Covid 19 coronavirus: Ananish Chaudhuri: Air New Zealand pilot layoffs - there is a better way

COMMENT:

I don't envy Greg Foran; what a way to start a new job, in the midst of a historically unprecedented catastrophe. I also don't have access to the budgetary nuts-and-bolts of Air NZ. It is clear that the company is facing a tremendously difficult time. I fly often on Air NZ and I think it is an extremely well-managed company, something that is not true of many other enterprises in NZ.

It has recently been reported that Air NZ management is planning to lay off nearly 400 pilots and around 1500 cabin crew. I think Foran and others in Air NZ's senior leadership team are making a mistake.

Laying off workers in a recession is a common practice. Though, it needs to be noted that this is not true of all countries in the world. Companies in USA or NZ typically resort to lay-offs while others in countries like Germany or France are more reluctant to do so. This has to do both with history as well as the legal institutions in these countries.

But, in general, in a country like NZ, the easiest way of reducing costs is to lay off workers. This is for a number of reasons. First, given the scale of revenue loss, it is virtually impossible for Air NZ to cut costs to an extent that it would actually make a difference.

This is also partly because all that needs to happen to make a position redundant is to remove and re-allocate items from one's job description. Once all such items are removed, the position becomes redundant and the person can be laid-off. The other advantage is that layoffs lead to other cost savings in the form of perks, benefits, retirement contributions and other fixed costs such as office space etc.

But, this is also somewhat myopic. Recessions pass. In fact, large scale lay-offs often make recessions worse. Workers who are laid off are pessimistic about their chances of getting work in the future. Even the ones who have work are afraid of losing their jobs and therefore cut down on spending. This exacerbates recessions.

Already there are signs that the worst of Covid-19 is over; at least in China and large parts of the developed world (with the possible exception of the US). Of course, it is still raging in the US, which probably accounts for a large part of Air NZ revenue.

It is not clear to me that there are nearly 400 qualified pilots available at short notice. The same goes for other qualified and trained staff who are facing the axe. So, what does Air NZ do, when business starts to take off again?

I suggest Foran negotiate with the Government for a much larger bail-out package than the $900 million credit limit the Government has offered.

Then, I suggest that Foran look into the German practice of Kurzarbeit (working short-time). This is essentially a furlough programme, where employees agree to or are convinced to accept a reduction in working time and pay. In the present case, this may well imply some people going on unpaid leave for three to four months.

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But at the end of that period or even before, if and when business picks up again, Air NZ will promise to re-hire those workers. They can be re-hired on the basis of length of service or some other performance-related criteria.

Air NZ should probably come to terms with the fact that the US sector as a source of revenue will either take a long time to recover or possibly not recover at all to its previous state.

In the interim, if the US market does not pick up, I would look into ramping up flights to other parts of the world. Increase direct flights to Shanghai and Beijing and/or look into other large metropolitan cities like Tianjin, Shenzen, Guangzhou and Chengdu. Each of these are cities of more than 10 million people.

The same would be true of cities like Bangkok (population of Thailand: 69 million), Jakarta (population of Indonesia: 264 million), Kuala Lumpur (population of Malaysia: 31 million), Manila (population of Philippines: 104 million) and New Delhi (population of India: 1.3 billion).

If Air NZ can fly to Chicago and is thinking of flying non-stop to New York City, then each of these cities are within reach. Taken together, the Asian countries amount to roughly 3 billion people with a burgeoning middle class. Even if the customer base amounts to 1 per cent, this is still 30 million people. If it is 5 per cent, then this is 150 million people. Soon, this starts to look as big as the US market.

A similar argument would be true of direct flights to both Brazil, Argentina and Chile.

What Air NZ is proposing now will essentially gut the company and pretty much destroy any chance of it turning around when the crisis passes.

But, has Foran and the think-tank at Air NZ really gamed out all potential situations? Is someone playing devil's advocate in that boardroom? What if we did this other thing instead of this thing?

One of the problems with dealing with crises is that we get consumed by dealing with the here and the now. At times, it is important to take a step back. Reason analogically, look at other times when Air NZ faced a catastrophe like this. Look at other airline companies that may have faced similar ruinous situations. Did they manage to work their way out? What was the response? What worked? What did not?

I may well be wrong. I am simply asking whether there may be other ways out; whether all the different options and the trade-offs have been adequately weighed.

- Ananish Chaudhuri is Professor of Experimental Economics at the University of Auckland. The views expressed are those of the author alone and do not reflect the views of these institutions.