Airline cost problems remain

The CEO of USAirways announced the need for new cost cuts next year. Most of these cuts will come from labor. Northwest has labor cost problems, too — although theirs are perhaps even greater because they haven’t used the bankruptcy process to restructure their labor expenses.

The interesting thing is that across the board, most of the labor cost savings of the last year have come from a smaller workforce rather than lower pay. In other words, the airlines have done a fairly good job of wringing featherbedding out of the contracts.

Southwest Airlines remains profitable even though it is just as unionized as the other major carriers. The difference in labor contracts is workrules. JetBlue, also profitable, has a huge cost advantage in labor. The contract with their pilots is less than thirty pages. The question in both cases is whether their cost advantage is sustainable.

The other significant cost issue facing airlines is underfunded pensions. This is partially a function of several years of a sluggish stock market. Stock market gains increase the value of the pension portfolio, losses reduce the portfolio value and force the airline the add cash.

The quasi-governmental Pension Benefits Guarantee Corporation has taken over the USAirways pension plan for pilots, which is estimated to be underfunded by $2.5 billion. Delta is taking a big charge to its balance sheet for its underfunded pension, which may cause it to show negative equity. And United may be faced with terminating its pilot pension as well.

The major airlines are pushing for legislative action. The most likely result is that the government will push off contribution requirements for several years.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community Milepoint.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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