Airline deregulation and labor relations

Monthly Labor Review, June, 1986 by William J. Curtin

Airline deregulation and labor relations

Over the past 6 years, the process of deregulation has placed great stress on the system of industrial relations in the airline industry. Numerous commentators have described the scenario by which deregulation has led to an increase in competition in the product market by encouraging new entrants and by allowing existing carriers to expand their routes. Some of the new entrants have successfully operated on a nonunion basis and, as such, have enjoyed significant cost advantages because of lower wages, lower benefit costs, and less stringent work rules.1 This, in turn, has created industrial relations pressure on established carriers with unionized operations to seek significant concessions from unions in order to compete with the nonunion entrants.

Professor John T. Dunlop has properly asserted that the industrial relations problems created by deregulation have been exacerbated by the fact that, prior to deregulation, inadequate consideration was given to the question of how deregulation would impact the relevant labor markets and the process of collective bargaining.2 Initially, the theoretical case for deregulation focused on the need for competition in the product market. Little attention was paid to the fact that collective bargaining in the airline industry traditionally operated as a form of labor market regulation that allowed unions to capture a portion of the monopoly profits generated by regulation of the product market. As a consequence, the disequilibrium that followed the withdrawal of product market regulation was not anticipated.

In examining the impact of deregulation on the airline industry, it is important to remember that much of the process of deregulation occurred during one of the worst economic recessions in recent memory. This economic downturn undoubtedly compounded the industrial relations problems.

Deregulation's early impact

Early in the process of deregulation, the disequilibrium described above presented a severe threat to the traditional economic power of certain airline unions. Additionally, there were events that caused some concern over the continuing viability of the process of collective bargaining under the Railway Labor Act.

The experience at Continental Airlines reinforced these perceptions. On September 24, 1983, Continental, the eighth largest passenger airline in the United States, filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Code. Pursuant to its perceived powers under Chapter 11, Continental unilaterally implemented drastic changes in wages, benefits, and work rules.3 In response, the Air Line Pilots Association, the International Association of Machinists, and the Union of Flight Attendants went on strike. Although these strikes dragged on for many months, they did not halt Continental's operations and they eventually were discontinued without a restoration of prepetition wages and benefits.

A surprising aspect of the Continental experience was that significant reductions in wages and benefits were imposed unilaterally and outside the traditional process of collective bargaining. To support the assertion that the Continental case was perceived as a threat to the entire process of collective bargaining, one only need recall the vigor with which both National Labor Relations Act and Railway Labor Act unions sought Congressional action to amend the Bankruptcy Code to prevent repetitions of the Continental initiative.4

Moreover, union setbacks were not limited to bankruptcy context. During late 1983, the Allied Pilots Association, as representative of American Airlines' pilots, agreed to a two-tier wage scale. This scale reduced pay for new hires by nearly 50 percent.5 In addition, the scales at American did not merge at any set time in the future. New hires remained permanently on a separate and lower scale.6 In the wake of the American agreement, Eastern, Delta, Western, Republic, and Pan Am also sought concessionary packages.

More recent developments

Recently there have been significant developments in airline labor relations that may indicate a trend toward stabilization. First, it appears that Chapter 11 no longer exists as an easy method to reduce labor costs without undertaking the rigors of concessionary bargaining. In 1984, Congress amended the Bankruptcy Code by adding section 1113, regulating the rejection of collective bargaining agreements.7 In a review of section 1113, two points are most significant. First, as a prerequisite to the rejection of any collective bargaining agreement, an employer must engage in collective bargaining with its union(s). The new statute specifically requires that an employer seeking rejection must (1) make a proposal to the union; (2) provide the union with information to evaluate that proposal; and (3) engage in good-faith negotiations prior to rejection.8 Second, if this bargaining is not successful, an employer must seek court approval before unilaterally changing the contract.9 In short, the type of swift, unilateral action undertaken by Continental Airlines is now impossible.