IN THE beleaguered airline industry,
mergers are again in the news.
What will it take for a postmerger
airline to succeed? We asked Tom
Kochan, a professor of management
at the MIT Sloan School of Management.
Mr. Kochan has researched
the industry for a decade and has
co-written a book due out in the fall,
entitled “Up in the Air: How Can Airlines
Compete by Engaging Their
Workforce?” He spoke with Michael
Hopkins, the editor in chief of MIT
Sloan Management Review, for the
Business Insight Journal Report.

BUSINESS INSIGHT: For now, the Continental-United deal has been
shelved, but Delta and Northwest
are still seeking to merge. Do you
think that’s a good idea?

MR. KOCHAN: Consolidation…is inevitable,
but unless Delta and Northwest
begin to address the differences
in their cultures and approaches
to labor relations, this is
a merger destined to fail.

BUSINESS INSIGHT: Why wouldn’t
they manage those differences?

MR. KOCHAN: My experience is that
the managers always say, “We’ll get
to those issues in due time. But
first we’ve got all these financial issues
around the merger, and we’ve
got to get our [route] networks in
order. Then we’ll get to employee
relations.” The reality is they never
get to them, and even when they
do, by that time it’s too late.

BUSINESS INSIGHT: Why are employee
relations and culture so important?

MR. KOCHAN: As our airline research
has shown, a high level of engagement
and a good labor-relations system
are the keys to increasing productivity
and service quality. And
productivity leads to profitability.

In the airline industry, productivity
requires two things from the
work force. First, it requires that
workers use their discretionary effort
to solve problems for us as passengers,
which means they must be
motivated and authorized to do so
on the front lines. Second, it requires
labor peace: no prolonged
conflict over new contracts, no
slowdowns, sickouts or stoppages.

In so cost-driven an industry,
productivity is all. With employees,
there’s a virtuous cycle and a disastrous
cycle that airlines can follow,
and the only question is which one
are they going to choose.

BUSINESS INSIGHT: Looks like the cycle
has been disastrous for a while:
Your research shows losses of
100,000 jobs and $30 billion for
U.S. airlines from 2001 to 2005. You
write about the need for employees
to have good jobs, good wages and
successful partnerships with their
companies, but how can that happen
when it appears there’s no
room for gains, only for cuts?

MR. KOCHAN: The deep cuts in jobs
and wages have been made. You
can’t really go any lower without
expecting to lose too much human
capital. Over time, I believe that as
the industry recovers, as it begins
to get its capacity close to the level
of demand, begins to raise a bit
more revenue, and begins to engage
employees and rebuild trust, then
you can design a compensation system
that says, “As we improve, so
too will rewards for employees.”

BUSINESS INSIGHT: Are any airlines
getting this right?

MR. KOCHAN: Several. The premier
example—the one that people always
turn to—is Southwest Airlines,
which happens to be the most
highly unionized airline in the industry.
Southwest gets to low cost by
emphasizing improved productivity
through loyalty on the part of employees,
who stay a long time and
operate a system that maximizes
employee ideas and discretion for
solving problems and achieving financial
objectives. It has had 25
years of successful financial performance
and good labor relations.
But there are other examples. Continental
Airlines is one.

BUSINESS INSIGHT: Do low fares inevitably
mean low-quality jobs? I think
the public generally presumes so.

MR. KOCHAN: The answer is no.
Southwest is a low-fare competitor,
and they’ve had high-quality
jobs, and their employees are
among the highest paid in the industry.
Productivity controls cost.

BUSINESS INSIGHT: Where do you
think the industry is headed?

MR. KOCHAN: I think there are three
potential scenarios. The first one
is the most negative and maybe
the most likely, and that’s that the
status quo of highly adversarial labor
relationships continues.

The second, more positive scenario
is that firm by firm, we start
to build more positive workplace
cultures in which managers and labor
leaders collaborate to help employees
regain some of the losses
they’ve incurred by sharing gains as
profitability returns. These mergers
that are being discussed are the natural
opportunity to insist that all
parties cooperate and build a business
plan for engaging employees.
If one or two of the companies do
this and are successful, then it will
put pressure on the others.

A third possibility is that we get
a sensible transportation policy.
Right now the government turns a
blind eye to the whole mess, but it
could say, “Look, this is a disaster.
This industry is very important to
the security of our country and to
our economy, and we have a stake
in making sure that industry leaders
start to deal with these workplace
issues.” And the government
has the leverage to [force change]
if it wants. It can hold up mergers
until the companies show that
they’ve got a business plan to address
these issues, and it can hold
out infrastructure improvements
as a carrot—air traffic control system
investments, for instance.

We’re not talking re-regulation—that would be a mistake. We’re talking
about a policy that understands
that human resources are essential
to industry success. We’ve seen this
in other industries, and we can do
it here, in airlines, as well.