The Art of Informed Bargaining

ALPA Economic and Financial Analysis analysts help safeguard pilot pay and benefits.

By Gavin Francis, Staff Writer
Air Line Pilot, October 2004, p. 14

A few years ago, an upstart airline facing financial restructuring asked its pilots to take a substantial pay cut. ALPA’s Economic and Financial Analysis Department, working from its own research, advised the pilot group not to accept the pay cut. Instead, the Department recommended, along with other changes, that the airline close its Orlando, Fla., base and make its Washington, D.C., base more efficient. The airline eventually implemented those recommendations with very positive results. Not only did the pilot group not have to take a pay cut, but it actually got a pay increase. The airline, Atlantic Coast, more recently known as Independence Air, went on to become a very successful company.

ALPA’s history holds many such examples of the union’s stepping in to help turn things around for a pilot group whose future looks bleak. And many of those successes have come as a direct result of the careful and detailed research accomplished by the professionals in the Association’s Economic and Financial Analysis, or E&FA, Department.

The E&FA Department supports ALPA’s primary mission of negotiating and enforcing collective-bargaining contracts by gathering, analyzing, and interpreting economic and financial data, and by providing the Association’s pilot leaders with reasoned recommendations. E&FA staff members work closely with ALPA Representation Department staff members, participating in contract negotiations alongside contract administrators in all phases of negotiations that relate to economics, such as wage rates, work rules, per diem, profit sharing, hotel expenses, etc., including analyzing an airline’s ability to pay.

When the airline industry is experiencing favorable economic conditions, E&FA staff members work to maximize compensation for ALPA members. But during adverse economic periods, their economic and financial expertise is absolutely crucial to protecting pilot pay and benefits.

"Our job is to examine the airline’s financial and operational data, the operating environment, and management’s plans and projections, and then give the pilot group an honest assessment of the condition of the airline and the validity of management’s claims," says Ana McAhron-Schulz, director of ALPA’s E&FA Department. "Then we look for ways to solve problems that will benefit both our pilots and the airline."

During contract negotiations, E&FA analysts provide ALPA pilot leaders with the expertise they need to effectively negotiate the best possible contract and help them determine how to respond to the company’s current and expected financial status. The analysts also judge the potential cost of contract proposals in terms of both their economic value and the airline’s ability to follow through on each item.

"We can build economic models that incorporate a number of variables to help us evaluate specific proposals," says Bob Christy, E&FA manager. "These sophisticated models take into account numerous factors, such as the number of pilots, number of airplanes, types of airplanes, retirement rates, block hours, pilot allocation/demand, and work rules. The result is an overall economic and financial model that allows us to accurately predict how an airline’s cost structure can change."

Capt. Tom Destefano (Delta), a former Negotiating Committee chairman for the Delta Master Executive Council, is well acquainted with E&FA staff members and the work they do to create these economic models. He helped to negotiate pay increases for Delta pilots flying the Boeing 737-800 and the Boeing 777 in the late 1990s and participated in the pilot group’s Section 6 negotiations that resulted in their 2000 contract.

"The E&FA Department was an invaluable resource to us during our negotiations," says Capt. Destefano. "We actively solicited the Department’s help from the beginning, and worked extensively with the E&FA staff to cost out each item."

The cost—about $2 billion a year—and the complexity of Delta’s contract required that, to be able to make sound judgments about management’s proposals, negotiators had to know the dollar value of each item as well as its intrinsic value. The only way to adequately determine those values is to request financial information from the airline. Some airlines are hesitant to share that type of information, especially with a labor union. But ALPA’s E&FA Department has achieved a solid reputation within the airline industry, and its credibility makes this exchange of information much easier.

"We met with Delta management before negotiations began to lay down some ground rules and to establish a mutually agreed-upon method for assigning costs to items," says Capt. Destefano. "Developing an effective working relationship was absolutely essential because we relied so much on each other’s information to accomplish the costing."

Department staff worked with Delta management and the Negotiating Committee to determine the most appropriate way to value the specific items that would be discussed. The result was a program that could quickly compute the dollar value of changes to the working agreement. The Committee could then quickly assess management’s proposals and respond accordingly.

"We constantly crosschecked the numbers that Delta provided. If a costing differential was identified, we cleared it up immediately. At the end of the three-year process, the numbers that the two parties independently generated almost always agreed. That’s not too bad when you’re talking about billions of dollars in proposed changes during the term of the contract," adds Capt. Destefano.

"The costing models and research were essential," agrees Capt. Jim Ford (Delta), who served on the Committee with Capt. Destefano. "Negotiating would have been impossible without E&FA analysis and input."

E&FA archives

To provide such top-notch research to pilot groups, E&FA maintains an extensive archive of pilot contracts, industry data, Security and Exchange Commission filings, government statistics, and ALPA history at the Department’s offices in Herndon, Va. The archive includes a wealth of economic and financial information that analysts use to help prepare pilot leaders before they sit down at the bargaining table. Thankfully, technology has made maintaining this vast resource somewhat easier than it was in the past. Although some of the information is still in hard-copy format, much of it is on microfiche, or has been scanned and preserved electronically in searchable databases.

"We have pilot contracts that date back to ALPA’s first negotiated agreement, signed in 1939 with American Airlines," says Kasia Newman, E&FA research librarian. "ALPA has an archive at Wayne State University, but we also maintain our information here in Herndon exclusively for union officers and ALPA staff."

Just housing the information is not enough, as analysts can’t just take the information at face value. Comparisons between contracts have to be made within a framework of a variety of economic factors. "Direct comparisons can be misleading because the economic environment is always changing," says Newman. "A lot of the industry and government forecasts are skewed as well, so we have to do a fair amount of interpretation, evaluating the information in the context of the political or market forces that drive the data. Most forecasts are subjective."

E&FA uses this information and often company-specific confidential data to give pilot groups an accurate picture of their airline and the industry. This wealth of information helps union leaders make informed decisions.

Concessionary bargaining

When the measure of success changes from pay increases to pay that doesn’t have to be cut, that’s regrettable. The economic turmoil that the airline industry has experienced over the past few years has brought about a number of corporate restructurings and some bankruptcies, unfortunately resulting in a highly concessionary bargaining atmosphere for employees.

Fortunately, ALPA members have an extremely knowledgeable and professional staff of economic and financial experts to see them through this difficult period. E&FA analysts understand the complexities of the airline industry’s many challenges, including drastically reduced revenues, aggressive expansion by low-cost competition, and record-high fuel costs, resulting in the need to lower costs and improve the financial health of airline operations, and frequently make those kinds of recommendations to protect pilot jobs, benefits, and pay.

"We try to ensure that, while our members may have to make concessions from time to time, they don’t have to give more than their fair share," says McAhron-Schulz. "Pilots shouldn’t have to bear the whole burden of any airline’s attempt to reduce costs. That burden should be spread fairly among all the stakeholders, including other employee groups, lessors, debtholders, and other vendors. An airline also needs to have a solid business plan that is not just based on lower pilot and other labor costs."

The Association believes strongly that if any of its member pilots are going to enter into concessionary bargaining, management must first open up the company’s books to the union and prove a need for such concessions. Often on closer examination, ALPA is able to determine that the company’s need may not be as great as management initially indicated, or that a better way to achieve a specific economic outcome may exist.

"Management is usually pretty quick to focus on pilot salaries," says Christy. "Management may be asking for cash when the problem isn’t a shortage of cash, but some operational inefficiencies that can be fixed. Sometimes, we can figure out other ways to address these problems that don’t require our pilots to take a pay cut."

E&FA staff members bring a wealth of experience to the table. In fact, most of the analysts on staff have had significant airline and aviation industry experience before coming to ALPA. The Department has analysts who have previously worked for US Airways, World Airways, Delta Air Lines, Piedmont, and British Aerospace.

"ALPA’s E&FA Department is recognized by many in the airline industry, and by our own management, as having a high level of expertise in the financial analysis of airlines. This expertise gives a high degree of credibility to the Negotiating Committee’s positions at the bargaining table," says First Officer Bob Moser (Northwest), Northwest Airlines Master Executive Council Negotiating Committee member. E&FA recently conducted an analysis of the airline’s financial condition that led to the Negotiating Committee’s decision to propose a pilot investment in Northwest Airlines.

E&FA analysts aren’t assigned to any particular pilot group. Their project assignments are usually based on their particular areas of expertise and the relevant issues on the table. A senior analyst and a junior analyst are often assigned to the same property, giving the junior staff member an opportunity to gain valuable experience.

"Almost all of the airlines are having economic difficulties right now," says Christy, "so our analysts have to provide support to quite a few of ALPA’s pilot groups at the moment. Under normal circumstances, the workload might require an analyst to travel two weeks out of the month. But due to the current concessionary bargaining environment, we’re lucky if we can get them back here in the office for even just a few days a month."

Keeping such a schedule is tough. But E&FA analysts understand how difficult being an airline pilot is these days. The analysts deal with the late hours and the long periods away from home because they know that somewhere out there is a pilot who’s probably already given up a good bit of his or her paycheck to keep an airline from going under, but may not have quite enough seniority to survive the next round of furloughs.