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Sunday, May 31, 2020

United Airlines Plans To Downsize Thousands Of Workers After Taking Billions Of Dollars From The Government

United Airlines Plans To Downsize Thousands Of Workers After Taking Billions Of Dollars From The Government

This week, United Airlines announced plans to terminate over 3,400 management and administrative positions. The brutal culling accounts for 30% of United’s management and administrative employees.

Over the weekend, Warren Buffett, legendary investor and one of the richest people in the world, hosted his company’s annual shareholders meeting. Berkshire Hathaway, Buffett’s publicly traded holding company, traditionally makes the investor meeting a fun party for its shareholders—compared to the stodgy conferences held by most other large corporations.

Thousands would regularly pilgrimage to Nebraska, the home of Buffett, to hear the Oracle of Omaha share his good, old-fashioned pearls of wisdom. As a sign of the times, due to social distancing and fear of flying, the event was live-streamed with only a few people alongside Buffett.

Buffett’s message was to bet on America’s future, but was relatively dour regarding current investment ideas. He specifically called out the airlines and said that he sold all of his holdings in this sector—some for big losses.

This week, United Airlines announced plans to terminate over 3,400 management and administrative positions. The brutal culling accounts for 30% of United’s management and administrative employees. Kate Gebo, the executive vice president of human resources, wrote, “We have to acknowledge that there will be serious consequences to our company if we don’t continue to take strong and decisive action, which includes making decisions that none of us ever wanted or expected to make.” Workers affected by the cuts will be notified in July. Prior to the firings, the impacted employees will be required to take 20 unpaid days off between May 16 and Sept. 30.

United Airlines previously reduced the hours of 15,000 employees and made them part-time workers. About 20,000 employees have left the company already.

According to a United press release, “United Airlines confirmed the airline expects to receive a total of approximately $5 billion from the federal government through the Payroll Support Program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Of the $5 billion total the airline expects to receive, approximately $3.5 billion will be a direct grant and approximately $1.5 billion will be a low interest rate loan. These funds secured from the U.S. Treasury Department will be used to pay for the salaries and benefits of tens of thousands of United Airlines employees.”

It's interesting to note that United Airlines said the job cuts will commence on Oct. 1. The date is important in that, by accepting the money from the stimulus plan via the CARES Act, companies are required to retain employees for a specified time period. In total, the U.S. airlines were given $25 billion in Treasury cash grants. Companies, such as United, can’t fire workers until after September 30. This was an incentive for corporations to retain employees. By admitting that United Airlines will fire people starting Oct. 1, it shows that the company is gaming the system by waiting for its very first window of opportunity to downsize thousands of employees. This move looks disingenuous and reeks of arrogance. The company accepted tax payer money knowing that it would have to fire workers.

It's understandable why United needs to let go of such a large number of people. The airline industry has been hit hard by the effects of COVID-19. Afraid of getting infected, potential passengers have avoided flying at all costs. With the rapid ascension of Zoom and other video technologies, it has further diluted the need to take the risk of getting on a plane when you can easily hold an important meeting from the comfort and safety of your own home. Government and medical professionals warned people against non-essential travel due to the risks of catching or spreading the coronavirus. As a result of the dramatic decline in business, the airlines industry is going through a horrendous time, threatening its ability to stave off bankruptcy protection.

In an email, United spokesperson Frank Benenati stated, “Travel demand is essentially zero for the foreseeable future and, even with federal assistance that covers a portion of our payroll expense through September 30, we anticipate spending billions of dollars more than we take in for the next several months, while continuing to employ 100% of our workforce. That’s not sustainable for any company. And that’s why we are doing everything we can to reduce costs in the near-term so we can bounce back quickly when demand starts to return and help ensure our company and the jobs it supports will be here when customers are flying again.”

Over 100,000 workers at the biggest U.S. airlines have accepted voluntary leaves, had their hours cut or lost their jobs. Within the last six months, 95,065 résumés including “airlines” were uploaded to Indeed, the large job aggregation site. It's reported by Reuters that Delta Air Lines does not anticipate air travel to recover for another two or three years. Over 37,000 Delta employees have taken unpaid leave. Doug Parker, the CEO of American Airlines, admitted that the airline industry will be “smaller than we intended to be certainly into 2021.”

The outlook for airlines is grim. The COO of United Airlines, Greg Hart, said that employees should “seriously consider” voluntary separation from the company. In an effort to “right size,” Hart said in a memo, "You may want to seriously consider if you're in a position to take a voluntary separation." Hart added, "You, alone, can decide if a [Voluntary Separation Program] works for you and your family."

Back in early March—which seems like a lifetime ago—Gary Kelly, the CEO of Southwest Airlines, announced that he will voluntarily take a 10% pay cut in response to the dramatic drop in air travel. "The velocity and the severity of the decline is breathtaking," Kelly said. He somberly added, "There is no question this is a severe recession for our industry and for us, and it's a financial crisis." Kelly’s base salary was $750,000 in 2018 with a total compensation of over $7.6 million.

United Airlines' chief executive Oscar Munoz announced he will waive 100% of his base salary until at least the end of June. For 2019, his wages were $1.25 million, but this was only 10% of his total remuneration package.

There is some hope that there is a big pent-up demand building up. Once restrictions are lifted, companies can reopen and people will be allowed to leave their homes again. They’ll want to return to their old lives. In addition to going out for dinner, getting a cup of coffee or seeing a live event, some people may want to take vacations and fly somewhere special. Important business trips that were put on hold will start up again. The fortunes won’t change overnight for the airlines. It may take a long time for people to feel safe enough to travel without catching or spreading the virus, especially if there is a resurgence.



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