Airline Restructuring and its Effect on Labor

Ana McAhron-Schulz Air Line Pilots Association Minnesota Economic Association October 6, 2006 Air Line Pilots Association – Who We Are • Largest commercial air line pilot union in the world, representing 61,000 pilots of 40 airlines in the U.S. and Canada • ALPA provides three critical services to its members: – Airline Safety and Security – Representation – Advocacy • Celebrating 75th anniversary What Led to Airline Restructuring of Last Five Years? • Slowing economy after “dot.com” bubble burst • Terrorist attacks of 9/11 – Led to unprecedented reduction in demand and revenue – Accelerated economic slowdown • War in Afghanistan and Iraq • SARS • Substantial and unpredictable fuel cost increases • Disparity between low cost carriers and “legacy” airlines • Overcapacity in many markets • Management capabilities • Highly leveraged business Casualties of 9/11

• Bankruptcies • Airline Shutdowns – Aloha Airlines – Emery Worldwide – ATA Airlines – Independence Air – Atlas/Polar Air Cargo – Midway Airlines – Delta Airlines (also subsidiary Comair) – National Airlines – ERA Aviation – Southeast Airlines – Florida Coast Airlines – TransMeridian Airlines – Gemini Air Cargo – Trans World Airlines – Great Plains Airlines – Vanguard Airlines – Hawaiian Airlines – Mesaba Airlines – Northwest Airlines • Out-of-Court Restructuring – Sun Country – American – United Airlines – Continental – US Airways (2) – Alaska – America West Source: Air Transport Association, ALPA E&FA What Did Restructuring Consist of?

• Immediate decision by “legacy” carriers to downsize – Parked aircraft and cancelled orders and options – Furloughed thousands of employees • Followed by focus on significant cost reduction efforts – Labor costs were number one and principal target • Inherent weaknesses and inability to obtain additional financing from ATSB or other sources forced some airlines into bankruptcy • After several rounds of cost cutting, airline managements eventually focused on revenue enhancement Effect of Restructuring on Labor? Disastrous • Jobs lost • Significant wage reductions • Harsher working conditions • Reduced benefits • Lost pensions • Diminished career opportunities

Restructuring Led to Significant Loss of Pilot Jobs 7,000

6,000

5,000

4,000

3,000 Pilot Furloug 2,000

1,000

0 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

ALPA Pilot Furloughs

Source: ALPA Membership Database Many Carriers, Such as United, Opted to Downsize Fleet as Part of Cost Reduction Plans 700

600

500

400

300

# Active Aircraft # Active 200

100

0 United Airlines 1/1/01 United Airlines 1/1/03 United Airlines 1/1/06

Source: BACK Fleets Many Carriers Parked Aircraft

Parked Aircraft 2,500

2,000

1,500

# Aircra 1,000

500

0 1999 2000 2001 2002 2003 2004 2005 2006

Source: BACK Fleets and Merrill Lynch 5/15/06 Focus on Labor Cost Reductions • Labor costs comprised approximately 35-40% of total operating expenses • Several rounds of negotiations at various carriers led to significant erosion of labor pay, working conditions, job security and benefits • Pilots have suffered the brunt of these reductions • Situation has been exacerbated by bankruptcy process as well as lack of Administration/Congressional support for airline labor – ATSB – Pension legislation

Since 2001, Total Industry Labor Concessions Amount to over $12B per Year

4,000 Pilots 29% and Pilots 32.5% 11.8% Cut and 14% Cut 3,500 Pilots 21% and 3,000 18% Cut Pilots Pilots 23% 15% and 2,500 Cut 23.9% Cut 2,000

1,500 (in Millions) per Year Pilots 8.9% Pilots Cut 1,000 26% Cut 500

0 US Airways United American Delta Northwest Continental Alaska

Source: ALPA E&FA August 2006, ECLAT Productivity has increased in labor more than efficiency of fuel and aircraft utilization

Source: IATA Industry Outlook March 2006 Airlines are transporting record number of passengers with fewer and fewer employees

600,000 800,000

700,000 500,000

600,000

400,000 500,000

300,000 400,000 Employees Passengers 300,000 200,000

200,000

100,000 100,000

0 0 2000 2001 2002 2003 2004 2005

Top 10 Airlines Passengers

Sources: DOT Labor Statistics (10 largest carriers) (Full and Part Time Employees) Air Transport Association Pilot Reductions

• Pay – Eroded to pay levels of early 1980’s – Many pilots W-2 earnings were reduced by 50% between pay and downgrades • Working Conditions • Benefits – increase in all insurance costs • Pension – Loss of pension benefits that PBGC guarantee will not even meet – not all airline labor was impacted the same way – Terminated pension plans: US Airways, United, Delta – Frozen pension plans: Northwest, Continental

An example of a US Airways Pilot

737 CAPT A320 CA

A330 F/O

Approx 57.5% drop in Earnings with downgrade

767 F/O

Approx 21% Pay Cut (2002), Followed by a 18% Pay Cut (2004) 757 F/O A330 F/O

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 US Airways Pilot with 14 Years of Service if restructuring didn't occur US Airways Pilot with 14 Years of ServiceToday An example of a Mesaba Pilot

Avro Captain 38% decrease in Earnings

Saab Captain

Saab Captain

Saab FO

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Mesaba Captain with 17 Years of Service Today Mesaba Captain possible after concessionary contract Mesaba may have one of the lowest 50 Seat Jet Rates in the industry

Comair Eagle Express Jet PSA Chautauqua Air Wisconson Industry Average Mesaba Current Skywest Trans States Pinnacle ASA Mesaba Proposal Mesa Captain with 7 Years of Service on 1/1/07 Absent Organized Labor, Situation Would be Far Worse for Airline Employees • ALPA Negotiating Process – Analysis – Direction – Negotiations – Membership Ratification • What ALPA was able to secure: – Continued job security protection with particular focus on merger/fragmentation policies and outsourcing – Financial returns including pay increases (both guaranteed and variable), equity, profit sharing, notes – Where defined benefit plans were terminated or eroded, we negotiated improvements to defined contribution plans – Right to continued access to information – Board representation remained at United, Northwest, Delta, Hawaiian Focus is Now on Next Round of Bargaining • Airline industry performance is improving – Revenues are up – Fuel costs are decreasing – Capacity discipline – Strong demand – More competitive environment as all airlines are performing on a more level playing field • Outlook for 2007 is profitable • Pilots will look to participate in the upside of the industry