Union: American Airlines Overstates Labor Cost Gap

DALLAS TheStreet) -- A key component of the AMR> ( AMR) recovery scenario is that contract improvements at competitors will lead to convergence with American Airlines' labor costs, which the carrier says are the highest in the airline industry.

American's flight attendants aren't buying it. As far as flight attendant costs are concerned, convergence in labor costs is already here, they say, a result of a series of contract improvements made by American's competitors.

"The cost disparity had turned to zero because of the contract increases," said Dan Akins, a consultant who serves as economic advisor for the Association of Professional Flight Attendants, in an interview. APFA represents about 18,000 American flight attendants. By mid-2011, "the flight attendant contract costs of other carriers were equivalent to those at American," Akins said.

"The conundrum for me is that American's cost disparity relative to their competitors has been shrinking, yet their performance in terms of profit margins has fallen further and further behind their competitors," he said.

Nevertheless Akins said he does not see an imminent bankruptcy, despite recent investor concerns that resulted in an overly enthusiastic sell-off last week.

On Oct. 3, American shares opened at $2.82 and sank as low as $1.75. Shortly before noon on Tuesday, the shares had nearly recovered the entire amount of that decline, as they traded at $2.73, up 8%.

It is accepted as common wisdom in the airline industry that American, the only legacy carrier never to seek bankruptcy protection, has a labor cost disadvantage relative to its peers. American has put the amount of the discrepancy at about $800 million annually. That number is not accepted by APFA, which says it is frustrated, not only by continual repetition of the number but also by the suggestion that American employees made no concessions. "In March of 2003, employees gave back $1.8 billion annually, and those savings are continuing," Akins said.

According to American, the $800 million includes roughly $200 million each for three items: wages, work rules, benefits (primarily health care for both current employees and retirees), as well as another $200 million annually that other carriers save by not contributing to pension plans. American says the numbers are based on an analysis that takes into account an average of contracts at each American competitor, rather than any specific contract. Akins said the computation has not been proven to the flight attendants.

In May 2010, American declared it had a $600 million labor cost disadvantage, but this year it increased the number in order to include the $200 million pension cost disadvantage.

In fact, the pension computation does not represent an annual expense item. Rather, American has indicated the $200 million represents the value of competitors' pension defaults spread over a number of years and viewed as an annual cost assumption. Said Akins: "There is no additional pension expense to include -- there is no difference in the cost of funding their plans versus other carriers funding defined contribution pension plans."

In any case, the flight attendant portion of the $800 million cost differential figure, which the airline did not provide for this story, is relatively small. About $800 million of American's annual payroll cost of $3.2 billion is for flight attendants, APFA said. It seems clear that the flight attendant differential has been shrinking since American quantified the $600 million differential in May 2010.

In January 2011, Continental flight attendants signed a new contract with a 2.5% retroactive pay increase and another 2.5% increase that took effect Sept. 1, 2011. Delta ( DAL) flight attendants received a 3.5% pay increase on Oct. 1, 2010. Southwest ( LUV) flight attendants received a 3% increase on July 1, 2010 and a 2% increase on July 1, 2011, awarded under a contract signed in 2008.

"Continental and Southwest might have increased flight attendant pay, but they don't have comparable benefits like retiree medical," said American spokeswoman Missy Cousino. "Plus, both carriers have significantly higher productivity meaning a lower cost per block hour. Even if convergence were happening, in cost per block hour, we remain hundreds of millions apart in terms of what we can afford and what APFA is seeking.

"American's flight attendants continue to be among the most highly compensated in the industry, including a benefits package no other airline matches," Cousino added. "We have real pay raises on the table and would be able to have higher rates if we had the equivalent productivity to go with it."

On American's second-quarter earnings conference call, CEO Gerard Arpey discussed the pay gaps. Regarding pension costs, Arpey said American spends about the same as competitors who abandoned defined benefit pension plans while in bankruptcy. "If you look at our defined benefit pension plans over the long run and you take their costs as a percentage of salary, you will find that that math leads to about 5%, 6% in terms of pension cost over time," he said, so continuing contributions are roughly equivalent.

Arpey said health care accounts for American's biggest cost disadvantage. "The bigger structural disadvantage we have is that our active employees do not contribute nearly as much to their medical plans (and) their medical contributions as the other airlines," he said. Additionally, he said, American spends about $250 million annually on retiree health care, while its competitors pay little or nothing.

-- Written by Ted Reed in Charlotte, N.C.

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