As the airline industry staggers into 2005, there’s only one way to describe its condition: gravely sick, and getting sicker.
In the scary scenario envisioned by BTC, as much as 70 percent of airline capacity could be operating under bankruptcy court protection by year’s end.
"It’s hard to imagine the situation being any more awful," says Wayne Cascio, a professor of management at the University of Colorado at Denver. There’s no more time for Band-Aid solutions, he says. "The industry desperately needs a whole new mindset."
The traditional airlines’ perilous predicament has been caused, to a large degree, by economic and technological changes far beyond the scope of anything human resources policies can influence directly. Yet if the airlines are to make a turnaround, experts say, changes in their human resources strategies and practices are crucial.
While the airlines continue to cut jobs and reduce compensation and benefits, experts says that they’re reaching the point of diminishing returns with such austerity, and must turn to improving productivity and increasing revenue to regain their health.
For human resources, the most important part may be a struggle to revamp job classifications and work rules to enable traditional airlines to emulate the efficiency of low-cost carriers. But achieving these significant changes means winning the cooperation of workers who too often are scared, angry and distrustful.
Part of the crisis, part of the solution
Though it’s easy to blame the airline industry’s woes on the lingering impact of the September 11 terrorist hijackings, which caused a drastic drop in air travel, the real causes are deeper and more pervasive.
Peter P. Belobaba, a research scientist for the Global Airline Industry Program at the Massachusetts Institute of Technology, concluded in a recent conference presentation that traditional airlines’ ability to generate revenue has "virtually disintegrated," mostly because of a marketplace altered by airline deregulation and the Internet.Business passengers are no longer willing to pay five to eight times the lowest available fare when they can easily shop for the cheapest ticket from their desks. The traditional airlines fly to many destinations via a hub-and-spoke system that offers a large number of locations and services for customers but is far less cost-efficient than the low-cost carriers’ model of flying to a limited number of popular locales. According to an analysis by the consulting firm of Booz Allen Hamilton, low-cost carriers spend seven to eight cents per seat per mile over a 500- to 600-mile trip, about half the expense that traditional carriers must bear.
Finally, Belobaba notes, cutbacks made by money-strapped traditional carriers have eroded the differences in service quality between them and low-cost carriers. And while a 40 percent increase in jet fuel costs in 2004 hurt all carriers, the ones already struggling financially were least prepared to absorb the blow.
But the airlines’ woes have been exacerbated by human resources’ difficulties in adjusting to and mitigating the stresses of change. Steven Appelbaum, a management professor at the John Molson School of Business at Concordia University in Montreal, and researcher Brenda Fewster audited human resources practices at 13 airlines in the United States and other countries.
In a 2003 paper, they concluded that "with the exception of a few high-performing airlines, the industry as a whole continues to function as a traditional, top-down, division-oriented, industrial model."
The traditional airlines have been relying on labor concessions and austerity to stanch their losses, but those measures have taken their toll. The troubled major carriers have reached the point where just making more wage and benefit cuts may not be enough to save them, Cascio says.
"You’re reaching the point of diminishing returns when you’re not only cutting wages but taking away people’s pensions as well," he says. "That’s when you start to see a backlash against the company."
In addition to the massive layoffs of recent years, cuts in salary and benefits and seemingly perpetual uncertainty have done long-term damage to companies by driving thousands of veteran airline workers out of the industry altogether.
"It's hard to imagine the situation
Within a week of the September 11 attacks, United and American airlines announced they would each eliminate 20,000 jobs, and US Airways cut another 11,000. Since then, layoffs have continued, though at a slower pace. In October, for example, US Airways announced that it would lay off 10 percent of its 3,700 salaried and nonunion workers in an attempt to trim $45 million from its $200 million management payroll.
In Charlotte, North Carolina, a former US Airways customer service agent is now building koi ponds for a living. In McLean, Virginia, two former Delta pilots run a home remodeling business, building rear decks and finishing basements. In New York City, a former United Airlines ramp worker is now a hospital receptionist.
The jobs they leave often seem to be going unfilled. Avjobs.com, an employment posting site utilized by most of the major airlines and related employers, listed about 1,800 openings in a recent 90-day period.
That’s a minuscule number of opportunities for a massive industry that employs about half a million workers in the United States. It barely begins to make up for the 110,000 airline jobs lost since 2000, when the business was at its peak.
While airlines presumably can hire younger, less-expensive workers to fill jobs if and when the need arises, the loss of skills and experience at various levels of their organizations isn’t going to help them run more efficiently.
Because of the erosion of wages and benefits, Cascio says that in the future airlines may have a problem that’s unprecedented in their history.
"For years, once you got a job with an airline, you stayed there for life," he says. "The seniority and the benefits were golden handcuffs. But if you take away those things, you take away the incentive to stick with a particular airline."
Ultimately, he warns, airlines may find their skilled, specialized workforces the target of recruiting raids by competitors. That may drive up airlines’ training and development costs and wreak havoc on efficiency.
What airlines can do
Industry experts say that if the traditional airlines are going to rebound, they have to do it through improved productivity rather than wage cuts. Southwest Airlines pilots typically earn 50 percent more than the $96,000-a-year industry median cited by Salary.com. But they also fly more hours per month, and the airline comes out ahead in the end, according to the Boston Globe.
Jody Hoffer Gittell, an assistant professor of management at Brandeis University and author of The Southwest Airlines Way: Using the Power of Relationships to Achieve High Performance, says Southwest doesn’t really think of labor as an expense. Instead, she says the airline sees its workforce as a source of information and expertise that helps lower expenses, and believes that value stems from the collaborative efforts it strives to foster.
"It’s these strong working relationships--or relational coordination--that results in high quality and low costs, and that helps SWA achieve profitability year after year after year," she says.
Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School, thinks Southwest may have increasing trouble sustaining that efficiency as it moves into bigger markets and competes more directly with the traditional carriers.
"They’ve been successful up to this point in large part by staying out of everyone’s way," he says. But Cappelli agrees that cutting wages isn’t the answer for the old airlines. "Basically, between wage cuts and fare cuts, they’re in a race to the bottom," he says.
In an article on the Booz Allen Hamilton Web site, analysts Tom Hansson, Jürgen Ringbeck and Markus Franke argue that to compete with low-cost carriers, traditional airlines should reorganize their operations and redeploy their workforces using the concept of "tailored business streams."
Using one process that’s sophisticated enough to deal with many types of customers is costly and inefficient, they say. Instead, airlines should simplify and automate the passenger-handling process for the bulk of their customers--"industrializing" it, in the analysts’ words--to reduce the number of worker interactions and to get people in and out of airports more quickly. Employees instead would spend more time dealing with the minority of customers with more complex trips or need for services so that they don’t slow down the entire system.
The low-cost airlines also benefit from flexible work rules that allow workers in one specialty to be cross-trained to perform other tasks. Pilots can help with baggage if necessary; flight attendants can clean aircraft. The time saved can help aircraft get in and out of the gate more quickly, reducing airlines’ costs.
"Work rules are the key thing in my mind that’s going to help some of these carriers," says Steve Hendrickson, senior partner at Sabre Holdings Corp.’s airline consulting division.
After Air Canada was forced to file bankruptcy in 2003, for example, the financially strapped airline was able to cut its maintenance costs by nearly a third through work rule changes, according to an analysis in the trade publication Airline Business. The airline renegotiated its labor agreements, reducing the number of job classifications from more than 900 to just 11.
That allowed workers to perform a wider variety of tasks when needed. Workers also agreed to allow the company more flexibility in scheduling overtime at periods of high demand. The result was a substantial increase in productivity. Mechanics went from performing maintenance during only 45 percent of their paid hours to spending 77 percent of the time working productively.
But with employee discontent already at the boiling point at many airlines, implementing such changes won’t be easy.
American Airlines, which has 80,000 employees and is the world’s biggest airline, brought in a third party to help mend fences with labor, launched a movement to disclose all financial matters to unions and began encouraging workers to submit their ideas to make the airline more efficient.
Continental Airlines, which is struggling to cut expenses by $500 million, sought savings in its field services operations, which include ticketing, gate and ramp operations, and cargo. Rather than simply dictating cuts, management met with employees and sought their suggestions on how to streamline procedures to make those operations more efficient.
As a result, while Continental still had to trim its personnel costs by $99 million, the reductions in workers’ hourly compensation and benefits were less than they might have been.
"In many cases, our agents identified solutions that preserved benefits that were important to them and their co-workers," Bill Meehan, Continental’s senior vice president of airport services, says in a press release. Similarly, American Airlines, at the suggestion of its pilots, has experimented with keeping them on the same aircraft throughout the day as a timesaving measure, rather than having them switch planes.
Last month, daily headlines spoke of new contracts and tentative agreements to deal with looming troubles with labor and bankruptcy courts. They heralded stories about Alaska Airlines’ consideration of outsourcing 500 baggage-handling jobs, of an agreement on cost cuts between United and its pilots union and of Delta’s $2.2 billion fourth-quarter loss, capping the industry’s worst financial performance ever.
But as the airline industry staggers into the new year, a question lingers: How much sacrifice are employees willing to make? No matter what course the old-line outfits take, they’ll have to engage their employees in new ways.
"What you need is for management and labor to be working together, not at each other’s throats, because that’s when everything starts to break down," Cascio says. "They shouldn’t be thinking about anything but survival."
Workforce Management, February 2005, p. 38-44 -- Subscribe Now!