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

1. Low-Cost Competition in the Airline Industry

CHAPTER 1 Low-Cost Competition intheAirlineIndustry These words from a front-page story in the December 22, 2007, issue of the New York Times should serve as a wake-up call to all those responsible for America’s air transportation system: “And you thought the passengers were mad. . . . Airline employees are fed up, too—with pay cuts, increased workloads and management’s miserly ways, which leave workers to explain to often-enraged passengers why flying has become such a miserable experience .”1 The story goes on to report comments from US Airways’ employees in a question-and-answer session with their chief executive officer. The employees ’ frustrations came through loud and clear about working for the airline with the most passenger complaints and mishandled bags and the lowest rate of on-time arrivals: “I hate to tell you but the interiors of our planes smell bad and they are filthy. As an employee I am embarrassed to admit working for US Airways.” “How long do you think the airline will be around the way it’s running right now?” Something is fundamentally wrong when both an industry’s workforce and customers report high and rising frustration with the way they are being treated. Can’t the industry do better than this? Is it too much to expect the airline industry, or any other industry for that matter, to provide a fair return 2 UpintheAir to investors, high quality and reliable service to their customers, and good jobs for their employees? Measured against these three expectations, US Airways is not alone. The U.S. airline industry is failing. In the first five years of the twenty-first century, U.S. airlines lost $30 billion. Four of the largest airlines wiped out their equity investors by going into bankruptcy. In 2008, there were only a few airlines in the world other than those owned by governments whose debt ratings put them above junk bond status. These few included Southwest, Qantas, and Lufthansa. In those five years, U.S. airlines also cut wages by more than $15 billion and laid off one hundred thousand workers. Worker morale fell to all-time low levels. And customer complaints rose to record levels as companies cut the number of flights to fill planes and cut services and frills to save money. With all of this, as well as aging air traf- fic control technologies, labor problems with and shortages of air traffic controllers, and increased congestion and flight delays, industry commentators in the United States and overseas have expressed worries that a “perfect storm” may be coming.2 Is all of this the unavoidable consequence of the 9/11 attacks on New York and Washington, D.C.? To some extent, yes. The sharp drop in air travel after 9/11 made one-time losses and cutbacks inevitable. But it’s more than that. This upheaval of losses, layoffs, wage cuts, and bankruptcies echoes previous periods in the early 1980s and early 1990s, highlighting the volatile nature of the industry. Booms are followed by contentious battles about wage increases, which are then followed by busts, accompanied by wrenching episodes of restructuring and concessions, which are followed by booms, as the cycle starts again. By 2006, as some U.S. airlines began to eke out modest profits, employees once again began raising their voices, asking for their fair share of whatever gains might be ahead—and the increasingly volatile up-and-down cycle of the industry seems destined to be repeated. In each downturn, though, three important stakeholders suffer. Investors lose as company valuations drop and in some cases disappear. Employees, who have substantial firm-specific human capital, especially in an industry such as airlines in which compensation is often linked to firm-specific seniority , obviously suffer from layoffs and cuts to pay or other benefits. Customers suffer much-degraded service levels, as airlines cut back on amenities and delay needed investments in equipment and terminals, and as employees become more and more demoralized. Yet the most recent upheaval reflects more than just another round of volatility. It also reflects a surge of new entrants that have spread price competition to an unprecedented degree. Around the world, the airline industry Low-CostCompetitionintheAirlineIndustry 3 is becoming increasingly competitive as markets are deregulated and new entrants with low costs offer low fares. As a consequence, the industry is increasingly driven...