This week in PlaneBusiness Banter, I wrote about how I feared we’d seen the video now unrolling at Midwest Airlines once too often.
The airline recently told employees that they would have to agree to major concessions – because new majority owner TPG would not consider any additional financing to the airline unless the airline could come up with a more healthy looking business plan.
Unfortunately, no matter how much Midwest cuts salaries, we all know the end of this story, and it’s not going to be pretty.
Midwest minority owner Northwest Airlines orchestrated this deal from the get-go, in an attempt to keep AirTran out of its backyard. Now all that’s left is for Northwest to figure out what it wants to keep from Midwest and let the rest of it …go away.
But for now, the fantasy of “sacrificing to keep the airline alive” will apparently continue.
As one reader said to us this morning, “It’s just sad.” Yes it is. For more than one reason.
Here’s the letter Midwest CEO Tim Hoeksema sent to employees this morning.
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To: All Midwest and Skyway Employees
Date: July 2, 2008
From: T.E. Hoeksema
Subject: Additional Details — Wage Reductions
In keeping with the promise I made to keep you informed, I am writing today to give you additional details on one of the action items in our restructuring plan regarding our employees — wage reductions.
Record-high fuel prices have put us in this predicament. As a result, we are taking action to restructure our airline: adjusting our fleet and network, and aligning our organization and costs to be able to compete and be profitable in this new energy economy. I believe that all domestic airlines will eventually need to restructure. We are implementing our restructuring in a comprehensive way, working to make significant and sustainable change quickly, whereas other airlines may make changes incrementally.
Unfortunately, there is no way to avoid deep and painful reductions to our current compensation. Our cost structure today, in advance of this restructuring, resembles that of airlines much larger than we are, with national and even global networks, flying larger aircraft. Following our restructuring, we will not have the larger aircraft and revenue generation capacity to support our current cost structure. Even the exemplary service you provide and the customer loyalty it engenders cannot overcome this disadvantage in the new energy environment of $140-a-barrel oil. Our choices are to fix this disparity so our costs better match our revenues, file for Chapter 11 and try to fix it there, or ignore it and fail as a business.
We believe our best choice — for ourselves, our customers and the communities we serve — is to step up to the difficult work in front of us and to restructure now on our terms. Many employees I’ve talked to over the last week agree with this decision when it’s presented in these stark, but realistic, terms.
If that’s our path, as we believe it should be, our guiding principles are clear:
· Everyone participates in compensation reductions, productivity improvements or employee count reductions; no exceptions.
· The reductions are fair and equitable.
“Fair and equitable” means applying the same standard to each work group and resetting everyone’s compensation to the market. That means benchmarking against airlines that fly aircraft of similar capacity, which is the basic component of our ability to generate revenue. Our commitment to set all employees’ wages and benefits to a consistent standard extends across all of our work groups, with the actual percentage wage reductions varying by work group.
Represented Work Groups
Our top-of-scale rate for pilots is currently 32% higher than the average hourly pay for pilots who fly aircraft of similar capacity for other airlines. The cost of pension, health and other benefits for our pilots is 45% higher than the average at comparably sized airlines. Productivity per pilot is also less than at comparably sized airlines.
Similarly, our flight attendants are earning above-market wages and benefits, although in this case the premium is smaller. Our top-of-scale rate for flight attendants is currently 23% higher than the average hourly pay for flight attendants in the cabins of aircraft of similar capacity.
Given these realities and the actions we need to take to adjust our fleet and network, we are proposing pay reductions, benefit adjustments and productivity improvements to the Airline Pilots Association and the Association of Flight Attendants to align pay and benefits for our pilots and flight attendants with comparably sized airlines.
Non-Represented Work Groups
According to salary surveys, many Midwest non-represented employees earn wages on average that are at or below those of employees at comparably sized airlines. Based on this, the average reduction in compensation for non-represented employees will be:
· Maintenance technicians — 10%.
· Professional staff (Grade 9-13) — 5%.
These reductions will be effective upon ratification of the ALPA and AFA agreements.
Midwest administrative staff (Grade 1-8) and Skyway employees will not experience a compensation reduction, nor will Midwest station employees. This decision is based on what the market currently provides in terms of compensation for these work groups, in conjunction with them taking significant reductions in employees through improvements in productivity and changes in capacity.
Senior management will earn wages and benefits below their peer group average. This reflects our belief as a management team that we should lead by example and that we bear ultimate responsibility for keeping our airline competitive.
· As CEO, I will take a 40% reduction in my total pay.
· Senior vice presidents will take a 25% reduction in total pay.
· Officers (vice presidents) will take a 17% reduction in total pay.
· Directors and senior managers will take an 11% reduction in total pay.
My pay reduction and those of the senior vice presidents will be effective July 15; the reductions for other members of senior management will be effective upon ratification of the ALPA and AFA agreements. I want to clarify two points regarding management pay. First, members of senior management have a greater percentage of their total pay “at risk.” Total pay includes salary plus incentive compensation awarded for the achievement of individual goals and on overall company performance. Second, the notion of incentive compensation based on our airline’s profit target this year is largely a moot point, since we’re in a restructuring mode, not a profit-achieving mode.
Some may say that our proposals aren’t fairly allocated “across the board” because the percentages aren’t uniform from one work group to the next. I understand the appeal of that argument, but it’s a false appeal; the pay and benefit reductions are fair, equitable and based on the market rates for similar positions at comparably sized airlines.
Please don’t misunderstand me; these are significant reductions by any measure and will cause great hardship to our employees and their families.
Regarding reductions in staffing, there is no way to minimize the depth of reductions we need to make to implement a comprehensive restructuring. We are still working through a position-by-position evaluation of every function within our airline, so it’s not yet possible to tell each employee whether the reductions will directly impact her or his job. But we promise to complete those efforts as quickly as possible and to communicate them in the most compassionate way possible.
Be assured that I do not underestimate the stress and concern this situation is causing you and your family, and I wish it could be avoided. At the same time, I cannot overstate the admiration and respect I hold for each member of the Midwest family as we continue day in and day out to deliver “The best care in the air.” It is that strong spirit and pride that has made us successful and will sustain us through this difficult chapter in our history.
Thank you.
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