ANNUAL NEGOTIATIONS AT BUDGET AIRLINES GROUP
Budget Airlines Group (BAG) was founded by the Devine family. Launched in 1980, BAG is based in Glasgow, Scotland with 4,000 employees of which 1000 are flight and cabin crew of which 250 are pilots and 750 are cabin crew. The company has survived different challenges over the years and is a market leader of the low-fare airline industry currently owning 120 aircraft. Today BAG’s flight network reaches out to 85 destinations, predominantly serving the UK and the EU. BAG has also created a number of strategic alliances with other minor world airlines to serve other markets jointly. It currently carries 35 million passengers a year and last year had a net profit of £15 million.
Over the last few years however there have been signs of organisational turbulence. The airline industry exists in an intensely competitive environment, and a combination of increased competition as a result of new entrants into the marketplace, long term disruption to flights because of volcanic ash in BAG’s key Scandinavian market, along with the recent European Referendum vote which led to the UK voting to leave the EU, has brought a degree of uncertainty for the future of the company. In addition increased concerns about terrorism have led to a significant drop in passenger numbers despite the constant drive to improve service and cost pressures are now being felt across the company. The cost of oil is the biggest expense of an airline and the increasing cost of oil has had a significant impact on BAG as it tries to maintain its market share in the low cost flight market.
Levels of union membership in the airline industry have generally reduced, however BAG does recognise the General Aviation Union (GAU) for flight and cabin crew and it has full negotiating rights. The company recognises one shop steward (an employee of BAG who represents the interests of pilots and cabin crew within the workforce). This shop steward together with a full-time official from BAG and two functional/service managers (the General Manager and the Human Resources Manager), make up the company’s joint consultative committee.
Generally employee relations within BAG are reasonable, however sickness absence has increased noticeably over the last 12 months and there have been a number of grievances raised by staff about their colleagues and managers, something that had been quite unusual for the company in the past. Employee turnover has also increased substantially with 50 pilots and 100 cabin crew leaving to join other airlines within the last 12 months.
Within this organisation which is still run by family members, an autocratic approach is taken to the running of the airline and there is little employee voice. Internally, management generally have worked their way up through the organisation and have been in post for a number of years. As a consequence there is limited opportunity for promotion or development. In addition managers within BAG generally have had no management or leadership training and joint consultation machinery seen as the only formal (or informal) communication process. Flight and cabin crews generally work in isolation of other crews which has had an impact on internal communication.
Within the aviation industry generally, employment levels have stagnated or declined in recent years and the company has tried very hard to maintain the workforce but did have to make 20 pilots and 50 cabin crew redundant 12 months ago. This did have a negative impact on employee relations within the company but it has worked hard to rebuild relations over this time. Revenue to the end of year 2016 was down by 4% on the previous year; and as a consequence the profit level was down by 2%.
In an attempt to secure the future of BAG, recent investment has also been made in 10 new aeroplanes to improve efficiency and service to customers, reduce operating costs and increase productivity.
BAG has built their business on strong cost control and careful management and they cannot afford to pay the annual salary rises that employees are expecting with the current uncertainties in the market place. Employees are paid a base salary only. In 2017, a pilot working for BAG will earn on average £50,000 per year, and a member of the cabin crew will earn on average £18,000 per year. Pilots and cabin crews work shifts that include weekends, nights and public holidays. The amount of time they spend away from home will depend on the flight routes worked on. Flight and cabin crew work a 5 days on 2 days off, 5 days on 3 days off rota. Holiday entitlement is an issue, with the statutory minimum leave offered to all employees i.e. 28 days annual leave which includes all public/statutory holidays. Whilst the employees recognise there are scheduling issues in relation to booking holidays they feel that they work hard and long hours, often working away from home and deserve longer time off.
One suggestion raised by senior management to resolve this current situation is that the number of cabin crew on each flight could be reduced as this could result in a staffing and cost saving but GAU has argued that this would compromise aircraft safety even though BAG operates a cabin crew staffing model that is above that required by law.
The situation for pay and annual leave is as follows:
1. Pay settlements at BAG had been made at yearly intervals over the previous two years. They had been broadly above inflation and were each for 1.1% per cent. There has been no settlement yet this year although a large number of similar firms in the region have done so.
2. Inflation last year was broadly 2.8% and it is estimated that inflation in 2018 will be 2.8%.
3. Information from Industrial Relations Services indicated that, for the industry, 75 per cent of the 30 settlements covering 250,000 workers had been 2.5 per cent or less.
4. Rates of pay and pay settlements made over the last six months for pilots and cabin crew in comparable airlines were as follows:
Firm % increase Basic salary per pilot
Scottish Airlines Ltd 2.6 £51,500
Welsh Airlines Ltd 2.5 £48, 000
Orkneyair Ltd 2.4 £50,500
Lowcost Air Ltd 2.0 £52,500
Flyme Ltd 2.5 £53,000
Henry Airlines Ltd 2.3 £53,500
BAG Not settled this year currently £50,000
Of these, Flyme Ltd is the closest to BAG in terms of airline but it is more profitable. Henry Airlines Ltd and Lowcost Air Ltd are the next two most comparable firms.
5. An analysis of trends in the % pay increases for pilots and cabin crew at BAG and the three most comparable companies is shown below.
Flyme Ltd 1.0% 1.25% 1.2% 1.0% 2.2%
Henry Airlines Ltd 0.75% 1.0% 1.5% 0.75% 2.3%
Lowcost Air Ltd 1.0% 1.3% 1.2% 1.2% 2.0%
BAG* 1.0% 1.3% 1.1% 1.1%
* No settlement yet this year, others have settled.
6. An analysis of annual leave provision for pilots and cabin crew at BAG and the three most comparable airlines is shown below. All 4 companies include the provision of 8 days public/statutory holidays within this figure. (4 weeks plus 8 days statutory holidays to equate to the Working Time Regulations entitlement of 5.6 weeks).
BAG Flyme Ltd Henry Airlines Ltd Lowcost Air Ltd
Annual leave 28 days 33 days 31 days 28 days
Negotiations have been in progress for 2 months and have reached a critical stage. Deadlock has been reached and there has been no willingness shown by either party to introduce external assistance, e.g. ACAS. The employees have now responded to the situation with a majority vote for strike action.
Management and Union Representatives for the pilot and cabin crew have therefore convened an urgent meeting in an attempt to resolve the situation and avoid a strike.
Both sides are aware that there is now more to be gained by a prompt settlement, than by letting the dispute drag on.
Issues for Bargaining
The last round of negotiations ended with the following deadlock. This is the starting point for your upcoming negotiation. Should the negotiation end without agreement, the negotiation will be deemed to have failed and the skilled workers will commence with strike action.
Employees: demanded an increase of 2.5% for all pilots and cabin crew.
Company: refused outright.
2. Hours per Week
Employees: demanded an additional week’s paid holiday (5 working days) for all pilots and cabin crew.
Company: refused outright.
Company: reject outright because:
They estimate this would represent a reduction of 5,000 working days and equate in itself to a 1.92% pay increase which the company cannot afford.
Case study adapted from businesscasestudies.co.uk
Task B Corporate Report
As a consequence of the recent dispute, the Board of BAG have decided they need to approach the issue of pay and reward more strategically. In particular, in light of on-going concerns and the recent breakdown in employee relations, they have identified a need to develop a pay system which:
• Encourages their workforce to develop more efficient working practices, including embracing the new technological developments; and
• Supports their broader efforts to foster greater employee engagement.
They are therefore considering the potential benefits of a form of performance related pay (PRP).
You are an HR Consultant hired by the Board to provide guidance on the options available to them and have been tasked with producing a corporate report which addresses the following:
a. Explain to the shareholders the relationship between performance based rewards, productivity and employee engagement.
b. Identify and discuss a range of possible PRP models.
c. In light of the issues facing the company and taking into account the business environment of BAG, recommend an appropriate model of PRP. You should refer as appropriate to relevant academic theories and models when justifying your choice.
d. Given that whatever model you recommend will represent a significant change for the employees, you are also required to identify the steps you would take to implement the change successfully.