Wednesday, October 14, 2009

A Negotiating Ploy?

The airline industry is fun for economists to observe because there are so many deviations from perfect competition that are explainable using managerial economics concepts. However, I did not see this coming. American Airlines and British Airways are seeking approval for an alliance (like a merger but not quite) but are facing opposition from antitrust authorities and Senators. Presumably,the airlines are pursuing the alliance because it would make each carrier more profitable. If labor is supplied by a monopoly (union), usually the workers share in any additional company earnings. (Certainly, airline workers took big pay cuts when demand fell after 9/11.) So why are they opposed to greater company earnings that they might get a share of?

It could be that the reason that this is believed to profitable is that it would decrease demand for unionized employees thus reducing costs. This would be consistent with raising prices and decreasing supply after acquiring a substitute. Further, it could be a negotiation ploy by management to decrease union bargaining power. This is what the Allied Pilots Association (APA) is arguing:
"If permitted to expand their scope, immunized airline alliances may lead to increased foreign control of U.S. airline operations, including maintenance practices and crew training," the association said in a release.
Alternatively, the lost jobs to feriners could be a red herring and union opposition is the negotiation ploy. The APA is levering potential political clout so as to maximize its share of any potential spoils.

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