For many years, labor relations in the airline industry were fairly predictable. A very small number of airlines -- led by Southwest Airlines (NYSE:LUV) -- had harmonious management-labor relations. Southwest benefited from a unique team culture, while its superior financial performance has allowed it to avoid layoffs or pay cuts for employees.
On the other hand, most of the legacy carriers were known for contentious labor relations. Their frequent need for layoffs and other labor concessions in the years after 2000 certainly didn't help. United Continental (NYSE:UAL) was a particular basket case.
However, a management change last fall sparked a stunning improvement in labor relations at United. It is now on the verge of having all of its unionized employees on current contracts for the first time since the United-Continental merger six years ago. Meanwhile, Southwest Airlines faces the biggest management-labor rift in its history.
United Airlines nears complete labor peace
On Friday, United Continental announced that its flight attendants had ratified a new contract. The ratification vote was fairly close -- 53%-47% -- indicating that many of United's flight attendants were hoping for better terms.
Nevertheless, even a slim victory is a big accomplishment these days. As airline profits have soared in the past few years, labor groups have become more strident in advocating for a bigger share of the pie.
Furthermore, this is the first joint contract for flight attendants from pre-merger United Airlines and Continental Airlines. As such, it will allow the company to fully integrate the two groups, which will have important efficiency benefits.
That wasn't enough for one day, though. On Friday, United Continental also reached a tentative joint contract for its maintenance technicians. If this agreement is ratified by the rank-and-file employees, all of United's unionized employees would be covered by current contracts for the first time in nearly a decade, according to the company.
Southwest Airlines goes the other way
While United Continental has become a model for labor relations in the past year, Southwest Airlines has looked rather dysfunctional lately. The majority of Southwest's employees have amendable contracts now -- including its pilots, flight attendants, and technicians. In some cases, negotiations have been taking place for years.
The discord between Southwest's management and its unions came to a head earlier this month. The boards of directors for the airline's four largest labor unions all supported "no confidence" votes for Southwest Airlines CEO Gary Kelly and COO Mike Van de Ven.
The proximate cause of these votes was a costly IT meltdown in late July that forced the airline to cancel more than 2,000 flights. However, trouble has been bubbling under the surface for a while. Many employees are frustrated with the slow pace of contract talks and think that management is blindly focused on the bottom line.
Not surprisingly, Kelly (the Southwest CEO) was furious about the calls for him to step down. He blamed the votes on overzealous union negotiators, describing the public no-confidence vote as an example of "tribalism at its worst." In short, whereas the unions blamed Kelly and Van de Ven for undermining Southwest's unique culture, Kelly leveled a similar accusation at the union leaders.
When will passengers notice?
The $64,000 question is whether the improvement in labor relations at United or the downward spiral at Southwest will affect customers or investors in any way. In theory, disgruntled employees aren't likely to provide top-notch service. Not only is this bad for travelers, it could also hurt investors over time as customers take their business elsewhere.
However, Southwest Airlines is starting with a huge lead in the customer service department. In the 2016 J.D. Power North America Airline Satisfaction Study, Southwest received the second-highest score of any airline. Its score of 789 fell short of longtime winner JetBlue Airways by just one point. Thus, customers haven't noticed any change in customer service standards over the past year.
Meanwhile, United Airlines' score of 675 was the second lowest of any airline measured. To be fair, the survey results were compiled between April 2015 and March 2016, so the J.D. Power report doesn't fully capture the recent improvement in labor relations at United.
Still, even if there has been objective improvement at United, it could take years for passengers to fully recognize the changes. Similarly, Southwest can probably rest on its laurels for a little while. But eventually, reputation will catch up with reality. If Southwest doesn't make peace with its labor unions soon, it could suffer permanent damage to its reputation.
Adam Levine-Weinberg owns shares of United Continental Holdings. Adam Levine-Weinberg owns shares of and is long January 2017 $17 calls on JetBlue Airways. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.