After months of speculation, AMR Corp, the parent of American Airlines, filed chapter 11 bankruptcy this morning. The stock dived 80.9% to 33 cents per share. For now, the airline will continue to operate as usual, and it will also be honoring frequent flyer miles.
American Airlines announced today that it has filed for Chapter 11 bankruptcy protection, making it the final large U.S. full-fare airline to seek court protection from creditors. One of the primary reasons? American is at a disadvantage because of high labor costs, proving that in a competitive economy, unions can’t do much for their members without sending companies into bankruptcy.
American had struggled after 9/11 to avoid heading to bankruptcy as its rivals did in the hopes of securing favorable contract agreements with labor unions. The unions though, had other ideas. Among their demands: Pilots wanted a 10 percent signing bonus followed by 7 percent raises in each of the next three years–massive raises in the midst of a miserable economy.
Meanwhile, Delta, United, and US Airways are all operating with huge concessions on wages, benefits and work rules for pilots, flight attendants, mechanics and ground workers won through bankruptcy proceedings, as The Wall Street Journal reports.
In the most recent negotiations, American offered job protection, signing bonuses, and pay raises to the tune of a 3.21 percent raise in the first year—taken as a lump sum, a structural rate increase, or a combination—followed by three annual boosts of 1 percent each. In turn, American asked for changes to pension benefits and increased productivity. But that wasn’t enough. As Bloomberg reports, union negotiators sought not to help keep the company afloat but to win back earlier concessions:
American was embroiled in negotiations with unions for all of its major work groups as far back as 2006, seeking to boost employee productivity and erase part of what it said was an $800 million labor-cost disadvantage to other carriers.
The airline’s pilots, flight attendants, mechanics and baggage handlers wanted to use the contract talks to regain some of the $1.6 billion in annual concessions they gave in 2003 to help the company avoid bankruptcy.
In the end, American’s efforts didn’t work. Last year, it was the only major U.S. airline to lose money—$471 million in net losses—whereas Delta had net earnings of $593 million and United earned $854 million, according to the Journal. Now, because American couldn’t cut labor costs and remain competitive with other airlines, it has no choice but to enter bankruptcy protection. In short, labor leaders ultimately forced American’s hand, and their behavior—and the resulting consequences—are entirely consistent with how unions work. Heritage’s James Sherk explains:
Unions function as labor cartels. A labor cartel restricts the number of workers in a company or industry to drive up the remaining workers’ wages, just as the Organization of Petroleum Exporting Countries attempts to cut the supply of oil to raise its price. Companies pass on those higher wages to consumers through higher prices, and often they also earn lower profits … [but a] cartel can charge higher prices only as long as it remains a monopoly. If consumers can buy elsewhere, a company must cut its prices or go out of business.… With competition, the union cartel breaks down, and unions cannot force consumers to pay higher prices or capture higher wages for their members.
In this case, American’s unsustainable losses forced bankruptcy, which in turn could have a negative impact on creditors, employees, retirees, shareholders, and consumers. And though American may emerge stronger after bankruptcy, it will not be without a steep price paid by all parties involved.