Do wage concessions REALLY save an airline?


Cap, Roci
Staff member
An excerpt from Holly Hegemans Plane Business Banter

US Airways

US Airways reported earnings last week, and for the quarter, the airline
lost $90 million, or $1.69 a share. Last year for the same quarter, the
airline reported a loss of $335 million, or $4.92 a share.

As our resident US Airways observer said to me in a note:

"Did you do any dissecting of UAIR's Q3 financials? Here's something
interesting I derived from the numbers while listening to Mr. Siegel on the
conference call as he attempted to warm-up those listening to the notion
that further cost cuts will be necessary.

UAIR pilots saw their salary cut 35%, more or less. The pilot's pension was
cut 100%. Other employees did not suffer wage and benefit cuts quite so
drastic, but all employees contributed to Siegel's cost-cutting plan...
because as we all know... it is those high 'labor' costs that are the root
of all UAIR's competitive problems, right?

Well, just play along and accept Dave's hypothesis that if you cut labor
costs and cut capacity, you will turn the company's finances around.

Buzzzzzt. Wrong.

Not only has this misguided plan failed to produce a profit for the
company, the ratio of personnel costs to total costs has not fallen, but in
fact increased!

Go back to the US Airways 10Q filed with the SEC on Nov. 9, 2001 for the
quarter ending Sept. 30, 2001, which was the last period before the Sept.
11 attacks negatively impacted the industry's results.

Labor costs for the quarter were $965 million and total operating expenses
were $2.739 million making the ratio of employee costs as a percentage of
total expenses 35.2%.

Fast forward 35% of the pilot's salaries and 100% of their pension since
then to the 8K filed with the SEC on Oct. 21, 2003. Personnel costs for the
quarter are now $656 million of the total operating expense of $1.8
million. This makes the current ratio of personnel costs to total operating
expenses now 36.3%!

Instead of Dave's employee slash and burn tactics reducing employment costs
on a relative basis, he has actually managed to increase them, hence making
personnel costs an even larger burden on the operation than he had before
he started implementing his grand vision!

Now here's my question. If a non-Harvard educated poke like me can figure
this out, how come all those fancy suits sitting in on the call didn't ask
Dave why his plan has actually made personnel costs a larger percentage of
the company's burden than before he slashed pilot wages 35% and pensions by

I did enjoy the question about Dave's insatiable appetite for RJs [This
question was asked by UBS analyst Sam Buttrick. Clearly a highlight of the
call.] and the question asking if there is any vision or if the company
plans to just continue shrinking. But beyond this, there wasn't much done
on that call to hold Siegel responsible for much of anything. I mean, for
goodness sakes, he took the thing into Ch. 11 and supposedly restructured
it to turn it around. Seems to me that all of his 'restructuring' has led
him right back to where he started. Sure, the losses are smaller, but
heck... so is the company!

So what were the headlines the next day? Dave will be back asking the
employees for more pay concessions. Insanity truly is defined as doing the
same thing over and over, expecting a different result.

I just don't get it... but one thing's for sure... neither does Dave."

I'd say with the news out Tuesday in regard to Southwest's arrival in
Philly, the last two weeks have not been particularly kind to Mr. Siegel.