South-Western College Publishing - Economics  
Pilots Save Jobs by Offering to Take Less Pay
Subject Workers take wage cuts to reduce losses by the firm
Topic Production and costs; Profit Maximization and the Firm; Labor Markets
Key Words

Wage Cuts, Profits, Union

News Story

The union representing Delta Airlines' pilots has offered to cut the wages of pilots by 9%, as well as forgo a 4.5% pay raise next year, in an attempt to stem company losses. Such a move will make the income earned by pilots more in line with other pilots in the industry.
Delta pilots are currently the best-paid in the industry, earning up to 1/3 more than pilots at other airlines, with beginning pilots earning $48,000, and veteran Boeing 777 pilots earning up to $275,000 annually. The proposed cuts are part of a company-wide cost-cutting plan to stem $2.87 billion in losses since 2001.

The pilots' union is emphasizing that this concession should be considered an "investment in the airline," implying that they want profit-sharing incentives in return for their current cooperation. The union is also asking for similar moves by "other stakeholders," including suspension of stock dividends, cuts in benefits for nonunion employees, and reductions in perks for top executives at Delta.

(Updated February, 2004)

Questions
1.

What impact will these wage reductions have on the firm's cost curves? Draw a graph indicating the impact on MC, AVC, and ATC.

2. What impact will this move have on Delta's cost structure in the long run? Illustrate this with a graph.
3. Does the union have any bargaining power that will allow it to request similar moves by "other stakeholders?" Why or why not?
Source Evan Perez, "Delta Air's Pilots Offer 9% Pay Cut." The Wall Street Journal. 4 December 2003.

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