NCPA - National Center for Policy Analysis

Airline Industry Death Spiral?

April 18, 2003

Wage concessions by American Airlines unions may save the company from bankruptcy, but may not save the overall industry from its long-term death spiral, say observers. The underlying problem is overcapacity and high fixed costs. The highest fixed costs are for labor. Wages rise precipitously in good times due to escalators in contracts with the monopoly unions representing workers.

The condition of the airlines isn't just a problem for employees or investors:

  • US Airways has already dumped its $1.7 billion pilot pension liability into the lap of the federal Pension Benefit Guaranty Corp.
  • The airlines collectively face unfunded pension liabilities of as much as $19 billion -- some of which taxpayers may end up funding.

American isn't the only airline to get wage concessions from unions. US Airways and United also negotiated union concessions -- in bankruptcy court -- and Delta, Northwest and others may follow.

The root problem, say observers, is the monopoly bargaining power of airline unions under the 1926 Railway Labor Act. Unions lack any incentive to bargain in good faith because they know a strike would put an airline out of business in a few days.

Sen. John McCain (R-Ariz.) proposed last year to reform the Railway Labor Act to allow "best-offer" binding arbitration, giving both labor and management an incentive to make fair wage offers that a panel of arbitrators would then choose between.

Source: Editorial, "The Airline Wage Escalator," Wall Street Journal, April 18, 2003.


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