Low-cost competition is transforming the airline industry in the United States and around the world. The low-cost sector has increased its growth rate in recent years, with the number of flights offered by low-cost carriers around the world growing by nearly 50 percent in the two-year period from August 2001 to August 2003, according to estimates by the Boeing Corporation (Baseler 2004). In the United States alone, low-cost carriers now hold a market share of 25 percent, relative to only 6 percent in 1990. As low-cost carriers have increased their growth, the legacy carriers have conducted massive layoffs to shed excess capacity, with overall industry employment down about 20 percent in the United States from its peak in the second quarter of 2001 (Air Transport Association 2005), and with over 44,000 employees laid off in 2005 alone (Marks 2005). Yet airline analysts argue that capacity in the industry, at least capacity of the higher cost variety, still exceeds demand, suggesting that layoffs may continue.

Low-cost carriers have competed successfully based in large part on lower unit costs, which have been achieved through two distinct strategies— higher productivity and/or lower pay and benefits. Legacy carriers have successfully reduced their own unit costs in their efforts to compete with their low-cost competitors, and like their low-cost competitors they have used two distinct strategies—increased productivity and/or reduced wages and benefits. Over the past four years, cuts in wages and benefits in the United States industry alone have equaled more than $10 billion, while both employee and aircraft productivity have grown steadily since the mid-1990s. The relative weight that individual airlines give to these two strategies for achieving low unit costs would appear to have monumental implications for employment relations.

We know that one of the most successful low-cost airlines, Southwest Airlines, which has maintained steady growth and profitability over its thirty-three-year history without resorting to layoffs, has relied on the knowledge of its frontline workers and their coordination with each other across functional boundaries to achieve high levels of employee and aircraft productivity (Gittell 2003). Moreover, Southwest has achieved these results with high levels of union representation and with employee pay and benefits that are currently among the highest in the industry. When asked recently in an interview by the Wall Street Journal whether he was concerned about employee pay levels, Southwest's CEO responded:

It's true, our employees are well-paid. They've produced the most efficient, most profitable airline with the best customer service, and they deserve to share the wealth.... Going forward, our pay, as always, will be a function of our profitability, which is based on our ability to keep our costs low.... Our people know what the airline industry environment is like. I'm confident they will do what it takes to keep Southwest on top. I would consider it a failure if we have to go to our employees and tell them to take a pay cut. (Warren 2005)

This statement is consistent with broader evidence that Southwest treats its employees as a source of value, rather than viewing them as a source of costs to be minimized and reduced. Southwest arguably exemplifies the high-road strategy for pursuing low-cost competition in the airline industry.

In this session, our colleagues from North America, Europe, and Australia explore the transformation of the global airline industry for employment relations in these regions of the world. In particular, they explore whether pursuing a low-fare product market strategy pushes airlines toward a low-road approach to employee relations, as others have found in the telecommunications industry (Batt 2000), or whether instead airlines can pursue a low-fare product market strategy while taking a high-road approach to employee relations, as we have seen at Southwest Airlines (Gittell 2003). This latter argument is consistent with the experience of the auto industry, where researchers have identified a high-road approach to a low-cost product market strategy—the Toyota Production System (Krafcik 1988). Like Southwest, Toyota has achieved low costs through the knowledge of its frontline workers and through their coordination with each other, rather than through low levels of pay and benefits. The papers on this topic are a first attempt to analyze the low-cost strategies that are emerging in the airline industry in North America, Europe, and Asia, so that ultimately we can ask whether the high-road or low-road approach to low-cost competition is winning out in the transformation of this critical industry.