I BOUGHT GOLDEN WEST Airlines in 1979, along with two business associates. I have thus had a front row seat in observing the results of airline deregulation. My airline, in fact, went bankrupt as a result of it. Nonetheless, I continue to support airline deregulation. And I do so because it is good for both airline passengers and airline operators.
Deregulation has brought turmoil. A good example of it is the current strike by 2,000 mechanics against Continental Airlines. Continental says it lost well over $450 million in the last 41/2 years. It is one of those airlines barely hanging on to existence. It is beseiged by non-union competition which pays far lower wages and benefits and suffers from far fewer work-rule restrictions than Continental. Yet the machinists' union is asking for a wage and benefit increase that the company says would exceed its last offer by $26 million by the end of 1984.
As a former airline owner, I see that union demand as reflecting unrealistic thinking that dates back to days when regulated airlines could pass on wage increases to passengers without worrying about competition. Sadly, large segments of the airline industry are still dominated by that kind of thinking, and it is hardly just the unions' fault.
We, the owners obviously have to assume an abundant share of the blame. We were not accustomed to economic freedom. Forty years of government regulation, cartelization, and protection had made us adept at dealing with government bureaucrats, not necessarily at competing for and retaining customers in a free market.
Learning how to compete has been -- not surprisingly -- painful, as I can personally attest. Nonetheless, deregulation has already freed the industry of many of its former rigidities. And the industry will become even more efficient in the future as fleets, aircrafts and route structures are realigned to reflect market realities rather than political preferences. Customers are already being served in almost all cases far better than before deregulation.
The Continental saga is still unfolding, but the story of how Golden West went belly up may show what was wrong with the airline industry when it was regulated, what we ourselves did wrong, and why I still think that a deregulated free market is in everybody's best interests.
Prior to deregulation, Golden West Airlines completely dominated the Southern California commuter airline market. However, unany other commuter airline in California, it was totally unionized and subject to extremely onerous work rules. At the time, it was in a position to pass these increased costs along to the public. Competition was limited. Joint fare arrangements with the major carriers made Golden West profitable despite its union costs.
Then along came two staggering blows. Deregulation brought dramatically increased competition. The strike by the airline controllers brought landing slot restrictions imposed by the government. This led to major changes in the schedule of departures and landings. And Golden West, because of its union work-rule restrictions, did not have the flexibility to cope with it. The union agreements also resulted, as a practical matter, in Golden West obtaining 40 hours of flying time per month from its crews, compared to 80 hours by the crews of its non-union competitors. These competitors also paid less.
By early 1982, Golden West was in desperate financial condition. Our first move was an attempt to get the pilots' union to remove the work rules that kept us from getting competitive levels of flying hours from our crews. We were turned down in this effort. We then proposed that our pilots, flight attendants, mechanics and station agents accept a 10 percent wage cut. At the same time we obtained major concessions from all our lenders in the form of deferments of payments of principal and interest on our debts.
The Teamsters' union, which represented our employes, took a neutral position on our wage cut proposal. It said that although they would not recommend it, they would not oppose it and would permit the company to attend the union meetings at which the votes would be held and attempt to convince the employes to vote for the proposal.
Over a period of five days I traveled with all of the union shop stewards to all of our locations throughout California. I spoke to each meeting seeking the employes' support for the wage cut proposal. There came a time on a rainy day in Bakersfield, after having been at this effort for four days and nights, when I was discouraged. I believed the effort was failing and that I was probably just as well off. On behalf of myself and the two other stockholders, I was preparing to throw in the towel, stop flying and avoid further losses.
However, at that point an incident occurred which caused me to continue the effort. We were about to leave in our Twin Otter for a slow, stormy flight from Bakersfield to our next appearance at our San Diego station when our flight was delayed. Most of the union shop stewards who were traveling with me were not on board at the appointed time. Our schedule was extremely tight. I got angry.
I rushed off the plane and back in the station. Only to discover our union shop stewards were behind the counter aiding passengers of a delayed flight and assisting their fellow station agents in getting the stranded passengers off on another flight. They were carrying bags out to the plane, checking in passengers and, in general, clearing up the confusion that existed. As soon as all was in order at the station, the shop stewards rushed out to our plane for the flight to San Diego. At that point I concluded that if the employe union representatives were that dedicated to the airline, it was surely worth a lot more effort on my part to help save it.
Eventually, the 10 percent wage cut was approved by the employes, though everyone knew it was merely a stop-gap measure. If economic conditions did not improve by the next year, the airline would be in fatal trouble.
Of course, economic conditions worsened. By January l983, the financial position of the airline was even more precarious than it had been in the preceeding year. And there had been a major change in the union representation of the pilots. They had voted out the Teamsters and voted in the Air Line Pilots Association (ALPA).
We went to our unions and sought a wage freeze and the elimination of all work rule restrictions in order to put ourselves in a competitive position from a labor cost standpoint. The Teamster locals were, in general, sympathetic to our problem and there was indication they were prepared to go along with our requests. The pilots union, however, completely turned us down and demanded a huge wage increase with no reduction of work rule restrictions.
At that point I came up with the idea of exchanging the work rule restrictions and excessive levels of wages and salaries for stock ownership in the airline. I began negotiating with some of the employe representatives with the objective of having the employes buy up to 50 percent of the stock in the airline through a wage set-aside program.
This initiative on my part caused high controversy between me and the other owners of the airline. On the other hand, the Teamsters indicated they favored it. The ALPA representatives indicated it was certainly worth further study. However, the other directors of the company and our banks would not go along with the idea of eventual employe control of the company.
As a result, this initiative was turned down primarily by the management and other ownership interests in the company who told me they felt my intervening in the negotiating process in this way had cost them any chance to work out the arrangements they had originally proposed to the unions. They felt the unions were now committed to a program of ownership and control or nothing. From there on the negotiating situation deteriorated very rapidly. The pilots union refused any concessions along the lines being requested by the company. The company landed in a Chapter 11 bankruptcy proceeding.
Whether the other directors were correct that my intervention made it impossible for the management to work out a conventional agreement with the employees or not, I don't know. I personally felt that the union-management conflict built into a long relationship, and the excessive costs and inflexibilities which were a part of the work rule restrictions, made it impossible to operate Golden West Airlines in a competitive environment. I felt then that the only hope was to trade ownership partnership for these excessive costs and rigidities. It might have succeeded, However, it never got the chance.
I am nevertheless convinced of two points:
The idea of offering ownership or profit participation in exchange for union-imposed cost excesses will, in fact, become an important ingredient in future American industrial negotiations.
The American economy and the American consumer are in the long run benefited by the effects of intense competition which penalizes businesses that have allowed themselves to develop unreasonable and excessive cost structures.
These penalties and the adjustments they occasion are not without considerable pain. My partners and I lost in excess of $4 million. In the case of the employes, they lost their jobs in an industry with an extremely high unemployment rate.
I think in our case there was plenty of blame to go around. But Golden West Airlines could have been saved had we as owners and managers done our jobs better, and had our union employes recognized the need for greater flexibility and understanding of the basic economics of our industry.
There is no question that deregulation has changed labor relations in the airline industry. I cannot think of any other industry in which such change was more desperately needed, although we hardly stand alone. Auto industry wages, for example, have been shaken to their roots by foreign competition. It is high time the American labor movement found out the ultimate truth: When you drive your employer's costs too high, you are directly responsible for the resulting unemployment among your membership.
This is a lesson Continental Airlines workers may yet teach us again. The encouraging aspect of the Continental strike is that significant numbers of mechanics seem to realize the importance of maintaining their jobs. These are the ones who are crossing the picket lines and working. Pilots, station agents and flight attendants are continuing to work. Continental says it is back up to 93 percent of its regular schedule.
What all of this indicates is that the labor movement -- at least in the airline industry -- has lost its consensus. Economic reality is changing the whole nature of the bargaining relationship, as it is in other industries. Ultimately, I am convinced, the labor movement in the United States will regain its consensus only when its positions are consistent with the economic needs of the companies and industries in which its members are employed.
Competition is what has changed all these attitudes, and deregulation is what brought on this competition. I can think of very few things that are likely to prove more beneficial to the American economy. The airline passengers of California did not owe us a living. They did not owe above-competitive wages to our employes nor profits to us, the owners. We had to earn those benefits, and we didn't.
I prefer being a competitive businessman to a politician scurrying after government favors. Competition has not created chaos. It has encouraged long-overdue adjustments to a competitive world. Even though my own airline became one of its casualities, I still believe that deregulation is proving of great benefit to the airline industry in particular, and the American economy in general.