One of the oldest airlines in the United States, Air Avia had withstood the test of time. Founded in the 1940s as a conglomeration and acquisition of several other airlines, Air Avia became an important image in US skies.
In its early years, the management worked with aircraft developers and were able to develop and fly some of the best passenger transport aeroplanes. Air Avia expanded its business to Europe by acquiring other airlines.
Then they expanded to Central and Latin America through a subsidiary. They managed to build and operate several airports there. It built up relationships with Hollywood offering free usage of its aircraft, and continued to gain in popularity, soon becoming one of the largest airlines in the world.
Air Avia proceeded to grow, expanding into jet travel though the offering of coast-to-coast non-stop flights. It then developed the first electronic booking system, the basis of online booking systems used today. It developed computer reservation systems and frequent flyer loyalty programs. It changed its routing to a hub-andspoke system, opening hubs at different airports all over the US. The 1990s saw a period of low fuel prices and a very favourable economic climate, and Air Avia prospered making higher than average profits. Rumblings about low wages from the pilots union were quashed with the help of government intervention, and even while Airline deregulation had led to falling stock prices and bankruptcies for its rivals, Air Avia sailed through.
In the early 2000s, Avia bought the nearly bankrupt Worldways Canada and its hub in a contentious merger that resulted in a number of junior pilots from Worldways being furloughed. Over 50 per cent of Worldways pilots were moved to the bottom of the seniority list at Avia. Senior pilots from Worldways were integrated at the same level of seniority as Avia captains hired before them, however, Worldways pilots soon began to earn more than Avia pilots and Avia also inherited Worldways substantial debt. In the wake of this merger and the World Trade Center attacks on 11 September 2001, Avia began losing money. Owing to the extensive furloughs of Worldways pilots, the former Worldways hub was soon staffed almost entirely by Avia officers. Cabin crews from Avia put former Worldways attendants on the bottom of their seniority lists and they were also furloughed. CEO , Doug Jenkins, tried to negotiate benefit agreements with unions but talks stalled because they found that executive compensation packages were being awarded at the same time. This revelation led to a severe undermining of trust, and Worldways’ former hub was severely downsized.
Avia tried to cut costs by standardising its fleet at every other hub that they still maintained. They rolled back the intermediate classes of service to its customers, and they also expanded in several markets, especially in Asia, and were able to report a small profit by 2006.
At this time, they were even achieving a 100 per cent rating on equality among employees – a rating they have since maintained.
However, the year 2008 brought a spate of further woes for Air Avia. April saw a mass grounding of aircraft and fuel prices were rising. By May, Avia, following the lead of other airlines, increased bag check fees to $15 for the first piece, then $25 for the second. They also instituted a steep $150 charge for domestic reservations.
They also announced that they would retire several of their jets used for regional transport.
But the early summer, cost-cutting measures did not seem to be working. Avia decided to furlough about a 1,000 of their attendants in Texas and ground further aircraft. They truncated a few of their hubs, reducing the number of flights. They also began to concentrate their repair work to only one of their hubs, cutting down the repair capacity of the others. The city of Frontiersville, which was thus affected, offered to upgrade repair facilities on the condition that the airlines maintain 600 jobs, however the base was closed the following year.
Air Avia was accused of maintenance problems on at least 20 of their aeroplanes about a year later with such problems including faulty emergency slides, improper engine coatings, incorrectly drilled holes, and other badly done repair jobs. It was alleged that cracks in pressure bulkheads were also not repaired. This is a serious lapse since a ruptured bulkhead could lead to cabin depressurisation.
The Federal Aviation Authority claimed that a plane was retired to keep the plane away from inspectors. By mid-2011, Avia was in trouble again. A report showing a slowdown in air travel and cargo was released.
There were fears of a weaker world economy. In addition, there was an announcement Air Avia had more than ten times the normal number of pilots retiring, a signal that they were afraid that the carrier was not going to last long.
Avia shares tumbled by 33 per cent to a ten-year low. The stock exhibited such volatility that trading was halted several times. The price of Avia’s stock fell by about 75 per cent that year compared to the rest of the industry shares that dropped by about 41 per cent. In addition it was the only major US airline that lost money that year.
Analysis revealed that Avia had an unusually large debt burden. They were also experiencing labour costs of about 30 per cent of their total costs. Unlike its rivals, Avia had never undertaken restructuring. They had also faced lower-cost competitors, and so, tried to deal with this through cutting their fares. While other legacy airlines had used bankruptcy to renegotiate labour contracts and slash costs in the past, Avia had stood firm, they had increased their borrowing and pledged all their assets. However, they were now dealing with a leaner and meaner market with former rivals now merging to form gigantic competitors. The company turned to its unions to discuss a solution. They wanted to change the structure of contracts with pilots, attendants and mechanics, but talks stalled when the pilots union did not send a proposal to its members to vote on.
In November, Avia filed for bankruptcy. US bankruptcy rules allow companies to reject contracts, so from this point, Avia felt it could better negotiate with unions. One of their aims was to reduce labour costs to competitive levels – 30 per cent was way too much.
They also wanted to restructure and cut other costs to continue their operations.
Other carriers had gone the same route. The most benign form of cost cutting had always been replacing larger airplanes like 737s, A320s and MD80s with regional jets (RJs). This saves money on fuel costs for the aeroplanes and also because crews on these RJs are paid less, and customers would find these planes more cramped and uncomfortable. Other airlines had also tried reducing the number of flights in their hubs, and routes that were not making profits were cancelled and fewer flights were maintained on busier routes with higher loads, and while the popular routes were more likely to remain unaffected, there was a possibility that lighter routes could vanish altogether.
Avia then came up with a plan to reduce employee costs by about 20 per cent. In early 2012, they announced that they would eliminate 13,000 workers or about 16 per cent of their entire workforce. They would also cut back on the health benefits for current employees and retirees. They said that these cuts would reduce costs by about $2bn a year, $1.25bn of which came directly from employee cuts. The CEO claimed that it was the only sane move they could make when considering how their competition had restructured in the past. Thus, airlines that failed to change were no longer operationally viable.
The unions were angry. They felt that Avia had disregarded the provisions in their agreements. The 13,000 employees who lost their jobs would represent about 4,600 mechanics, 4,200 ground staff positions, 2,300 flight attendants and about 400 pilots. About 1,400 jobs would be cut for management and support services, though no specific numbers were given. Other proposals were for partnerships and more efficient use of Avia aircraft. Union officials felt that the company was downplaying the amount they were realising from their employees. Together with cuts in health and retirement benefits, employees such as flight attendants would be facing pay cuts up to about 18 per cent and faced working longer hours. In total, employees were likely to give back about $3bn annually.
Analysts note that Avia has shifted its policy of maintaining its aircraft in-house. They have decided to outsource repair work overseas as their competitors have done, achieving impressive savings. For instance, a multiyear contract with an Asia based repair shop is likely to save them hundreds of millions. However, there is still the disadvantage of foreign repair stations not complying strictly with US safety standards. The CEO, however feels that this ‘near term’ pain in cuts would result in an airline that once again ruled the skies.

Question

1 What were the reasons for Air Avia to downsize for each time that it did so? Compare and contrast the reasons.
2 Like other airlines, Avia has options other than downsizing. Can it afford to reduce customer service and expectations at the cost of retaining its employees? Should the downsizing be accompanied with other changes to maximize its impact?

3 Do you think that the proposed downsizing in Avia is likely to be effective? Consider the changes to the workforce they propose. Have they learnt from past experience? Could they change their plan?
4 A ir Avia has a contentious relationship with their unions. Could they have managed this relationship better to help them through their conundrum?
5 W hat are the likely long-term employee impacts of downsizing? Discuss how ‘survivors’ react to downsizing decisions, emphasizing their fears, concerns, feelings and long-term productivity. Will the reputation of Avia as an employer suffer?