Robert (gurdonark) wrote,
Robert
gurdonark

a tale of two classes, first class and coach



American Airlines serves as one of the Dallas/Fort Worth area's largest local industries. The D/FW Airport provides a major hub for American flights, and many local people work either for the airline or for the companies that serve the airline.

For years now, it's been apparent that the business model used by American Airlines ran the risk of becoming outmoded. American, like all the "traditional" carriers, offers reasonably affordable fares to those who can plan trips weeks ahead. The fares dramatically--in American's case staggeringly--increase for travellers, usually business folk, who must make fully refundable reservations on short notice. The onset of the economic dislocation by grounded and then reduced-service flights in the wake of the terrorism of September 11, 2001 put many traditional air carriers "on the ropes". It's a debatable point whether 9/11 really "destroyed" full service carriers, so much as accelerated their decline. It's clear that "full service" high fare air carriers were going to have to adjust their business model eventually in any event. The 9/11 events meant that the timing of the adjustment must be "now".

American Airlines' recent performance strongly suggests that Chapter 11 reorganization, a form of bankruptcy, looms on American's near horizon. Chapter 11 need not be the end of a company's world, as companies can and do pare down operations and re-emerge in streamlined form. Chapter 11 usually amounts to the end of the corporate shareholders' world, though, as creditors of the company, including those who hold bonds of the company, usually get the economic benefit of the reorganization. American, understandably, would prefer to convince its various creditor classes to permit it to reorganize outside a formal court proceeding; professional expenses involved in running a major Chapter 11 (attorneys, accountants and the like) stagger the imagination.

But here the plot thickens a bit. Creditors tend to demand viability from companies which owe them money, as a non-viable company might out better be dealt with in Chapter 11 proceedings. Airlines have two major expenses--fuel and labor. Because "fuel" cannot be arbitrarily reduced, but labor expenses sometimes can, American's effort to streamline its operations outside bankruptcy focus on winning significant labor concessions from its pilot, mechanics, and flight attendant unions. American's pitch was simple and direct--vote to take pay and benefit cuts, or the airline will go into bankruptcy, and impose them in a more draconian fashion anyway.

This all pretty much follows the "form book", but American's management introduced a novel twist. At the same time that the airline was telling its valued employee unions to vote in massive cuts, American promised its executive circle various economic bonuses. One was in essence the potential for direct economic reward in the event that American "pulled it off" and stayed out of bankruptcy. The other was a deposit of over forty million dollars in executive pension payments, which would be designed to be exempt from the bankruptcy process.

The net effect of this series of transactions was simple--those who did the work maintaining the planes, walked up and down the coach aisles serving customers, personned the reservation phones and flew the planes, were asked to take substantial pay cuts, to stave of a Chapter 11 that may well occur even with the company-favorable wage concessions. It's one thing to cut one's paycheck, but it's something far worse to cut one's take home pay and then wonder if the "cut off the top" merely arranges more deck chairs on the Titanic.

But the stunning arrogance of management was to determine that while employees should take the cuts and run the risks, executives should merely reap the rewards of working out a troubled airline. American did not disclose to the rank and file, of course, the concessions, and they escaped notice until securities filings made by American came to light just after the various constituencies narrowly approved the concession packages.

Now the unions are talking re-vote, American has agreed to forego some of the bonuses, but the forty million dollar plus pension contribution for the benefit of executives is still a go (I suspect that there is an employee benefit legal reason for this, but I'll not elaborate my thoughts in a public journal, as I'm not about legal advice on line).

I want American to survive, and I suspect the employee concessions are necessary to its survival. I entertain doubts about American's survival in any event. But the moral fable inherent in this little real-life story captures my imagination.

For a good part of my adult life, it's become clear that the "two cultures" which now exist are no longer "liberal arts culture" v. "science culture", but "corporate management culture" v. "everybody else". In some perverse objectivist fantasy, MBAs who run flawed financial models about plane revenues matter more than pilots who fly the planes. One primary rule of "corporate management culture" is "the captain always jumps off the ship in a golden parachute". In "everybody else" culture, the good old fashioned "middle class morality" instead posits that fair treatment matters.

The past three years show the decay and greed which the American corporate management class have sunk, which has had the net result of causing corporate executives to loot corporations in decline through bonus arrangements, even if the effect were in essence to strip the Iraqi art treasures off the corporate walls. The many recent Chapter 11s have uncovered frighteningly banal tales of corporate greed, in corporations where valued ordinary employees get the short end of the stick.

I'm not suggesting that all employees bring equal value to a company, nor that substantial pay differentials for different skill sets are inappropriate. But American corporate culture has moved well beyond mere economic reward, to creating an enshrined sense of privilege for those who manage major corporations. Even the recent corporate law reforms become amusing in this context, as it becomes "front page" news that the SEC will now require officers of corporations which solicit investor funds to actually certify that their financial statements are correct and audited.

I believe that US financial markets will recover from the havoc wreaked upon them by the twin demons of recession and a loss of public confidence in the financial statements of many corporations. Ultimately, though, this recovery will be fueled by consumer spending and by small business--in essence, dollars spent by the very people whom "corporate management" culture treats as second class citizens.

Shareholder groups are finally catching on that corporate management is part of the problem in our current landscape, and not often enough part of the solution. But I wish that corporate management culture would self-reform, and find a little more humanity among the greed. I don't know that I want American's workers to re-vote and tank the corporation. But I do know I'm tired of the rats grabbing the cheese as they scuttle off the sinking ship. American's problems are not really high labor costs so much as a business model designed by the corporate boardroom that has been a failure for years. It's true that Amrican now needs labor concessions--but it's also true that management should be chided, not rewarded, for this fiasco.

I tend to fly discount carriers, which have flexible last-minute pricing and easy changes of reservations. I'm often willing to take a one-stop rather than a non-stop, to save my client or my firm the extra expense of last-minute full-fare flights. I wish that the corporate boardroom at American had worked on catering their business model to travellers like me--for we are legion, and fly Southwest and America West. But why alter one's business model, when one can always cut flight attendant pay, and sew new thread in the golden parachute?

I guess it's a forelorn hope, but I want people to worry just a bit less about getting rich, and just a bit more about being straight-up and fair.The thing that galls me most is that the extra money for the executives is often largely a difference of standard of luxury, while the pay cuts for the lowest tiered employees may affect owning a home or other real quality of ordinary life issues. I'm a big fan of MBAs, who do some good and meaningful work in this country. But "high pay" need not equate to "we get rich no matter how badly the company tanks". I want to fly airlines that treat employees like people, and not as ways to pad the executive bonus scheme.
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