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Air labor costs to take off
March 7, 2001: 3:38 p.m. ET

Talks at Northwest, Delta, other airlines could raise costs as traffic falls
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - Negotiators from Northwest Airlines and its mechanics union returned to contract talks, with each side's proposals still separated by hundreds of millions of dollars a year.

The two sides expressed public confidence they could still reach a contract by the Sunday night deadline. But with President Bush's earlier statement that he is prepared to step in to keep planes flying if the nearly 10,000 members of the Aircraft Mechanics Fraternal Association do strike, there is little chance of disruption for the passengers or the airline's revenue stream. Analysts say they expect that the talks will end up before an arbitration body known as a presidential emergency board (PEB), which has at least 60 days to consider the two sides' proposals and recommend the terms of an agreement.

graphic"If the union's public statements mean anything, they seem willing to force the point," said Jim Higgins, airline analyst for Credit Suisse First Boston. "They seem to be confrontational for confrontation sake."

The talks are being held under the auspices of the National Mediation Board, which oversees labor relations in the airline and railroad industries, which have radically different labor laws than most private sector employers. Unions cannot strike without the NMB offering binding arbitration to both sides, followed by the expiration of a 30-day "cooling-off period" that follows if either side rejects the offer. And through use of a PEB, the strike can end minutes after it starts.

Union officials attacked President Bush's promise of a PEB at Northwest as they headed into talks in Washington, saying it removed the incentive for the company to negotiate with them in the five days before the deadline.

"This is a sad affair for labor in this country," said O.V. Delle-Femine, national director of the union, told CNNfn as he headed into talks. (350KB WAV) (350KB AIFF).

The company has praised the president's stance, saying it protects the interest of Northwest customers. It said that customer bookings have not fallen off after Sunday, indicating a lack of concern by passengers and ticket agents at this time.

graphicThe company says it is offering the AMFA members an immediate 18.7 percent pay increase, while the union is seeking a 40 percent increase. Steve Lanier, the union's secretary, said the difference in costs between the two sides' proposals now stands at $400 million annually, which he said is far closer than earlier in negotiations. But it is still more than the $296 million the company earned in 2000.

But Doug Killian, spokesman for Northwest, said the company's proposal would raise the company's costs by $2 billion-to-$2.5 billion during the next three years. He said in addition to a pay increase the union is seeking retroactive pay that would cost the airline $825 million, or about $82,500 per member, while the company is offering only $41 million in retroactive pay.

If the dispute goes to a PEB, such a large retroactive pay bonus is unlikely to be recommended by the board, said Credit Suisse First Boston analyst Higgins.

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"I've never seen that level of retro pay," said Higgins, who used to follow railroads, where PEBs are far more common than in the airline industry. "The whole notion of retro pay is a relatively new issue for the airline industry."

Higgins said he believes that the expected cost increases that could result from labor negotiations at the nation's four largest carriers have basically been factored into many forecasts, but if those contracts come in richer than expected, that would be another dent in earnings.

"Labor is company specific, but it is placing fairly strong upward pressure on costs at a time of deteriorating traffic," he said.

Pilots talks could cost Delta

Besides the Northwest mechanics, there are negotiations taking place between No. 3 Delta Air Lines and its pilots, No. 2 American Airlines and its flight attendants, and United Airlines, the world's largest carrier, and its mechanics, customer service representatives and ramp workers.

Delta and its pilots broke off talks Feb. 28 without an agreement. Both sides then asked the NMB to offer them arbitration under an agreement the two sides reached before the current round of talks began. But the board has yet to make the offer and no new talks are scheduled between the two sides.

graphicThe company said Wednesday that its offer to pilots would boost the cost of pilots pay by $282 million, or 16.5 percent, above the current contract costs this year. It also said that its costs would be $486 million, or 25 percent, greater in 2002, $522 million, or 29 percent, greater in 2003, and $621 million, or 34 percent, higher in 2004, the final year of the proposed contract.

The company said the union proposal would result in a 46 percent rise in costs above the current contract, 56 percent above the current costs next year and a 67 percent increase by 2004.

The difference in the two proposals equals $503 million this year, $540 million next year, $564 million in 2003 and $613 million in 2004, according to the company's figures.

But a union spokeswoman disputed the gap is that large, although she couldn't give detailed cost numbers of the different proposals.

"We will grant there is still a significant gap between proposals," said Karen Miller of the Air Line Pilots Association. "But a lot of them relate to job security and provisions that are no cost to the company."

Machinists now oppose UAL-US Airways deal

Job security provisions are also a stumbling block between United Airlines and the International Association of Machinists, which represents about 45,000 United employees and another 15,000 at US Airways Group (U: Research, Estimates), which United parent UAL Corp. is proposing to buy.

The IAM, whose members own about 20 percent of employee-owned UAL, voted in favor of that purchase in a board of directors vote last May when the union's opposition could have killed the deal. But Wednesday it issued a statement saying that lack of job protection guarantees by United management has resulted in the union now opposing the deal.

graphic"Until we reach and ratify collective bargaining agreements with United to address the effect of this merger on employees, it is not in anyone's interest for this transaction to go forward," said a statement from Robert Roach Jr., IAM general vice president. "The failure of United to provide written job protection dramatically increases the possibility of a strike by members of the Machinists union at United Airlines."

United issued a statement repeating its assurances that it does not plan any layoffs due to the merger, but that talks fell apart because of demands over relocation, furlough and seniority provisions of the contract.

"United made significant moves in these discussions to address the issues raised by the IAM," said the statement by Andy Studdert, its chief operating officer. "Unfortunately, the IAM subsequently chose to add totally unacceptable conditions to the merger closing."

Despite the IAM's strike threat, there are no talks currently scheduled between the IAM and United and the NMB is therefore far away from releasing the two sides into a cooling-off period that could start the clock ticking towards a strike.

United spokesman Joe Hopkins said the IAM's new opposition to the US Airways deal is unfortunate, but not enough to block approval at this stage. The deal is being weighed by the Justice Department for antitrust concerns.

"Legally they can't stop it from happening, but there is a political impact," he said. "We want them on board. We want to facilitate a smooth transition and want the support of all the employees to do that. But this isn't a show-stopper."

But a strike and political pressure aren't the only ways that unhappy mechanics can cause problems for United. The airline has asked the Federal Court of Appeals in Chicago to order mechanics not to ground planes as a way of gaining leverage at the bargaining table. A decision is pending in that case.

A lower court issued a temporary order against the union in that regards last November, but it expired despite the airline's request to make it permanent.

Hopkins said in the first week of this month the airline has seen an average of 33 planes a day grounded for mechanical problems, which he said is nearly twice as great as the airline thinks it should be seeing. But it is only about a third as bad as it was last November.

Airline traffic slowing

As if all the labor problems are enough of a threat to airline profits and revenue, the industry is seeing a fall-off of passenger traffic recently. February traffic numbers were weak enough to prompt several Wall Street analysts to lower earnings forecasts for almost all the major airlines.

The total miles flown by paying passengers fell 3.4 percent in February from the same month a year earlier at the nation's five largest airlines, and that was despite the year-ago month being a day longer due to leap year.

The load factor, which is the percentage of available seats being filled by paying passengers, fell 0.5 percentage points for those carriers to 66.7 percent from 67.2 percent.

Higgins said the load factors came in weaker than expected at virtually every major carrier for the month, and his talks with executives have suggested that the more profitable business travel is actually dropping faster than the thinner-margin vacation traveler.

He said that despite lowering most of his estimates during the last week, further downward revision looms.

"We think earnings estimates are too higher for entire group," he said. "I'm not sure even we are done lowering estimates. I doubt we are."

Shares of UAL (UAL: Research, Estimates) gained 11 cents to close $39.21 in trading Wednesday, while shares of Delta (DAL: Research, Estimates) climbed 35 cents to $43.58. But shares of Northwest (NWAC: Research, Estimates) shares lost 34 cents to $21.03 graphic