In November 2001, the VC pilots' trade union agreed to far-reaching wage concessions in order to save the German charter airline LTU from bankruptcy. Following an earlier settlement between LTU and ver.di, the union representing ground crew and flight attendants, wage concessions were thought to be a pre-condition for any further state subsidies, as part of a joint effort to save the airline. With talks at Lufthansa, the largest German airline, still under way, unions and airlines are seeking to find the best way to bring the airline industry through its current difficulties.
On 8 November 2001, the German pilots' trade union (Vereinigung Cockpit, VC) and LTU, Germany's second-largest charter air carrier, concluded a special collective agreement aimed at saving the airline from bankruptcy. According to the pilots' own estimates, the agreement will save the airline about DEM 60 million and thus contribute more than 40% to an overall savings package, which also includes wage cuts among the ranks of ground crew and flight attendants. After having negotiated for more than 12 hours, VC agreed on concessions by LTU's 360 pilots which include:
- wage cuts of 10%;
- renunciation of the annual bonus;
- a general wage freeze; and
- more flexible working time arrangements.
All these provisions will be in force until 31 December 2003. According to a VC statement, the agreement confirms the union's high degree of responsibility in its efforts to save LTU.
Prior to the pilots' deal, the Unified Service Sector Union (Vereinigte Dienstleistungsgewerkschaft, ver.di) had agreed to revisions in its agreement with the company, which will affect another 2,300 LTU employees. With slightly different provisions applying to ground crew and flight attendants, the major provisions for ground crews include:
- a 5 % wage cut until the end of 2003; and
- a 50% cut in the annual bonus.
In exchange for these concessions, management has agreed not to challenge LTU's current no-dismissal clause and to cease any efforts to outsource significant parts of its business. As far as the pilots are concerned, they also received a form of dismissal protection: if LTU should feel the need to reduce its fleet of aircraft, VC and the company have agreed to negotiate a new part-time work model which will help pilots to receive additional training.
Background
When Swissair bought LTU about five years ago, the German carrier had high hopes of improving its market position and performance with the help of a solvent and powerful partner. These hopes, however, never fully materialised. Even prior to the crisis which hit the entire airline industry in the wake of the terrorist attacks on the USA on 11 September 2001, LTU had lost about DEM 500 million during the previous two years. While Swissair had originally promised to cover this deficit, it was not able to do so anymore when the former Swiss flagship airline was recently forced to file for bankruptcy protection.
With the majority shareholder (49.9 %) in deep trouble, LTU's other shareholders - the Rewe retail group (about 40%) and CLK (10.1%), a conglomerate of investors based in Cologne - were either unwilling or unable to fill the void. LTU, which is based in Düsseldorf and has a strong presence at Düsseldorf International Airport, finally turned to the regional government for help. The federal state of North-Rhine Westphalia, of which Düsseldorf is the capital, needs the LTU jobs to keep unemployment from rising and it is also in its interest to keep Düsseldorf airport as busy as possible. In 1997, when the state government sold its shares of the airport, it agreed to a clause which requires the state to refund part of the revenue from this transaction in the event that the number of departures and arrival falls below a certain threshold. The North-Rhine Westphalia government fears that this might occur if LTU is forced to file for bankruptcy.
Despite these incentives to provide co-payments to help bail out LTU, Ernst Schwanhold, the state minister for economic affairs, made clear that his government would help only if major stakeholders were willing to contribute to the rescue plan as well. Thus, shortly after LTU's new collective agreements with ver.di and VC had taken effect, the North-Rhine Westphalia government provided a payment guarantee, worth DEM 240 million, and also initiated talks with the major shareholders. These talks finally led to a preliminarily transfer of Swissair's stock to Sparkasse Düsseldorf, a local savings bank partly owned by the municipal government. This payment guarantee, in particular, has upset LTU's competitors, namely Lufthansa and its charter subsidiary Condor, which feel that state support might provide LTU with an unfair competitive advantage.
Crisis management at Lufthansa
While Lufthansa was performing fairly well in the first half of 2001 and was able to grant substantial pay raises to its pilots (DE0106226F), its chief executive, Jürgen Weber, estimates that in the wake of the events of 11 September the number of daily passengers has declined by 30,000, which has resulted in a loss of revenue of DEM 20 million per day. In a first reaction, Lufthansa grounded 43 aircraft but also suggested a 'three-step plan', of which parts are to be negotiated with ver.di, the union representing ground crew and flight attendants. In a first step, which is already on the way to being implemented, the company will not fill vacancies, will reduce paid overtime by asking workers to take leave, and will suspend any recruitment for a limited time.
While these emergency measures have provided some relief, Mr Weber believes that more substantial initiatives are needed to bring Lufthansa back to profitability. He also suggests a second step which mainly involves a 20% reduction of working time without wage compensation. This change, however, would require a revision of Lufthansa's collective agreement for cabin and ground staff, which was negotiated in March 2001 (DE0104215N). Should ver.di refuse to come to terms, Mr Weber sees no other choice but to enact step three of his programme which includes short-time working and dismissals. The union, however, takes a different view on this point. According to Jan Kahmann, a member of ver.di's executive council, there is no pressing need yet to implement such far-reaching measures as working time reduction without wage compensation. Rather, ver.di suggests offering Lufthansa's employees more opportunities to: take unpaid leave of absence; shift to part-time work; or take days off which are banked in special accounts. In addition, the union demands that Lufthansa ends overtime working.
The VC pilots union, which has a separate agreement with Lufthansa, shares ver.di's scepticism about a 20% across-the-board working time reduction. According to a VC spokesperson, it would be difficult to introduce a four-day working week due to organisational reasons. The pilot's union maintains that its members always have a seven-day working week and that, at least prior to the crisis, qualified pilots were in short supply. In contrast to its agreement with LTU, VC does not see any pressing need to agree any further wage cuts at Lufthansa. Because part of pilots' pay at Lufthansa is based on the company's performance, the union expects that in 2002 pilots will completely lose their bonus worth some 16% of their annual income.
Commentary
The German social partners have a long history of negotiating agreements for crisis relief and in several cases have successfully prevented, slowed down, or buffered large-scale job cuts. Starting in the 1970s, such agreements were introduced in the overall mining and steel industry but later also became a measure of last resort for individual companies. This was in particular true in the early 1990s when Volkswagen faced large excess capacities in domestic plants and threatened to dismiss thousands of workers. In most of these cases, unions and employers, sometimes assisted by the state, used the instrument of reducing weekly or even life-long working time in order to avoid dismissals. The recent crisis in the airline industry, however, is different from this pattern in two respects.
First, and this is in particular true for the case of Lufthansa, nobody seems to have adequate estimates of the length and depth of the global crisis in this particular industry. Thus, the unions seems to be well advised not to agree to long-term concessions but rather to define measures on a short-term basis.
Second, the Lufthansa pilots automatically made remuneration a major focus for crisis adjustment when they earlier negotiated an agreement which makes substantial parts of their income contingent on the company's performance. Thus, Lufthansa's pilots will now face a wage cut without even being asked to come to the bargaining table. Other unions, some of them currently considering making parts of employees' income contingent on companies' performance, will watch VC's experience closely. (Martin Behrens, Institute for Economic and Social Research, WSI)