Mergers and Bargaining in the Airline Industry

Mergers and Bargaining in the Airline Industry

Pierre-Yves CrCmieux - Marc Van Audenrode

Abstract. Using newly collected firm-level data, this paper analyzes the effect of mergers on the earnings and employment of pilots, flight attendants, and mechanics in the US airline industry between 1971 and 1990. The results show that mergers had a significant and largely negative impact on flight attendants’ earnings but have a limited impact on mechanics’ and none on pilots’ earnings. Mergers have no significant direct impact on employment for pilots or mechanics but affected flight attendants’ employment negatively. The indirect impact of reduced activity following mergers did lead to an overall negative impact on employment for pilots and significantly increased the magnitude of the effect for flight attendants.

Introduction

The US economy of the 1980s will probably be remembered in part for its steady. stream of mergers, acquisitions, and takeovers. This is particularly true of the airline industry where all but one of the major airlines experienced a merger or takeover of some sort during the decade (see Table 1).

While the effects of mergers have been extensively debated from an industrial organization perspective with a particular emphasis on the effect of mergers on market power, much less has been written

Pierre-Yves CrCmiew, Department of Economics, CP 8888 Station A, UniversitC

Marc Van Audenrode, Universitt Laval.

We thank Bill Dickens, James Peoples, and Denise Jarvinen for very helpful comments. Van Audenrode thanks the FCAR program of the Government of QuCbec and the SHRC program of the Government of Canada for generous financial support and CrCmieux thanks the PAFACC at the UniversitC du QuCbec a Montreal. The usual disclaimer applies.

Received on August 29, 1995 and approved by the Editorial Board on March 28, 1996.

LABOUR 10 (2) 297-318 (1996) JEL L22L93

du QuCbec a Montreal.

8 Fondazione Giacomo Brodolini 1996. Published by Blackwell Publishers, I 0 8 Cowley Road, Oxford OX4 IJF, UK and 238 Main Street, Cambridge, MA 02142. USA.

298 Pierre-Yves CrCmieux - Marc Van Audenrode

about the effect of mergers on labor. Mergers and takeovers could be expected to have an impact on employee earnings because they result in a breakdown of normal bargaining relationships between workers and management and an increase in monopsony power on the part of the employer both of which will reduce the employees’ bargaining strength. Of course, mergers also tend to increase the firm’s market power and its relative efficiency. This, in turn, might lead to higher available rents. In a traditional bargaining framework, these rents will be captured, in part, by the union and result in higher wages for the workers at the merged firm (Peoples, 1989).

Simultaneously with their effect on earnings, mergers could be expected to have an effect on employment. Mergers might lead to efficiency gains. Despite the rigid technology associated with the occupations included in the sample, overlapping routes among the merging firms could result in down-sizing of operations after a merger. This would, in turn, lead to employment losses. Mergers will also have an indirect effect on employment through their effect on wages.

The next section provides an overview of the history of mergers and acquisitions in the airline industry since the early 1970s and is followed by an analysis of the theoretical effect of mergers on bargaining. The third section reviews recent evidence in the mergers and labor earnings literature. The following two sections describe the specification of the model, the data and the empirical results. The sixth section presents the empirical results on the effect of mergers on employment. Finally, we offer some conclusions on the effect of mergers on employment and earnings.

1. Institutional background

Mergers and acquisitions have shaped the airline industry over the last decade. Fifteen mergers, buyouts, and takeovers (friendly and otherwise) involving at least one major airline occurred between 1979 and 1990 (see Table 1). The 1978 Airline Deregulation Act freed the industry from much of the government interference characterizing the preceding period. New entry into the industry was no longer subject to government approval after 1978. This resulted in a large number of entrants in the early 1980s. This wave of new entrants met significant competition from the established carriers and resulted in many bankruptcies and mergers. Of the 34 airlines operating as scheduled carriers in 1979, only 15 remained in 1992.

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Mergers and Bargaining in the Airline Industry 299

Of the 11 major airlines operating in 1985, three had stopped flying by 1991 (including Eastern despite an earlier buyout), two were in bankruptcy (both after hostile takeovers in the first half of the 1980s), and one had merged, leaving five airlines operating normally. Furthermore, of the 15 mergers which occurred between 1979 and 1992, nine resulted from the buyout of one company by another, one resulted in the reemergence of the two airlines under a new name (Southern and North Central became Republic), and one resulted from the hostile takeover of Continental by Texas International in 1982 which was followed by the bankruptcy of Continental and the buyouts of New York Air, Peoplexpress, and Frontier.

2. Mergers and the bargaining process

Mergers can have two types of effects on labor earnings. The first effect has been considered by Shleifer and Summers (1988) and tested empirically by Gokhale el al. (1992). In this type of model, known as the breach of trust model, takeovers result in the layoff of senior workers thereby preventing them from collecting their rents.'

In this paper, we emphasize another type of effect. Mergers will lead to a break in normal bargaining relations between union and management. This is evidenced by the elimination of employee stock ownership programs or other concession for equity agreements which appeared in the early 1980s and were usually eliminated following mergers or hostile takeovers (Capelli, 1985). The absence of pattern bargaining particularly for pilots and flight attendants also exacerbates the importance of good relations between union and management at a given firm (Capelli, 1985). The absence of goodwill and trust which generally follows mergers or takeovers often leads to labor disputes and a general worsening of labor relations. Finally, the Continental takeover in 1983 had a chilling effect on labor relations for all following mergers. Texas International acquired Continental Airlines in 1982 and immediately sought the protection of bankruptcy laws to restructure the airline. From the labor prospective, the outcome of the takeover was unusual. All Continental Airlines' employees were laid off and then rehired at lower rates and without the benefit of seniority previously accumulated at the airline. Union contracts were unilaterally terminated and major strikes followed.* The Continental takeover was also characterized by the creation of a non-union subsidiary

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300 Pierre-Yves Cremieux - Marc Van Audenrode

forcing employees into an unsuccessful strike effort. This set the stage for the wave of mergers and takeovers to follow foi the rest of the decade. Nevertheless, the Lorenzo takeover had some unusual features. The Continental takeover resulted in a formal breach of trust vis-u-vis the senior workers at Continental since it prevented them from capturing the wages over their marginal product of labor ordinarily accruing to senior workers. In all other merger cases, workers from acquired firms negotiated with the new owner and secured a new contract. In most cases, seniority ladders were merged. In a few cases, the new employees were added at the bottom of the surviving airline’s seniority ladder.

Mergers increase the total rents potentially available for labor by gaining market share and monopoly power. However, mergers might also weaken workers’ bargaining position because of increased industry concentration resulting in an increase of the airlines’ monopsony power on the labor market. Higher industry concentration on the product market and the resulting increase of the employer’s monopsony power on the labor market affect the bargaining process in opposite directions. In the case of the airline industry, because of limited barriers to entry and periodic price wars despite the limited number of companies, it is unclear whether increased management power will outweigh the increased availability of rents available following the merger.

This paper examines simultaneously the impact of mergers on three different categories of workers - namely pilots, flight attendants, and mechanics. Because the three categories vary widely in bargaining strength, it will be possible to examine the relative importance of changes in union strength which will vary across categories, and management strength which should affect all worker categories equally within the same airline.

3. Previous evidence

In a rent sharing context, the overall effect of a merger is unclear. On one hand, the increase in rents due to increased concentration following the merger and the increased efficiency resulting from the merger might lead to higher wages (Hendricks, 1976; Peoples, 1989). On the other hand, mergers will lead to greater concentration on the labor market as well as the commitment of funds for the merger which might not be available as rents following the merger. These effects will decrease employee bargaining power.

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Mergers and Bargaining in the Airline Industry 30 1

Relatively little evidence on the effect of mergers on labor has been provided so far. Some limited evidence on the impact of mergers on wages are presented by Lichtenberg and Siegel (1990), Lichtenberg and Kim (1989), Peoples (1989, 1992), Brown and Medoff (1988), and Gokhale et al. (1992). Lichtenberg and Siegel (1990) use 1977 and 1982 data from the US Census Bureau to analyze wage growth at firms experiencing ownership changes in the interim period. They find that wage growth at production establishments and auxiliary establishments experiencing ownership changes is 2 percent and 6 percent smaller, respectively, than wage growth at firms not experiencing ownership changes. Using 1979-84 data, Lichtenberg and Kim (1989) also found that mergers in the airline industry had a negative effect on average wage growth in firms experiencing mergers. Because the data included only aggregated employment (labor is an index of 15 categories of employees), it is impossible to distinguish between changes in the workforce composition and changes in actual wage levels. Nevertheless, they find that wage growth was 4.6 percent lower at airlines involved in mergers compared to all other airlines. Using March 1981 Current Population Survey (CPS) data, Peoples (1989) finds that employees working in industries which had a higher percentage of acquisition assets had significantly higher wages if the acquisitions resulted from horizontal, vertical, or product extension merges. Using a panel of CPS data, Peoples (1992) finds that the extent of horizontal acquisition in the industry does not help explain union wages. He does find that non-union wages seem higher in industries with more horizontal acquisitions. Because CPS includes data on employees only, the absence of profits and other firm controls might introduce simultaneity bias in these two studies. Brown and Medoff (1988) conducted a study similar to Lichtenberg and Siegel (1990) using data from MESC records from the Institute for Social Research at the University of Michigan. These data cover 200,000 firms between 1978 and 1984. They found reductions in wages resulting from ownership transfers of less than 5 percent whether the ownership transfers resulted from simple sales, assets-only sales, mergers, or reorganizations. Because of the large number of small firms in their samples, Brown and Medoff point out that this might result from the removal of upper management at one of the two firms rather than from losses for all employees afier the takeover. Brown and Medoff also find that ownership changes have positive or negative impacts on employment depending on the type of change of ownership. Furthermore, their results are sensitive to

8 Fondazionc Giacomo Brodolini 1596.


the year studied and the specification of the model. They conclude that ownership changes have little effect on employment or wages. Finally, in a recent study, Gokhale et a!. (1992) find that extra-marginal wage payments are reduced mostly as a consequence of the reduced employment of senior workers. They interpret this result as evidence of a weakening of h e a r contracts because of potential breach of trust in the case of takeover.

Our paper will improve on previous research in a number of ways. Many of the studies of takeovers suffer from incomplete data. Brown and Medoff (1988), Lichtenberg and Siege1 (1990), and Lichtenberg and Kim (1989) have very limited information on the composition of the workforce within the firm targeted by a t a k e ~ v e r . ~ As a result, much of the wage differentials observed after the takeover could be due to changes in the workforce composition rather than in the wage structure. Peoples (1989, 1992) uses CPS industry-level data which avoids the problems linked to changes in the workforce composition but does not provide information on the merged firms. This is not the case in the Gokhale et al. article which identifies very narrowly defined occupational groups with firm-level data. However, the sample includes only non-production workers and the paper focuses exclusively on the issue of breach of trust. One of the shortcomings of the paper is that the reduction in the employment of senior workers could result from economies of scale realized as a result of mergers rather than a pure breacb of trust on the part of the employer, resulting in a reduction in extra marginal wage payments.

In our paper, the data on employment, earnings, and firms are extremely rich. Furthermore, by limiting ourselves to one industry and specific occupations, we avoid many of the control problems encountered in other studies. The airline industry is characterized by rigid technology with little if any returns to scale (Keeler, 1978). The industry is highly unionized with a stable workforce. Hence, any changes in employment levels or earning levels following takeovers and mergers can be safely attributed to the change in corporate ownership rather than some change in technology or simultaneous movements in labor supply. Because we limit our study to production workers with very clearly defined and federally regulated tasks (pilots, flight attendants, and mechanics), the ability of new ownership to impact job descriptions and worker productivity are limited.

0 Fondarione Giacomo Brodolini 1996.


4. The data

As mentioned earlier, data from our sample are limited to three types of production employees: pilots, flight attendants, and mechanics. The data cover 21 years and 12 to 27 airlines (depending on the year because of mergers and bankruptcies). Mergers and takeovers are easily identifiable and both targets and initiators of corporate changes are known (Table 1).

Table 1. Mergers, takeovers, and bankrupties for major airlines, 1971-92

Airline <78 78 79 80 81 82 83 84 85 86 87 88 89 90 91

American Aircal TWA Ozark Braniff Florida Exp. Mackey Eastern Texas Int’l Continental New York A i r People Exp. h n t i e r Northwest Republic Southern North Centr. Hugh. Air W. West Coast Bonanza Delta Western Northeast PanAm National United Piedmont Empire Mohawk USAir PSA

T T

T . - 0 - ‘ I

T 0

Note: Airlines in bold are included in the sample.

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304 Pierre-Yves Crtmieux - Marc Van Audenrode

The airlines included in our micro-level data set account for over 90 percent of domestic passenger airline industry revenues. Data on firm characteristics are drawn from the Air Cum'er Trufic Stutktics and the Air Currier Financial Stutistics. Data on payroll and employment information were collected directly from the Form 41 schedules P5.2, P6, P10 reports filled out quarterly by the airlines for the Civil Aeronautics Board and subsequently for the Department of Transportation. The data include only the domestic operations of the carriers because of inconsistencies in reporting for employees working outside the United States and the absence of information on fringe benefits which represent large portions of total compensation for employees working abroad. Because of the Deregulation Act of 1978, a deregulation dummy variable and deregulation interaction terms with the firm characteristic variables were included in the regressions. Since there are no data available on 'seniority profiles in the industry, a seniority variable was constructed from data on employment flows (see Appendix A). Continental Airlines was deleted from the sample because of unreliable data for the years surrounding the merger.4

5. Empirical specification and results of the earnings regression

The dependent variable of each estimating equation is the log of average real annual earnings for the worker category considered (pilots, flight attendants, or mechanics). Our regressions on earnings levels include five types of explanatory variables. First, a number of firm characteristic variables are included to account for differences in ability to pay, differing characteristics in the type of work performed by the employees, and differences in employee characteristics. The size of the firm is proxied by total revenues and should capture the well known size-wage effect. Profitability is measured by real net income as reported by the firm. The relative size of the bargaining unit is also included in the regression. All three variables are consistent with an ability to pay interpretation of wage determination (Peoples, 1990).' Average aircraft size and average length of flights measure compensating differentials across airlines (CrCmieux, 1996). A seniority variable and a union membership variable capture differences in average seniority and union status.6 Deregulation interaction terms are included to account for structural changes resulting from the 1978 Airline Deregulation Act. Seven dummy variables takes value one if an

0 Fondazione Giacomo Brodolini 1996.


ownership change or a merger occurred for a given airline up to seven years earlier. These dummy variables capture the effect of mergers or takeovers on employee earnings for seven years after the mergers. Finally, a series of airline and year dummy variables are added to control for fixed effects. The regressions are run separately for the three categories of employees.

A. Pilot results

As shown in Table 2, significant coefficients have a sign consistent with prior expectations.’ Two variables other than the merger variable capture the extent of rent sharing. First, the pilots’ unions (the Allied Pilots’ Association for American Airlines and the Air Line Pilots’ Association for all other unionized airlines) were very effective at capturing rents. The coefficient on the dereg*union membership variable indicates that unionization earned pilots about 30 percent more. The union variable only captures wage differentials linked to unionization after deregulation since all airlines included in the sample had unionized pilots before deregulation. Second, the significance and size of the labor share coefficient confirm the existence of rent sharing.’ Pilots seem to extract higher wages from their employers the smaller the percentage of the airline’s total workforce they represent. Hence, if mergers and takeovers result in a breakdown of normal bargaining relations, reduce available rents through commitment of the firm’s assets to the takeover, and reduce the ability of employees to extract a share of this rent through an increase in the monopsonistic power of the remaining employer, we should expect pilots to lose much from takeovers and mergers. Perhaps surprisingly, the coefficients on the merger dummies for pilots are very small and insignificant. This seems contradictory with strict rent sharing or breach of trust theories since pilots probably have high rents to lose and have steep age earnings profiles. However, pilots also hold the airlines hostage since they can cripple their company’s earning potential through strikes. Pilots are not easily replaceable and are indispensable to the operations of the company. Hence, it seems that despite much to lose, airline pilots held on to their rents through changes of ownership. This result is sensitive to sample and model specification. Under other specifications (merger dummy for two years only, omission of United Airlines or American Airlines for example), we find some small negative effect of mergers on earnings. In all cases, the

B Fondadone Giammo Broddini 1996.


Table 2. Estimation results for pilots, flight attendants, and mechanics

Dependent variable: Log of average annual earnings

Dependent mean (e') Number of obs. R squared

Variable Intercept

Real revenues

Real net income

Average capacity

Average length

Labor share

Union membership

Seniority

Seniority squared

Dereg'Real revenues

Dereg'Real net income

Dereg 'Capacity

Dereg*Length

Dereg'Labor share

Dereg'Union memb.

Dereg*Seniority

Merger (1 year)

Merger (2 year)

$78,179

377

Pilots 0.78

10.90'*' (0.15)

(2 x lo-") -9x lo-'

0.01' (1.8 x

(5.6 x 10-9

(1.8 x - 7 . 8 ~ lo"**'

- 2.3* * (0.78)

NA

0.06**+ (0.01)

-2.3 10-3-

(3.9 x

(2 x lo-')

(1.8 x lo-') 9 x lo-'

-4.6 x lo-' (5.2 x lo-.') 7.8 x

(1.6 x

- 0.97 (0.92) 0.33*'*

(0.05) 5.2 x 10-3

(7.9 x lo-')

(0.06) 4.9 x 10-3 (0.06)

0.04

$22,834

377 0.67 Flight att.

9.66."

1.3 x (0.12)

(2 x lo-")

( 1 . 9 ~ lo-')

(6.2 x 10-1) - 5 . ~ ~ 10-4.- (1.9 x

-2.9 x lo-'

1.4 x lo-'**

- 3.02"' (0.98)

(0.095) -0.13

5.4 x lo-' (7.3 x lo-')

(9.8 x - 2 . 6 ~ lo-"**'

- 1.3 x lo-' (2 x lo-')

(1.9 x lo-')

2.8 x (1.6 x

2.9 x

-7.5 x lo-> (6.3 x lo-')

1.46 (1.05) 0.11

(0.08) -0.12 (0.10)

-9.9 x 1 0 - 3 (5.4 x 10-2)

(5.4 x lo-?) -0.1.)'

$29,607

362 0.71 Mechanics

10.71 * (0.20)

(3 x lo-") -3.1 (2.3 x 10 ')

- 1.3. (6.5 x lo-')

-7.5 x lo-'***

-3.11*** (2.3 10-9

(0.95) -4.8 x 10.' (0.12)

(1.1 x lo-') -9.8 (2.7 x 10.~1

lo-* (3 x 10-8) 3.1 x

(2.3 lo-')

5.8 x 10-"**

3.7 x 10.' (6.7 x

2 (1.9

(0.94)

(0.10) -2.2 x lo-' (7.6 10-3)

2"

0.33'.

-0.10. (0.07)

-0.13. (0.07)

8 Fondazionc Giammo Brodolini 1996.


Table 2. continued

Dependent variable: Log of average annual earnings

Merger (3 year) 0.07 (0.06)

Merger (4 year) 0.08 (0.07)

(0.07) Merger (6 year) 0.07

(0.08)

Merger (5 year) 0.04

-0.15*** - 0.03 (5.7 x 10-2) (0.07)

-0.21’ 0.12 (6.8 x lo-’) (0.09)

-0.15** -0.05 (6.8 x lo-*) (0.08)

-0.13 0.10 (8.0 x lo-’) (0.10)

Merger (7 year) -7.5 x 10.” -0.25” 0.17 (0.12) (0.11) (0.14)

Nofe: Firm and year dummies were included to account for fixed effects and are not reported in

** 1

*

the table. Significant at the 1 percent level. Significant at the 5 percent level. Significant at the 10 percent level.

..

statistical significance of the results are limited (never above 95 percent confidence interval) and the point estimates show effects below 10 percent under any specification. Hence, we can conclude that mergers had little effect, if any, on pilots’ earnings.

B. Flight attendants’ results

The results for flight attendants are also reported in Table 2. The signs of the coefficients are similar to those found for pilots except for the merger dummies. The negative, although insignificant, coefficient on the union membership variable coefficient is surprising. However, because of fixed effects, the union membership variable only captures the effect of a change in status at a given airline. Again, the importance of labor share is clear and implies some significant rent extraction. Mergers are found to have a large, negative, and persistent effect on flight attendants’ earnings. Flight attendants employed by companies having experienced an ownership change have earnings over 20 percent below those of flight attendants whose companies were not affected by changes of ownership. Not surprisingly, the effect of ownership changes occurs

8 Fondazione Giammo Brodolini 1996.

308 Pierre-Yves CrCmieux - Marc Van Audenrode

with a four-year delay but remains strong for the entire seven-year period. This delayed response results from rigidities introduced by three-year contracts. The results are not surprising given the flight attendants’ weak bargaining position. Flight attendants are particularly vulnerable to monopsony power resulting from increased concentration because of the lack of similar work opportunities outside the airline industry. They will also have decreased pay following mergers because of the reduced availability of rents. However, unlike pilots whose bargaining methods and heavy reliance on strikes imply a capacity to affectively extract rents generated by the increased market power of the newly merged firm, the flight attendant unions have not relied heavily on strikes. Hence, it is possible that a gift exchange model of the type developed by Akerlof (1982) together with some rent extraction better explains rents in the case of flight attendants. The change in earnings following mergers is to be expected since the normal relation between labor and management is severed by the ownership change. In terms of gift exchange, a merger will lead to a change in the “norms determining a fair day’s work” (Akerlof, 1982, p. 543) particularly after the 1982 Continental experience. This will negatively affect earnings. It is worth noting that the results are extremely robust to changes in sampling (both cross-sectionally and time series) and to changes in specifications (single merger dummy for two years or five years, omission of other rent sharing explanatory variables, etc.).

C. Mechanics’ results

The results for mechanics are also presented in Table 2. While most of the coefficients are of similar sign and magnitude as for the flight attendants and the pilots, the effect of mergers and acquisitions falls in a category of its own.

Although negative, the coefficients on the merger variables are smaller than for flight attendants and are only statistically significant at the 10 percent level for the first two years. This indicates a limited effect of mergers on mechanics’ earnings. Mechanics, unlike pilots and flight attendants, have limited rents compared to mechanics in other industries (Card, 1989). As a result, we would expect mechanics to be less sensitive to increased concentration on the labor market than flight attendants or, even pilots. We would also expect them to be less likely to capture some increased rents due to

8 Fondnzione Giawmo Brodolini 1996.

Mqgers and Bargaining in the Airline Industry 309

greater monopoly power on the part of the newly merged firm. Furthermore, the development of a more uniform bargaining approach by the IAM which represents most of the mechanics prevented mechanics at merged airlines from earnings levels greatly above or below that of other airlines. It remains that mechanics are more easily replaceable than pilots particularly since the development of subcontracting for aircraft maintenance. While the effect of increased monopsony power in the labour market is limited by the availability of similarly paid jobs outside the industry, the threat of job loss following a merger is real since the new ownership can reduce its maintenance operations through subcontracting. As for flight attendants, the results for mechanics are robust. Under no specification could we obtain a clear significant effect of mergers on mechanics earnings despite changes in sample size, model specification, time period, etc. Hence, we can confidently conclude that mergers had a weak effect, if any, on mechanics' earnings.

6. The effect of mergers and takeovers on employment

To determine the effect of mergers on the employment of pilots, mechanics, and flight attendants, regressions were computed with the log of employment as the left-hand side variable and a number of explanatory variables on the right-hand side of the estimating equations. The explanatory variables included seven dummy variables capturing whether the airline had been involved in a merger or takeover over the previous seven years. To account for possible endogeneity bias, we performed a two-stage least squares procedure by instrumenting employee earnings and company size.' To accurately compare employment before and after mergers, we created fictitious firms based on the combination of the merging firms before the merger. This involved calculating the sum, or the weighted sum, of the different variables before the merger." The number of observations is smaller than in the earnings equation because firms which experienced mergers were combined prior to the merger to form the fictitious firms. The employment at each fictitious firh is' compared to the actual employment of the merged firms after the acquisition.

The regressjon results are reported in Table 3. The estimations reveal no statistically significant direct negative effect of mergers on employment except for flight attendants who seemed to have lower levels of employment starting four years after the mergers.

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Table 3. Decomposition of the effect of mergers on employment: estimation results for all categories

Dependent variable: Log of the number of employees

Number of obs. Dependent mean (ex) R squared

Variable Intercept

Predicted overall available ton miles

Real net income

Average capacity

Average length

Predicted average annual earnings

Union membership

Deregulation dummy

Dereg'Pred. overall available ton miles

Dereg*Real net income

Dereg*Average cap.

Dereg*Average length

Dereg'Pred. average annual earnings

Dereg*Union memb.

Merger (1 year)

Merger (2 year)

Merger (3 year)

246 1153 0.99

Pilots 7.46***

(2.52) 1.12***

0.43

- 0.05* * *

(0.04)

(0.44)

(5.6 x - 1.3 10-3*** (2.1 x

(0.22) - 1.28***

NA

- 6.45* * * (2.18) - 0.02 (0.03) - 0.58 (0.47) - 2.9 x (7.9 x 1.ox lo-"**

(2.0 x 0.62***

(0.190 0.14**

(0.07) 0.01

(0.06) -0.02 (0.07)

-3.1 x 10-3 (0.08)

243 1863 0.99 Flight att. 0.77

(1.63) l.ll***

1.95** * (0.42)

-om***

-1.4 x lo-"**

- 0.92***

(0.04)

(5.1 x lo-))

(2.1 x

(0.17) 0.17

- 3.34* (1.73) - 0.05* *

- 2.56*** (0.45)

-0.02**

(0.11)

(0.02)

(7.7 10-3) 8.0

(2.0 10-4)

(0.18)

(0.08)

0.51 * * *

- 0.25* **

- 0.08 (0.06) - 0.08 (0.06) - 0.05 (0.06)

240 1572 0.98

Mechanics 7.42* *

(2.97) 0.78' * *

(0.06)

(0.71)

(8.9 x

- 0.65

- 0.06** *

- 1.0 x 1 0 - ~ (3.8 x

-1.0*** (0.29) 0.61***

(0.21) - 1.50 (2.77) 5.6 x lo-'

(0.04) 0.22

(0.79) 6.1 x lo-'

(0.01) 3.3 x lo-'

(3.6 x lo-*) 0.16

(0.27)

(0.14) 0.03

(0.11) 0.02

(0.11) 0.12

(0.12)

-0.14

8 Fondazionc Giammo Brodolini 1996


Table 3. contiwed


Merger (4 year) 0.03 (0.09)

(0.08) Merger (5 year) 0.02

-0.13* 0.28* * (0.07) (0.13) - 0.18** * 0.11 (0.07) (0.12)

Merger (6 year) -0.6 x lo-’ -0.19** 0.25 * (0.09) (0.08) (0.13)

Merger (7 years) 0.05 -0.16 0.20 (0.12) (0.11) (0.20)

Note: Firm dummies were included hut are not reported in the table. ***, **. and * indicate significance levels at the 1, 5. and 10 percent levels, respectively.

Mechanics seem to benefit from a positive effect of mergers on employment in the fourth and sixth years following mergers.

The results also show that two of the major factors determining employment across all categories are, as one would expect, the physical production of the company (overall available ton miles)” and earnings levels. Since mergers affect earnings (in the case of flight attendants) and might affect overall available ton miles, mergers could still have an indirect effect on employment. A regression of overall available ton miles (OATM) on seven merger dummies with firm and year h e d effects shows that mergers do, in fact, have a large direct negative effect on airline activity (see Table

To determine the overall impact of the direct and indirect effects of mergers on employment levels, we estimated a reduced form equation. For the three categories, we regressed the number of employees in the relevant category on airline and year dummies along with various exogenous variables and seven merger variables. The results presented in Table 5 show that mergers had quite a significant negative effect on employment for flight attendants and pilots. In both cases, the effect is significant starting with the fourth year after the merger and are of similar magnitude. For mechanics, the effect is insignificant in all but the fourth year for which the magnitude of the effect is smaller than in the case of pilots and flight attendants.

4).

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3 12 Pierre-Yves Cremieux - Marc Van Audenrode

'Igble 4. Effect of mergers on total airline activity ~~

Dependent variable: Overall available ton miles.

Number of observations Mean dep. variable R squared

Intercept Merger (1 year) Merger (2 year) Merger (3 year) Merger (4 year) Merger (5 year) Merger (6 year) Merger (7 year)

209 14.37 0.90

Parameter est. 11.65 * * *

-0.37* -0.41' - 0.23 -0.61** -0.60" -0.73** -1.03**

Standard dev. 0.22 0.21 0.21 0.22 0.25 0.24 0.29 0.42

Note: Firm and year dummies were included to account for tixed effects and are not reported

*** ** *

in the table. Significant at the 1 percent level. Significant at the 5 percent level. Significant at the 10 percent level.

7. Conclusions

The empirical evidence shows that mergers have a direct, negative, and significant effect on earnings for flight attendants, and to a lesser extent mechanics, but have no direct effect on pilots' earnings. The results provide insights into the rent extraction mechanism. Mergers and acquisitions can have four effects on earnings. First, mergers and ownership changes affect normal bargaining relations between workers and management. Second, increased monopsony power on the part of the firms following a merger will affect workers' ability to extract rents. Third, airline mergers decreased the amount of rents available to workers for rent sharing purposes through a commitment of assets for the merger. Last but not least, mergers increase the firm's market share thereby enhancing its monopoly power and increasing potential rents for its worker to capture. The four effects will have competing impacts on employees' ability to extract rent or benefit from gift exchange type agreements. The empirical results show that increased concentration in the labor market, reduced rents due to the commitment of large assets to a merger, and the breakdown of normal bargaining

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Mergers and Bargaining in the Airline Industy 313

Table 5. Reduced form estimation of the overall impact of mergers on employment estimation results for all three categories


Number of obs. Dependent mean (ex) R squared

Variable Intercept

Average capacity

Aver. length of flight

Union

Dereg'Union

Dereg*Aver. capacity

Dereg*Aver. length

Merger (1 year)

Merger (2 year)

Merger (3 year)

Merger (4 year)

Merger (5 year)

Merger (6 year)

Merger (7 year)

272 1043

0.89 Pilots

5.04*'* (0.28)

-0.05'" (0.02) 2.0 x 10-3***

(5.0 x lo-') NA

0.29 (0.19) 0.09"'

(0.02) - 1.6 x 10-3-

(4.3 x lo-')

(0.20)

(0.22)

(0.22)

-0.10

-0.11

-0.19

-0.81**' (0.26)

-0.47. (0.25)

-0.78**' (0.27)

-0.98** (0.4)

269 1669

0.92 Flight att. 3.59ff'

(0.28) - 0.02 (0.02) 2.3 x 10-3***

(5.0 x lo-') 0.95 ' '

0.24 (0.25) 0.121 *

(0.3)

(0.02) - 1.9 10-3***

6.9 x 10-3 (0.21)

(0.21)

(0.21)

(4.1 x lo-')

0.01

0.01

- 0.82"' (0.24)

(0.24)

(0.26)

(0.38)

-0.41'

-0.63''

-0.86"

265 1366

0.94 Mechanics 5.21*"

- 0.08"' (0.22)

(0.01) 3.3 x 10- 3**'

(4.7 x 10-9 0.34

(0.33) 0.16

(0.23) 0.09'"

(0.02) -1.8 x lo-.'''. (3.9 x 10-4) 2.0 x lo-'

(0.20) - 0.02 (0.21)

-0.15 (0.21) -0.68'" (0.23)

-0.25 (0.22)

-0.35 (0.24)

(0.35) - 0.54

Nore: Firm and year dummies were included to account for fixed effects and are not reported

*** **

in the table. Significant at the 1 percent level. Significant at the 5 percent level. Significant at the 10 percent level.

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relations outweighed the increased available rents resulting from increased monopoly power for flight attendants but balanced each other in the case of pilots and mechanics leaving their earnings virtually unchanged. The combination of limited bargaining power and the absence of similarly paid opportunities outside the industry probably explain the flight attendants’ difficulties following mergers. On the contrary, pilots, who yield significant power at the bargaining table, and mechanics who enjoy similarly paid opportunities outside the industry, lose little in terms of earnings after mergers.

While the regression results show that mergers only have a statistically significant direct effect on employment for flight attendants, the combination of direct effects and indirect effects on employment through changes in the level of activity and earnings resulted in a significant negative impact of mergers on employment for both pilots and flight attendants. Mechanics’ employment levels, on the other hand, were left relatively unscathed by mergers.

Appendix.A Model of seniority

As was mentioned in the paper, no data exist on average seniority at the different airlines for the period covered. Instead, seniority profiles for the 1971 to 1992 period were simulated for each worker category’at each airline using employment flows from 1959 to 1992.

Assumptions for the seniority model

1. Employment growth before I959

Since data on employment is only available starting in 1959, employment growth is assumed to be constant equal to (1/10)*Emp1(1959) from 1949 to 1959 with zero employment in 1949.

2. Quits, layoffs, and retirements

No quits occur in any employment category except for flight attendants before 1975 who quit or are terminated after two years. All changes in employment come from layoffs and retirement.



If Empl(t + 1) = Empl(t) +X, and X> 0

then the firm is assumed to have hired H(t+l)=X+Empl(t-45), where Empl(t-45) is the number of employees hired 45 years ago and ready to retire (Empl(t-35) for pilots). Priority in hiring is given to employees furloughed in the last five years. They accumulate seniority while on furlough. Others are new workers without seniority.

If Empl(t + 1) = Empl(t) +X and X < 0,

then the firm is assumed to furlough its employees with least seniority first. It will fire X-Empl(t-45) employees since Empl(t-45) (Empl(t-35) for pilots) will have retired that year.

3. Employment duration

Mechanics are assumed to be hired at 20 years of age and to remain on the job until they reach 65. They do not quit but can be furloughed if the airline contracts its labor force.

Pilots are assumed to be hired at 30 years of age since most of them become pilots after 10 years in the Air Force or Navy. They are assumed to stay with the same airline for 35 years and retire.

Flight attendants are assumed to be hired at 20 years of age. Because of discriminatory laws, they are assumed to accumulate no more than two years of seniority before 1975. After 1975, they are assumed to stay on the job for 45 years until they reach age 65.

4. Seniority

All employees, including those furloughed in the last five years, accumulate one additional year of seniority every year. All new hires are hired at zero seniority regardless of whether they have been employed by another company unless they were in the pool of laid-off workers.

5. Seniority rules for furloughs

If the airline contracts its workforce, it will furlough its least senior employees first. These employees will enter a pool of

0 Fondazionc Giacomo Brodolini 1996.


furloughed workers who have priority for rehiring for the next five years (except for flight attendants before 1975). They accumulate seniority during their furlough. After five years on furlough, if the employee has not been rehired, he loses his seniority and falls into the general pool. An employee furloughed at one company and hired by another company starts out with zero seniority.

6. Mergers

If a merger occurs, the employees at both firms (the surviving one and the other one) are assumed to be kept on by the new firm with their seniority. If the number of employees after the merger is less than the sum of the two pre-merger firms (which is usually the case), furloughs are assumed to occur on a pure seniority basis. In other words, management combines the employees from the two companies into one pool of new employees and furloughs those at the bottom of the seniority scale.

Notes

'These rents result from the well-known argument developed by Lazear (1979). * For an excellent detailed account of the Continental Airlines' takeover, see Isaac

Cohen's article (Cohen, 1990). Brown and Medoff (1988) have data on total payroll for each firm in the sample.

Lichtenberg and Siege1 (19%) have observations on production and non-production workers. Lichtenberg and Kim (1989) use an index for labor based on 15 categories of employees. ' Because Continental Airlines reports unrealistically small earnings for its

employees (probably because of data based on operation during parts of the year only), it biases the results towards showing larger losses for workers following mergers.

'While the share of total employment (measured in number of employees) which is represented by a particular bargaining unit is not usually included in wage regression, it is an important determinant of a firm's ability to pay. Workers who are part of a relatively small bargaking unit will obtain wage increases more easily c e t e ~ paribus since the total increase in cost resulting from a given wage increase will be smaller than if the same wage increase was granted to a large bargaining unit. The labor share variable is defined for each firm each year as (number of worker in the categoryhotal employment).

6There are no other data available on employee characteristics such as race, gender, education, etc. However, because occupations are very narrowly defined and require federally mandated certification, these differences in worker characteristics which are often crucial determinants of wages should not be of great importance in this study.

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’The negative coefficient on the average length of flight variable for pilots and flight attendants, while counter-intuitive, is exactly what one would expect. Pilots and flight attendants who fly many short trips rather than a few long trips should be compensated for the added stress involved.

*The sign and significance of the labor share variable could also be interpreted as evidence of capitauskill complementarity. However, in the airline industry, the rigid technology makes this contingency unlikely.

In the first stage, the identifying variables for the log of real earnings were labor share, seniority, seniority squared, and their interaction with the regulatory variables as well as year dummies. Year dummies were the only identifying variables for company size (instrumented with the log of overall available ton miles).

‘‘A simple sum was calculated for real revenues, profits, and employment. For labor share, seniority, capacity, length, and real earnings, a weighted sum was calculated. Employment was used as the weight.

”Whereas real revenues were used as a size control variable in the earnings equation, overall available ton miles were preferred in the employment equation. Because mergers were often followed by price cuts in order to gain market share, real revenues tend to underestimate the actual physical size of the airline after mergers thereby overestimating the effect of mergers on employment.

References

Akerlof G. A. (1982) “Labor Contracts as Partial Gift Exchange”, Quarterly Journal of Economics 87: 543-569.

Brown C. and Medoff J. L. (1988) “The Impact of Firm Acquisitions on Labor”, in Auerbach A. J. (ed.), Corporate Tabovers, Chicago, I L The University of Chicago Press.

Capelli P. (1985) “Competitive Pressures and Labor Relations in the Airline Industry”, industrid Relations 24: 316-338.

Cohen I. (1990) “Political Climate and f i o Airline Strikes: Century Air in 1932 and Continental Airlines in 1983-1986”, Industrial and Labor Relations Review 43:

Crtrnieux P.-Y. (1994) “The Effect of Deregulation on Employee Earnings: Pilots, Flight Attendants, and Mechanics, 1959-1992”, Industrial and Labor Relations Review, 49: 223-242.

Gokhale J., Groshen E. L. and Neumark D. (1992) “Do Hostile Takeovers Reduce Extra Marginal Wage Payments?”, Mimeo, Federal Reserve Bank of Cleveland.

Hendricks W. (1976) “Conglomerate Mergers and Collective Bargaining”, Industrid

Keeler T. E. (1978) “Domestic Trunk Airline Regulation: An Economic Evaluation”, Study on Federal Regulation, Washington DC: US Government Printing Office.

h e a r E. P. (1979) “Why is There Mandatory Retirement?”, Journal of Political Economy 87: 1261-1284.

Lichtenberg F. R. and Kim M. (1989) “The Effects of Mergers on Prices, Costs, and Capacity Utilization in the US Air Transportation Industry, 1970-1984”, NBER Working Paper No. 3197.

308-323.

Relations 15: 75-87.



Lichtenberg F. R. and Siege1 D. (1990) “The Effect of Ownership Changes on the Employment and Wages of Central Office and Other Personnel”, Journal of Law and Economics 33: 383-408.

Peoples J. Jr (1992) “Industry Wages Effects of Horizontal Acquisitions in the USA’, Applied Economics 24: 519-528.

Peoples J. Jr (1990) “Airline Deregulation and Industry Wage Levels”, Eastern Economic Journal 16, 1: 49-58.

Peoples J. Jr (1989) “Merger Activity and Wage Levels in US Manufacturing”, The Journal of Labor Research 10: 183-195.

Shleifer A. and Summers L. H. (1988) “Breach of Trust in Hostile Takeovers”, in Auerbach A. J. (ed.) Corporate Takeovers, Chicago, IL The University of Chicago Press.

US Civil Aeronautics Board. Air Carrier Financial Statistics, various issues, 1959-1988. Costs and Statistics Division, Bureau of Accounts and Statistics.

US Civil Aeronautics Board. Air Cam’er Trafjic Statistics, various issues, 1959- 1988. Costs and Statistics Division, Bureau of Accounts and Statistics.

US Civil Aeronautics Board. Form 41, P Schedules, 1959-1984. Costs and Statistics Division, Bureau of Accounts and Statistics.

US Department of Transportation. Form 41, P Schedules, 1985-1990. US Department of Transportation. Handbook of Airline Statistics, various issues,

1959-1978. Costs and Statistics Division, Bureau of Accounts of Statistics.

0 Fondazione Giacomo Brodolini 1996.

Mergers and Bargaining in the Airline Industry

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