Reflections on Growing Workforce Headwinds
October 20, 2023
For many companies, COVID-19 is in the rear-view mirror, but the challenges it’s left in its wake are still very prevalent, especially in regard to the needs (or demands) of a post-pandemic workforce. A confluence of economic and job market trends has forced companies in labour-heavy industries into a complex operating environment. Inflation remains stubbornly high, especially for wages; interest rates continue to challenge investment business cases; and the growing risk of operational disruption has driven up the costs of preserving labour stability. With margins being tested, companies are taking note.
Macroeconomic indicators across Europe are seemingly ping-ponging between cautiously optimistic and cautiously pessimistic on a weekly basis, causing businesses to adopt rightfully cautious approaches. With hopes that eurozone inflation will peak and interest rates will revert gradually to a more palatable norm, current levels don’t allow for nonchalant attitudes, and uncertainty reigns. Speculation about recovery versus recession, new market paradigms and a “soft landing” continues. As a result, in board-rooms and executive offices, we continue to see a strong focus on cash flow management, investment scrutiny and the need to maintain strong balance sheets.
Some traditionally exalted white-collar industries (e.g. tech, finance) are experiencing these pressures most acutely. In these sectors, overly ambitious, pandemic-fuelled growth has led to heavy headcount corrections.1 In contrast, in certain blue-collar sectors, we are witnessing the opposite.2 Pent-up consumer demand, alongside a drain of talent during two years of intermittent lockdowns and survival fears across Europe, is driving a high need for labour in these industries. Over the course of the past 12 months, many companies have played an urgent but unwinnable game of catch-up in hiring, training and retaining sufficient qualified staff against a backdrop of record low unemployment.
An Evolving Labour Landscape
Two critical elements that form an important context to the situation are the winding down of government support schemes and the business-as-usual negotiations for collective labour agreements. Just as businesses are losing the state support that helped keep them afloat during the public health crisis, they’re also facing renewed demands from labour. While companies continue to administer contracts that employees live by daily, labour is less likely to make the kinds of concessions they agreed to while the existential threat of COVID-19 made the proverbial “burning platform” real. Those concessions included pay cuts, off-book flexibility and forceful shifts to part-time status. Times, however, have changed.
Pandemic-era labour concessions compounded by inflation have resulted in loss of real wages, a common focus point in current negotiation cycles. Now, in a post-survival environment, unions are demanding full corrections; they are showing less willingness to accept below-inflation wage increases and a much greater appetite for industrial action. Taking aviation as a case study, we see numerous examples of threatened or actual labour unrest over demands for better pay and working conditions. For many companies, it seems labour stability must be “bought,” because in the eyes of the unions, the time to “earn” it has expired. London ground handling staff announced several strike days over the peak summer travel period because of pay disputes;3 in August 2023, 95% of Virgin Atlantic pilots voted in favour of a strike due to fatigue concerns;4 British Airways quelled unrest by agreeing to a 13% wage increase and £1,000 one-off bonus for its 24,000 staff (excluding pilots);5 and Lufthansa signed a four-year, 18% pay rise agreement with their pilots.6 In the UK specifically, the magnitude of industrial action has reached historic levels — almost 4 million working days were lost to strike action between June 2022 and April 2023 (the highest for any period since 1989/1990), with almost 80% stemming from workers in transport, storage, and information and communication.7,8
The rising cost of labour stability is doing little to stem inflation, thereby fanning the flames of high interest rates. In light of that possibility, CFOs will continue to scrutinise investments, especially where the ROI is not crystal clear in the short term and mid-term. And while the travel sector has been pleasantly surprised by revenue strength, especially over this year’s summer period, the continued willingness of consumers to keep spending should not be taken for granted. In fact, early signs point to reduced (unit) revenues in the travel sector towards the end of this year.9 Consumers may also pull back spending In sectors where it is standard for labour to drive 30, 50, or even 70% of total operating expenses, securing workforce stability at 10 – 20% wage increases will not go unnoticed. Customer pass-through is an increasingly risky gamble — and we see this already.
Continuing with examples from the aviation and travel sectors, companies are seeing creeping margin pressure. Labour as a share of total costs is increasing, and in many cases, we see labour cost growth outpacing revenue growth. It is vital to remember that these trends do not yet reflect the outcomes of recently closed or in-progress contract negotiations. Sixt car rentals, for example, saw labour cost as a percentage of revenue increase from 15% in 2019 to 19% in 2022 (an approximately 25% increase).10 On a recent earnings call, American Airlines warned that continued strength in travel demand has provided pilots with the upper hand in contract talks and bolstered their bargaining power as airlines rush to increase staffing and expand capacity — a trend not lost on their European peers.11
An Opportunity To Refocus on Proactive Strategies
This situation provides businesses with an opportunity to see labour as the key lever to work with — not against — and to take a proactive approach to negotiation strategy, which is always rewarded. And if the pen has already hit the paper to conclude the latest rounds of negotiations, all is not lost. This is the time to step back and reflect on longer-term labour strategy and efforts to maintain or repair relations with labour partners ahead of the next cycle.
Company leadership and investment funds should consider these fundamental questions to inform their labour engagement and management:
- How can companies creatively offset the impact of wage inflation, beyond asking customers to foot the bill? What can unions deliver in return for wage increases?
- In labour management, how do we transition from a “cost reduction” mindset to a “unit cost” improvement framework?
- Apart from wages, what are companies offering to promote workforce stability and healthy workforce profiles (e.g. career progression, training and development opportunities)?
- Is there a crystal-clear understanding of the impact of labour agreements? Which areas drive cost, and which areas could contain cost (and how can cost containment opportunities be fully developed)?
- How can investment funds ensure their portfolio companies are proactive in planning for and executing on their labour strategy (instead of relying on ad hoc responses to market swings)?
While there is no one-size-fits-all approach, no-regret endeavours exist. Consider the following principles:
- Look beyond the immediate toolkit: While unions and labour agreements often are branded as the main obstacle to productivity and profitability, they are not the be-all and end-all. There is plenty to be gained while still adhering to contractual obligations.
- The importance of clarity on the starting point and end goals: While contract negotiations often provoke emotional responses, they should always be rooted in hard financials — “asks” and “gives” should retain strong ties to the P&L based on what is needed for the long-term health of the business.
- Think long-term: Negotiation cycles rarely allow an agreement to reach “greenfield” flexibility in a single swing; incremental optimisation is the norm and should continue to be the objective.
- Every end of a negotiation cycle is the beginning of the next one: There is no better time to engage with labour and to work to repair and protect relationships than after a contract is signed.
How Can We Help
At FTI Consulting, our Human Capital practice specialises in workforce optimisation. We focus on maximising performance within the guardrails of existing agreements and pushing the bounds of what is possible through the lens of optimising how agreements are structured and how we administer them.
2: Incentive for staff return (link)
3: London ground handling staff strikes (link)
4: Virgin pilot strike vote (link)
5: British Airways agreement (link)
6: Lufthansa pilot pay deal (link)
7: UK labour dispute statistics (link)
8: UK labour dispute statistics. (link)
9: Airline fares soften (link)
10: Sixt car rental investor relations (link)
11: American Airlines higher third-quarter cost (link)
Most Popular Insights
- 10 Global Cybersecurity Predictions for 2024
- Global CFO Survey 2024
- Bridging the Gap Between Artificial Intelligence Implementation, Governance, and Democracy: An Operational and Regulatory Perspective
- The Power of Positive Paranoia: A Key Trait for Every CEO and General Counsel in 2024
- A Targeted Approach is Key to Implementing AI