United Continental Writes Labor Another Big Check

As United Continental (NYSE: UAL  ) merges the operations of its predecessors (United Airlines and Continental Airlines) the integration of its labor groups has been one of the toughest tasks. Full integration is necessary for United to realize the synergies it expects from the merger. While United's management originally hoped to complete integration in 12-18 months, significant work remains to be done more than two years after the merger was finalized on Oct. 1, 2010.

Two weeks ago, United took another step toward completing the integration of its labor groups. The company announced that it had reached a tentative agreement with the IAM union, which represents more than 28,000 fleet service workers, customer service agents, and storekeepers for United. While it is critical for United to complete these new labor contracts, it has only done so by writing big checks to its labor groups. These costs may be filed away as "special items" in United's earnings reports, but they are eating away at United's cash flow nonetheless.

Pilot payday
United completed a new labor contract with its pilots last year. The pilot agreement boosted pay by an average of 43.2%, but also included a $400 million lump sum payment: roughly $40,000 per pilot. Including other costs, the ratification of the agreement led United to take a $475 million charge last year. The primary justification for the lump sum payments is that they represent retroactive pay; in other words, they make up for raises that employees would have received while negotiations were occurring.

Deja vu
This month's IAM agreement will also include a significant amount of retroactive pay. The IAM states that the current contract ought to have been completed as early as 2010, and employees have lost substantial income (in the form of foregone raises) due to the delay. According to a preview of the agreement released by the IAM last week, workers will share a total of $130 million in retroactive pay. The wage raises included in the agreement are fairly modest (5%-10%), but workers will also receive additional protection against layoffs and perks like more vacation time.

The short-term costs of United's new labor agreements are significant, and it could take many  years for United to make up for these front-loaded costs in future savings. While United ended last year with plenty of unrestricted cash ($6.5 billion), that is down by $2.2 billion from the end of 2010, and is offset by United's heavy debt burden. The one-time costs of United's new labor agreements are just one reason why United is probably a value trap.

Encore?
Another major airline merger is on the horizon, with American Airlines (UNKNOWN: AAMRQ.DL  ) and US Airways (NYSE: LCC  ) having recently announced their intention to merge. There are plenty of reasons to believe merger integration will be very expensive for American and US Airways, just as it was for United and Continental. With labor groups at both carriers having earned much less than the industry average for a long time, "retroactive" pay bonuses could soon haunt American and US Airways, too.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2013, at 12:55 PM, PAQuaker wrote:

    Would you mind please providing your email so I can send a private comment.

    Thank you.

  • Report this Comment On February 27, 2013, at 2:21 PM, IAHpilot wrote:

    "Pilot payday

    United completed a new labor contract with its pilots last year. The pilot agreement boosted pay by an average of 43.2%, but also included a $400 million lump sum payment: roughly $40,000 per pilot. Including other costs, the ratification of the agreement led United to take a $475 million charge last year. The primary justification for the lump sum payments is that they represent retroactive pay; in other words, they make up for raises that employees would have received while negotiations were occurring."

    That paragraph is not correct. Please correct it, and get the facts. There may be a few Airbus 320 pilots that got a big raise, but certainly nowhere near 43.2%. The $43.2% is not even close to an average raise percentage. My raise was close to 21% and that is after pay cut after pay cut and concessions since 9/11. The lump sum amount is no where near what the company owes me if they payed me my new pay rate since the contract expired. My lump sum amount is $37,000 (before taxes), and that is being held up by lawsuits. I understand you are not a fan of labor, but at least get your facts correct.

  • Report this Comment On February 27, 2013, at 2:35 PM, TMFGemHunter wrote:

    I apologize if that number was incorrect; I've seen that cited in a number of places. It's possible that 43.2% is the total raise over the course of the contract. My understanding is that there will be an 8.5% raise next year and 3% raises in the following years.

    I wouldn't say it's fair to characterize me as "not a fan of labor". I'm not a fan of investing in United Continental because of the structure of its labor deals. Delta pilots are getting very nice raises and I'm a big fan of that deal because it will allow the company to cut a lot of costs elsewhere.

    @PAQuaker: You can reach me at alevineweinberg@fool.com.

  • Report this Comment On February 27, 2013, at 2:41 PM, IAHpilot wrote:

    Thank you for responding. I have also seen that 43.2% number in other articles. I have no idea where it came from, and it is definitely incorrect. I stand corrected on my comment about you not being a fan of labor.

  • Report this Comment On February 27, 2013, at 2:47 PM, boeing737pilot wrote:

    As a current United pilot, I do not even know where to begin how inaccurate and misleading your article is with regards to pilot pay increases under this new contract. One that I might remind you was years past the amendable date to begin with.

    The above comments from readers are true and let us also not forget that United management dragged out negotiations for so long only added to the numbers of money that was rightfully due to the pilots. Mr. Levine-Weinberg if your employer delayed or failed to reach a timely negotiated settlement, would you not expect money owed to you from the time of your amendable date of a collective bargaining agreement?

    If you really want to write a story on high salaries versus returns on investment, how about an article about the bloated compensation of United management given the dismal financial performance?

  • Report this Comment On February 27, 2013, at 3:34 PM, fastbreak02 wrote:

    While I would agree that an investment in UCH would be a poor choice, I believe you are misguided in your reasoning.

    Quite frankly, UCH's problems lie not with their employee groups, but are firmly planted in their board room. Their management is clueless about what goes on in the trenches at an airline. If they ever figure out that their people ARE their airline they may well become a force to be reckoned with.

    For now they will simply languish in mediocracy, waiting for a leader to show up. They certainly don't have one today.

  • Report this Comment On February 27, 2013, at 3:36 PM, TMFGemHunter wrote:

    @boeing737pilot: This article isn't even about pilot pay. I merely mentioned the pilot agreement as an example of another significant earnings charge/cash flow item.

    I would disagree with your point of view that you are/were entitled to a big raise. There are plenty of people in this country who are glad to have any job, let alone a stable job with six-figure income. I'm happy for you that you are getting a nice raise and some other benefits. I just don't think you were really "owed" anything. Your union reps did a good job of negotiating lump sum payments: that's all.

    I agree that United shareholders haven't been served well by executives in the past year or two. That's why I dumped my shares last year, and am now short UAL. For what it's worth, I think the board should have brought in an outside chairman, rather than giving all the power to Smisek. However, executive pay is not a significant driver of United's costs.

  • Report this Comment On February 27, 2013, at 3:46 PM, TMFGemHunter wrote:

    @fastbreak02: I think you misunderstood the point of the article. I am not blaming employees for United's poor performance: the buck stops with management.

    The point I was trying to make here is very simply that United is being hit with a bunch of one-time expenses related to labor agreements and other cost increases. I don't think the company will be able to grow unit revenue fast enough to meet profit projections given the cost increases.

    If anyone is to blame, it is management, for losing so much ground on unit revenue compared to competitors last year.

  • Report this Comment On February 27, 2013, at 4:57 PM, boeing737pilot wrote:

    @TMFGemHunter

    >I would disagree with your point of view that you are/were entitled to a big raise. There are plenty of people in this country who are glad to have any job, let alone a stable job with six-figure income. I'm happy for you that you are getting a nice raise and some other benefits. I just don't think you were really "owed" anything. Your union reps did a good job of negotiating lump sum payments: that's all.<

    Negative sir. Owed is in the eye of the beholder. I get sick and tired of this class envy arguments when it comes up to pilot pay. The plenty of people in this country that would be glad to have my job can also do it themselves. Serve in the militarily and defend your country as a pilot or slug it out through the civilian process of obtaining ratings and hours. I also doubt very much passengers on board complain how much pilots make when in an emergency the years of training and skill make handling the events second nature.

    After the 8.9% giveback in 2005 and with this agreement, my pay was only raised 3.1% which hardly even keeps up with inflation. The retro alone does not even factor in the work rule and quality of life issue that equates to dollars which can never be recouped.

    Finally I noticed you did not comment if the same situation was applied to you and your contractual agreements and delays in your salary and benefits. We were in fact "owed" retro monies based on the delay of obtaining a new CBA.

    >>I agree that United shareholders haven't been served well by executives in the past year or two. That's why I dumped my shares last year, and am now short UAL. For what it's worth, I think the board should have brought in an outside chairman, rather than giving all the power to Smisek. However, executive pay is not a significant driver of United's costs.<<

    On this I completely agree with you.

  • Report this Comment On February 27, 2013, at 7:40 PM, TMFGemHunter wrote:

    We'll just have to agree to disagree. I've never had the luxury of having a contract that entitled me to raises...

  • Report this Comment On February 28, 2013, at 8:04 AM, fastbreak02 wrote:

    >>I've never had the luxury of having a contract that entitled me to raises...<<

    No offense but like Mr. Smisek you've probably never had a "real job" either...

  • Report this Comment On February 28, 2013, at 10:02 AM, 767guy wrote:

    Author is not against labor, cites DAL raises as not hurting Delta. DAL pilots are paid a hair more than UAL pilots, were paid a lot more than UAL for last few years, AND got retro pay with their merger contract. But the author is ok with that......

    As others have stated, my raise at UAL was 21%, AFTER giving up 42% in our post-911 bankruptcy. Without even accounting for inflation, this raise means I make less than I did since the 2000 contract.

    I don't feel "owed" what I make, I earn it. The author feels I should be satisfied with such a good, stable job. I saw over 2,000 of my fellow pilots furloughed while I took that 42% pay cut. This great job is open to anyone. Just apply, as long as you're qualified. The author ought to get his facts on that process before staring our pilot group feels we are "owed" anything.

    I agree with the author that management is the real problem by not growing unit revenue as fast as competitors.

    DAL has higher labor costs but is better managed. Since Smisek, the Continental CEO took over, United has list many premium customers due to changes that are destroying United's focus on premium, international travel customers.

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