Date: January 29, 1997 Source: Wall Street Journal, B6 Headline: "American Air Pilots Asked to Agree to Arbitration" Summary The Allied Pilots Association again rebuffed American Airlines' attempts to resolve a contract dispute with its pilots and initiated informational picket lines at 9 airports, anticipating a strike on February 15. Union leaders continue to refuse third party intervention through binding arbitration for determining contract terms. At issue is the tentative contract, recently rejected by the pilots, providing for a 5% pay increase over four years, plus stock options, in return for productivity improvements. The compensation package would further American pilots' position as the best paid in the industry. The proposed contract follows the lead of many other airlines -- including Continental and Southwest -- that have obtained agreements with pilots that provide for stock options in lieu of --rather than in addition to -- guaranteed pay increases, along with concessions for productivity improvements. The difficulties with the pilots union is the latest in a series of labor disputes dating back to the November 1993 strike by its flight attendants, thwarted by President Clinton's intervention. The current controversy has already created disruptions to American's business regarding its order for $6 billion in new planes from Boeing, competing with lower-fare airlines by expanding commuter routes using smaller planes, and the proposed alliance with British Airways. CPM Observations A pilots strike at American Airlines would have a significant impact on the Company, the airline industry, and the US economy. A similar labor situation exists at United Airlines where employees are beginning to question the wage concessions made in return for 55% ownership of the company. Employees at United and at other airlines have seen 2 years of record profits following a series of significant wage, benefit, and work rule concessions in the early 1990s. The timing of a pilots strike at Amercian outside of a holiday period would likely not attract Presidential intervention. Unlike other industries that can continue to operate with managers replacing workers, skeleton crews, and strikebreaking "scabs," a pilots strike often eliminates most or all of an airline's service. And those who remember the United strike 12 years ago also may remember the disruption caused to the business environment. But beyond the inconveniences of a major airline strike, this dispute may spark a reversal of the progress made over the past 5 years in the airline industry, shifting employee compensation programs from guaranteed entitlement-based systems to performance-based ownership-oriented systems. A victory by American pilots will likely trigger "pattern bargaining" at other airlines, ending one of the most notable industry examples -- for all its successes and failures -- of innovations in compensation strategy as a response to new competitive pressures. Index: union.001/CoAMR.001/IndAirline.001 Recently in "Performance Bytes"... August 22, 1997 "Management Pay -- Unintended Consequences" The Economist, August 22, 1997 [strategy.002] March 7, 1997 "Performance Stock Options" Congressional Record, January 21, 1997 [alleeso.004] February 24, 1997 "Most EDS Employees To Get Stock Options..." Wall Street Journal, February 24, 1997 [alleeso.003] January 29, 1997 "American Air Pilots Asked to Agree to Arbitration" Wall Street Journal, January 29, 1997 [union.001] January 24, 1997 "A Tale of Two Compensation Strategies: (Eastman Kodak & AlliedSignal)" Fortune, January 13, 1997 [strategy.001] January 8, 1997 "Small Concerns Are More Likely to Pay Directors in Stock Than Large Firms" Wall Street Journal, January 8, 1997 [bdcomp.001] December 31, 1996 California Qualified Stock Options (CQSOs) State of California, Secretary of State (AB 3194) [alleeso.002] December 27, 1996 "All about EVA" CFO Magazine, November, 1996 [perfmeas.001] December 18, 1996 "Stock Options to Be Given to 69,000 Staff Members" (Chase Manhattan Corp.) Wall Street Journal, December 18, 1996 [alleeso.001]