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The Truth About Corporate Bankruptcy

May 1, 2012

The truth? Corporate bankruptcy is just another tool of big business to bust unions, lower wages and further erode the economic stability of the American middle class. We all hate to see large companies struggling – it makes us fearful for the future of US economic hegemony – and of course, there are the jobs.

So what happens? Bankruptcy allows companies to “save” those jobs – although they won’t, strictly-speaking, be the same jobs when they’re done. Wages will be lower, benefits will be less generous, and of course not all those jobs will be saved… The upshot has been a consistent weakening of labor unions and their ability to protect the welfare of their members.

The perfect example is the airline industry:

Over the past decade, major airlines have figured out how to use the bankruptcy code to accomplish what they have never been able to at the bargaining table: reduce wages and benefits to “market” levels.

Back in the days when fares and routes were regulated by the government and compensation was effectively set in an industry-wide pattern, there wasn’t much incentive for airlines to resist above-market wages, gold-plated benefits and inflexible work rules. And even after the industry was deregulated and the major carriers faced competition from lower-cost, non-union upstarts, the threat of a crippling strike gave the airline unions the upper hand in contract negotiations.

Bankruptcy has changed all that. Suddenly, airline executives discovered a way to unilaterally abrogate their labor agreements, fire thousands of employees and impose less generous pay and more flexible work rules. Indeed, the technique proved so effective that several airlines went through the process several times. The unions’ strike threat was effectively neutralized. (WaPo – emphasis mine)

But there are signs that we may be starting to see the beginning of the end. Recently, American Airlines decided to pursue bankruptcy — hoping to emerge with 13,000 fewer positions, reduced benefits for current employees and for those already retired, and a lot more freedom to demand “flexibility” in work rules.

Not so fast, this time. In what I can only describe as a brilliant maneuver, the airline’s unions have struck a deal of their own with rival airline, US Airways.

If the gambit succeeds, the unions will not only wind up with more jobs and higher pay than American was offering, but also the satisfaction of seeing American’s top executives tossed out on the street….

All of which makes the pilots union deal with US Airways so significant. Essentially, US Airways agreed to pay all of its pilots — the American pilots as well as its own — the higher American Airlines wages, along with small annual raises. In return, the union accepted less lavish medical and retirement benefits along with adoption of US Airways work rules that have been rationalized during two trips through the bankruptcy process. In the end, what probably sealed the deal was the US Airways promise of no layoffs.

What’s more, the turn-around plan put forward by US Airways makes actual business sense. Instead of simply demanding $800 million in cost cuts (mostly labor), “the merger with US Airways is premised on $1.2 billion in synergies that result in large part from increased revenue as the merged carrier achieves the scale and scope necessary to compete with industry leaders United and Delta.”

Why should you care about all of this? Because these unions have sent a message that two sides can play the bankruptcy game.

For years now, Corporate America has viewed the bankruptcy court as a blunt instrument by which failed executives and directors can shift the burden of their mistakes onto shareholders, employees and suppliers. The auto industry bailout orchestrated by the Obama administration posed the first challenge to that assumption. Now the unions at American airlines have taken another step in curbing this flagrant corporate abuse and restoring the rule of law.

11 Comments leave one →
  1. May 1, 2012 5:12 pm

    I understand your point and respect your views. There is a much deeper problem at hand here which causes these failures. It is not the lack of unions but the lack of a real free market coupled with government intervention. Competition is a great thing and there is nothing wrong with falling wages IF (a big IF) everything else falls with it but it will not happen as long as government subsidizes certain industries. That is how we get higher prices and high inflation which strips the poor and middle class of their wealth and purchasing power. Take a look at the Technology sector, competition creates lower pricing and quality products and it has nothing to do with unions and government doesn’t subsidize technology. When they do, we get situations like Solyndra. I don’t really care much for stock holders, they invest at their own risk but this country used to be a world leader because at the turn of the century, we had a true free market. Unfortunately, we don’t have that today.

    A great debate that can go on forever.

    D. Medina

    • May 1, 2012 5:55 pm

      The idea of a completely unfettered “free market” and how it could magically fix all that ails us is the right wing equivalent of “but in theory socialism is a perfect system!”
      Unfortunately, we have to live in the real world, where people do not operate in completely rational – and certainly not in altruistic ways.
      “The Market” doesn’t give a damn about you – why should you place all your faith in it?

      • May 1, 2012 6:58 pm

        There is no such thing as a right or left wing, it’s a one party war system. Socialism didn’t work then and doesn’t work now thou we are a cross between Socialism and an Authoritarian state.

        A “Free Market” and Austrian Economics would fix many problems but by no means will it create a utopian society. Every country has their issues but we should look at the countries that have implemented free markets and/or growth based on savings and not printing money out of thin air and call it wealth. They are better off than we are.

        Many don’t understand the system but I will put all my faith in the “Market” because the market is the people. The people know what is best for them and their wealth and not the government or any other private entity. Once the powers of government are limited as outlined in the Constitution and power given back to the people, I will be ecstatic.

        • May 1, 2012 9:12 pm

          Just out of curiosity – who are these wondrous nations of free market opportunity and just how are they better off than we are? I cannot think of a single nation with anything approaching a truly unregulated market. It simply doesn’t exist – thank goodness! – because if (as you say) the “market” is people – we know what people are like (selfish, not always principled, prone to error…)

        • May 2, 2012 12:47 pm

          If this is the way you look at humanity, then there is no hope. People are capable of great things and they do great things every single day. Unfortunately, the media can care less of good deeds and turn their focus on divide and conquer and keep the masses in fear. Basic psychology 101 (Look into Edward Bernays)

          I am not an anarchist, I believe in limited government, not the absence of government. There should be regulations in place on certain industries but not the countless regulations we have today. The Obama administration had passed 43,000 regulations last year and are expected to pass 65,000 this year and they have the audacity to blame companies for not hiring. On top of that, the CBO stated that Obamacare will cost $1.7 trillion a year which is $800 billion more than expected. I wouldn’t hire neither without knowing what my cost will be.

          Since humans are “selfish, not always principled and prone to error”, maybe your solution would be something out of the Matrix movie or total socialism. Let’s see how that one would play out.

        • May 2, 2012 12:11 pm

          Somalia is a perfect example of an unregulated free market economy.

          As for people knowing what’s best for them… that must be why they eat at McDonald’s. don’t exercise, carry a credit card balance, and so on.

        • May 2, 2012 12:51 pm

          Once again, people take what I say to the total extreme. I never said unregulated, I stated limited government. There is a difference between an anarchist and a libertarian or constitutionalists.

          And people have the right to choose what they put into their bodies, is that something you want to regulate too? You can’t punish the masses for what a few do. It’s unethical and unconstitutional.

        • May 2, 2012 1:23 pm

          Actually, Somalia has a what is best described as “a limited government”. If you want something less limited, you are already getting into the regulated market territory, so apparently you do not trust the free market 100% yourself.
          I don’t care what people are putting into their bodies. These behaviors are just some examples of dumb decisions people make. But I will consider regulating that behavior when it impacts others.

        • May 2, 2012 3:14 pm

          Somalia has a lot of problems from a corrupt government to war lords and heavy sanctions as well. I wouldn’t even describe Somalia’s government as a government at all.

          You are 100% right in the sense that some industries need some sort of regulation. I would point to pharmaceuticals and banking as an example. The market in this case being the people would be the best indicator of market pricing, interest rates etc. The reason for this is if a companies prices are to high or provide poor service, the people or market in this case will go to a competitor and that company will eventually go under if they can’t compete. When you have competition in the market, you get lower prices and better quality just like when you go buy a flat screen tv or a stove or laptop. The main problem we have today in this market which is not a free market is that government subsidizes these industries and the end result is astronomical prices, bad service and high inflation from printing money to support these industries. I pointed out housing, education and healthcare prior. So those companies get rewarded for irresponsible behavior and the poor and middle class get the bill. This is wrong. This is why there are calls to End the Federal Reserve which is a private bank who is trying to regulate the economy but all they do is transfer wealth from the poor and middle class to the rich. It’s a deep rabbit hole

          You last statement is accurate, as allowed by our constitution, an individual should be allowed to do what they wish as long as they don’t infringe on others liberties or cause harm to others.

  2. May 1, 2012 4:09 pm

    This article is very informative but the main problem is not companies using bankruptcy as a vehicle to solve problems, due to the fact that bankruptcy destroys the credibility of a company and plunges their stocks but Unions and Government intervention and regulation kill companies. It’s even stated in the article.

    “Over the past decade, major airlines have figured out how to use the bankruptcy code to accomplish what they have never been able to at the bargaining table: reduce wages and benefits to “market” levels.”

    The key word I want to point out in that statement is “Market” level benefits and wages. Anything that government gets involved in always raises prices, just look at housing, healthcare and education. This creates a higher cost to do business which the cost is passed on to the consumer. On top of that extra cost due to government regulation, here comes unions demanding extremely high wages and benefits above the market norm. This is unsustainable and will cause companies to go under or relocate to other countries or states that are free to work states like Texas and South Carolina. These are the states that Boeing and Lockheed Martin has relocated to and the jobs that go overseas are never coming back. As a person who worked for a major international union, I can tell you it’s never about the rights of the employees but money generated from union dues and investing their pension funds in the market. Only at unions I have EVER seen an office manager make $260k a year and this is on the low end.

    If you want to see industries succeed and create jobs, we need government out of the way and unions stop being greedy and using political clout to get what they want for themselves. A true free market will work above what we have today which is corporatism.

    • May 1, 2012 4:23 pm

      Yes. Please DO note that the word “market” is in scare quotes. In the case of the airlines especially, it is DE-regulation that caused the problem of declining wages, etc. Were it not for competition from non-union airlines, we wouldn’t have entered a race to the bottom in terms of middle class job security. It is not the unions, but the lack of unions causing the pain.
      Your comment presupposes that the most important thing is stockholder value, period. I would submit that there is a much greater good with which the U.S. used to be concerned – and in which we used to be a world leader.

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