Bitter, Deadly Dogfights

By John S. DeMott.

Airline deregulation leads to brutal struggles over union wage rates

To be big in the U.S. airline business was once a strength. Now it is a weakness. That is the conclusion many airline executives have reached after five years of bitter fare wars. Largely as a result of airline deregulation, which started in 1978, a two-tiered industry has come into existence. On the one hand are the old, giant, heavily unionized trunk carriers with high, fixed labor costs. Examples: Continental, Eastern and TWA. On the other hand are the new, small, nonunionized carriers. Examples: People Express, Muse Air and New York Air.

Vast wage differences exist between old and new carriers. Pay for a pilot on a unionized airline is roughly twice that on a nonunionized one ($85,000 vs. $45,000). The old carriers did not worry excessively about labor costs in the days of regulation because they could always pass along the higher union salaries in higher fares. But now, in an era of deregulation, an airline can set any price it wants, and the nonunionized carriers are offering inexpensive flights that are stealing business away from the unionized ones. Lately though, the older lines have been trying some unorthodox ways to cut wages.

On Sept. 24, Continental Air Lines Chairman Frank Lorenzo, 43, attempted to reduce wage costs by temporarily going out of business. Lorenzo's plan was to close down the ninth largest U.S. airline and reopen a smaller carrier with lower labor costs, along the lines of the newcomers. Lorenzo claimed that Continental had been unable to win enough voluntary wage concessions from its unions.

True to Lorenzo's aim, Continental was again flying last week. Within 54 hours of filing petitions for reorganization under bankruptcy laws in Houston, it had re-established service to 25 of the 78 cities it had served. It fired all 12,000 employees and then invited 4,000 back at barely half their former wages. Senior Continental pilots who used to average $83,000 a year could return, but at salaries of $43,000. Flight attendants who had worked their way up to $35,700 were cut back to $15,000. Senior mechanics saw their wages shrink from $33,280 to $20,800. Lorenzo also reduced his own salary from $267,000 to that of a senior captain, $43,000.

Continental employees were livid at the bankruptcy and pay offers. Said one worker, recalling the airline's past brushes with economic disaster: "A lot of people gave their hearts and souls here for years. Now there is nothing but broken hearts." Complained Senior Flight Attendant Pearl Kelly: "Lorenzo is pulling us around like puppets."

Some employees accepted the pay cuts because they felt there was no real choice. Said Flight Engineer Joseph Glavin: "They've got us between a rock and a hard place. You can quit and save your pride, or you can continue to work and hope for the best." Flight Attendant Jacki Vanderhock, 29, agreed to a 50% cut, from about $2,200 a month to $1,000. Said she: "I think we'll make it. At least if we agreed to work, we had a job and a future."

Union sources claimed that they had already offered deep concessions to Continental. Pilots, they said, had agreed to give up $60 million in wages, flight attendants $40 million. Said Pilot Paul Eckel: "Sure we have an inflated wage structure, but there's a right way and a wrong way to correct that."

Lorenzo defended his strategy, saying that the airline's union contracts were "vestiges of another era." He added that the bankruptcy maneuver would create for Continental the "opportunity to compete in a very challenging and potentially rewarding marketplace." Lorenzo called the airline the "New Continental" and said it aimed to be the biggest discounter in the air. One company insider said the motive was solely survival: "We didn't want it to bleed to death like Braniff," referring to that carrier's slide into bankruptcy in May 1982.

Stunned, angered and confused at first by Continental's unexpected shutdown, passengers by last week soon lined up ten deep at its ticket counters to grab "introductory" fares of $49 to fly anywhere nonstop on the airline's domestic system. At Terminal C of Houston's Intercontinental Airport, Bonnie Hash, 22, stood at the end of a line of 53 people, waiting to swap the return portion of a $425 round-trip ticket to Seattle for a $49 one. "It's inconvenient," said she, "but it's worth the wait." It is still not sure, though, that the flying public will stick with an airline surrounded by so much uncertainty.

Frontier Airlines, which also has financial troubles, reluctantly lowered its fares to match Continental's on competing routes. Said one Frontier official: "We simply cannot let Continental take business away from us at ridiculously low fares." United Airlines and American, however, did not follow suit.

Continental's pilots hit back late last week by striking the carrier. The pilots' strike could stop the New Continental from staying airborne, but there were signs that the airline might have enough pilots to keep flying despite the walkout. A Continental spokesman said only 350 pilots were needed to keep the down-scaled airline going. Declared Lorenzo after the pilots said they would strike: "Continental has more than enough pilots and flight attendants to sustain its operating level and increased service." He said that starting this week the airline actually would increase its domestic flights 20% by adding ten extra flights in eight major markets, restoring its schedule to what it was before the bankruptcy petition. In Continental's opinion, said an official, Bruce Hicks, pilots do not even have the legal right to strike because pre-strike provisions of the Railway Labor Act, which governs unionized airline employees, have not been exhausted.

Pilots for other carriers were so angry at the Continental bankruptcy and other effects of deregulation that they were threatening to stage a short, symbolic nationwide work stoppage. Said an official of the 40,000-member Air Line Pilots Association: "Deregulation is ripping the guts out of this industry, and no one would like to focus on that. But someone is going to have to."

Other unionized carriers looking for their own routes to survival are closely watching Continental's bankruptcy and reorganization. Former Astronaut Frank Borman, 55, chairman of Eastern Air Lines, which is $2 billion in debt and lost $94.4 million in the first half of this year alone, has already said he might follow Lorenzo. Two days after Continental's ploy, Borman told Eastern's 37,500 employees that if they do not accept pay cuts of at least 15%, the company will be forced to either shut down `a la Braniff or go into bankruptcy `a la Continental. Eastern, one of the most heavily unionized firms in the industry, claims its salaries average a staggering $47,000.

Borman has asked Eastern employees for wage concessions in the past, and they have delivered, giving up possibly more than employees of any other airline. It is unclear whether workers will come around again. Borman, say insiders, has become increasingly aloof and tightlipped, and resentment toward him is growing throughout East- ern. Said Al Hanson, a union spokesman at the airline: "This is a manufactured situation. It is time for Borman to exit; he's become totally noncredible." Borman has given his employees until Oct. 12 to agree to lower wages.

Other unionized carriers are looking at still other ways to reduce labor costs. Trans World Corp. last week was considering spinning off its money-losing TWA subsidiary so that the airline could face its problems alone. Western is offering one-fourth of the company's stock to employees in return for wage concessions.

One unresolved issue in the Continental case is whether the company could legally slash labor costs through bankruptcy, since its real intention was to cut its work force and get employees to accept lower salaries rather than simply to shield itself from creditors. A company filing bankruptcy has, in some circumstances, had to prove conclusively that it was in imminent danger of collapse to get out of its union contract obligations.

Using bankruptcy as a tool to escape from sticky situations has been tried before. In 1982 Manville filed for reorganization to protect itself from an estimated $2 billion worth of suits flowing from alleged health dangers of its asbestos products. The company today is thriving. The Supreme Court is now reviewing a case in which a New Jersey building-supply company declared bankruptcy to escape a labor agreement with the Teamsters. A lower court has already ruled in favor of the company, saying that the terms of the contract were "burdensome."

Lorenzo claims that Continental's wage rates were more than just burdensome. His high-cost airline simply could not compete with the low-cost carriers. An unforeseen consequence of deregulation had given the new, nonunion airlines an important cost advantage over the old ones, and Lorenzo believed that he had no choice but to take drastic steps to reduce Continental's costs. Says he: "Some very, very brutal things have happened to this industry. I have the job of trying to steer through some stormy waters." But if Continental is successful in breaking its union contracts through bankruptcy, several other airlines may go down that same runway. --By John S. DeMott. Reported by Jerry Hannifin/Washington and Lianne Hart/ Houston with other bureaus

With reporting by Jerry Hannifin, Lianne Hart This file is automatically generated by a robot program, so viewer discretion is required.