For the second time in four months, unionized pilots flying for cargo airlines Atlas Air Worldwide Holdings (NASDAQ:AAWW), its Southern Air unit, and ABX Air, a unit of Air Transport Services Group (NASDAQ:ATSG), descended on Cincinnati to protest the lack of traction in contract talks that have dragged on for several years. But the pilots’ message wasn’t as much meant for the ears of Atlas and ATSG executives as it was for another company some 2,300 miles away.
Amazon.com, Inc. (NASDAQ:AMZN) relies on Atlas and ATSG planes and crews to deliver shipments for its Amazon Air unit. About 20 percent of Atlas’ 123 planes fly for Amazon. At ATSG, the percentage is closer to 30 percent. Amazon also has substantial, albeit minority, equity stakes in Atlas and ATSG. Amazon is monitoring the ongoing disputes, and it isn’t pleased with the lack of resolution as well as the snail’s pace of progress, especially as the peak holiday season begins to come into focus. “Neither side seems willing to work towards a reasonable compromise,” Amazon said in a statement Aug. 22. “This is contrary to the interests of Atlas, the pilots, and the customers they both serve. We have an obligation to deliver to our customers, and so do they. “
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Talks with Atlas are scheduled to resume Aug. 26 and last for three-and-a-half-days. The ATSG dispute is expected to go into mediation next month, according to Paul Cunningham, an ATSG spokesman.
Amazon expects record volumes this holiday season, and has already launched one-day deliveries for millions of products available through its “Prime” service. The delivery commitments will be hard to keep without a smoothly functioning air delivery network. Amazon will also not have FedEx Corp. (NYSE:FDX) in its corner after the two severed their air and ground contracts over the summer. The confluence of those factors means that Amazon will have less margin for error this peak season than ever before, and makes it that much more critical for Atlas, ATSG and their pilots to work in harmony. It may also explain why the pilots chose Cincinnati-Northern Kentucky International Airport, the planned site of Amazon’s global air cargo hub, to stage the protests earlier this week.
Capt. Robert Kirchner, who chairs the executive council for Atlas Air pilots at Teamsters union Local 1224, said in an interview Aug. 23 that Amazon and German shipping and logistics giant Deutsche Post DHL, Atlas’ two biggest customers, should be shielded from major peak-season disruptions because Atlas can shift resources and put more airlift and crews at their disposal. Atlas also flies for FedEx and UPS Inc. (NYSE:UPS), which are both profitable contracts for the Purchase, N.Y.-based operator.
The question is how well Atlas’ other customers will be served during peak season if schedules are re-arranged, especially with the carrier suffering from pilot attrition, Kirchner said. According to Atlas’ pilots, poor planning and disorganization led to more than 400 flights in July not having assigned crews.
Amazon, DHL and other Atlas customers can also take comfort in knowing that pilots at Atlas and ABX Air are forbidden at this point from striking under the Railway Labor Act of 1926, the federal law that governs airline and railroad labor relations. Contracts covered by the Act don’t expire, but become “amendable.” The ABX contract became amendable in 2014, while the Atlas and Southern Air contracts became amendable in 2016. The law requires that both sides engage in an exhaustive process of negotiations, arbitration and mediation before a strike or lockout can occur.
Yet with a fair amount of bad blood already evident, there is concern that pilots could choose to adhere to the letter of their current agreements – known as “working to the contract” – a strategy that could slow airline operations even as the union stays within the confines of the law. Then there is the concern of proving that workers are acting in a well-orchestrated manner to deliberately slow operations. “Legally [the pilots] have to work, but I also think it’s hard for someone to prove that a group of workers isn’t just being lazy, versus an organized slowdown,” said Seldon Clarke, analyst for Deutsche Bank.
There is precedent for labor taking matters into its own hands. In November 2016, 250 ABX Air pilots staged a one-day walkout to protest the company’s alleged understaffing of its pilot rolls since 2014, which resulted in the pilots flying thousands of emergency assignments for which they were not properly compensated. A court ordered the pilots back to work the next day. In July 2019, a federal appeals court panel upheld a lower court decision blocking Atlas pilots from engaging in work slowdowns, taking excessive sick days on short notice, and refusing to work overtime shifts. Atlas had sought the lower court injunction after failing to convince the union to change its behavior, which the company said was aimed at pressuring it to cave on contract talks.
Atlas blamed labor-related disruptions in part for second-quarter results that came in below expectations. In disclosing the results, Atlas wouldn’t specify what those disruptions were. Company executives were evasive about the issue when quizzed by analysts on the subsequent conference call.
Kevin Sterling, an analyst at Seaport Global Securities, said Atlas was reluctant to discuss the labor situation because it doesn’t want to give the union any ammunition to bring to the bargaining table. Atlas executives are frustrated because don’t know when an amendable contract will be reached, and they fear it may take well over a year to get to that point, Sterling said. The company is also feeling pressure from Amazon to ensure smooth operations during the upcoming peak period, he added.
Pilot union leaders have taken a hard line against both of the employers, charging them with deliberately understaffing their pilot rolls, overworking and underpaying their crews, and failing to understand the changes in flying demands triggered by e-commerce delivery requirements, which is a relatively new phenomenon for Atlas and ATSG.
According to the local, more than 10 percent of its pilots left Atlas in 2018, and more than 15 percent left ABX last year. “Pilots are exiting Atlas Air at an alarming rate for opportunities with much higher wages, better benefits and respect from management,” said Kirchner in a statement Aug. 22. FedEx and UPS Inc. (NYSE:UPS) pilots flying Boeing (NYSE:BA) 767 freighters were being paid one-third more than pilots operating the same aircraft type for Amazon Air, the local said.
Atlas and ABX pilot leaders have also accused the companies of stonewalling. “The pilots have offered to negotiate on items like implementing industry-standard pay, giving pilots stronger benefit plans and defining the scope [of aircraft operations by the union], but the company refuses to provide realistic proposals that move the needle closer to an amendable contract,” Kirchner said.
“We have spent more than five years trying to negotiate with the company to get a fair contract in place, but ABX Air’s current management has been so unreasonable that in the last two and a half years they have only agreed to the contractual definition of an international flight,” said Capt. Rick Ziebarth, who chairs the executive council for pilots at the local. “Not only does a five-year battle with the carrier’s pilots crush morale, but it’s also just bad for business.”
Cunningham, the ATSG spokesman, declined comment on specific contract issues.