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Can Cutting Labor Costs Just Save United?  
User currently offlineTwaneedsnohelp From , joined Dec 1969, posts, RR:
Posted (12 years 1 week 3 days 18 hours ago) and read 1524 times:

I was thinking about the situation out United today (when I should have been doing homework) and frankly, I think it's a lot worse than it's portrayed.

I really think the only way United survive the long run is if it manages to cut its labor cost significantly and drive profit from that. And you know what, I don't even know if they can do that - without pushing salaries down to unreasonable levels.

The reason I say this is that the other "medecines" are going to screw the company. Like, for one, starting the low-cost subsidiary. I'm worried about this because it's never really worked well because the big airlines have simply never shown the business acumen or flexibility to make it succesful. Furthermore, they've always failed at creating the kind of excitement over their products that have fueled JetBlue, EasyJet, Southwest, and RyanAir.

What else is being tossed around.. Cuttng amenities. This won't do it either. Becuase then UA will get caught in the murky grey area of no-frills low-cost amenities but high-cost frills infrastructure and business operating costs. This is just the first step in a death spiral.

What else... Cutting network service. Again another awful choice, because thats UA's strongest point. Despite the high cost and mediocre service, United really can get you anywhere in the world you want. Thats a huge selling point for FF business travelers. If United starts cutting cities, then they are pairing down their business advantages.

Whats next.. squeezing corporate customers. Another fuck-up if you ask me. United doesn't have a whole lot riding for it today but it does have a fairly credible relationship with the corporate travel community who have come to accept United because of its reasonable FF program, fairly standard service and reliability, and network size. So, I was terribly concerned when I read that one of UA's strategic consultants, McKinsey & Co recommended that United make deep cuts to its corporate travel contracts. Now companies will have an even greater incentive to book more passengers on low-cost airlines.

So where does that leave us? Short of flying cheaper planes (which really isn't possible), I think United's sole remaining hope is just forcing labor to tighten their belts.

It's gonna suck for those FAs, ticket agents, and baggage handlers, but if United can keep its advantages: fair FF program, huge network, relationship with corporate customers, and marketting - they should get by even if a few more bags are lost or a few more customers get yelled at by surly stewardess.

Now maybe I'm wrong - maybe the amount they can lower labor costs won't make up the difference between revenues and expenses and then - quite franky - I think they're finnished.

Any differing or consenting views?

27 replies: All unread, showing first 25:
 
User currently offlineAA717driver From United States of America, joined Feb 2002, 1566 posts, RR: 13
Reply 1, posted (12 years 1 week 3 days 9 hours ago) and read 1504 times:

UAL can't squeeze the employees too tightly because eventually they will move on to greener pastures.

UAL will emerge from Ch. 11 a leaner, meaner airline--still with a huge debt load. Ch. 11 restructures debt, it doesn't erase it.

USAir has the same problem(maybe worse). It has a crushing debt load(thanks to Steve Wolf) and isn't meeting its plan. Someone tell Bronner that you can't make a profit by cutting pay!TC



FL450, M.85
User currently offlineBUFJets From United States of America, joined Jan 2001, 231 posts, RR: 0
Reply 2, posted (12 years 1 week 3 days 8 hours ago) and read 1485 times:

United is losing multi-million dollars a day now (I've heard as much as 22 million/day for this month). If salaries alone were causing this problem, they would have been out of business long ago.

Getting UA salaries in line is very important because they were too high for many employees. Although, I hope they don't bank on that alone as there are obviously other problems to fix.

The market has changed since the early 90's. They need a new business model to address today's market.


User currently offlineBroke From United States of America, joined Apr 2002, 1322 posts, RR: 3
Reply 3, posted (12 years 1 week 3 days 8 hours ago) and read 1478 times:

The largest segments of an airline's operating costs are labor and fuel.
Dropping uneconomic routes and less fuel efficient airplanes can be a start to reducing these.
BUT (Don't you just hate that word)
What appears at first glance to be an uneconomic route maybe one that is providing a feed to a very profitable route. So cutting the money losing route can cost income on your money maker. The analysis can be complicated, but necessary.
Reducing head count and pay scales can also be obvious ways to reduce operating costs; identifying where fat is not as easy as it seems, people try to protect their rice bowls even if it means the company loses. Lowering pay scales can be a good way of lowering employee morale, so your service goes down.
Then you have the non-operating cost of a high debt burden and the principal and interest payments that the lenders expect. You might be able to lower your operating costs in an efficient manner and end up with too little operating profit to service your debt burden.
I'm not saying that United can't recover, but it is a difficult task requiring the best energies, skills, and co-operation of all involved; with the understanding that sacrifices will be expected of everyone, starting at the top.
With the airline industry in the shape it is in today, there are few places in the industry for skilled people to go in any numbers to provide a fall back against the possible loss of the company.
I wish the people of United all the best in their challenge. It maybe the greatest career challenge any of them will ever face and it is in the hands of all. A few, who do not wish to accept the challenge, could sabotage the best efforts of many.


User currently offlineCV640 From United States of America, joined Aug 2000, 952 posts, RR: 5
Reply 4, posted (12 years 1 week 3 days 7 hours ago) and read 1455 times:

If they are loosing $22 million aday, I think every employee would basically have to work for free in order to break even. They need real leadership with a good buisness plan, along with wage and work rule cuts in order to return to profitability.

User currently offlineDelta737 From United States of America, joined Jun 1999, 516 posts, RR: 11
Reply 5, posted (12 years 1 week 3 days 7 hours ago) and read 1450 times:

If we flew for FREE it would save about $3.88 per ticket per hour on an 80% full MD-88.

Personally, all the labor costs savings on earth will not bring a poorly managed airline out of the doldrums but we are, however, very easy and politically correct targets.

My math:

MD-88 - 142 passengers (80% load = 114 pax)
FO-$120/hr
CA-$220/hr
*Estimated* per hour cost of pilots, plus retirement, medical etc: $442/hr
$442 divided by 114 = $3.88 per hour per ticket.

So basically, if you're on a two hour flight from Tampa to Cincinnati, if your pilots flew for FREE, you might see a $7.75 cheaper ticket.

Instead of paying $374 from TPA to CVG (as per Travelocity.com), you'd be paying a super duper sale price of $366.25 if those rotton, evil, overpaid pilots would just fly for FREE!  Smile

Doug Taylor


User currently offlineUAL1837 From , joined Dec 1969, posts, RR:
Reply 6, posted (12 years 1 week 3 days 7 hours ago) and read 1446 times:

United is cutting far more than labor costs...it just hasn't been announced yet. As far as the shuttle is concerned, it will be structured different than the main line so it will cost far less, like it did in 1994. It was cancelled because it ended up tying in too close to the mainline, and therefore costs went up. This shuttle will be different than the old one.

User currently offlineSean-SAN- From United States of America, joined Aug 2002, 772 posts, RR: 1
Reply 7, posted (12 years 1 week 3 days 6 hours ago) and read 1427 times:

Hmm.. If UAL pilots flew for free...


9000 pilots * 70 minimum monthly pay * $150 average/hr * 60% contibution to defined benifit penion..

9000 * 70 * 150 * 1.6= $1.52 Billion dollars savings per month. I think that would do it..

-Sean





User currently offlineDelta737 From United States of America, joined Jun 1999, 516 posts, RR: 11
Reply 8, posted (12 years 1 week 3 days 5 hours ago) and read 1401 times:

Actually, the average pilot doesn't make $150/hr and the defined benefit isn't nearly 60% of the hourly rate.

Please, by all means do the math, but start out with relevant numbers.

Doug Taylor


User currently offlineSean-SAN- From United States of America, joined Aug 2002, 772 posts, RR: 1
Reply 9, posted (12 years 1 week 3 days 4 hours ago) and read 1393 times:

I was under the impression that the average at UAL is around $150.. Since everyone has at least 2 years seniority now especially..

Here's the numbers to back up my assumption (and why I felt $150/hr for UAL is generous..)

According to airinc, a 5 year UA A320 F/O makes $10720/mo. Divide that by 70 hours, you get a little over $150/hr. The $150/hr number doesn't even account for captain pay, or higher paying wide bodies.

As for the pension, I think 60% costs incurred is probably about right. UAL pilots get 45% of final pay in a DB pension, and an additional 11% in a DC pension. Also, 60% could also account for social security contributions (roughly $6000 per year, per pilot), 401K contributions, insurance, etc etc.

Where am I exaggerating Doug?

http://www.jet-jobs.com/press%20releases/airlinefacts.html

-Sean


User currently offlineSean-SAN- From United States of America, joined Aug 2002, 772 posts, RR: 1
Reply 10, posted (12 years 1 week 3 days 4 hours ago) and read 1388 times:

Just so we're clear, the topic here is UA pilots.. I'm painfully aware most pilots don't get paid nearly as well.

User currently offlineDelta737 From United States of America, joined Jun 1999, 516 posts, RR: 11
Reply 11, posted (12 years 1 week 3 days 3 hours ago) and read 1371 times:

Well, I've got 5 years on the MD-88, I make pretty close to A320 rates which is about $120 or so per hour.

About 71 hours on average equals about $8,250 pre tax.

We get 60% final average earnings after 25 years of service, but that DOES NOT mean that $5,112 is stashed away monthly waiting for me to retire. So you're going to have to take that out of the equation entirely.

The 401(k) is employee-funded from pre-tax dollars and the company will throw in about a 2% match in company stock at Delta. I'm not sure if the 2% match even shows up as a company expense since it's paid in stock and not hard dollars.

I'm not saying that you're exaggerating, I'm contesting the figures you're using in your computations, nothing else.

Doug Taylor



User currently offlineTwaneedsnohelp From , joined Dec 1969, posts, RR:
Reply 12, posted (12 years 1 week 2 days 17 hours ago) and read 1319 times:

some good discussion here.

AA717driver:
UAL can't squeeze the employees too tightly because eventually they will move on to greener pastures

What do you mean? Whose moving to "greener pastures"? The employees? No way - theres no where to go. No one's hiring and even if anyone was - would these employees leave their seniority at UA? UA managament has that trump card on labor.

UAL will emerge from Ch. 11 a leaner, meaner airline--still with a huge debt load. Ch. 11 restructures debt, it doesn't erase it.

Now this sounds dangerous. If they're losing 22 million a day with their present debt burden - how they hell are they going to service a new "huge" debt load? ESPECIALLY if they are "leaner" which I understood meaning smaller company and smaller revenues.

Someone tell Bronner that you can't make a profit by cutting pay

How come? You didn't address that.

BUFJets:
If salaries alone were causing this problem, they would have been out of business long ago.

Not necesarily. In the past they managed to afford high labor costs because they had a strong business with tremendous revenues. Because of well-known reasons they don't have the same revenues they used to. So revenues dropped but labor costs stayed constant. Hmmm...

Broke:
Dropping uneconomic routes and less fuel efficient airplanes can be a start to reducing these. BUT (Don't you just hate that word) What appears at first glance to be an uneconomic route maybe one that is providing a feed to a very profitable route. So cutting the money losing route can cost income on your money maker. The analysis can be complicated, but necessary.

Broke, I agree entirely. As I originally stated, if they cut their cities and network, they're starting down this slippery slope of painfully unraveling their entire "majic" (if you will), in other words --what they do best. Taking that apart - even cities that appear marginally profitable - is the first nail in the coffin to changing their business. Their business is a worldwide network airline. If they reduce that worldwide network - what have they got? Expensive employees, expensive infrastructure, and budget travelers who don't care about worldwide network - just 40 bucks to miami.

Reducing head count and pay scales can also be obvious ways to reduce operating costs; identifying where fat is not as easy as it seems, people try to protect their rice bowls even if it means the company loses.

Thats the thing here. It won't be fat they'll be cutting. To turn the $22 million around, they're going to have cut through the labor fat and then cut into the labor bone. As I said its gonna suck for the employees - but how badly for the company and its customers? As I said maybe a few more cofees will be spilled on passengers, a few more bags lost, etc... but they might start making money while keeping what they need to do business: their massive infrastructure, their worldwide network, their extensive FF and marketting programs, their corporate contacts, etc... They'll still have employees of course - but somewhat unhappy employees. But "somewhat unhappy employees" can still fly the plane and pour juice and coffee, etc.. So...

pay scales can be a good way of lowering employee morale, so your service goes down.

Exactly - but how lethal will that be? I'm saying it might not be that bad. a few more cofees will be spilled, a few more bags lost, etc...

CV640:
If they are loosing $22 million aday, I think every employee would basically have to work for free in order to break even

Well see theres the question. How much will each employee have to give up to turn the company into the operating black. Frankly, I don't know. I'm not an armchair CFO or anything - but I'm willing to bet its not "free employees". It's somehwere between free and what they earn today ($X) and I have a feeling much closer to $X than $0. Let's hope at least!

We can start the math if you want - how many employees? What is UA's average hourly pay? How many hours do UA employees work on average a day? Whats the income statement shortfall? $22 Million?

They need real leadership with a good buisness plan,

Ok heres where your wrong. Yes of course real leadership - that goes without saying. But "good business plan"? What do you mean? I think UA's got a fairly good business plan as it is now. They've got 5 hubs in every part of the country - they've got alliances with the world's best airlines. They've got a well-known FF and marketting programme. They've got a modern fleet of jets. They've got basically the service standard - two class configuration with the upper class accounting for about 7% to 8% of the plane's seats. etc.. etcc

I don';t think there is anything wrong with the business - its a pretty top top business any other airline in the world would shit their pants for.

The weakness is just that American travel habits have changed and less travelers are interested in the United/American/Delta product and are moving over to the JetBlue/Southwest/Airtran product. Does this mean the UA/AA/DL business is dead? Of course not - it just needs tweaking. It's too late in the game to change everything and try and become a WN/B6/FL. They just need some minor adjustments and if you ask me - their first should be cutting labor costs by something like 20 to 30%.

Respectfuly, I don't know where Delta737 learned accounting - but his numbers make little sense to me.

Ok Sean-San- kind of started where I left off above. CV640 said that if the employees worked for free they still wouldn't make up the difference. Well thats obviously wrong as Sean points out. So the question is where's the Happy Median between them working for $0 (and saving the company $1.5 Billion a month) and them working for $? (and saving the company $22 million a month). Start your calculators!

TNNH


User currently offlineSean-SAN- From United States of America, joined Aug 2002, 772 posts, RR: 1
Reply 13, posted (12 years 1 week 2 days 17 hours ago) and read 1313 times:

Even if you take the 60% pension out of the equation (which is a leap since the company is paying into it), you still end up with $1 Billion per month. That's using a very low $150/hr rate for UAL pilots, even though the average is probably over $200.

The whole premise of pilots working for free is rather pointless. Why not compare how UAL would do with America West rates?

AmWest --
No Pension
50% less pay (about)

Saves $500-750 million dollars per month. That would put UAL in the black immediately.

-Sean




User currently offlineTwaneedsnohelp From , joined Dec 1969, posts, RR:
Reply 14, posted (12 years 1 week 2 days 16 hours ago) and read 1311 times:

Sean-SAN-:
The whole premise of pilots working for free is rather pointless.

Not pointless. Unworkable? Of course. But useful. By plugging 0 into the equation you clearly show one end of the extreme and with the present labor cost (let's call it X) supplying the other extreme end - we've just got to find a number in between. You suggest using HP's labor cost which is .5X.

If .5X equals saving the company 500-750 million a month - than holy shit.

Food for thought.

TNNH

PS: Is HP's labor costs per capita really half of what United's are? That's staggering.


User currently offlineSean-SAN- From United States of America, joined Aug 2002, 772 posts, RR: 1
Reply 15, posted (12 years 1 week 2 days 16 hours ago) and read 1304 times:

TWA.. take a look at the website I provided, divide UA's and HP's by their average hours/month, and you see HP pays roughly half of UA.. infact, some regionals approach HP pay, namely Comair.

Also, HP has no pension, saving tons of cash.

-Sean


User currently offlineTwaneedsnohelp From , joined Dec 1969, posts, RR:
Reply 16, posted (12 years 1 week 2 days 15 hours ago) and read 1294 times:

Unreal.

United lovers: take notice. here's your antibiotic.


User currently offlineAA717driver From United States of America, joined Feb 2002, 1566 posts, RR: 13
Reply 17, posted (12 years 1 week 2 days 8 hours ago) and read 1276 times:

TNNH--I tried to word my statement about greener pastures to show that eventually, there will be jobs out there. The CSA's and rampers can find work that pays the equivalent of the concession-riddled contract that is coming.

On the Bronner comment. I believe Doug Taylor answered that. And, if AWA has such a HUGE cost advantage because of their lousy pay and benefits, why are they in the financial shape they're in? Part of the answer is that management has turned what used to be a great place to work(late '80's) into a crappy place to work and it is reflected in the effort the employees put out.
Now, UAL is going to slash pay and benefits what kind of effect will that have on the workforce morale?

Comparing AWA pay with UAL. AWA is about the only big airline besides SWA that is hiring pilots. Why are they hiring? They're not expanding. People are leaving for greener pastures. Why? Job security and pay and benefits. An A320 FO can to to JB and at least have a shot of getting a retirement from stock that will be worth something someday.TC



FL450, M.85
User currently offlineJ32driver From United States of America, joined May 2000, 399 posts, RR: 1
Reply 18, posted (12 years 1 week 2 days 4 hours ago) and read 1254 times:

Some of the numbers you people are spewing forth (Sean-SAN) make no sense at all.

Lets take a realistic look at the math. I'll use your numbers, just read the results correctly.

9000 pilots X $150/hour X 70 hours X 12 months = $1.134 Billion per year.
$1.134 Billion/ 365 days = $3.1 million per day in payroll costs for pilots.

Lets assume benefits and retirment add 60% to that cost.
$3.1 million + 60% = $4.97 million per day. We'll call it an even $5 million a day.

UAL is losing $20 Million a day. If the pilots work for free UAL is still losing $15 million per day. We all know the pilots aren't gonna work for free. Lets say the pilots agree to a 50% reduction in wages. Thats only a $2.5 million per day give back to the company.

If the pilots take a 50% pay hit, where does UAL find the other $17.5 million they need everyday to operate? The Flight Attendants and Customer Service Reps can't afford to take a 50% paycut. The mechanics can afford it, but those morons will walk away from the company and watch it sink rather than take a 50% paycut to keep their job and seniority.

These numbers disturb me. I don't work for United directly, but if they go under, my company will probably furlough 75% of its employees until we find someone else to feed. My making my mortgage payment depends directly on UAL not being liquidated.

I guess thats why I don't have Mr. Tilton's job, I don't know where to find $20 million per day.


User currently offlineTwaneedsnohelp From , joined Dec 1969, posts, RR:
Reply 19, posted (12 years 1 week 1 day 16 hours ago) and read 1232 times:

I tried to word my statement about greener pastures to show that eventually, there will be jobs out there. The CSA's and rampers can find work that pays the equivalent of the concession-riddled contract that is coming.

Oh yeah? You think if UA lowered their salaries, these employees would bolt? No offense, but I doubt it. There are some jobs out there - but not a ton and it's a huge inconvenience to family, etc...

what kind of effect will that have on the workforce morale?

I agree thats a serious question. But if the option is shitty worforce morale or killing the company with highly expensive labor - then thats one hell of a question. No one wants lousy workforce morale, but how bad could it be. You site HP as a company that has lousy workforce morale, but HP is not in the disaster that UA is in. If UA was where HP is now -they'd be worlds healthier.

J32driver:

Good math. Can't argue with the numbers. So you see - its not gonna be an easy time fixing this company. $22 million a day is a ridiculous shortfall. Someone posted a thread today pinning UA's liquidation at a 70% chance. Now maybe we know why. Sucks hunh?

TNNH


User currently offline242 From United States of America, joined Oct 2000, 498 posts, RR: 1
Reply 20, posted (12 years 1 week 1 day 16 hours ago) and read 1224 times:

The Flight Attendants and Customer Service Reps can't afford to take a 50% paycut. The mechanics can afford it, but those morons will walk away from the company and watch it sink rather than take a 50% paycut to keep their job and seniority.

Funny, no one calls pilots and management "morons" when they stand up for themselves. It's high time that the industry realizes that aircraft mechanics skills easily transfer outside of aviation. The automotive service industry alone estimates some 30,000 jobs went unfilled in 2001. Automobile sales are still over the top. Mechs have options. Their pay can only go so low.

United definitely needs wage and headcount reductions, but don't get angry when the mechs only give the minimum possible.


User currently offlineAA717driver From United States of America, joined Feb 2002, 1566 posts, RR: 13
Reply 21, posted (12 years 1 week 1 day 9 hours ago) and read 1206 times:

TNNH--I should have capitalized the word EVENTUALLY. No, there aren't enough jobs out there now for the entire workforce. But just like TWA who paid much less than the big airlines, there will be a slow drain of talented people to other airlines or industries.

You're probably right about companies choosing poor morale over good wages. Look at AA. They seem to revel in the fact that their employees hate management. Big grinTC



FL450, M.85
User currently offlineTwaneedsnohelp From , joined Dec 1969, posts, RR:
Reply 22, posted (12 years 1 week 1 day 5 hours ago) and read 1191 times:

They seem to revel in the fact that their employees hate management.

hahaha! Thats funny.


User currently offlineSean-SAN- From United States of America, joined Aug 2002, 772 posts, RR: 1
Reply 23, posted (12 years 1 week 1 day 4 hours ago) and read 1185 times:

J32 -- what's one zero, right? Sorry for my mistake.

 Smile


User currently offlineJ32driver From United States of America, joined May 2000, 399 posts, RR: 1
Reply 24, posted (12 years 1 week 22 hours ago) and read 1166 times:

Sean... no sweat about the math. I had to look at it 5 times to make sure I was spewing valid information myself.

As far as getting angry at the mechs for being willing to walk off... I can't. I've been there with a previous airline when pilot jobs were a plenty. I was 1 of the 100% of my pilot group that voted to strike. We were completely ready to shut the company down and start over at another company. Thats when it was easy to find a job.

The mechs are the only ones that can transfer skills easily. That puts them in the drivers seat. We just hope they are responsible drivers who are willing to take their foot of the gas pedal for a bit. Of course it doesn't much matter now. After all... the bankruptcy judge is in the drivers seat.


25 UAL1837 : While it isn't the only change needed to help bring back United, cutting labor costs will cut the cash flow siginificantly. Apparently, the unions are
26 Artsyman : Labor costs alone will not recover the 22 million a day, but it shouldnt. Tuning the airline will get some of it, getting rid of older planes will be
27 Klwright69 : Artsyman, you are right when you say that all UA's losses can't be entirely attributed to salaries. CO is losing money too. However, UA is twice is la
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