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The heated rivalry between

US Airways'


management and pilots has given way to tense cooperation. This is the latest example of a fundamental shift in labor relations due to growing competition from low-cost carriers, and it could also mean good things for other carriers that are still hoping to renegotiate union contracts.

The situation at US Airways, which emerged from bankruptcy protection last year, is a prime example of how hostility can flare and then quickly fade as losses mount and both sides realize they must work together -- or perish. US Airways' pilots, represented by the Air Line Pilots Association, recently said they are willing to negotiate with management on a concessions package that could include additional pay cuts.

Two months ago, the pilots had a different stance, calling for the resignation of CEO David Siegel and CFO Neil Cohen. They were saying management had squandered the $1 billion in pay cuts the union had already granted, not including the termination of its pension plan.

"We are not changing our position about senior management; however, business is business and we're not going to watch the rest of the building burn while waiting for a management change," said Jack Stephan, a spokesperson for US Airways' pilots union. "We will engage with management in a comprehensive solution to return airline to profitability. It will require participation by all parties, not just pilots."

This isn't to say that all of US Airways' unions are willing to negotiate; the company's flight attendants, for instance, have sued management for breach of contract.

"In order to move forward, we need detailed information on how management intends to turn this company around, including how all levels of management intend to participate in the sacrifices required by the new plan," said Perry Hayes, president of the flight attendants union at US Airways. "Bad management decisions are costing this airline millions. After two rounds of huge concessions to save this airline, the employees will not solely bear the brunt of management's continued inability to return this airline to profitability."

The Hard Line Softens

The flight attendants may be talking tough, but the pilots' reversal indicates an industrywide recognition on the part of unions that struggling carriers can't return to profitability without their help. Today's unions won't cut off their nose to spite their face, unwilling to become the next Eastern Airlines, where unionized employees went on strike against CEO Frank Lorenzo in 1989, an act that helped lead to the carrier's demise.

"It doesn't take a rocket scientist to say that business is not improving dramatically. It's tough out there, and the thought is that sooner or later, unions are going to have to give -- it's just a question of when," said Helane Becker, airline analyst at The Benchmark Company, a New York-based brokerage firm.

Indeed, in today's environment, unions are willing to negotiate earlier in hopes of averting a lengthy stay in bankruptcy. The fates of



, parent of American Airlines, and

United Airlines

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are testament to this fact.

In December 2002, United filed for bankruptcy, the largest in the history of commercial aviation. Fourteen months later, the carrier has yet to emerge from bankruptcy, continuing to file for extensions, despite cutting employee wages and thousands of jobs. In April 2003, American's unions avoided this fate, agreeing to a last-minute package of massive wage concessions that not only staved off a Chapter 11 filing but returned the airline to profitability a year ahead of schedule.

All Together Now

The rise of low-cost competition has forced management and unions to put aside their differences and form a united front. Both

Southwest Airlines

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Frontier Airlines


plan to introduce service from Philadelphia, a US Airways hub, and that has already lowered ticket prices before a single plane leaves the runway.

As a result of the competition and high fuel prices, US Airways management said it needs to cut costs by as much as 25% in order to stay competitive. In the fourth quarter, US Airways' unit costs were 11.7 cents a mile, while Southwest's were 6.5 cents a mile.

"In US Air's case, Frontier and Southwest have both moved into Philadelphia with fares that are much lower than what's out there now," said Becker. "There's no surprise that US Air has a business plan that's not workable."

In this climate, some of the industry's longest struggles over wage concessions have ended. On Dec. 30, 2003,

America West


ended a four-year battle with unionized pilots, who narrowly approved a three-year contract. Seven weeks later, on the same day that US Airways' pilots announced their willingness to negotiate, America West reached a tentative four-year agreement with its Transport Workers Union. The agreement is subject to ratification, a process which begins in late March, paving the way for a signed contract as early as April.

The wage cuts from unions are part of America West's plan to lower costs, boost revenue and return to profit -- moves that would result in more jobs. In 2004 the carrier plans to aggressively expand capacity by 10%, and it plans to hire 1,000 new employees to do it.

The deals not only enable America West to keep costs in check, they also help the carrier gain momentum in its ongoing negotiations with flight attendants and mechanics. Also, the deals keep the carrier in line with the terms of a loan guarantee from the Air Transportation Stabilization Board, which was created after the World Trade Center attacks to provide liquidity to the airline industry. Under a seven-year business plan that allowed America West to secure the loan guarantee, the company agreed to limit pay increases. (If found in violation of that plan, the company would have to pay off its loans sooner than expected.)

Concessions a Matter of When, Not If

With the industry betting on an economic turnaround, management and unions are looking to build airlines with a chance to succeed over the long term, even if it means pain in the short term.

"We wish a lot was different," said Stephan, spokesperson for US Airways' pilots. "And one thing that's not changing is the competitive environment out there. We will work with management to come up with a solution. We have a lot of work ahead of us. This will have to be something that everyone takes part in. We're not looking for incremental fixes but an all-encompassing solution."

Ultimately, the recent developments at US Airways and America West can be seen as positive steps for shareholders of other carriers that are looking for wage concessions from unions, namely

Delta Air Lines

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Northwest Airlines



"All of the traditional carriers are in a bad place right now, but they're in a good place to negotiate with unions because they can easily prove business is not profitable at the moment," said Thom Nulty, partner Corporate Solutions Group, a travel consultancy firm in Monarch Beach, Calif. "They're in the driver's seat."

While unions and management seem more willing to bury the hatchet to stop the rise of low-cost carriers, concessions will not be easily won. Gerald Grinstein, Delta's CEO, wants to renegotiate the company's contract with pilots, which doesn't expire until May 2005, but he has said that a deal might not be reached in 2004. But unlike the disastrous spite-and-malice show that led to the insolvency of Eastern Airlines and other carriers in the past, the major difference now is that concessions will come before it's too late.

"The Delta pilots, in the end, they'll get a deal. It's going to be later rather than sooner at this point," said Becker, noting that all terms of the contract become open for negotiations in August. "Nobody ever wins in the type of negotiations we have in the airline industry, but the leverage is shifting from labor to management at Delta."