What a spectacle for the Labor Day Weekend. Frontier Airlines is filing for bankruptcy because United Airlines and its pilots union could not agree on how Frontier pilots should be paid after United's now-canceled acquisition of Frontier.
The apparent issues are bizarre: United wanted to bring Frontier's pay scale up to its own pilots' level--an almost 70% increase--over a five-year period, while the UAL unit of the Air Line Pilots Assn. wanted Frontier's pilots brought to parity over 18 months. That is, one side was offering pay increases of almost 14% a year and the other side was demanding a rise of more than 40% a year--when average wages in the economy are rising 2.5% a year.
As you might expect from such foolishness, the real issue lies elsewhere. The Frontier pilots--indeed the Frontier company, which is owned by People Express--are only pawns in a struggle between United's management and the union over the two-tier wage agreement reached at United after a 29-day strike last year. The union accuses management of trying to sneak in a new lower-pay category for pilots; management accuses the union of trying to destroy the agreement that allows United to put incoming employees on a lower pay schedule than current employees--a cost-reduction technique originated by American Airlines that has become common in the industry since 1983.
And, as you might also expect, United and the pilots union are also pawns in the continuing process of airline industry deregulation.
The wisdom of deregulation is still debated eight years after it began. Some critics see it as a disruptive device to lower air fares. Others see it as a tactic for union-busters, such as Texas Air Corp. Chairman Francisco A. Lorenzo, who put Continental Airlines into Chapter 11 bankruptcy in 1983 in order to break the airline's labor agreements. Perhaps, suggest the critics, we should try to reverse deregulation.
You may as well try to reverse the ocean. Deregulation is both a cause and a consequence of the reaction in the 1980s to the inflation of the 1970s. It is thus part of the major trend of this decade, which is to dismantle rigid and rising wage and cost structures in all of our industries--those that face foreign competition, such as automobiles and steel, and those that know no foreign competition, such as medicine and broadcasting--and airlines.
Why is it happening? Because we need to engender growth of productivity after a decade in which U.S. productivity growth lagged that of every major nation. Productivity--output per unit of work--is not some dry statistic but the measure of how efficiently a society uses its resources. The more productivity in a society, the more there is to go around. Getting more output for less pay is a pretty fair way of improving productivity.
Changed Pay Structure
But labor unions, as the organizations that won for employees the fixed and rising wage levels of other decades, are suffering the greatest reverses in this one.
At Continental, Frank Lorenzo has changed the pay structure so that up to 15% of the pay of every employee, from pilot to reservation clerk, is based on performance. Lorenzo's Texas Air, where labor costs now run 20% of revenue, is in the process of acquiring Eastern Airlines, where labor costs run 37% of revenue. The pay outlook at Eastern is obvious.
But, let us not forget, it wasn't Lorenzo who started the competitive shakeout of deregulation. The man who did that is Donald C. Burr, chairman of People Express, who also changed the way people were paid. Instead of salary, he gave them stock in the company. People's labor costs then were half those of other airlines, and Burr forced the giants, such as American and United, to change their pay schedules.
Yes, but People Express is now threatened by the fierce competition it unleashed, and employees' stock is worth less each day. So what have we reaped?
Plenty. The airline industry has double the number of passengers today--410 million anticipated this year--that it had 10 years ago. And they are being served by 15% more employees. So more people are flying at lower cost. That sounds productive.
And the labor unions, whose contributions we celebrate this weekend, have they a place in this new age?
For the answer, a little perspective. Unions were at their most vital in the previous great disinflationary period--the 1930s. It wasn't so much that they won an extra buck an hour back then as that they gained for employees the right to bargain with their employers--as in Flint, Mich., in 1937, when the United Auto Workers occupied a factory to force the chairman of General Motors to listen to his employees.
The manager-employee relationship in the new age is different. Ideally it is one of greater mutual respect and better pay for improving performance. The labor union that adapts to this new circumstance, helping employees to improve output, and pay, while ensuring fairness in the performance reviews will have a place. But the union that thinks the new pay structures are a passing phase, to be resisted against the old days' return, is likely to have no more future than Frontier Airlines.