Star-Telegram: Delta'S Vote Against Unionizing Should Make American Airlines Stop And Think

[Bob Owens]

It's called compound interest... $1100 per year drawing 5% over 30 years results in a total of $81,523. You'd a 14% rate of return *consistently* over 30 years to be able to support a $580,000 payout, and I just don't think that's realistic. Maybe for one or two years, but the last five years have been nowhere near that.

Rates of return for public employee pensions have been averaging between 7.5% and 8%, and those staying at 8% are getting a lot of flack for it.

And your $33,000 in seed money at $1100 per year would only net $149,500 over 30 years...

That's why I say the number is mathematically impossible. Maybe for one year out of the 30 that was the company's contribution, but I highly suspect it's averaging out to a lot more than that, especially with lifespans increasing and rates of return being lower over the past couple years.

When we were given the option of converting to the 401K in either 1999 or 2000, I was told that the company's pension contribution worked out to between 9% and 11%, which is why they were going with only the 401K for non-union new hires. Plugging in an 11% contribution with 7% rate of return comes back with a whole lot more realistic end result ($4800 per year grows to just shy of $530,000).

So, you can choose to take your total value statement as the end-all financial document, or you can go look for an online compound interest calculator and run a few scenarios on your own.

Your numbers are based on an individual account, not a defined benifit pension plan.
You are forgetting about the fact that I may not live to see a penny of any of that, unlike a 401K which goes into a fund and it passed on to heirs. If my wife and I die before we retire they keep all that money. Some years the company may put in 9% but in others, like 2009 they put in ZERO. There were years in the go-go 90s where they put in nothing, and even took excess earnings out of the plan and used it to prop up profits, with a disproportionate amount going to the executives through profit sharing and bonuses.

 

[Bob Owens]

Based on everything that has happened to network airline employees so far, they have recovered much of their current earnings (the average salaries per full-time equivalent employee at AA is almost identical to those at every other network carrier except for CO which still makes about 10% less than other carriers - the continued legacy of CO's bankruptcies.

COs mechanics earn considerably more than AA mechs when benifits are added. Before the new contract it came out to around $10,000 more per year. Now its considerably more than that.

What the previously 4 BK carriers did accomplish in BK was to significant reduce their workforces and increase productivity - which is precisely what AA has been unable to do outside of BK.

I have to challenge that as well. AA has reduced their headcount by around 40,000 employees since 9-11 yet their revenue increased by around $5 billion(by years end-projected) over 2003. They did this with out increased outsourcing (outsourcing gives false productivity increases), in fact they increased the amount of work the do in house and they do more 3P work. What AA has achieved on the maint end is in fact remarkable.

 

[WorldTraveler]

Bob,
when you take into account total average employee compensation at CO vs. at other carriers (which is directly reported on their annual and or quarterly statements), it is very possible to calculate average compensation per employee.
The top of scale is far less significant than the distribution of people on that scale and the amount of pension compensation that airlines spend.
Remember that CO is a pretty young airline relatively speaking in terms of compensation because most of their employees left or had their salaries and pensions so dramatically reduced that CO has enjoyed a labor cost benefit for most of the decade. At the beginning of the decade, CO employees earned on average $60K per year in total employee compensation (salary and benefits) compared to about $100K for the network carriers (AA, DL, NW, UA, US).

In the last year, all of the network carriers are around $90K in average compensation per FTE except for CO which was in the low 80s. It is not a surprise that as CO's employee costs have grown, they have found it increasingly difficult to compete against other carriers, including in NYC which has become even more competitive than ever.

As a percent of total employees, AA had the 2nd lowest percent of employee reductions among the network carriers during the decade ended 2008 (right before the DL/NW merger)- about 25% compared with about 20% for CO, 35% for DL, 40% for NW, 50% for US, and about 55% for UA. CO actually laid off a higher percent of employees post 9/11 but grew their way back out of the crisis because of their low costs and their aggressive growth which continued for much of the past decade, slowing only in recent years.
But again, average compensation for AA employees is quite similar to those at the other network carriers except for CO.

AA has also done a very good job of maintaing its network size during bankruptcy compared with other carriers with the exception of DL which started growing quickly during BK and has gained even more network size as a result of better utilization of the acquired NW system and assets.
It is likely that UA will do the same thing as a result of the CO merger.

All of the network carriers reduced their headcounts and then turned the employee reductions into increased productivity. The simple fact - corroborated by publicly available statistics - is that the carriers that went through BK reduced their headcounts more because they were able to get rid of more high cost assets - and then turned around and starting growing after BK in order to obtain the efficiencies. Because AMR did not file BK, they have not been able to get rid of higher cost assets - and the associated employees - as quickly - and thus AMR's efficiency gains have come much slower than those at the 4 network carriers that filed for BK.

 

[ThirdSeatHero]

3rdseat,
The mechanics lost a lot of FUTURE retirement benefits when UA filed for BK and abrogated the contracts but there was very little actual loss because even one year under a new contract did not significantly increase ACCRUED retirement benefits. As you note, the PBGC does give partial credit for the benefit increases.

The loss of contractual pension benefits, future or otherwise, is a loss. Additionally, your assertion that there was no significant increase in accrued benefits over a single year is also incorrect. One example: As of the date of signing in 2002, the multiplier for Mechanics at UAL age 60 jumped from 56.44 to 87.00 per years of service. While the mechanics were among the highest groups, the other IAM groups benefits increased in equal proportion. This was significantly reduced with the PBGCs Phase in restrictions.

But also keep in mind that all airline employee groups became creditors in one form or the other of their companies duing bankruptcy - and most employees received stock in the reorgnized company as it emerged from BK. A significant reason for those lump sum payments and stock payouts was to compensate for the losses those employees suffered.
But most airline employees spent the money from the lump sum payouts and sold the stock, never putting it in their retirement accounts (401Ks). There are some who did and for them, the BKs probably resulted in increased retirement benefits than if those companies had not filed for BK - and they also reduced their taxes during the period when the lump sum or stocks were distributed.

I have no information on the particulars of the other network carriers BK proceedings, so on those I'll withhold comment. As far as UAL is concerned, we did indeed receive stock during the reorganization, and yes, I had my stock rolled into my 401k at the onset, but it came nowhere near in compensating for the loss of either wages or benefits (pension).

But again, the real point of this discussion is not to prove whether employees of the 4 previously BK carriers suffered loss or not but to show what MIGHT happen to AMR employees if AA were to file.

True, it wasn't the focus of the discussion but it is a part, insofar as it was a portion of the foundation of your position in the discussion. You stated there was no loss, and indeed there was.

Based on everything that has happened to network airline employees so far, they have recovered much of their current earnings (the average salaries per full-time equivalent employee at AA is almost identical to those at every other network carrier except for CO which still makes about 10% less than other carriers - the continued legacy of CO's bankruptcies.
Further, employees of the 4 carriers rec'd stock to compensate for their losses and in the case of DL and NW, only the DL pilots had their pension plans terminated - so the rest of the employees did not suffer the same kinds of losses that UA and US employees suffered. IN a sense, BK became somewhat more employee friendly for DL and NW employees than it was for UA and US.

I'm not sure if you are intending to include UAL employees in your assertions of recovering much of their current earnings, as UAL mechanics at least have not.

And finally other network carrier employees (besides AA) are receiving profit sharing that is increasing their salary levels to at or above what they made before bankruptcy.

While it is true that following the UAL reorganization we were made part of a profit sharing plan, in the years since the BK it has paid only once, and then a few hundred dollars. This in now way could be considered as ""..increasing their salary levels to at or above what they made before bankruptcy..""

As the industry is only recently started to stabilize, I tend to doubt the rank and file employees at the other network carriers have faired much better when it comes to profit sharing.

 

[Bob Owens]

My point is on the maint end AA enjoys an advantage. Our wage rates and other compensation are lower than Continentals. As far as reduction of employees you havent taken into account that outsourcing does not mean labor needed to produce has been eliminated, it just means that cost of the labor to produce has been moved out of "labor costs" to a different category. What it also does is produce a false productivity increase.
Other considerations when factoring Maint labor costs are when they are used to show AA CASMs, once again AA puts out misleading figures because in addition to insourcing more work we also do a lot of 3P work, especially at Taesel. So lets say AA puts $60,000 of labor into an RB211 rebuild and they make a $100,000 profit on the rebuild, which they split with Rolls Royce, well that $60,000 gets added to the Maint labor cost but it didnt produce any ASMs. This happens with all our 3P work, labor costs are incurred that dont produce ASMs, and we do a ton of it in Europe as well, where AA pays a lot more in benifits and around $45hr to their mechanics. All that labor gets added to our CASMs even though none of it is used to produce any ASMs. See how this can distort the numbers? Then the company will go out and claim that our mant labor CASMs are out of whack, and all the Wall Street types that are unaware of whats really going on will chime in about how AA needs to get their labor costs in check.

 

[700UW]

CO's FAs are IAM and are the highest paid of the legacy carriers. CO's BKs were years ago, nothing compared to last bankruptcies. Also I was involved in the IAM Negotiations at CO when they took concessions, that is some of the best management around in the industry, night and day compared to my previous employer US Airways. I was assigned to CO NC during concessions.

 

[WorldTraveler]

Bob,
I get the whole productivity number calculations... but you are stuck on the wages scales when the reality is that AA has about 10K too many employees for the same amount of seat miles that other airlines produce and total compensation per employee at AA is not the same as at CO. 700UW is coming to the same incorrect conclusions with regard to FA compensation. I have also said that the problem is not exclusively maintenance related but exists throughout AA. You continue to bring the issue solely down to insourcing and outsourcing of overhaul maintenance but the simple fact is that other carriers do a significant amount of maintenance in-house that is NOT overhaul related.
Total carrier productivity can be calculated from carrier financial documents. And despite what you might want to believe, AA cannot distort some numbers solely to show higher costs for one department... because if they overinflate costs in one department, they have to cut costs somewhere else because it all MUST add up to the total amount that is reported to Wall Street as a corporate entity. There are analysts at the DOT and on Wall Street who really study these numbers and can sniff out lies.There are far too many financial controls and audits in place to think that on a systematic basis, AMR is able to overstate costs attributable to every employee group and still show that they are losing money... that kind of stuff just doesn't happen.
Further, maintenance costs are one of the areas which companies report on a quarterly basis to the DOT - and AA has the highest maintenance costs among the network carriers - more than 60% higher than DL which is the lowest maintenance producer and 30% higher than the network industry average - which includes AA.
How much of the total productivity disadvantage AA has that is attributable to mainteanance is not known - because there are too many pieces of internal data that are not available. But AA's maintenance costs - which are carrier reported and have very specific guidelines about what must be included - are not distorted. Again, the total costs are reported and the sum of the parts must equal the total.
If you can tell me how AA handling maintenance in-house makes their maintenance costs 50% higher than DL's and 30% higher than the average of the network carriers, then I am all ears. If you can also tell me what other employee groups are driving the productivity disadvantage while maintenance is working at industry average productivity, again I am all ears.
The reality is that AA has grown very little during the past decade and that is a key reason why their costs are so high. All of the other network carriers cut their costs much more than AA while those were in BK. Compound that with the fact that CO learned over a decade ago that the way you keep costs low is to continue growing because you bring in new employees who are paid less. That principle is fundamental to the success of the low cost carriers. While the network carriers cut thousands of employees post 9/11, they drove their CASMs very high because they became much less productive and laid off the most junior employees who are also the lowest paid. Part of the reason DL was able to turn around so quickly was because they began growing while they were in bankruptcy which served to improve productivity. Now that they are hiring new employees, they have the opportunity to further drive down costs. With the exception of CO, none of the other network carriers have grown during the past decade. CO and DL are the only airlines that are flying more capacity now than they were on 9/11, even when you take out the capacity DL acquired as part of the NW merger.
The simple fact is that growth after a major restructuring is necessary in order to keep costs down - and AA has not grown. AA cannot profitably grow until they have industry average costs or else manage to find above average revenue opportunities for new markets - and if you know where those markets are, let AA mgmt know.


3rdseat,
I cannot tell you how you fared relative to the averages - that is yours to know alone. And just like the maintenance related costs above, I cannot know w/ specificity how UA maintenance fared relative to other employee groups.
I can know how UA as a whole did - and I can also know how UA and the PBGC as a whole handled the situation.
Again, benefits you were promised and not delivered are not the same as what was accrued and lost. Whether UA "wrote a benefits check" in some of their negotiations pre-BK which they knew they could not keep, I don't know... but remember that UA was coming off hundreds of millions of dollars in lost revenue that was directly related to employee strife in 2000 - and they weren't interested in repeating it given that the company's financial situation was far weaker as a result of 9/11.

But I also will say again that DL and NW employees DID fare better in BK than UA employees dd.. partly as a result of UA's very lengthy BK which slowed the period of recovery for everyone - and as a result of the fact that UA management dug very deep from the employees because there was considerable doubt as to whether UAL could recover... at the time UA filed for BK, the track record for emerging from BK among airlines was still very spotty.

But that also highlights that DL and NW both had a much clearer understanding of what they needed to do so they moved through BK much faster and they also did not dig as deep from their employees as UA and US did... the industry did evolve to being somewhat more friendly to employees during BK through the decade.. and DL and NW also petitioned hard for pension relief and got it - largelly because the PBGC was very worried about the possibility of taking on two more large airlines' pension plans. So not only did DL and NW get lower cost options to deal with their pension funding problems (remember that UA and US gave lots of stock to the PBGC), but DL and NW did not have to cut employee costs related to pensions as deeply.

So, your situation may have been worse individually and UA employees clearly did fare worse than DL and NW employees.
UA has also been much slower in returning to profitability - although they are closer to par w/ DL now - which has meant your ability to benefit from their recovery has been lessened.

But again relative to a potential AMR bankruptcy - if it ever occurs- the template has been written for a faster, more certain, and less painful bankruptcy process has been written and if AMR and its employees ever go down that road, the expectations for how they should fare should be more closely aligned to what DL and NW did than UA and US.
It would be nice to think that AMR could get its cost down outside of bankruptcy but given that it has never been done, AMR mgmt is focusing solely on growing revenue... while that is important, AA is not gaining any revenue advantage that other airlines don't already have and they are growing on a lower cost base.

 

[Bob Owens]

How much of the total productivity disadvantage AA has that is attributable to mainteanance is not known - because there are too many pieces of internal data that are not available.

Exactly.

Why are their maintenance costs so high? Winglets, oversized overhead bins, new interiors and countless other mods, older aircraft, doing 3P work and adding those costs to the costs at AA, they admitted that they do not seperate them. So if they do a C-Check for North American that cost gets added to AAs costs, when TEASEL rebuilds engines for various other carriers through their Rolls Royce partnership, all that gets added to AA's costs. Then we can go into things like remodelling and painting hangars, offices, flat screen monitors etc. Stations spending money on things that arent needed and when questioned management tells people "If we dont spend the money on something they will take it out of next years budget". They arent necissarily lying, just playing with the truth. There is nothing there to alarm regulatory agencys because no laws are being broken, even the shareholder isnt harmed by this selective disclosure of information. THey dont care if its used to try and supress wages. In Europe AA has a lot more mechanics than they would at US based cities with a similar number of flights, why, because those workers spend more time working for other carriers, this generates costs and revenue but not ASMs, yet another example of how the company distorts figures.

 

[ThirdSeatHero]

WT,

Rather than digress into a full blown analysis on the success and/or shortcomings of airline bankruptcies past or future, I'll simply reiterate my position.

Your previous response to Eric concerning pension losses was inaccurate.

""...Again, nearly all employees in the airline industry except for pilots have retirement benefits that were below the maximum guaranteed by the PBGC - so there was no loss....""

Thousands of employees other than pilots took pension cuts following UALs default. Receiving full benefits under the PBGCs maximum guarantee isn't based solely on whether or not your contractual pension benefit fell under it, there are a host of factors that come into play, one of the most onerous to UAL employees being the Phase In limits which dropped the payouts on our respective plans.

While you seem to consider future agreed upon contractual benefits as not factoring to loss, I will simply then disagree. Contractual benefits if not in wages are benefits negotiated in lieu of wages, therefore if those benefits are taken or reduced it is a loss. While myself and other UAL employees did indeed receive compensation in the form of a new 401k plan, profit sharing and stock allocations it came nowhere near to making us whole.

 

[Bob Owens]

Yes, that's what Bob previously posted was his 2008 total value statement amount shown for his pension contribution. In 2008, AA's pension contributions were small. In 2009, no contribution was made, and this year, AA contributed $460 million to the pension funds and expects to contribute about $520 million next year. This year, AA has about 66,000 mainline employees. The 2010 contribution equals about $7,000 on average per full-time mainline employee. If AA contributes $520 million next year, that will equal an average of about $8,000 per full-time AA mainline employee.

Nope, $1126 for years 06, 07. 08 and 09. Sure maybe they put in $500million, but my guess is most of thats for the Executives, management and maybe the pilots. The Execs usually get big pensions even with only a few years with the company because they often get a lot of years padded into the plan, managements plan is a lot better than ours, I know someone who recently went into management because he said it doubles his pension and the Pilots are forced to retire Early so a lot of money must be set aside for them as well. I think the company wants us all to be like Al Blackman and work until we are over 80. Like I said if they work us till we die they dont have to pay anything to our hiers. $1127 a year may be more than enough.

AMR has around 80,000 employees.

Hey, these are AAs numbers, they came up with them and added as part of our annual compensation. You also have to remember that in 2009 they didnt put anything into the plan, so the $6500 average for 80,000 gets knocked down to $3250 averge from 2009 to 2010. I think they claim they put $2 billion in since 2001, so thats only around $222million/year, we had more employees then but I'll let them slide with the 80,000 figure, so since 2003 they have averaged $2800 a year per employeee.

Like I told you guys already, the company said that in the short term the 401K, which was a max of 5.5% would cost them more than the DB plan. Why do you guys keep insisting these numbers must be so much higher than the company does? Figure it out, 5.5% of $68,000, so that comes out to $3740, so the figure is less than that.

I think that even then the numbers will be screwed up because you have to remember back in 2003 we lobbied to allow the company to defer funding the pension, so in the coming years they will have to make up for what they did not put in when they had more employees. The number of employees were in a steady decline since 2002.

 

[FWAAA]

Nope, $1126 for years 06, 07. 08 and 09. Sure maybe they put in $500million, but my guess is most of thats for the Executives, management and maybe the pilots. The Execs usually get big pensions even with only a few years with the company because they often get a lot of years padded into the plan, managements plan is a lot better than ours, I know someone who recently went into management because he said it doubles his pension and the Pilots are forced to retire Early so a lot of money must be set aside for them as well. I think the company wants us all to be like Al Blackman and work until we are over 80. Like I said if they work us till we die they dont have to pay anything to our hiers. $1127 a year may be more than enough.

AA doesn't contribute money to the DB pension earmarked with your name - AA simply contributes what the IRS-approved formulae requires each year based on actuarial assumptions about payouts, assumed rates of return and plan asset values.

Yes, most of the $460 million contributed this year was for the executives, management and pilots. Uh-huh.

AMR has around 80,000 employees.

So what? Eagle employees don't participate in a DB pension. Eagle employees have a 401(k) and that's it. AA mainline employees number about 66,000 this year.

Hey, these are AAs numbers, they came up with them and added as part of our annual compensation. You also have to remember that in 2009 they didnt put anything into the plan, so the $6500 average for 80,000 gets knocked down to $3250 averge from 2009 to 2010. I think they claim they put $2 billion in since 2001, so thats only around $222million/year, we had more employees then but I'll let them slide with the 80,000 figure, so since 2003 they have averaged $2800 a year per employeee.

In the 10 years ended 12/31/10 (including 2001 and 2010), AA has contributed almost exactly $2.7 billion to the DB pension plan (including the $460 million this year). At an average of $270 million/year cash outlay, it has been cheaper for AA (from a cash-flow perspective) than WN's defined contribution retirement plan expenses (in relative terms, as if AA adopted WN's DC plans), as I've posted numerous times since this board was established. WN's 401(k) match varies but ranges up to 9.3% for pilots and up to 8.3% for AMTs. Eagle's 401(k) match ranges up to 8% depending on years of service.

Like I told you guys already, the company said that in the short term the 401K, which was a max of 5.5% would cost them more than the DB plan. Why do you guys keep insisting these numbers must be so much higher than the company does? Figure it out, 5.5% of $68,000, so that comes out to $3740, so the figure is less than that.

Airlines not providing a DB plan typically contribute money to the employees' Defined Contribution accounts on top of the 401(k) match. Southwest contributes 15% of its pre-tax profits to its employees' defined contribution plans and matches the employees' 401(k) deferrals. If AA froze/terminated the DB pension plan, even the incompetent TWU and its ineffective negotiators would get more than a 5.5% match for the employees it represents. My guess is that the pilots and FAs would negotiate at least the same percentages as at WN.

 

[WorldTraveler]

Bob,
when AA or any other airline does contract work for another airline, they separate out the costs of providing that revenue from what is used to provide AMR's own maintenance services.
Given that AA should only be doing contract work that makes money, it makes all the sense in the world for them to do that work PRECISELY BECAUSE it reduces the cost of providing maintenance services to AA. The reason why the network carriers have the potential to make money providing contract maintenance is because they largely have the staff and equipment already in place. As long as they can schedule their own maintenance needs around the contract work (and vice versa), they should be able to obtain that business - assuming their costs for performing contract maintenance is competitive with - uh hum - 3rd party MROs.

FWAAA is exactly right that the DB plans that airlines really do not want to terminate DB plans because the replacement is more expensive to set up than to continue with what they have. That is precisely why DL and NW fought to obtain permission to delay funding their pension plans while in BK. DL and NW are contributing to new defined contribution plans while also catching up funding on their DB plans. AMR and CO have tried several times to be included in the program to delay pension funding but the rules were set up so that the plans had to be frozen in order to obtain delayed funding.

3rd seat,
I think we can resolve our discussion by acknowledging that bankruptcy is a bloody process that no one enjoys - it costs the companies hundreds of millions of dollars; employees lose; creditors obtain fractions of what they were owed; and common stockholders typically lose everything. Just for the company alone, UAL spent over $300M on its BK process, the longest and most expensive in the airline industry. Without a doubt, if the company could have reduced costs elsewhere, it would have gladly given the employees the $300M but BK is still the only process in which across-the-board cost reductions can be made along w/ balance sheet improvements.
As much as I agree with you that employees lose FUTURE benefits during BK, that is precisely why the process is used - and why UA probably agreed to significant benefit increases before BK, knowing full well that the chances they would be able to live up to those commitments were limited. Remember that it was UA who caved to the pilots after the horrific summer of 2000 which became the basis for the DL pilot contract increases shortly therefter. It was only because AMR did not conclude a contract with its pilots prior to 9/11 that they were not saddled with a pilot contract like UA and DL - one which set the standard for increases with other labor groups and which ultimately had to be unwound during BK. In short, yes, you lost future promises in BK but the creditors, stockholders, and the company itself did not recover what they lost during the BK process - either present or future obligations. And with all due respect, the creditors and stockholders did not intentionally bring the company to its knees until the goose laid its last golden egg.

 

[eolesen]

And finally other network carrier employees (besides AA) are receiving profit sharing that is increasing their salary levels to at or above what they made before bankruptcy.

You've made this statement twice now. I hate to call your bluff, but the profit sharing info I've been reading doesn't come anywhere near restoring salary to pre-filing levels. Who has been made whole, WT?

 

[eolesen]

The Execs usually get big pensions even with only a few years with the company because they often get a lot of years padded into the plan, managements plan is a lot better than ours, I know someone who recently went into management because he said it doubles his pension and the Pilots are forced to retire Early so a lot of money must be set aside for them as well.

What a load of crap, Bob.... What execs are getting big pensions with only a few years? Guys who gave up their retirement elsewhere? That's what happens when you get hired in from outside.

Given that all of the senior management team except maybe two or three have over 20 years, I'm really curious to know who got extra years..

Arpey's entire professional career (29 years) has been with AA.

Horton joined AA in 1985, and with the exception of the 4 years when he was CFO of AT&T, has also spent 21 years at AA.

Dolara started out in either reservations or sales, and 43 years of service,all of it with AA and Trans Caribbean (he came to AA thru the merger).

Del Valle started out as a flight attendant, and also has 25+ years (if not more), all of it with AA.

Goren, the new CFO, has 25 years with American.

Kennedy, the head lawyer, has been with AA for 26 years.

Kreeger, the guy heading up inflight, Res, and AA.com also has 25 years with AA.

So who is slurping at the pension trough that I missed?

 

[Hopeful]

You left Carty off that list. He received more AA credit than he actually had.