United Airlines' desperate campaign to win a $1.8 billion federal loan guarantee was set back last week after its mechanics union rejected a proposed 7 percent pay cut. The vote threatened to effectively nullify even bigger concessions made by United's pilots and flight attendants; United hoped the package would shave $1 billion a year off its labor costs and allow it to return to profitability. With cash reserves rapidly dwindling and a $375 million debt repayment due tomorrow, United may have no choice now but to seek a financial timeout in bankruptcy court.
Even with all its unions on board, United's bid for federal aid was far from certain. Although House Speaker J. Dennis Hastert (R-Ill.), Chicago Mayor Richard M. Daley, Boeing and a legion of well-connected lobbyists were actively agitating on its behalf, United faced stiff opposition from rival carriers as well as the Bush administration's ideological distaste for undisguised corporate bailouts.
United's big problem, like that of American, Delta and US Airways, dates back to before deregulation, when the airlines were essentially a government-sanctioned cartel. Back then, airline unions used their threat to strike to win pay far above what other Americans with comparable skills were able to command. And because airfares were set by the government based on airlines' actual costs, the burden of these above-market wages was passed on to consumers in higher ticket prices.
Although deregulation largely changed that dynamic, it never really lowered the base pay on which subsequent increases were calculated. Nor did it eliminate many of the benefits and arcane work rules that prevent the old airlines from operating anywhere near as efficiently as well-run upstarts such as Southwest and Jet Blue. Now these low-cost carriers are the price-setters in the deregulated marketplace, forcing United to operate at a loss on many competitive routes.
In that context, the mechanics' vote is easier to understand. Bankruptcy or no, these workers are now face to face with the harsh reality that, after 25 years, deregulation is about to erode the last vestige of their above-market pay scales. Rather than surrender, they decided to go down fighting.
If United is forced to declare bankruptcy, it may be only a matter of time before the competitors who lobbied against the federal loan guarantee will be forced to follow suit. For the most part, these carriers are caught in the same cost squeeze as United. And after United emerges from bankruptcy shorn of debt, unwanted leases and onerous parts of its labor contracts, those rivals will face stiff competition from one more low-cost carrier ready and able to lower fares even further.