Airlines

Airlines^[6]

Warren Buffett once said, “It would have been a blessing for shareholders if someone had thought to shoot down Orville Wright at Kitty Hawk.”^[7] Holdups, caused by strikes, make it difficult for airlines to sustain profitability. Airlines are especially vulnerable to holdups because of their high fixed costs and specialized workforce.^[8]

Strikes are extremely costly to airline companies because strikes cause their expensive planes to sit idle. Furthermore, airlines have difficulty replacing striking workers because of their employees’ specialized skills. Consequently, airline workers can do massive damage to their companies and can hold them up for high wages.

To understand the airlines’ dilemma, consider the following highly simplified example. Assume that if there is no strike, your company expects to have:

1. $10 million in revenue

2. $9 million in costs

Absent a strike, you will make $1 million in profits. But what happens to profits if your employees strike? Ideally, you would replace your workforce and suffer no harm. If easy to replace, your employees could not hold you up since you wouldn’t be dependent upon them. Now assume, however, that your workers have specialized skills, so if they go on strike, you must shut down and lose the $10 million in revenue. Your workers now can hold you up because they have an artificial monopoly over you. After being trained, your current workers are the only ones who can complete the needed tasks, so you are dependent upon them. But how much would a strike hurt you?

The strike would cost you the $10 million in revenue, but it would also save you some of the cost since you would no longer have to pay your workers. If your entire $9 million in costs were from salaries, then a strike would hurt you by only $1 million. What if, however, you normally paid only $2 million in salaries and the other $7 million in costs was attributable to equipment expenses? Now a strike would cost you the $10 million in revenue but save you only $2 million in costs. The lower the percentage of your costs represented by wages, the more costly a strike would be. When a few workers are needed to operate many expensive machines, and these workers can’t be replaced, the workers have you in their power. This is the situation for airlines, because it takes specialized skills to operate and maintain their extremely expensive planes.

^[6]This section is based upon the outstanding article “Into Thin Air” by Roger Lowenstein, The New York Times Magazine, 2/17/2002.

^[7]Ibid.

^[8]Ibid.