FLYING INTO TROUBLE

By S.C. GWYNNE/FORT WORTH

What happened last Friday night might be termed, in the jargon of the ever precarious airline business, a near miss. A showdown strike by American Airlines pilots was avoided only by the dramatic intervention of someone who doesn't fly commercial, the President of the U.S. Bill Clinton, apparently not at all eager to see billions of dollars drained from the prospering U.S. economy, used a provision of the Railway Labor Act (which governs organized labor in the airline industry) to impose a 60-day cooling-off period.

But this is one industry, and one company, that glows white hot with anger between its labor and management. United, Northwest, USAir, TWA and Continental are lined up with labor negotiations like so many jets waiting to take off from O'Hare. Does this mean a year of strikes? Not necessarily, but the situation at American is a sort of wind sock for the industry.

The main problem with airlines is prosperity. The carriers find themselves flush with cash, a condition they rather like. The profits are rolling in now because of a gritty, singleminded and profoundly painful campaign of cost cutting over the past five years, in which airlines have done everything from "outsourcing" (i.e., contracting out to other firms) plane cleaning and baggage handling, to whacking travel agents' commissions, to laying off ticket agents, middle managers and mechanics, to shrinking passenger seats and eliminating meals.

AMR Corp., the parent company of American, has been a champion at it, having shaved more than $1 billion in costs. USAir knocked back 10% of its flights. Delta laid off a large percentage of its work force. Northwest decided to retrofit old aircraft instead of buying new ones. The majors stopped, for the most part, their suicidal price-cutting wars. They curtailed their wildly optimistic purchases of new aircraft that had led them into such trouble in the 1980s. They shut down unprofitable routes, leaving many cities to the commuters.

The airlines also asked for--and got--huge concessions from their employees to help them through hard times. But after all that effort, and just when they should be reaching that nice, cushiony air at 31,000 ft. or so, the industry is running smack into turbulence in the form of employees who are insisting on a share of the good fortune. The employees are also determined to protect themselves, as American's pilots are, from outsourcing and other forms of cost management. The result is escalating tension in an industry not known for touchy-feely labor relations to begin with.

American's 9,300 pilots are perfectly willing to ground themselves and the nation's largest carrier, taking with them its 90,000 employees. Their anger is directed at one employee in particular, Robert Crandall, chairman of AMR. "As long as you treat your employees as merely 'units costs,' like the Styrofoam coffee cups we throw out after every flight, morale will remain at rock bottom," wrote one pilot on the very active Website of the Allied Pilots' Association, which represents American's pilots.

Of all the unions with which the company must deal, none carries anywhere near the clout of the flyboys and -girls, a highly trained, highly paid and highly agitated bunch who have always seen themselves on a par with management, with one exception: pilots cannot be replaced quickly or easily. The pilots' union badly bloodied United Airlines in a strike in 1985, and pilots hammered the final nail in Eastern Airlines' corporate coffin in a strike in 1989. The majority of American's pilots served in the military, and many seem to relish the notion of a dogfight with their famously pugnacious boss. "A lot of these guys have been in combat," says strike chairman Matthew Field of the APA. "If he wants combat, we'll give him combat."

Crandall is the kind of blunt corporate instrument who is used to this sort of stuff. He has frequently antagonized the pilots over the years and once even mocked a pilot-commissioned study of the company, saying, "If the pilots were in charge, Columbus would still be in port." But he may also have misread apa's intent. Crandall thought he had a deal last fall, but a hard-line union contingent, working through the Internet, mobilized membership to reject a contract offer blessed by the union's executive committee.

What deep grievances brought the pilots to the verge of such an extreme act? Though outsiders had trouble understanding how a group with an average pay package of $120,000 a year and a stratospheric wage of $100 to $166 an hour could possibly demand more, the pilots' wages have in fact been frozen for nearly four years. They also believe the company should be in a more generous mode, given AMR's $852 million in profits in 1996.

More than money, however, the pilots are upset at what they maintain is AMR's continuing attempt to shift jobs to its lower-cost commuter airlines. At issue is AMR's stated intention to acquire new 50-seat jets to replace existing turboprops on commuter routes flown by its American Eagle subsidiary. Eagle pilots earn one-third the salary of their American counterparts.

The American pilots believe the so-called regional jets will really be used to fly longer routes that would normally be flown by American Airlines pilots and that the Eagle pilots, who are represented by another union, the Air Line Pilots Association (ALPA), will continue their encroachment on APA's turf. "The term regional jet is a misnomer," says Captain Rich Rubin, 47, who pilots a wide-body 767 on long-haul routes out of Miami. "It is a long-range, high-performance jet that flies at Mach .81 at 40,000 ft., like a 767. It will deprive us of our routes, and it will replace MD80s and F-100s [existing 100-seat-plus jets]. With this jet, Pocatello, Idaho, to Dallas becomes a profitable route."

American doesn't quite see that as a problem and contends it can't afford to let APA members fly the regional jets. Says American Airlines spokesman Chris Chiames: "We would be at such a disadvantage, we could not compete. The trend in the industry is to move to the regional jet, but this jet is not flown by the majors." The small jets are now flown by the likes of Comair, Delta's commuter affiliate, and Northwest Airlink, both of which have pay scales like American Eagle's.

The growing labor rift at United, which had record sales of $16.4 billion last year, is in some ways even more serious than the one at American. Both United and American pilots overwhelmingly rejected tentative agreements with management in January. United's mechanics did likewise.

The difference at United, the nation's second largest airline, is that its employees (not including flight attendants) happen to own the company, and the rising bitterness among its pilots and machinists threatens the entire premise of employee ownership. In 1994 United employees completed a purchase of 55% of the company. In exchange for their ownership stake, they made concessions totaling $4.8 billion. (Pilots as a group own 25% of the company.) They also gave up their right to strike. Yet United's pilots, embittered by what they feel was harsh and callous treatment of them by their management during labor talks, can in some sense create even more trouble. "We are owners, and we have serious clout," says Captain Kevin Dohm, a 737 pilot from Chicago. "If need be, we will force the issue and start getting rid of management." That would include Gerald Greenwald, the man the union picked to run the company.

In the meantime, United must worry about its 20,000-strong Association of Flight Attendants, which opted out of the employee-ownership plan and thus can strike. The union and the company are mired in negotiations that, according to union spokeswoman Jill Gallagher, are "not going well at all." The union is already conducting "informational picketing" at selected sites.

Northwest Airlines is another labor trouble spot, with six unions currently in negotiations. Like United, Northwest gave its employees ownership of one-third of the company in exchange for 15% across-the-board pay cuts for three years. All parties are paying close attention to what happens at American. "The airline industry is a copycat industry," says Paul Omodt of ALPA in Minneapolis, Minnesota, which represents Northwest pilots. "What happens at one airline happens at another. There's not a lot of original thought." Labor negotiations are also due to begin at Continental and TWA.

As these various airlines pursue their ever more difficult contracts, what drives almost every move they make is a manic, singleminded desire to push costs down. Executives vividly remember the period from 1990 through 1994, when U.S. airlines lost $13 billion--more than the entire industry had made in its history,

It's also because, despite the full planes and record profits, the industry is still burdened with a large amount of debt and faces big capital outlays for new equipment. The U.S. has the oldest fleet in the developed world. Nor is the threat from discount carriers over. Although the ValuJet crash took with it the public's confidence in upstart airlines, the barrier to entry is still relatively low. Capital, pilots, planes and entire outsourced airline service industries are readily available.

The response of companies such as Delta to this challenge defines the predicament of the large carriers today. Delta, after four years of losses totaling $2 billion, lopped off more than 10,000 employees and $1.6 billion in costs. The airline, once a paragon of service, paid a steep price for such bloodletting: it plunged to last in on-time arrivals and lost thousands of bags. Passenger complaints rose to record levels. Delta had attempted to drive down its cost from 9.26[cents] per "available seat" mile to 7.5[cents] per mile, a goal it has not yet attained. The company recently admitted that it had gone too far in cutting back passenger service and vowed to make amends.

Labor remains the single largest controllable cost for an airline. And while the labor situation seems to wax touchier and more problematic each day, airlines are also turning to more empirical ways to save money. These include setting up ticket "distribution channels" that bypass travel agents. By selling directly to consumers, they avoid commissions. Many have implemented ticketless travel, and some are offering discounted weekend and other specialty fares on the Internet.

All this cost cutting has accompanied one other remarkable change in the way airlines do business. The mid-1990s have seen the major carriers, in effect, stop picking one another's pockets. Where once they seemed to have a policy of infinite expansion into competitors' territories, now they view wholesale expansion as too dangerous. The last carrier to seriously invade another's main hub was a Continental operation called Continental Lite, which attempted to win market share in major Eastern markets. Continental Lite sank in 1995, losing $300 million. Since then the hub-and-spoke carriers have retreated to their fortresses while beefing up their commuter-feeder operations. Northwest dropped Washington's National Airport to concentrate on Detroit and Minneapolis, where it had 78% and 84% of the market respectively by late last year. American dropped Raleigh-Durham, North Carolina; San Jose, California; and Nashville, Tennessee, in order to bolster Miami and Dallas; Continental ditched Denver.

While all this may be, as analysts have suggested, a sign of maturity in the industry, passengers may be forgiven if they see absolutely nothing here that resembles good news for them. Without a doubt, consumers benefited from the cheaper airfares that followed in the decade after deregulation. In a period of expanding capacity, letting the market set the fares is a great idea. But now the pendulum is swinging in the sellers' direction. The airlines' widely touted "price discipline," for example, translates roughly to a 27% increase in the average price of a ticket in the past two years.

Demands such as those made by American's pilots and other groups--who gave up wages and benefits in the past--can only put upward pressure on prices. And with companies such as USAir and TWA struggling mightily to maintain altitude, a big merger is possible, which would invariably reduce price competition. The net effect, everywhere you turn, is that fares are up and service is way down--and the prospects aren't good for much improvement in the future.