Small Matters: Costs clipping American's wings

Posted: December 12, 2011

What do American Airlines and the other major carriers have in common?

They all buy their aircraft from the same market producers, buy their fuel from the same competitive producers, use the same competitive suppliers.

What they don't have in common is hiring their labor from the same competitive pool of workers. Unions have a lock on labor costs. Since "deregulation," the real cost of flying has declined (airports are now crowded, no piano bars in those 747s) and all the major carriers have gone through bankruptcy at least once, mostly to fix their labor costs.

All, that is, except American.

American has been trying to renegotiate its labor contracts for several years now, but has not been successful. The pilots union refused to let the rank-and-file members vote on management's wage proposal: 3.2 percent in 2011, followed by 1 percent annual increases for the length of the contract.

The pilots demanded 10 percent up front and 7 percent for each of the next three years, a deal you can't find in a competitive market.

American's labor costs (and work rules) are already the most costly in the industry. Losing billions over the past few years, American has opted for Chapter 11 reorganization to deal with its competitive disadvantages regarding labor costs.

American could opt to have the government - taxpayers, through the Pension Benefit Guarantee Corp. - pick up some of the costs. (All carriers would also likely pay higher pension-insurance fees.)

Of course, American will keep flying during the process, just as General Motors would have kept operating had it gone through a normal bankruptcy, which the bailout prevented. President Obama's administration's scare tactics intimated that domestic auto production would come to an end without the government bailout, but this would not have been the case - just as American will keep flying.

The U.S. Treasury recently estimated the taxpayer loss on this auto bailout adventure at $23.6 billion. This is in addition to the estimated tax-revenue loss of $15 billion on the $45 billion the government gifted GM in the process, something no regular bankruptcy process would have allowed.

There is no end to the goodies you can get financed by the taxpayers if you are politically well-connected.

The National Labor Relations Board has been doing all it can to enable workers to more easily unionize, even small businesses. Only 7 percent of the private sector is now unionized. Unions are strongest in the public sector, where "bottom lines" don't impede on giving things away under union pressure. Instead, taxpayer wallets bear the cost.

Sadly,the NLRB has been politicized with recess appointments to advance the union agenda, not be an impartial arbiter of labor issues.

Western Europe is now struggling with its labor cost problems: governments employ too large a share of the workforce, have promised too much and can't deliver. Those governments can't raise taxes enough to fund the promises and can't use their central banks to print money. It will not end nicely. Everyone is trying to live beyond their means by borrowing someone else's money. It can't work.

So, unions continue to tax citizens by forcing union compensation above market levels. When labor costs are forced up by unions or laws (minimum wages, for example), the costs are passed on to customers. Competitive firms must earn a minimum return to stay in business.

Pizza-parlor owners hit by an increase in the minimum wage or a mandate for paid sick days off or higher taxes must pass the costs on to customers, or learn to live on lower compensation. American Airlines was unable to do so with its excessive labor costs because its competitors didn't have to, having already endured their "bankruptcies."

American could not raise its prices because of the competition, and now the company is in bankruptcy.

The goodies the unions managed to extract over the years can't be maintained. No other airline will take on their excessive labor costs, so now the courts will try to sort things out.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on small business. Contact him at dunk@temple.edu. Read more of his columns at www.philly.com/dunkelberg.

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