Airline merger dramatizes new union clout
Unions at Frontier Airlines opt for People Express. Transworld workers favor financier Carl Icahn. Behind these recent corporate takeovers is a bold trend: Labor unions in the United States are getting a major say in the fate of companies.
Financially troubled Frontier Airlines, based in Denver, agreed this week to a buy-out proposal by People Express, the no-frills airline based in Newark, N.J. As with TWA last summer, Frontier's labor unions were crucial in determining who the new owner would be.
The labor position both times was basically: not Frank Lorenzo.
Mr. Lorenzo is president of Texas Air. He had made offers for both TWA and Frontier. But his reputation scared the unions. Lorenzo took his Continental Airlines property right into Chapter 11 bankruptcy so as to rescind the union contract and dramatically reduce costs.
``Labor harmony and price'' were the deciding factors in going with People, Frontier president Joseph R. O'Gorman said Wednesday. Mr. O'Gorman said employees were involved in negotiations with People Express ``from the second day of the talks.''
People Express ``guaranteed we will run a separate entity for five years and there will be no furloughs'' of Frontier's 4,600 employees, Mr. O'Gorman said. ``It was our best option.''
Despite getting millions of dollars in wage and benefit concessions over the past few years, Frontier lost $31 million in 1984. Earlier this year, Frontier sold about half of its fleet of jets to United Airlines and then leased them back.
``The major factor is Frank Lorenzo,'' says Don Skiados, national director of communications of the Air Line Pilots Association (ALPA). ``He tried to get TWA and then Frontier. We took him on each time. Airline employees don't want to work for him.'' Mr. Skiados cites Lorenzo's alleged ``union busting'' as the reason.
Consequently, with TWA and Frontier unions have made concessions on wages and working conditions to attract other buyers. And knowing that uncooperative employees hurt corporate profits, owners and managers have been willing to listen to the wishes of the unions.
What the unions have to bargain with, besides their cooperation, is financial power. This comes both as their ability to take salary cuts and -- perhaps more important -- in the financial clout of pension funds and employee stock ownership programs.
``It is tremendously important,'' says Oscar Ornati, professor of labor economics at New York University, ``that a very very large proportion of the savings of this country is in the hands of unions. We're beginning to see the use of these pension funds in these cases [the TWA and Frontier deals].''
If unions make concessions, Dr. Ornati says, they ask to become partners in the company and to be protected from antiunion owners.
Curiously, Donald C. Burr, president of five-year-old People Express, is no friend of unions, either. But at least he has chosen a less drastic method of trying to keep labor power at bay: He has preempted much union sentiment by making employees owners of the company.
Nevertheless, Skiados says the ALPA is still trying to organize at People Express. He notes, too, that in negotiating with Frontier Airlines Mr. Burr had to sign an agreement with a ``solid-as-a-rock'' labor coalition and says, ``We're looking forward to working with People Express.''
Joseph Swanson, professor of finance and transportation at Northwestern University, sees this as a trend in which ``unions are prepared to actively be engaged in the process of determining the future of the company.''
Overall, notes Professor Ornati, the ``antagonism between unions and employers has been more blown up in the public mind than in reality.'' He points to the longstanding financial trade-offs between garment industry companies and unions and between printers and unions. These have even included union loans to start new businesses to create new jobs.
Ornati says airlines are in the vanguard of a new era of union-management cooperation because the ``great skills'' of the pilots' union ``have helped employers see the possibility of measured discourse.'' Ornati notes that ``all employees have the power not to cooperate, and no intelligent board wants a group that doesn't go along.''
That cooperation is essential in the highly competitive airline industry. Since deregulation occurred in 1978, airlines have been forced to trim costs and consolidate operations to survive.
Price cutting has put the most pressure on airline earnings, says Clifford Winston, a specialist on the field at the Brookings Institution. And one of the biggest areas that leaves for cost savings, he says, is labor.
Mr. Winston notes that People Express has a solid and effective operation out of Newark. It has expanded rapidly in the past three years throughout the Eastern Seaboard, into the Chicago market, and onto international routes. With Frontier, he says, People will have a base for operations in the West, attractive labor relations, and a good marketing defense.
People Express will be getting Frontier Airlines for ``peanuts,'' as one analyst put it. The estimated $85 million People must raise to buy an entire airline is almost equivalent to the price of the 20 used Boeing 727 jets People bought in 1983.
While the $24-a-share bid amounts to a $300 million purchase price, Frontier already had $215 million in cash set aside for its unions to take the airline private. The cash was raised by selling 25 jets to United Airlines.
For passengers, says Mr. Winston of Brookings, airline deregulation in general continues to prove beneficial. The TWA and Frontier takeovers should have no negative effect on prices or service and may in fact spark more competition.
Passengers could benefit from the merger. It could make more low-priced seats available in and out of Denver, says John Pincavage, an airline analyst at the PaineWebber brokerage firm.
For the last two years, United, Continental, and Frontier have been battling for market share in Denver. Mr. Pincavage figures Frontier/People could set its fares in line with the discount-carrier Continental and still have a higher profit margin than Continental. Competition between these two at the low end may force United to open up more discounts seats or lose market share.