proud of his performance, he ran away without the golden parachute he so richly deserved.

04 Jan10:08

I note with some disgust that

By mattheww50

I note with some disgust that inevitably management's pension plans are untouched by Chapter 11 filings, and inevitably, management richly rewards itself for having destroyed the value of the shareholders and rank and file employees. I also note that mangement is never asked to give back the bonuses they were paid for having sucessfully negotiated the contracts that are now blamed for forcing the company into chapter 11.

One of the Bankruptcy reforms that is really needed is a 'clawback' of such bonuses as well as a requirement that managment pensions get EXACTLY the same treatment that rank and file employee pensions get in Bankruptcy. The other reform I would love to see is that senior management gets terminated as part of the Bankruptcy process. This is in fact the norm in many countries outside the USA. Outside administrators are called in, because in filing for Chapter 11, the managment is in fact admitting failure.

Of course the peopole who ultimately pay for managements years of non-performance are the tax payers as they get saddled with the costs of taking over the pension plan. Another example of privatize the profits, and socialize the losses.

04 Jan15:10

For so many years, each year

By Mike Bartlett

For so many years, each year a new gimme has been imposed on the airline, and the attitude is "if you don't give it I will strike" and as recently stated by a Qantas union "We will bake you slowly". Trouble is you cooked your own goose!

All these impediments on costs have accumulated to a point where the airline can no longer compete, particularly against the Asian carriers.

Passengers no longer have loyalty to airlines only to their pockets, and certainly surly attitudes from crew and staff who believe they are doing you a favor by allowing you on "their airline" don't auger well for flying with that airline again.

Management didn't destroy the airline(s) the unions did, but never mind as they have told the airline when bargaining without us you don't fly, we'll make sure of that by go-slows and strikes.

One big flaw. Without an airline you don't fly, strike or go slow, you simply stop. What a surprise?

You have managed to strike the airline out, now once again everybody but the employees is resonsible.

There's no money left in the honeypot anymore for the selfish staff, the debtors, nobody, just the bones for the vutures.

But there is a silver lining to every cloud. At least you have helped reduce over capacity.

Don't forget to mnake sure you have all the same ... perks when you apply for your next job. Good luck - you are going to need it.

04 Jan20:28

There are no participants in

By Ron Kuhlmann

There are no participants in this mess that fail to bear responsibility. Much of it dates to the Crandall era when a culture of confrontation, both internally and externally, was fostered. The legacy of those fights still infects both sides and the finger pointing just makes the whole situation more of a circular firing squad. Unless all players learn to make nice and try, AA could come apart at the seams.

05 Jan17:00

How can anyone blame the

By Mike Hammond

How can anyone blame the unions? Name one that went on strike in the last 20 years? Last time the Allied Pilot's Union tried to strike, Washington (Clinton) stepped in and stopped it. Explain how SWA, one of the most unionized companies in the USA, continually makes everyone happy? SWA pilots are the highest paid in the industry yet their fares are (supposedly) the cheapest. Must be the management. AA's management made millions in the last decade. Other legacy carriers who already went down Bankruptcy Road also have grossly overpaid, lame management, and line employees who have their wages gashed and pensions dismissed. I don't even particularly like unions, but blaming them and not management is ignorant. Contracts are a 2-way street.

06 Jan00:20

We were on strick aug 27

By km sully

We were on strick aug 27 1998. Pilots of NORHTWEST AIRLINES

06 Jan00:21

nwa pilots on strick 14 days

By km sully

nwa pilots on strick 14 days starting aug 1998

06 Jan02:06

If it all the unions fault,

By deldert

If it all the unions fault, what happened at Delta?

07 Jan12:14

What saddens me the most

By Anonymous

What saddens me the most about this article and the comments that have followed in this forum and others is how intent everyone is on assigning blame. AA is the last major network legacy carrier in the US to go this route. If it was just management or just the union's fault, ask yourself why did it also occur at every other major carrier in the US and why are we seeing similar financial distress at other major airlines elsewhere in the world as well?

Is all airline management in the world inempt? I think not. In my opinion, it the failure of both management and organized labor to work together when the world has changed around them and work together to respond to those changes in a way that allows the company to continue to thrive to the benefit of all constituents. So long as organized labor, and non organized airline employees fail to grasp the fact that their owners (shareholders) and their passengers are their lifeblood, and so long as management fails to recognize that as a service business their employees are the product, these failures will continue. There are no entitlements for anyone. Businesses have to respond to changes in market conditions. Consumers decide what they are willing to pay for air travel. If the airline can't produce the product at a price point that allows them to profit under those conditions, they will fail. It's really that simple. With limited exceptions, air travel consumers have demonstrated they are unwilling to pay a signficant price premium for exceptional service and the perfect shopping environment created by the Internet puts the power in the hands of the consumer to find the best deal.

Many frequently point to Southwest as the model all airlines should have followed. Had they done so, Southwest would not be the carrier they are today. Southwest seized an opportunity at a point in time and thrived in a different business model. But that opportunity window is now closing and Southwest's CEO has publically stated Southwest must also change if they are to continue to be successful in the changed environment.

AA has an opportunity to emerge from bankruptcy as a much stronger competitor. Hopefully, they can return to the once proud position they held as a leader in the industry. I sincerly hope through the process all involved will grasp the reality of the marketplace and work together to create the infrastructure, the product and the culture that will allow them to be successful.

07 Jan12:44

Your editorial does nothing

By JohnC

Your editorial does nothing to address the fact that in the post deregulation era, legacy airlines like American have followed the "stack 'em deep, sell 'em cheap" theory of overbuying aircraft and then dumping them into markets they had no business going into and underpricing seats to generate the cashflow to service the debt. Their desire to be the biggest at any cost overrode the basic economics that not everyone can afford a properly priced airline ticket and that air travel is not a right.

Consequently, when the economy tanks and the buyers of the cheap seats run out of disposable income, the red ink flows and airlines; instead of going back and renegotiating the bad deals with manufacturers, go after labor instead because they can. They leave it to those such as yourself, who have nothing beyond a rudimentary understanding of the business and believe whatever you are told and regurgitate it.

AMR has been planning this bankruptcy since Crandall. It was their way to gut retirees health care costs that became a fear in the 80's and 90's and retirements that they agreed to and found they couldn't cover because they sold their product below cost.

11 Jan22:07

Wow, your bias is incredible,

By JetFlyBoy

Wow, your bias is incredible, Ms. Walker! You conveniently failed to mention the enormous cuts that all union and non-union employees absorbed during our last contract, when management was allegedly ready to file BK, in order to give management the 'tools' they required to right the company. Blaming is pointless, but the fact is at that point it was management's RESPONSIBILITY to the shareholders, customers and employees to make AA a viable entity. Employees did their part but management failed miserably at theirs.

12 Jan14:35

The majority of comments here

By Mak

The majority of comments here give some indication of how poisoned the work environment at AA is. Every day.
This will carry over into bankruptcy. In all likelyhood the results here will be no different than the last decade before bankruptcy. Next stop liquidation.

31 Jan22:59

The author was spot on,

By Anonymous

The author was spot on, management's willingness to agree to lavish contracts to keep the rank and file quiet and on the job was irresponsible. Case in point, the dispatchers that managed to get a "no lay off" clause in their contracts. Then the union leaders, taking as much of the cake as they could get to show what a bunch of great guys they were. If they were investment advisors they'd be broke. Ignoring the business climate and focusing on the big payout. You think they play the stock market with their dues ?

22 Mar13:24

This comment makes me laugh.

By Anonymous

This comment makes me laugh. Has the writer seen any "investment advisers" going broke in this business climate? On the contrary, THEY'RE the ones who are "focusing on the big payout," and they continue to rake in the huge bonuses, regardless of the consequences of their actions. The recklessness and greed of the Wall Street paper-pushers, coupled with the deliberate abandonment of proper governmentt oversight, is precisely what caused the current economic crisis. And, as "failure socialists" inevitably do, they want to fob off the costs of their malfeasance onto the "greedy" unions and working people. If we are going to consider unions and working people "greedy," consider what role models they have in the financial sector!

28 Mar14:55

Go on strike and close them

By Anonymous

Go on strike and close them down.The workplace has turned to slave labor so lets all live off the government.Link cards and all