The unions representing bankrupt American Airlines may come to regret agreeing to hook up with US Airways. Merging with a smaller carrier that has its own severe labor troubles looks far more painful and disruptive to American employees than would be the case if they just stuck it out with their current bosses. Given all the question marks surrounding this pact, the unions move here looks more like a bargaining tactic than an earnest defection in what has become a high stakes game of chicken with American management over wages, benefits and pensions.
For now, American management isnt blinking. But eventually they may need to be a little bit more accommodating to their employees and pensioners and look for cuts elsewhere if they want to put all this merger talk to bed. If not, Americans creditors could start feeling nervous about supporting an airline with a hostile workforce and end up siding with US Airways by default.
American Airlines three main labor unions support a tie up with US Airways (LCC), a development that came as a bit of a shock to many in the airline industry. But it was no surprise that labor would be at the center of the battle for control of American -- after all, it was the airlines high labor costs that forced it into bankruptcy in the first place. Americans labor cost is equivalent to around 28% of its revenue, the highest of any major airline operating in the U.S. today. That compares with Delta (DAL), United (UAL) and US Airways where labor costs are 18%, 20% and 17% of revenue, respectively. This huge cost disadvantage meant that American paid annually around $600 million more in wages compared to its peers.
American management had tried for years to come to an agreement with the unions for a new contract that would bring labor costs in line with the rest of the industry but failed as the unions didnt want to let go of their juicy perks and fat pensions. But US Airways revealed on a conference call with analysts last week that they were able to effortlessly come to an agreement with Americans unions, which would involve slashing just $800 million off Americans annual labor bill in a merger. They noted that this would put American workers pay and benefits in line with industry standards.
The agreement would be around $190 million less than the $990 million American tentatively plans to cut in labor costs. US Airways says its plan saves "at least" 6,200 positions out of the 13,000 positions American plans on cutting under its plan. It promised that the synergies created in a merger would yield $1.25 billion in additional revenue each year, which would be roughly equal to the $1.2 billion in cuts American has proposed so far.
Its hard to say where all these savings would come, and US Airways didnt specifically say. What it did say is that other airlines that have merged in the recent past have netted a gain as much as 6% to 7% of the newly combined carriers revenues by choosing to merge rather than remain stand alone entities.
But merging also creates a lot of headaches for airlines, especially for labor, which usually comes out the loser in any deal. Probably the most painful part in merging an airline is dealing with integrating seniority lists among its employees, especially its pilots. US Airways knows this all too well as it is still trying to merge its seniority lists seven years after its merger with America West. So while the public sees US Airways as an integrated unit, it actually must operate as two separate carriers in which legacy US Air pilots and flight attendants can only fly on legacy US Air planes and legacy America West pilots and flight attendants can only fly on legacy America West planes. This prevents US Airways from achieving maximum fleet utilization that management says costs the airline $10 million a year.