Are Unions Killing Corporate America?

Jonas Max Ferris
Two of America’s most storied industries are crumbling before our eyes. Airlines and automobile makers have been some of our biggest employers, and there was a time you could measure the strength in the economy by looking at these titans.

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Today, the economy and corporate profits are humming along, while most U.S. airlines and automakers are teetering on bankruptcy. Four major U.S. carriers have already filed for bankruptcy since the start of the millennium, with some smaller failures peppered in along the way. GM stock trades at 20 year lows, while Ford is in the single digits. Today the combined market value of all U.S. based airline and auto makers is less than half the market value of Google, an Internet search engine that didn’t exist a decade ago. Where did it all go wrong?

Many blame labor unions. Their collective bargaining deals have increased costs to these old businesses to the point of bankruptcy. Unions are by no means good for corporate profits or stock prices. They are not even good for non-union labor, who can face lower wages outside a union than they may face without any unions, and can have trouble breaking in and getting a job with the union powers that may be calling many of the shots. Unions are mainly good for union members, but possibly just in the shorter run.

Individually, most workers are a commodity. Their pay does not have to be closely related to how much value they bring to the table, and is more a factor of supply — how many people will line up to do the job at a certain price. Without any unions and with a glut of cheap labor like we had 100 years ago, lower end workers can get treated pretty badly. By grouping together, unions have the ability to extract profits from a company and receive pay packages that are probably more then they would get without unions in the picture.

With enough union power, it is even possible to squeeze industry right into bankruptcy. But it is unlikely such a squeeze is taking place. At best, or rather, at worst, unions are just one straw that broke the camels back.

Union power has been declining for decades. Today, just 12.5 percent of wage and salary workers are union members. Back in 1983, a full 20.1 percent of the workers were union members.

Beside a graying of the line between owners and workers (thanks to employee stock ownership plans and option packages), the labor market has become more free-flowing. Jobs are more likely to be moved overseas to save a buck. Workers are more likely to hop around trying to get the best deal rather than sit back and enjoy the comfort of job security and a pension. Most workers have not seen significant wage increases during the time since this trend has been building, so it may not be a system that is working for all (not that they always have a choice). However, on my last visit to Russia some told me they liked things better under communism.

Perhaps the real culprit behind the steady weakening of unions is bad union management. Some unions don’t realize you can’t get blood from a stone, and if your union members work for a poorly run company or one that could easily outsource entire swaths of manufacturing, different tactics and goals may be in order.

A good example of poor leadership in today’s unions is the recent fiasco with the Metro Transit Authority strike in New York City. Service jobs, as FOX News’ Terry Keenan pointed out in a recent column, are the last areas of labor strength. You can’t outsource a bus driver. By all means, the MTA union was in a position of power — they could shut down the entire transit system of the most important city in the world and cost billions in damages.

Unfortunately for the workers seeking a more gravy deal, they chose to start a strike but had little muscle to back it up. This is like starting a war with no bullets. By my estimates, the MTA union had a war chest of about $100 per worker on strike. What ever happened to the days when unions would support the workers while on strike with cash and food? Many of these guys live paycheck to paycheck, and are in no position to go without money for a month. All they achieved was losing even more public support for unions.

So if unions are so weak today, what is bringing down these two American industries? High oil prices? Government restrictions? Dumping by foreigners? Surely somebody is to blame.

Two words: bad management. There are very few costs that could destroy a business if the same costs had to be paid by your competitors. Oil is a good example. High oil prices can’t destroy the airline industry because all airlines have to buy oil and would therefore pass the costs on to consumers (as do successful airlines in Europe). If all airline workers were in a union, and they somehow got a ridiculously high pay package, it is something the airlines would have to pass on in ticket prices. Unless the prices to the consumer were so high and consumers stopped wanting the services entirely, the businesses would survive.

With airlines, the problem is twofold. First, I can’t think of one difference between one carrier and the other (other than I’m pretty sure I can get leather seats and a TV on JetBlue). Airline executives have turned airline travel into a commodity. The magic and nostalgia of the jet set lifestyle from the 50’s is long gone. I’m willing to pay a larger price premium for organic tomatoes than one carrier over another.

Who has the best seats? The best legroom? The best service? Lounge? Baggage handling? Food? You don’t know because there is no answer. When I book a trip, I’ll spend hours trying to find the right hotel, but the flight is just an equation of price and times. Are unions to blame for this? I’d point the finger of blame squarely at executives — none of whom are union members (though equally overpaid given their sorry performance).

What slim profits could be had serving up a product that has no premium value over competitors is ruined by a hyper-competitive marketplace. Airlines could charge a price premium if demand exceeded supply, or if they could build mini-monopolies on certain routes. The latter doesn’t exist because the government has been very good (possibly too good) at insuring competition in the business. No buying up all the gates in Newark and charging $500 to fly to Miami.

Demand rarely exceeds supply because airline executives made the brilliant decisions to do major expansions in the late 1990s because passenger travel was growing thanks to a hot economy. The paint wasn’t even dry on Northwest’s multi-billion dollar terminal expansion at DTW before they filed for bankruptcy.

Bankruptcy itself is another big problem. Unlike in Europe, it’s all too easy to wash away your mistakes and keep right on flying, ensuring solvent competitors will never be able to charge a price premium as supply will still exceed demand. If stock and bond holders of airlines “unionized” and forced some to shutdown, they would do better as a group.

The auto business is even more screwed up than air travel. Detroit has spent the better part of 30 years destroying what brand value they built up in the golden years for American autos. Today, many wouldn’t even bother test driving a new U.S. car — they wrote them off as crummy long ago.

Sure, pensions and union pay packages add a few thousand dollars to the price of a car, but does that explain why consumers will pay $10,000 more for a Toyota than a similar U.S. car or truck? American autos are fast becoming the choice for those that simply can’t afford a “better” Japanese auto. Are unions to blame for management never building a product that is saleable in a high gas price environment, or making desirable designs, or focusing on reliability? Did union members think up the Pontiac Aztec? The last major oil shock almost wiped out the entire U.S. auto business (and jump started the Japanese auto industry). Since management clearly didn’t learn any lessons that time, the U.S auto business can probably only last another couple years if gas prices (or the U.S. dollar) don’t fall.

Let’s not forget that foreign airlines are successful. Even Air France is far more successful than American Airlines. Think about that for a minute. France. Do you think it is because they have low-paid, hard-working labor?

The American automobile industry is losing out to the Japanese, and to some extent, the Germans. It’s not like GM is facing cheap imports from China. European and Japanese cars are expensive and these countries have had to deal with a falling U.S. dollar that makes U.S. produced goods cheaper. Germany has one of the highest cost and longest vacation time labor forces in the world. Toyota’s labor unions have won big bonuses for workers amidst all the profits. Japanese workers on the lower end of the income distribution have a bigger share of total income compared to Americans so you can’t say it's surplus cheap labor that makes the clock tick in the land of the rising sun.

Bottom line, Toyota makes better products that people are willing to pay up for. They have brand equity; GM and Ford have $7,500 cash back. Airlines have frequent flyer miles — a costly incentive to fly the same airline even though it stinks ("I hate ‘em, but that’s where my miles are…"). The biggest innovation out of the American auto business in recent years was employee pricing — another gambit to sell B-list merchandise at paper-thin profits.

Sure, it’s a bit unfair that employers can’t merge into one and call all the shots without government intervention, while employees, in theory, can set labor prices as one. Unions are not blameless in the slow death of these industries, but are far from the root cause. Besides, in 20 years there may not be any private sector unions. Then we’ll have to find the real culprits.

Jonas Max Ferris is a regular contributor on "Cashin' In" (Saturdays at 11:30am ET and Mondays at 5:30am ET) and is co-founder of .