Two can play the airline bankruptcy game

Over the past decade, major airlines have figured out how to use the bankruptcy code to accomplish what they have never been able to at the bargaining table: reduce wages and benefits to “market” levels.

Back in the days when fares and routes were regulated by the government and compensation was effectively set in an industry-wide pattern, there wasn’t much incentive for airlines to resist above-market wages, gold-plated benefits and inflexible work rules. And even after the industry was deregulated and the major carriers faced competition from lower-cost, non-union upstarts, the threat of a crippling strike gave the airline unions the upper hand in contract negotiations.

Bankruptcy has changed all that. Suddenly, airline executives discovered a way to unilaterally abrogate their labor agreements, fire thousands of employees and impose less generous pay and more flexible work rules. Indeed, the technique proved so effective that several airlines went through the process several times. The unions’ strike threat was effectively neutralized.

All of which makes what is happening at American Airlines deliciously ironic. Late last year, American finally decided to join the rest of the industry and make its first pass through the bankruptcy reorganization process after failing to reach agreement on a new concessionary contract with its pilots’ union.

The company hoped to win speedy court approval for a plan to eliminate 13,000 positions, reducing benefits to current employees and retirees and reforming work rules that have made American’s productivity the lowest in the industry. Instead, the unions did an end run and struck new labor agreements with US Airways, which will use it as the basis for launching a bid to buy its larger rival out of bankruptcy.

If the gambit succeeds, the unions will not only wind up with more jobs and higher pay than American was offering, but also the satisfaction of seeing American’s top executives tossed out on the street.

It’s taken the American unions — particularly the pilots unions — far too long to acknowledge how far out of whack their compensation had become compared with the rest of the labor market. This is still an industry, after all, in which senior pilots work the equivalent of 12 to 15 days a month while earning pay and benefits valued at $200,000 to $250,000. The rules governing compensation and scheduling remain so arcane that two Northwest Airlines pilots recently flew their plane 45 minutes past their destination in Minneapolis because they were so engrossed in trying to game the system to get the flight assignments they desired. Even today, seven years after the merger of America West into US Airways, the two pilots unions are still in court fighting over how to merge their seniority lists.

All of which makes the pilots union deal with US Airways so significant. Essentially, US Airways agreed to pay all of its pilots — the American pilots as well as its own — the higher American Airlines wages, along with small annual raises. In return, the union accepted less lavish medical and retirement benefits along with adoption of US Airways work rules that have been rationalized during two trips through the bankruptcy process. In the end, what probably sealed the deal was the US Airways promise of no layoffs.