Up in the Air: How Airlines Can Improve Performance by Engaging Their Employees

6. The Legacy Responses: Alternative Approaches

One industry insider referred to legacy airlines as “dinosaurs.” But unlike the dinosaurs, the legacies are certainly not extinct. Many of them are reinventing themselves. Although new entrants have become an increasingly significant segment of the airline industry, most of the industry’s revenue, passengers, and employees are still generated, flown, and employed by large legacy airlines. Thus the impact of the new-entrant airlines on the industry’s employment relations comes not only directly from their own practices but also indirectly, from the reactions of the legacies to the rise of low-cost competition. In chapter 2 we discussed the development of the dominant employment paradigm in the United States since deregulation. The dominant paradigm has remained a control/accommodation approach. Within this paradigm, the industry’s wage negotiations have been adversarial as well as volatile, with management and labor exploiting swings in bargaining power as the industry has cycled through ups and downs. In addition, the general direction of wages has been down, with employees often losing in the drive to meet increasing low-cost competition. However, there have been noteworthy variations from the dominant paradigm, which this chapter discusses in more detail, asking two main questions: What alternative practices or approaches have been tried? And which practices seem to have been more effective than others? We discuss four deviations from the dominant paradigm. The first is the union-suppression strategy pursued by Frank Lorenzo, whose high-profile CHAPTER 6 TheLegacyResponses: AlternativeApproaches TheLegacyResponses:AlternativeApproaches 125 battles helped set the strongly adversarial tone in the early days of the industry ’s deregulation. The second is the strategy of a low-cost operation inside the legacy airline. The third is the employee stock ownership plan (ESOP), in which employees (or more accurately, their unions) participate in the governance of the firm via collective stock ownership and representation on the board of directors. And the fourth involves creating a higher commitment relationship with employees. Union Suppression: Frank Lorenzo at Texas Air, Continental, and Eastern We briefly introduced the labor relations strategy made famous by Frank Lorenzo in chapter 2. We discuss it in more detail here to contrast it with strategies followed at other airlines in the 1980s and 1990s and particularly to compare it with what followed at Continental after Lorenzo’s departure. Lorenzo had acquired a midsized airline, Texas International, in the early 1970s and was eager to seize the opportunity offered by deregulation.1 One of his first moves after deregulation was to create a corporate holding company, Texas Air, as the parent of Texas International, and then launch a subsidiary low-fare airline, New York Air. New York Air was nonunion and hired relatively inexperienced employees to keep wages 30 percent lower than those at Texas International. This so-called double breasted tactic2 anticipated the low-cost operations later launched by other legacies but was done unilaterally and was bitterly yet futilely opposed by the unions at Texas International. However, Lorenzo was more infamous for his tactics at Continental Airlines. He acquired Continental in a hostile takeover in 1982, ultimately winning out in the courts against an attempt by Continental’s management and employees to buy the firm via an ESOP. Before and after the takeover, Continental was in financial difficulty. Lorenzo quickly initiated layoffs and demands for wage cuts. Agreements for modest cuts or deferrals were made with all but the mechanics union, which went on strike in August 1983. But Continental hired replacements , the pilots crossed the mechanics’ picket lines, and rather quickly the strike was “utterly broken.”3 Continental never bothered to settle with the union and instead began rebuilding a nonunion mechanic base. Lorenzo then asked the pilots—who had just helped break the mechanics strike—for a halving of their wages. When the pilots refused, Continental filed for bankruptcy in September 1983. Unlike “normal” bankruptcy filings, which represent the failure of all attempts to rescue a company, Continental 126 UpintheAir used bankruptcy as a strategic maneuver to reduce its labor costs by abrogating its labor contracts. It then invited employees to return to work at about 50 percent of their previous wages. These actions prompted the pilots and flight attendants also to go on strike, but enough employees returned to work and sufficient replacements were hired that Continental was able to maintain a small but growing operation . Continental never came to terms with these striking...