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Forbes Magazine
Wage Slasher
Thursday January 30, 6:34 pm ET
By Mark Tatge
With help from a Chapter 11 filing, DAVE SIEGEL persuaded $336,000-a-year airline pilots to take huge pay cuts.
David N. Siegel, chief of US Airways Group, the nation''s seventh-largest carrier, is leading a revolution that may change the airline industry forever--by challenging its most powerful union.
He''d be loath to say so. His main job, in the 11 months he has spent as chief executive, has been to turn around this seeming basket case, which suffered a 16% drop in business since Sept. 11, a Chapter 11 filing in August, delisting from the NYSE (shares trade over-the-counter for 22 cents), an estimated $1.2 billion loss last year on revenue of $6.6 billion and a fresh defeat in the Senate of a plan to extend payments to its pension fund by 23 years.
And yet the 41-year-old veteran of Continental Airlines, Avis Rent A Car and Northwest Airlines is upbeat. I''ve never been more optimistic, he says. It''s a fresh start for the company.
Is it ever. Yes, Siegel has done the predictably correct things to right the carrier, due to emerge from bankruptcy in March. He has restructured $8 billion in on- and off-balance-sheet debt, handed pink slips to 3,700 workers, slashed the fleet from 417 to 279 large jets, increased the airline''s load factor--the fraction of available seats paid for--2.1 percentage points to 71% and dropped the cost per available seat mile to 11 cents from 12.2 cents the year before. But he also succeeded where nearly everyone else--at US Airways (OTC BB:UAWGQ.OB - News) or at any other carrier--has failed before: in persuading surviving employees to take $1 billion a year in wage and benefit cuts. (Siegel himself took a 20% pay cut and passed on a $750,000 bonus.) More specifically, he has cracked a vertebra in the strong back of the Air Line Pilots Association (ALPA), which represents 67,000 pilots nationwide. With huge reluctance Siegel''s 4,059 pilots have accepted average wage cuts of 32% to 40%.
If it can happen at US Airways, can bankrupt UAL (NYSE:UAL - News) (United) and financially lame AMR (NYSE:AMR - News) (American) be far behind? Siegel is unapologetic. We either have a cost structure where we make money or we go away, he says. As a result of those concessions and across-the-board cutbacks, this optimistic boss believes US Airways will book a profit in 2004.
Siegel seems to have won over his people through amiability, straight shooting and steeliness--a bit like his Hollywood hero, Arnold Schwarzenegger. He constantly talks to people. Not only across the negotiating table but at cookouts, in hallways and break rooms. He flies in the cockpit jump seat discussing work rules and pay issues with pilots. Dave is not one of these CEOs who leaves by the side door to avoid employees, says David Bronner, chief executive of the Retirement Systems of Alabama, the pension fund providing $500 million in interim financing. Patricia Friend, international president of the Association of Flight Attendants, says Siegel is doing the best he can with a bad situation.
Better than that, he has exploited the downturn to extract unprecedented concessions, especially from pilots. Within a month of taking over last March, Siegel was able to persuade union leaders that, on its then-current course, the airline would run through $1 billion in cash within 12 months and probably find no lender willing to provide more. The unions were shocked, says John Luth, a financial adviser to the airline. No one had put it in these terms before.
With candor came toughness. In June, Siegel and Senior Vice President Jerrold A. Glass negotiated a deal with the pilots dubbed jets for jobs. Pilots laid off from mainline jets would be offered half the new openings for pilots on regional jets (50 seats), now flown by affiliates under US Airways'' colors. They will be hired first for all new pilot jobs at US Airways'' new regional affiliate. Made by Bombardier and Embraer, these little jets are quieter and more fuel-thrifty than US Airways'' aging turboprops. They will make it economical for the airline to continue flying to places like Omaha, Madison, Wis. and Mobile, Ala.
Pilots are not thrilled: A first-year regional-jet captain gets $51,000 for a work schedule that has him in the cockpit for 1,020 hours a year. That compares with $193,000 for a 12-year captain flying an Airbus A330 (who was making up to $336,000 six months ago). A pilot who is laid off and rehired at a regional starts at the bottom.
The pay-cutting started in July when US Airways was awaiting word on its $1 billion federal loan guarantee application. First officers on A330 jets were cut from $229,000 to $143,000; on Boeing 737s, from $152,000 to $111,000. Three days before filing for Chapter 11 on Aug. 11, 2002, grumbling pilots agreed to a six-and-a-half-year virtual freeze on wages, save cost-of-living allowance. Two days after United filed for bankruptcy on Dec. 11, 2002, US Airways pilots okayed a second round of wage givebacks, averaging 8%. These were done under threat of liquidation, says Roy Freundlich, spokesman for the US Airways unit of ALPA.
Everyone has had to make sacrifices, and the pain has been enormous, says Siegel. More torment is to come. Yet to be resolved is $3.1 billion in pension liabilities affecting 7,000-plus employed, furloughed or retired pilots. Average retired pilots expect 50% of annual pay, or up to $70,000. But Siegel says unless he''s permitted to pay those obligations over 30 years, he will foist a $500 million obligation on the Pension Benefit Guarantee Corp. Most US Airways pilots could get as little as $28,000 annually.
Workers at United, American and other lines are now competing against a trimmed-down US Airways. How long can they prop up the wage scale?
Wage Slasher
Thursday January 30, 6:34 pm ET
By Mark Tatge
With help from a Chapter 11 filing, DAVE SIEGEL persuaded $336,000-a-year airline pilots to take huge pay cuts.
David N. Siegel, chief of US Airways Group, the nation''s seventh-largest carrier, is leading a revolution that may change the airline industry forever--by challenging its most powerful union.
He''d be loath to say so. His main job, in the 11 months he has spent as chief executive, has been to turn around this seeming basket case, which suffered a 16% drop in business since Sept. 11, a Chapter 11 filing in August, delisting from the NYSE (shares trade over-the-counter for 22 cents), an estimated $1.2 billion loss last year on revenue of $6.6 billion and a fresh defeat in the Senate of a plan to extend payments to its pension fund by 23 years.
And yet the 41-year-old veteran of Continental Airlines, Avis Rent A Car and Northwest Airlines is upbeat. I''ve never been more optimistic, he says. It''s a fresh start for the company.
Is it ever. Yes, Siegel has done the predictably correct things to right the carrier, due to emerge from bankruptcy in March. He has restructured $8 billion in on- and off-balance-sheet debt, handed pink slips to 3,700 workers, slashed the fleet from 417 to 279 large jets, increased the airline''s load factor--the fraction of available seats paid for--2.1 percentage points to 71% and dropped the cost per available seat mile to 11 cents from 12.2 cents the year before. But he also succeeded where nearly everyone else--at US Airways (OTC BB:UAWGQ.OB - News) or at any other carrier--has failed before: in persuading surviving employees to take $1 billion a year in wage and benefit cuts. (Siegel himself took a 20% pay cut and passed on a $750,000 bonus.) More specifically, he has cracked a vertebra in the strong back of the Air Line Pilots Association (ALPA), which represents 67,000 pilots nationwide. With huge reluctance Siegel''s 4,059 pilots have accepted average wage cuts of 32% to 40%.
If it can happen at US Airways, can bankrupt UAL (NYSE:UAL - News) (United) and financially lame AMR (NYSE:AMR - News) (American) be far behind? Siegel is unapologetic. We either have a cost structure where we make money or we go away, he says. As a result of those concessions and across-the-board cutbacks, this optimistic boss believes US Airways will book a profit in 2004.
Siegel seems to have won over his people through amiability, straight shooting and steeliness--a bit like his Hollywood hero, Arnold Schwarzenegger. He constantly talks to people. Not only across the negotiating table but at cookouts, in hallways and break rooms. He flies in the cockpit jump seat discussing work rules and pay issues with pilots. Dave is not one of these CEOs who leaves by the side door to avoid employees, says David Bronner, chief executive of the Retirement Systems of Alabama, the pension fund providing $500 million in interim financing. Patricia Friend, international president of the Association of Flight Attendants, says Siegel is doing the best he can with a bad situation.
Better than that, he has exploited the downturn to extract unprecedented concessions, especially from pilots. Within a month of taking over last March, Siegel was able to persuade union leaders that, on its then-current course, the airline would run through $1 billion in cash within 12 months and probably find no lender willing to provide more. The unions were shocked, says John Luth, a financial adviser to the airline. No one had put it in these terms before.
With candor came toughness. In June, Siegel and Senior Vice President Jerrold A. Glass negotiated a deal with the pilots dubbed jets for jobs. Pilots laid off from mainline jets would be offered half the new openings for pilots on regional jets (50 seats), now flown by affiliates under US Airways'' colors. They will be hired first for all new pilot jobs at US Airways'' new regional affiliate. Made by Bombardier and Embraer, these little jets are quieter and more fuel-thrifty than US Airways'' aging turboprops. They will make it economical for the airline to continue flying to places like Omaha, Madison, Wis. and Mobile, Ala.
Pilots are not thrilled: A first-year regional-jet captain gets $51,000 for a work schedule that has him in the cockpit for 1,020 hours a year. That compares with $193,000 for a 12-year captain flying an Airbus A330 (who was making up to $336,000 six months ago). A pilot who is laid off and rehired at a regional starts at the bottom.
The pay-cutting started in July when US Airways was awaiting word on its $1 billion federal loan guarantee application. First officers on A330 jets were cut from $229,000 to $143,000; on Boeing 737s, from $152,000 to $111,000. Three days before filing for Chapter 11 on Aug. 11, 2002, grumbling pilots agreed to a six-and-a-half-year virtual freeze on wages, save cost-of-living allowance. Two days after United filed for bankruptcy on Dec. 11, 2002, US Airways pilots okayed a second round of wage givebacks, averaging 8%. These were done under threat of liquidation, says Roy Freundlich, spokesman for the US Airways unit of ALPA.
Everyone has had to make sacrifices, and the pain has been enormous, says Siegel. More torment is to come. Yet to be resolved is $3.1 billion in pension liabilities affecting 7,000-plus employed, furloughed or retired pilots. Average retired pilots expect 50% of annual pay, or up to $70,000. But Siegel says unless he''s permitted to pay those obligations over 30 years, he will foist a $500 million obligation on the Pension Benefit Guarantee Corp. Most US Airways pilots could get as little as $28,000 annually.
Workers at United, American and other lines are now competing against a trimmed-down US Airways. How long can they prop up the wage scale?
