Sports leagues have them. Actually so too do investment banks. Typically the former try to keep players salaries in the neighbourhood of 50%-55% of total team revenues while investment banks tend to do the same for employee compensation. Is it time for the airline industry to consider the same?
I was reading the following article by Jad Mouawad in the New York Times Airline jobs look poised for a comeback. It talks about how industry profitability is expected to be $8.9 billion in 2010. That’s quite a change from the $60 billion lost over the past decade. Meanwhile, the number of airline employees has declined from a peak of 577,000 in 2001 to about 380,000 today. Airline employees are naturally wondering if they should share in some of the bounty now that better times are here.
What should airlines and employees do in this situation? It occurred to me that a salary cap might be an eminently sensible solution. Let’s look at a few facts. I’ve included two charts here, one on the general profitability trends over the years (the data is a bit old but the recent trend is to repeat the ongoing one) and one on the change in total wages in the 2000-2009 period.
Airline Industry Profit Trends
If one thing stands out here, it is volatility. Basically it is impossible to predict what will happen over the next decade. So why not peg wage costs to what overall profitability will be. This is different than sports leagues and investment banks, where the peg is based on revenues. But profits are what count here.
This “revenue share” could come in the form of a dividend payment at the end of each year. A certain percentage over the salary base goes to employees and a certain percentage goes to shareholders. The entire work force could be included, top management as well. Yes, compensation becomes a bit more volatile but hasn’t it already been incredibly unstable over the past decade?
I’d suggest something like this might bring a bit more steadiness to the industry since labor costs are one of the key industry cost drivers. Something to think about, isn’t it?
Ted Leavitt
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