Sept. 5, 2023, © Leeham News: Decades after US airline unions were on the decline, some are making big gains in restoring wages, benefits, and strength.
Pilots at American, Delta, United, and Alaska airlines (among others) won big wage increases under recent contract negotiations. Pilots at Southwest Airlines are aggressively seeking more money and revised work rules. Flight attendants at American just approved a strike authorization by a wide margin.
Drivers at UPS Airlines, the package-freight carrier, won a generous new contract. Pilots at rival FedEx also became more militant in recent months.
One can hardly blame the unions for seeking dramatic wage hikes and work rule changes. Labor has been under constant pressure since the 1970s. Unions probably reached their peak strength in 1966, when five US airlines were struck at the same time by the International Association of Machinists and Aerospace Workers (the IAM). Sixty percent of the capacity was grounded for 43 days. Eastern, National, Northwest, Trans World and United were affected.
The industry was highly regulated. The Civil Aeronautics Board, created in 1938, oversaw virtually everything airlines did. Routes, airfares, serving alcohol, classes of service, and mergers were tightly controlled by the CAB. So was the competition. From its inception to 1978, the CAB turned down every single application to create a new airline (except a host of local service carriers immediately following World War II) or to upgrade charter carriers to scheduled service. More than 70 applicants were turned down.
Deregulation of the US airline industry changed everything. Approved by Congress and signed into law in 1978, the CAB went out of business shortly after. The Department of Transportation took over some but not all of its duties. The DOT and the Department of Justice were charged with approving or disapproving mergers, the latter for anti-trust/anti-competitive reasons. Airlines were free to set airfares at will. They were free to enter and exit markets in the US at will. (International routes still required government approval.)
Under the CAB, any changes in fares required its consent. Fares were set that virtually guaranteed labor costs would be covered. With new route authority often taking years to wind through the CAB’s bureaucracy for approval or disapproval, US carriers were well insulated from free-market competition. Those airlines that did fail were subject to mergers with stronger carriers, which needed access to the failing carrier’s routes, planes, and facilities in order to grow. The complete shutdown of a failing carrier was a rarity.
Under deregulation, failing carriers were allowed to fail. Other airlines might buy assets, such as slots, gates, and planes, but the freedom to move into new markets was unfettered. Buying international routes still required government approval, however.
With freedom, and in some cases, stupidity, management’s ability to cut fares below costs in a desperate effort to generate cash meant the underlying cost structures had to change. And labor’s cushy, decades-long ability to hold management hostage came under attack.
During the 1970s, leading up to deregulation, and into the 1980s as airlines tried to adjust to a free market, labor costs (wages and benefits) were usually the single largest expense on the balance sheet. This would change during the presidency of Jimmy Carter when OPEC—the oil industry’s cartel—realized it could use pricing as an economic weapon. Fuel now holds this honor.
Braniff Airways was the first major casualty of deregulation. Its CEO, Harding Lawrence, went wild expanding the airline, figuring deregulation was going to be a short window of opportunity. The expansion was ill-advised in its own right. However, the plan was hurt by a concurrent recession, inflation, and fuel price spikes. As Braniff descended toward bankruptcy, employees—unionized and non-union—took haircuts in an effort to save the company. It was unsuccessful. Braniff collapsed in 1982 and ceased operations.
Continental Airlines was next. Already hurting from trying to adjust to the new free marketplace, Texas Air Corp. made a successful hostile bid for the airline. By 1983, its fortunes were reaching a point where bankruptcy was threatened. Labor unions declined to agree to the cuts demanded by management. Bankruptcy was declared, but unlike Braniff, Continental announced operations would be suspended for two days before resuming as a much smaller, low-fare airline. Federal law at the time allowed Continental to abrogate labor contracts. Unions were furious.
But even these two events were only part of a pattern. In 1981, also in response to the new deregulated environment, American Airlines persuaded its pilots to agree to a two-tiered wage system. The incumbent pilots remained on what became known as the A scale. New hires came in at lower wages, known as the B scale. American’s CEO, Bob Crandall, promised American would order new airplanes and grow if pilots approved the B scale. They did, and he followed through.
United Airlines followed a similar path. A two-tier wage approach came under the nomenclature Blue Skies. But United’s CEO, Dick Ferris, had bigger ambitions. United’s parent company, UAL Inc., bought Hertz and a hotel chain. Ferris changed UAL Inc. to Allegis, which one critic said sounded like a world-class disease. The Air Line Pilots Association (ALPA) set out for Ferris’ head and eventually forced him out of the company. Unsuccessfully, the pilots led an effort to buy the airline.
The first Persian Gulf War, in 1991, led to a series of airline bankruptcies in the US. At one point, 40% of the capacity was operating under Chapter 11, the reorganization section of the bankruptcy code. Storied names like Pan Am and Eastern collapsed. Newer airlines like Midway (the first one) and several others ceased operations. Northwest, Continental, and TWA were among those that successfully reorganized.
The Great Recession of 2008 caused several more airlines to declare bankruptcy or cease service. And then there was COVID and the 2020 pandemic. Government aid avoided more bankruptcies. But throughout each of these events, labor granted more concessions.
Not anymore. Today, pilots are some regional airlines gained 100% salary hikes. Others at major carriers gained hikes in the 40% range. Southwest never laid off pilots or employees and largely maintained pay scales. During COVID, Southwest asked for some concessions, but these were rebuffed. Eighty-three percent of Southwest’s workers are unionized. Today, Southwest’s labor costs are among the highest in the industry. Yet the pilots and flight attendants want more.
Unions are on a roll. It’s taken 57 years for unions to demonstrate the kind of strength they had with that 1966 strike. It’s been 45 years since deregulation was approved and 31 years since Braniff’s bankruptcy took a significant hit on labor wages.
Karl Marx coined the phrase, “History repeats itself, first as a tragedy, second as a farce”. What’s happening today in the airline industry sure has this look and feel.