October 11, 2005

Bucking an industry trend toward cutting wages to offset soaring fuel costs, American Airlines is betting it has more to gain by courting its employees than by squeezing them.

American, fortified by a USD$3.5 billion cash pile, has embarked on the industry`s greatest experiment in union-management cooperation since an ill-fated attempt at employee ownership at United Airlines ended up with United filing for bankruptcy in 2002.

``Our strategy is... focused on continuing to improve our competitiveness... by having a constructive, collaborative working relationship with our people,`` American Airlines` CFO James Beer said in an interview. ``That approach has continued on a regular basis to yield fruit.``

The airline has encouraged cooperation by forming ``leadership teams`` comprising rank and file as well as management, paying performance bonuses and fully meeting its pension obligations, among other moves.

Executives at American are seeking union help in cutting costs and raising revenue while avoiding pay cuts beyond USD$1.8 billion in concessions granted by employees after the airline came close to bankruptcy in 2003.

The strategy goes against what Delta Air Lines and Northwest Airlines -- both of which filed for Chapter 11 bankruptcy protection -- are doing: Seeking wage reductions and also possibly convincing judges to let them stop funding pension plans.

Another competitor, Continental Airlines, won most employees` agreement on a package of cuts earlier this year.

American`s approach is being closely observed by analysts, who maintain that if energy costs stay at current levels, more substantive cuts will be needed.

The Fort Worth-based airline`s chief executive, Gerard Arpey, ``has done a good job in working with the unions, but the big test still lies ahead because American will have to cut further to stay competitive with these other airlines in bankruptcy,`` said Ray Neidl, Calyon Securities analyst.

American has boasted the lowest costs -- excluding fuel -- among the major US airlines, though they are greater than those of discount carriers like JetBlue Airways and Southwest Airlines, according to Calyon data.

Based on staff costs alone, though, American has the second-highest costs after Northwest among the majors.

American`s efficiency stems in part from ideas by the joint worker-management committees, which meet regularly.

The airline has acted on various suggestions by its pilots, allowing them to reduce air-speed when flights are running ahead of schedule in order to save fuel, for example.

As for aircraft maintenance, which can be so cost-intensive that many airlines have outsourced it, American is making progress toward a goal set in March of making its repair operations profitable.

American has attained close to USD$200 million in cost savings and increases in productivity and revenue at its Tulsa, Oklahoma maintenance base, said Bob Reding, senior vice president for technical operations, moving closer to a target of USD$500 million by the end of 2006.

American`s flight attendants are doing their part by selling meals and personal entertainment devices after the airline agreed to pay them commissions, said Tommie Hutto-Blake, president of the Association of Professional Flight Attendants, their union.

``We`re trying to get our folks to realize that the only way we`re going to turn this big old company around is every one of us trying to think of a new way to help,`` she said.

Though employees are still smarting from the 2003 concessions and therefore resisting further pay reductions, some have opened the door to catching up to rivals in productivity.

American`s pilots, for example, have been studying how Southwest pays their counterparts industry-leading wages while keeping one of its lowest cost structures.

``We want to go out and kick the competition`s butt,`` said Ralph Hunter, the head of the Allied Pilots Association, American`s pilot`s union, who admits he`s drawn some criticism for cooperating with management.

American unions also point to their united front in pressing the US Congress for pension reforms, including a joint visit to Washington in June by about 300 blue- and white-collar employees.

While the industry`s last experiment in union-management cooperation met an inauspicious end at United Airlines, that possibility seems remote for American, which has some of the most solid finances in a turbulent industry.

But it is a reminder of how high the stakes are on its wager that its union strategy can flout the conventional wisdom.

(Reuters)