The sick cope best with labour pains

Aug 24th 2005
From The Economist Global Agenda

America’s Northwest Airlines and British Airways are both feeling the effects of strike action. Ironically, struggling Northwest is coping reasonably well without its striking mechanics, while buoyant BA is still recovering from a one-day stoppage by some ground staff. When dealing with unions, it helps to have little to lose

THE last time a big strike hit Northwest Airlines (NWA), in 1998, the American carrier was paralysed for two weeks and the pilots who caused the stoppage walked away with handsome pay increases. This time, the effects have been far less painful. Despite a walkout by 4,500 mechanics and cleaners last week, Northwest says that it has run nearly all of its scheduled services—though with some delays—after bringing in new staff to cover the work of the striking employees. Oddly, the main factor in the airline’s favour this time is the deteriorating fortunes of full-service carriers in America (and around the world). Northwest, America’s fourth-biggest airline, has gone from a successful money-making venture, unable to resist the power of the unions, to a financially troubled one that has little to lose from taking on disgruntled staff.

The contrast with the situation at another strike-hit airline, British Airways (BA), underlines this point. BA is recovering from a blow to its reputation and finances caused by a brief stoppage. On August 11th, around 1,000 ground staff walked out in sympathy with 670 fellow union members who had been sacked by Gate Gourmet, a catering firm that supplies BA and which used to belong to the airline. The industrial action stranded around 70,000 flyers, some for several days. The dispute is a direct consequence of BA’s largely successful efforts to recover from the troubles afflicting airlines over the past few years. Ironically, its position of relative strength makes it more vulnerable to the flexing of muscles by its workers, who complain that the airline continues to look for ways to cut costs despite being profitable. BA has suffered strike action in the busy holiday period in each of the past few years.

There is no doubt that BA is in much better shape than most American airlines. Since the terrorist attacks of September 11th 2001, America’s big carriers have amassed losses of over $30 billion between them. But the cause of the slump predates the New York atrocity. Airlines suffered a steep drop in demand from lucrative business-class customers after the bursting of the dotcom bubble. Meanwhile, the older carriers, with heavily unionised workforces, high running costs and a legacy of crippling pension and health-care commitments, faced mounting competition from low-cost competitors (which now have 30% of the market compared with 7% in 1990). On top of this, the soaring oil price has forced up fuel costs.

The big airlines’ reaction to these threats has been to shed employees, cut pay and pensions, and outsource operations to cheaper providers. Since 2000, around 100,000 airline employees have gone, and carriers have secured billions of dollars in cost savings using Chapter 11 bankruptcy—or the threat of it—to persuade workers to make concessions. Under bankruptcy protection the courts can relieve a company of its debts and rescind contracts that make it difficult to continue in business. US Airways, America’s sixth-largest airline, has used the provisions of Chapter 11 to force annual cost cuts from workers of $1 billion. United Airlines, the second largest, has used them to save more than $3 billion, through job cuts and changes to its pension rules.

The mere threat of Chapter 11 has also proved a useful weapon, albeit less potent. Delta Airlines, America’s third-largest carrier, said this week that it would seek savings in addition to the $1 billion it negotiated last November, as its cash position has deteriorated considerably since then. Many observers think Delta will file for bankruptcy later this year, perhaps before October 17th when the rules governing Chapter 11 are changed to limit the time companies can spend restructuring under its protection. Northwest may join it before the rules are tightened.

No wonder, then, that America’s cash-strapped airlines are more willing to take on their unions these days. Doing so requires careful planning as well as pugnaciousness. Northwest, for instance, long expecting a strike, made elaborate contingency plans that were helped by the restructuring the industry had undergone. It rapidly replaced the 4,500 striking staff with just 1,900 temporary workers (and is training another 400) drawn from the pool of staff laid off by other airlines.

Furthermore, other unionised employees at Northwest refused to back the striking mechanics, perhaps sensing that it would hasten the airline’s tail-spin into Chapter 11 and a full-scale restructuring that would see many more jobs go. The divisions in America’s labour movement burst into the open last month, when several large unions representing over a third of its membership withdrew from the AFL-CIO, America’s trade-union federation.

BA must be wishing that its unions were just as divided. Britain’s flag-carrier has clawed its way back by shedding more than 13,000 jobs since 2001 and cutting costs by £1 billion ($1.8 billion) a year. Much of this saving came through outsourcing the preparation of its in-flight food. But this also left BA at the mercy of Gate Gourmet—the only catering firm in the Heathrow area in a position to serve the airline. It did not help that BA had no contingency plan.

BA’s own employees may have felt emboldened to strike (illegally) in support of former colleagues at the catering firm in order to set a marker for the battles to come as BA moves to the new, fifth terminal at Heathrow. The changes in working practices that the airline hopes to introduce with the move are sure to arouse union ire. BA wants another £300m squeezed from running costs in the next couple of years.

The airline industry, more than most others, is vulnerable to strikes. In the current harsh operating environment, a small number of cabin crew, mechanics or catering staff can bring a carrier to its knees within weeks—especially if they cannot easily be replaced. But the lesson from recent experience in America and Britain seems to be this: if you want to get the better of your unions, it helps to be on your knees from the start.

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