Earnings at the top U.S. airlines -- particularly American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), and Southwest Airlines (NYSE:LUV) -- have soared in the past two years or so. In many ways, a new golden age of the U.S. airline industry has begun.
However, as airline profits soar, it's natural for employees to look for pay increases and work rule improvements. That's especially true because employees had to endure reverses on both fronts in the past 10-15 years. This tension recently revealed itself strikingly as American Airlines flight attendants rejected a lucrative contract offer from management.
Contract time at American Airlines
In September, Delta Air Lines announced that it would give employees an early profit sharing payout this year to reward them for the company's surge in profitability. Delta also promised a 3%-4% raise for all front-line employees next year.
Coincidentally, Delta announced these raises around the same time that American Airlines and its flight attendant union were putting the finishing touches on a tentative contract agreement.
The Association of Professional Flight Attendants had committed to negotiating an industry-leading contract with American's management team. Delta's raises meant that the just-completed contract was no longer the best in the industry. So the APFA went back to American Airlines' management and got a match for the Delta raises, worth $13 million annually.
The proposed contract would have allowed American Airlines and US Airways flight attendants to leapfrog other flight attendant groups to become the best paid in the industry, so it seemed like a no-brainer that union members would ratify it. Instead, the APFA announced on Sunday that the ratification vote failed, with 8,180 votes in favor and 8,196 opposed.
A strange situation
Normally, when union membership rejects a tentative contract agreement, management and the union resume negotiations in order to reach an agreement that can find enough support for ratification. However, American Airlines' unions and management already agreed on an expedited arbitration process in the event of a failed ratification vote.
Under the terms of this agreement, the arbitration award is capped at parity with Delta's industry-leading contact. As a result, the company and the union both agree that the contract terms determined by arbitration will be worse than what the flight attendants just rejected!
This could make for a quick arbitration process. Both sides have already agreed to an industry-standard contract, so there's not much left to "arbitrate." Presumably, American would assent to the maximum $111 million in contract improvements, putting its flight attendants at parity with Delta's. That would represent an $82 million savings over the life of the contract compared to the agreement that was just rejected.
Are bad labor relations back?
Presumably, the thousands of American Airlines flight attendants who voted against the tentative agreement want better contract terms -- not worse ones. Given that American Airlines now has a clear legal path to imposing contract terms that are less generous than what it had previously offered, it's clear that the flight attendants are playing "chicken" with management.
If the union and management team go ahead with the arbitration process, it will undoubtedly make a lot of flight attendants bitter. In the long run, that's probably not worth the relatively small amount of savings that American would achieve.
That's why thousands of flight attendants are betting that American Airlines will offer a better deal in mediation talks before going to binding arbitration. Yet there is a very strong possibility that the union and management team will end up in arbitration anyway, locking the flight attendants into a contract inferior to the one they just rejected.
This isn't the only battleground
The American Airlines flight attendant contract is one of many recent instances of contentious bargaining in the airline industry. Southwest Airlines has traditionally had excellent labor relations, yet a recent piece in Businessweek described its workforce as "disgruntled."
Sure enough, 10 union leaders -- representing the vast majority of Southwest's employees -- sent a letter to Southwest CEO Gary Kelly in June, claiming that employee morale was at an all-time low. The union leaders suggested that the inability to reach long-term contract agreements with Southwest was one of the biggest problems.
Meanwhile, the International Association of Machinists -- a prominent airline union -- is making a push to represent flight attendants at Delta. (Most Delta employees, including flight attendants, are not currently unionized.)
Rising health insurance premiums have been a key point emphasized by the IAM in pitches to potential members at Delta. It's far from certain that it will succeed in its unionization drive. But the fact that it's even trying when Delta flight attendants have the best pay in the industry shows that many employees want even better terms in light of Delta's record profitability.
The next few months could be key
American Airlines and the APFA union have just a few months to try to hammer out a revised agreement in mediation before going to binding arbitration. The arbitration result is certain to be worse than the contract terms that American's flight attendants just rejected.
What happens in the coming months could be critical for the entire airline industry. If American and the APFA reach a mediated settlement it will provide a model for labor-management cooperation in an era of plenty for U.S. airlines. If not, it could be the beginning of a new round of labor strife as airline workers try to get a bigger piece of airlines' surging profits.
Adam Levine-Weinberg has no position in any stocks mentioned. 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.