Ryanair to Recognize Unions Even Though Hell Hasn't Frozen Over

(Bloomberg) -- Ryanair Holdings Plc pilots got an unexpected Christmas present on Friday when Europe’s biggest low-cost carrier agreed to recognize their labor unions. Investors are the ones paying for it.

The move, which Chief Executive Michael O’Leary had previously said wouldn’t happen before “hell would freeze over,” was aimed at averting the first-ever walkout by employees. Ryanair stock fell 9 percent, the most since June 2016, as shareholders digested the potential for higher labor costs at the notoriously tight-fisted airline.

Ryanair to Recognize Unions Even Though Hell Hasn't Frozen Over

The Irish carrier, which had already canceled some 20,000 flights since September because of botched planning for crew vacations, said it acted to reduce the threat of further disruption during the busy holiday season. “If unionization is what we need to do not to have disruptions for our customers, then we’re going to do it,” Edward Wilson, chief people officer at Ryanair, said in an interview. Pilot unions in Germany, Ireland, Portugal and Spain had called for strikes in coming days.

Caught off guard, unions reacted cautiously. “We have received Ryanair’s offer for talks,” said Markus Wahl, a spokesman for the German pilot union. “We will now evaluate it and then discuss how to proceed,”  A spokeswoman for Ireland’s umbrella IMPACT trade union called for an “immediate meeting” with Ryanair management to clarify the situation. In Italy, the Anpac union called off its strike planned for Friday.

Tactical Move

It might be a good offer with substance, or it might just be a tactical move to avoid the strike next week, said another person familiar with union leaders’ views of the situation.

Still, the decision marks a watershed for the Dublin-based carrier. 

“More power is likely to be shifted toward unions, and Ryanair is likely to be forced to engage in lengthy negotiations,” Daniel Roeska and other analysts at Sanford C. Bernstein Ltd. wrote in a note to clients.

The six countries where Ryanair has agreed to recognize unions -- Germany, Ireland, Italy, Portugal, Spain and the U.K. -- account for 80 percent of its pilots, the Bernstein analysts estimated. “We’d expect a full coverage of pilot unionization to come very quickly, and cabin crews are likely to follow,” they wrote. “In the longer term, the consequences could be profound.”

Ryanair has been struggling to quell a rebellion among its 4,200 pilots, many of whom have complained about inflexible work rules and limited opportunities for promotion. Efforts to appease them with pay raises have failed, and defections to other carriers worsened the vacation-scheduling fiasco.

Caveats

Adding to pressure on Ryanair, the European Court of Justice in September struck down a company rule that required employee lawsuits to be heard by Irish courts rather than in the jurisdictions where the employees are based. And U.S. pilots’ groups had offered to support Ryanair crews in unionizing.

Ryanair’s offer to pilots comes with some caveats. The airline said it would recognize only unions that establish committees of Ryanair pilots to discuss company-specific issues and would not engage with any pilots who fly for competitor airlines. “Pilots may not be entirely happy” with those restrictions, which would limit the role of national umbrella unions and other major labor groups, analysts at Irish brokerage Goodbody wrote in a note.

Investors may not be happy, either. Though it’s probably averted labor actions during the holiday period, Ryanair may now face an elevated risk of strikes in the future, analyst Alex Paterson of Investec in London wrote. Concessions won by employees in negotiations could erode the bare-bones model that has given Ryanair “a considerable cost advantage over its peers.”

Ryanair to Recognize Unions Even Though Hell Hasn't Frozen Over

Others said markets had overreacted to Ryanair’s action. The carrier’s effort to retain pilots by offering generous pay increases will already add an estimated 100 million euros ($118 million) in annual costs, analysts at Raymond James in London wrote, adding: “We fail to see a material impact to earnings” from the decision to recognize unions.

Still, the European Court of Justice decision reflects a broader trend toward unions gaining a stronger foothold in regional companies, said Roeska of Sanford Bernstein in a separate interview. In the end, he said, Ryanair’s decision could be “a smart move to save the costs and effort of lengthy legal battles, and jump straight to this end result immediately.”

©2017 Bloomberg L.P.