It has been six years since American and US Airways merged, and there is now finally a joint contract on the table for the new American’s mechanics and fleet service agents. Those are the groups represented by the joint TWU-IAM Association, and they’ve been locked in a heated battle with the company that led to massive operational disruption this past summer. I’ve followed this negotiation closely, and I didn’t think they’d come to an agreement any time soon. I was wrong.
Now the unions have to get the full details to membership and have them vote on the deal, and that means the burden is on leadership to disseminate all the information. For that reason, we know that there are huge gains here for the front line. What we don’t know is what the company actually gains beyond just having this behind them. It looks like a very rich contract from the information the unions are putting out, and that makes me wonder if we’re just back in the same old cycle of pattern bargaining that has ended poorly in the past.
In short, these employees will benefit from cherry-picking the best of other airline contracts that are active today. Fleet service will get Delta pay while mechanics will get Southwest pay. They’ll all get Delta profit-sharing, and they get big scope protections that seem to out-pace everyone else. It’s a big win. But that doesn’t mean that they didn’t have to give up something. I point to the negotiations update the union issued back in December pointing out some of the biggest points of contention. Let’s go through those to see how they were resolved.
All the Moneys, Including Profits
On the wage side, it looks like the unions settled on matching the industry-leading pay that Delta has for fleet service and Southwest has for mechanics. That last update made it sound like the unions wanted more, but with the total package, they agreed to settle for a match.
The unions also had some pretty nasty words about American’s proposed signing bonus in that last update. “Company Negotiators have flat out insulted our members with their demand for a zero retro payout and have offered a ‘bonus’.” That tune changed quickly, because that’s exactly what’s in the new contract. Fleet service gets a flat $3,000 and mechanics get a flat $6,000.
Not mentioned in the union update but something that will be of great interest is American’s shift on profit-sharing. These groups will get their fair share of 10 percent of profits up to $2.5 billion per year and then 20 percent above that. This goes against everything American has said it wanted to do for years, but Delta’s continued goodwill in recent years means American had little choice. You can assume that all other workgroups will have this baked in for future contracts. The front line also gets fantastic retirement benefits with five percent of salary paid by the company plus another four percent match.
In the end, it sounds like the unions backed off of some of the most aggressive demands on pay, but they’ve done quite well for themselves overall.
The Problem of Scope
In the December update, the wording was vague about just what the sticking point was on scope, but as I’ve written before, this was a huge problem. So how did it get resolved? Well, in a few different ways. I’ll focus on the mechanics here to avoid getting even more long-winded than this already is.
For base maintenance, the heavy work done when airplanes are out of regular service, the unions were able to extract some headcount guarantees that weren’t there before. There will be 2,600 guaranteed jobs for people who work on the airplanes. As it was explained to me by Gary Peterson at the TWU, there are other guarantees around other parts of the organization (components, engines, etc) that will effectively make the current staffing levels a new floor. The math on this isn’t entirely clear to me, but management seems pretty happy as well. So somebody is probably doing the math wrong.
On the line maintenance side (the stuff done while an airplane is in scheduled service), you’ll remember that the issue was around off-shoring. As the union explains it, the company has given in on several points where it wouldn’t budge previously.
First, there is a ban on allowing anyone outside the TWU-IAM workforce to work on any airplane domestically unless it’s an emergency in a place where American has no mechanics and another airline/provider can fix the problem and get the airplane back into service. The restrictions say that this can only happen if they have the workers and the parts there. If anything needs to be flown in, then the American mechanics will fly in too and do the work. Also, this only is allowed if it’s something that prevents the airplane from flying its scheduled flight. If it’s just a broken coffee pot, too bad. It has to come back to somewhere that American employees can work on it.
Then we get to how much of this work can be done off shore. If you recall, previously the unions wanted to cap the amount of work that could be sent off shore at 7 percent while the company wanted it to be at 12 percent. In the end, they settled on 11 percent going up to 12 percent three years after signing. So didn’t the company win this battle? Nope.
As Gary explained it, the way that percentage is calculated is quite different than it was originally envisioned. In effect, the company will look back once a year to see how many full-time mechanic equivalents were employed by the company. Then (for the first three years), 11 percent of that number can be used to work on airplanes outside the US.
In a previous way of looking at it, the company could just count up the number of paid hours worked. If employees worked overtime, that counted as 1.5 or 2 hours for each actual hour worked. With those numbers going high quickly, it created more of a canopy for offshore workers to build up hours. But with this new way of counting as full-time equivalents, the unions have done very well for themselves. Though I can’t verify the math myself without more detail, Gary seemed confident that with this new way of measuring, the union will actually restrict more offshoring than under the previous proposal.
The old US Airways IAM group had cadillac medical plans. The assumption was that there was no way the company was going to allow that to continue. This wasn’t addressed in the last negotiations update, but the unions did better than I thought. The IAM will be able to keep their plans with some being phased out in five years. This is better than I imagine any rational person thought possible. At the same time, TWU members might grumble about this since they still can’t join the legacy IAM plans.
The unions were full of bluster regarding the vacation proposals, saying “we are so significantly apart on Vacation that every member should be disgusted with how American views us compared to Management.” In short, management gets a fifth week of vacation at the 17th year of service, but the union folk wouldn’t get that until the 25th year. In the end, the company gave it to them at the 17th year.
The Payroll System
If there’s anything the front line will grumble about most, it’s probably the shift in the payroll system timing. American wants everyone to get on the same payroll system as the rest of the company and that means paying in arrears instead of advance. That’s a timing issue, and it is something that the unions gave in on. But if that’s the biggest give, then geez, they’ve done well for themselves.
You can read the summary from the Association here. What it looks like to me is that the unions were able to extract big gains in scope and pay, even if they had aggressively tried to go even higher in previous proposals. They did come down from some of those lofty demands, but the end result is a pretty big win.
From the company’s side, it’s hard to know exactly what has been gained. The company knows that it is better off just sitting on the side and letting the unions work through the process. For that reason, we’ll publicly only see the gains being made by the unions, because that’s what they want to highlight. Presumably there are some gains in productivity and efficiency for the company beyond even just being able to merge the two workforces into one, but until the full contract language is out, it’s hard to know exactly what that is.
From where I sit, it looks like the unions have done very well for themselves. What they gave in on was either relatively minor (the payroll system) or unrealistic (wages well above the current industry leaders). If this was a deal that was actually on the table previously, then it’s incredible that the union wouldn’t pounce on it to send to membership. That’s why my assumption is that management bent more toward the end to get a deal done. Having a deal is really important. It puts a little wind in the sails of a company that’s been wandering around the doldrums for some time. It also clears the deck to focus on pilot and flight attendant negotiations which are poised to be pretty nasty.
Where I get stuck is in what I’ll never know. Could this deal not have been done before the mechanics wreaked havoc on the operation this summer? If this was really out there that early and the unions wouldn’t send to membership, shame on them. But if the company only recently came to this point, then it’s mind-boggling why it would suffer through the pain of the summer only to end up in this place in the end.
From American’s perspective, it seems pretty happy publicly. This is the statement I was given.
This tentative agreement gives our world-class mechanics and fleet service team the best contract in the business while allowing American to remain competitive. We’re glad the Association has endorsed it.
But this is going to be expensive for American, even though that in itself isn’t a surprise. The bigger question is in what this means for future negotiations. It feels like the industry hasn’t really learned. It ends up agreeing to expensive contracts that won’t be sustainable when the economy turns down. I know that CEO Doug Parker believes it’s a different industry, but until we go through a downturn without massive givebacks, I won’t believe it. The way things are going, we may learn soon enough.
After reading this my first thought was that AA will ramp up their in-flight credit card pitches along with reducing seat pitch to 20″ and adding 6 more rows into their planes. And who knows what else they will now make us pay for to “enhance the customer experience”. Thank God I have moved most of my flying to Delta.
This JCBA was supposed to bring both pre-merger workforces together. Instead, it only reinforces the fractures. I’m not sure that’s a victory.
American continues to lock in its ludicrously high levels of staffing compared to competitor airlines. They’ll need to grow a lot over the next 10 years to increase their revenue and amortize those huge fixed costs. There’s no other option – either grow, or get suffocated and snuffed out by other airlines with much lower cost structure.
Not confident in their ability to pull it off.
As usual, the devil’s in the details. I may be showing my lack of knowledge, but it seems to me that pattern bargaining is going to be less of a drag on earnings that it was in the past because the airline industry is much more consolidated. The other thing to keep in mind is that the other large carriers’ unions are going to want to emulate the better provisions of American’s new contract, just as American has followed Delta’s lead on the issue of profit sharing. There may be some drag on earnings in the short term, but in the long run, these things will tend to even out. Once a new deal is approved, American’s investor update should include an estimated impact on its costs, and we’ll have a better idea of its impact. American’s board may be willing to live with lower margins than other carriers because it wants to keep more Americans employed here instead of sending money to other countries. That’s its prerogative.
While it’s true we haven’t had a major recession for quite a while, it’s also true that this economy has grown more slowly than in the past. It’s not the old “boom and bust” cycle (i.e., the “dot.com” and “housing” bubbles) that was so damaging in the past. This expansion seems to be based on better overall fundamentals, although there’s always an element of risk. It’s safe to say there will be a recession. The questions are how deep it’ll be, and how long it’ll last.
One thing that comes to my mind is the provisions surrounding the medical plans. Health care in this country consumes about 18% of our GDP, compared to an average of about 11% in other industrialized countries. That’s a real drag on American business overall. I’m guessing (and only guessing) that most new hires are going to come in under the TWU umbrella, so the IAM plan will probably be phased out by attrition. I also don’t know how much of American’s health care is self-insured.
Just some random thoughts. Again, I could be showing my ignorance. If someone has more in-depth knowledge, I’ll be interested to see it. Thanks.
Brett has been predicting a recession ever since the 2016 election. He’ll get it right one of these days.
Brett’s comments “It feels like the industry hasn’t really learned. It ends up agreeing to expensive contracts that won’t be sustainable when the economy turns down.” sure seem prescient
The profit sharing clauses are meaningless. AA isn’t generating anywhere close to sufficient profits now; once all of the labor groups demand and get the kinds of gains the TWU-IAM got, there will be no profits, as in down from industry lowest level of profits today.
Pilots & Flight Attendents are going to be jelly.
The both are in talks now (or will be soon), correct?
Yeah, and you can be sure they are watching this very closely
It looks like American lost on almost every key point. Given Delta is starting to move in on MIA and they’re already the least profitable of the legacies, they may end up getting acquired within a decade. Doug Parker needs to get fired after the way he’s run them the past few years. I’m not sure how he still has a job.
> they may end up getting acquired within a decade
By whom? They’re the largest airline in the world by passengers, passenger miles, fleet size and in the top 3 for revenue and routes.
I’m not their biggest fan, but acquisition seems pretty unlikely.
It should be pointed out that the contract is not set in writing yet. Members only see “bullet points” who knows what the final document will say?