How Covid is working through markets: British Airways edition

Because markets clear supply and demand, abrupt shocks often lead to surprising outcomes.  Covid is a big market shock.  

An early example of the ‘I didn’t think of that’ genre comes from world aviation. British Airways is taking advantage of the collapse of air traffic to restructure its workforce.

The airline has a two-tier workforce for cabin crew.  A long-serving legacy workforce with high pay, subject to expensive working restrictions.  And a younger, more flexible, lower paid workforce. 

Naturally the airline has been working away for many years to whittle down the legacy crews.  This has led to regular strikes at busy times of the year, when negotiations between the airline and the unions break down.

The persistence of these legacy arrangements has been underpinned by the airline’s dominance of the profitable London Heathrow hub.  The airline’s landing slots and routes there used to generate enough economic rent to pay above-market wages and to make disruption prohibitively costly.

But Covid has upended that model.  Airlines are not making money and the strike weapon looks pretty useless right now.

More than 8,000 of British Airway’s 14,262 Heathrow-based cabin staff are in the legacy category (and they make up a higher proportion of those in senior roles).  The airline envisages making 4,700 redundancies and eliminating many of the legacy terms and conditions.

To add insult to injury, the airline has started negotiations by offering redundancy at the statutory minimum.  This contrasts with very generous voluntary redundancy offers made in better times – another measure of workers’ lessened bargaining power.

It’s a fascinating case study: workers and bosses squabbling over how to divvy up the excess profits extracted from consumers with the help of poor government regulation (which has ensured a shortage of airport capacity near London), now turning into a fight over who should bear the losses.

And it is far from being a closed case.  It will almost certainly be played into bigger debates over the future of aviation and appeals for government support from British Airways (note that BA’s partner airline, Iberia, appears to have secured state aid on the condition that it not challenge staff working conditions).

The government (and voters) might also find some useful reflections when considering the future of Air New Zealand.  Because one lesson is that while it may be painful to let the parties sort out problems in a market framework, the economic burden of bailouts (particularly where they are early, generous, preserve archaic terms and conditions in sheltered industries and/or postpone necessary change) may well be greater in the long run.

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