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The Obama White House Supports Big Unions
By Vaughn Cordle, CFA / November 2008
Obama’s White House will be good for labor, but bad for investors and consumers.
Based on implied and explicit promises, the Obama White House will back policies that enhance union
power. This will result in higher labor costs, higher average fares, and a smaller airline industry with
fewer workers.
We estimate that total labor costs for the industry will increase as much as $14 billion over the next 4
years as labor contracts become amendable. This higher cost will have to be offset with lower fuel costs,
higher fares or a combination of both. To offset the higher labor costs on their own, fares would have to
increase by approximately 10%.
In contrast to expected higher labor costs, [hedge-adjusted] fuel costs will be $11B lower (-25%) in 2009
if oil prices average $75 and will improve to $14B lower (-32%) if oil prices average $65.
However, lower jet fuel costs will be mostly offset by revenue weakness in 2009, which we estimate will
be a $10.5B (7.5%) hit on about $142B in total revenue. (This is the mid-point estimate of a range
between $9B and $12B.) If our assumptions are correct, the industry will barely break even in 2009, and
it could be 10% smaller 4 years from now than it would be otherwise if our labor cost assumptions are
correct—all other things held constant.
Bottom line: What the oil market giveth, labor taketh away.
Based on what Obama has promised the unions, it appears that he is their main man in Washington.
He has an opportunity to be a great President; however, if lives up to the promises implied in his
campaign rhetoric, he won’t win a second term because markets and the broader economy will suffer.
With an Obama White House, power clearly shifts from "greedy" Wall Street and corporate executives to
labor and their union representatives. Great news for the unions, but not so good news for the markets,
investors and airline consumers.
By Vaughn Cordle, CFA / November 2008
Obama’s White House will be good for labor, but bad for investors and consumers.
Based on implied and explicit promises, the Obama White House will back policies that enhance union
power. This will result in higher labor costs, higher average fares, and a smaller airline industry with
fewer workers.
We estimate that total labor costs for the industry will increase as much as $14 billion over the next 4
years as labor contracts become amendable. This higher cost will have to be offset with lower fuel costs,
higher fares or a combination of both. To offset the higher labor costs on their own, fares would have to
increase by approximately 10%.
In contrast to expected higher labor costs, [hedge-adjusted] fuel costs will be $11B lower (-25%) in 2009
if oil prices average $75 and will improve to $14B lower (-32%) if oil prices average $65.
However, lower jet fuel costs will be mostly offset by revenue weakness in 2009, which we estimate will
be a $10.5B (7.5%) hit on about $142B in total revenue. (This is the mid-point estimate of a range
between $9B and $12B.) If our assumptions are correct, the industry will barely break even in 2009, and
it could be 10% smaller 4 years from now than it would be otherwise if our labor cost assumptions are
correct—all other things held constant.
Bottom line: What the oil market giveth, labor taketh away.
Based on what Obama has promised the unions, it appears that he is their main man in Washington.
He has an opportunity to be a great President; however, if lives up to the promises implied in his
campaign rhetoric, he won’t win a second term because markets and the broader economy will suffer.
With an Obama White House, power clearly shifts from "greedy" Wall Street and corporate executives to
labor and their union representatives. Great news for the unions, but not so good news for the markets,
investors and airline consumers.
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