Why are airline profits soaring?
, a delegate to the San Francisco Labor Council and former president of Air Transport Employees Local Lodge 1781, analyzes developments in the industry.
WALL STREET is jumping up and down because airlines are making money again--big money. The nine largest U.S. passenger airlines posted cumulative net income of $1.45 billion for the three months ending June 30, according to Air Transport News. This is four times the income generated last year. These are not exceptions.
Passenger revenue in September increased by 19 percent for all the major carriers, the ninth consecutive month of gains. The good times don't stop there. The top ten U.S. airlines will bring in profits of $2.8 billion for the current year and $3.5 billion for 2011, predicts Vaughn Cordle, founder of AirlineForecasts LLC.
But how did airlines turn their fortunes around, and what does it mean for passengers and employees who can both arguably be described as long-suffering victims of greed in the sky?
While it definitely is a remarkable turnaround for the beleaguered industry, it is neither a big mystery how it happened, nor a big surprise that it does not necessarily bode well for either the traveling public or airline workers.
Aside from mounting industry consolidation, which generates its own profit dynamic resulting from a monopoly of the skies, the profitable excesses are being accomplished the old-fashioned way: charging more fees and higher ticket prices, cramming more people into each flight and reducing service staff.
EXPERIENCE CLEARLY shows that fewer airlines and less competition come at the expense of consumers. As a result, ticket prices will surely continue to rise following the the merger of United Airlines (UAL) with Continental and the just-announced purchase by Southwest of AirTrans, as they did with the merger of Delta with Northwest.
Don't be deceived by periodic sales to targeted tourist meccas--fares are indeed going up. In fact, summer prices jumped an average of 18 percent according to the Air Transport Association, a major trade group.
But airlines have discovered additional ways to gouge consumers. I am referring to those exasperating fees for bags, meals and confirmed seat assignments. The consulting firm IdeaWorks estimates that carriers will garner an extra $18 billion in 2010 from these irritating service charges. This is a whopping 33 percent jump from last year.
Carriers can still temporarily decrease tickets for various marketing reasons as long as they keep charging these lucrative fees.
UAL president John Tague calls them "an unequivocal success." His enthusiasm is understandable because UAL took in around $1.8 billion from fees last year. And don't expect these additional travel costs to disappear. Tague claims he would feel comfortable doubling the amount UAL earns from baggage charges.
The second factor leading to profitability also negatively impacts travelers. By trimming fleets, airlines are filling each aircraft well above previous industry standards for profitability. The U.S. Department of Transportation reported that 86.9 percent of all seats were filled in July for all major U.S. airlines. This is the "highest recorded for any July."
Last year, the average passenger "load" on each aircraft was 84 percent for the majors compared to 82 percent the previous year. Only a few years ago, the profitable range was in the 70th percentile. This rising trend is not so comforting for those paying more for the privilege of sitting in stuffy and cramped cabins.
It makes one realize that passengers are not the beneficiaries of the industry's self-proclaimed "efficiency." But neither are airline employees. They have endured major wage and benefit reductions since 2001.
This brings us to the final piece in the puzzle of how airlines have so rapidly climbed out of their descent.
In the last few years, bankruptcy courts ripped apart the wages and benefits of hundreds of thousands of employees. Based on long experience, veteran airline employees realize that good times returning to the carriers does not automatically mean good wages and benefits returning to them.
Labor costs at the five network airlines have fallen some 33 percent, or $16 billion, since 2003, according to analyst Cordle.
Consolidation of the industry will not slow this trend. Mergers allow airlines to combine routes, equipment and employees, which, of course, are designed to produce a better product with fewer costs. It all appears very reasonable. But like the example of rising ticket prices and more crowded aircraft for travelers, unregulated consolidation almost always comes at the expense of airline employees.
In fact, Continental CEO Jeff Smisek, who will run the newly merged United, had to frankly admit in a May 3, 2010, letter to wary employees: "Mergers do result in some job losses."
So it's employees and passengers that both have to deal with the harsh realities of consolidation. Travelers are held hostage to the unrelenting pricing demands of fewer airlines while workers fall victim to the monopoly profit strategy of trimming service personnel.
SO ONCE again, the question arises: "Who benefits from fewer but bigger, unregulated airlines?"
Well, no surprise, certainly Wall Street generally loves mergers such as the UAL/Continental deal, where executives predict "$1.2 billion in annual benefits...from cutting overhead," as recently reported by Chicago Tribune's Julie Johnsson.
But all these changes in the industry that affect both travelers and airline workers are not happening without some resistance, and airline workers are actually strategically situated to defend themselves because they largely enjoy collective bargaining rights.
Air transport remains the most unionized workforce in the nation, pegged at 46 percent by the Bureau of Labor Statistics. But the biggest holdout was always Atlanta-based Delta Air Lines. Management long cultivated its patriarchal "Daddy Delta" reputation for Southern charm and individual consideration as the best antidote to unionization. It was quite successful over the years, with pilots the only large unionized group.
But now, there are a series of extremely important union representation elections currently taking place at Delta. These are quite large, even by Railway Labor Act standards, where a company's total national workforce in the "class and craft" is entitled to vote. The Association of Flight Attendants (AFA) is vying for 20,000 Delta flight attendants while the International Association of Machinists (IAM) is seeking to win over in three separate elections, 14,000 ground workers, 16,000 customer service agents and another 700 stock and store clerks.
Most of these 50,000 workers are already voting. Elections were triggered by the 2008 merger of largely non-union Delta with the union carrier Northwest Airlines. Results from the various elections will be announced from November 3 through the first week of December.
An IAM Local Lodge 1781 Tradewinds editorial appeals to Delta workers in its upcoming fall issue:
It takes a united workforce, all of us collectively bargaining to get our points across to management and to negotiate a legally binding contract. Despite our widely different opinions on things that normally distinguish us as separate individuals, we really do share common goals of achieving a decent living and dignity on the job. Vote IAM at Delta!
The stakes are very high. If a majority opts for no union, the carrier not only remains the largest non-union airline, but IAM and AFA workers integrated into Delta from the former unionized Northwest Airlines will immediately lose all their inherited contract rights and benefits.
If successful, however, new members of the IAM and AFA will exchange the nebulous "Daddy Delta" culture for a set of legally binding labor protections. Perhaps service cuts that normally accompany downsizing of a merged airline will be successfully averted.
Clearly, a workforce with collective bargaining rights is in a stronger position to reverse past concessionary bargaining and to counter any future adverse affects of consolidations.
Employees and passengers often do not recognize that together they share common goals of promoting a viable and successful transportation system with fair pricing and reasonable working conditions. It is extremely important for both to support their mutual interests.