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Chrysler, GM and Ford can afford a raise for the UAW

·Senior Columnist

Labor unions have lost their muscle, and many Americans feel the United Auto Workers got its comeuppance when it made steep concessions to gasping automakers in 2009. But six years later, unionized workers have a strong case for a much better deal.

Members of the UAW are poised to strike against Fiat Chrysler (FCAU) as early as Thursday if management and labor can’t agree on raises, healthcare benefits, job security and other complex issues. Labor talks can go in many directions, but what happens between the UAW and Fiat Chrysler will most likely influence future negotiations with Ford (F) and General Motors (GM), with the outcome affecting at least 150,000 employees of the so-called Detroit 3.

Everybody knows how the drama begins: Unionized workers typically claim their employers are rich, while management insists there’s not enough money to go around. But the three U.S. automakers are undeniably in far better shape than they were a few years ago, when GM and Chrysler declared bankruptcy and Ford nearly did. As part of that historic shakeout, the UAW in 2007 and 2009 gave up many long-established job protections, accepted the closure of numerous plants and agreed to a much lower wage structure for new union members.

The UAW now says its workers have done their part, and it’s time for some payback. And the union’s timing is good. Auto sales this year are on pace to top 17 million, which would be the best number since 2001. Cheap gas has spurred sales of big trucks and SUVs, a specialty of the Detroit 3 and their most profitable vehicles. “When you’re at the top of a market cycle, and the automakers have been profitable for 4 or 5 years, if that’s not the time to get what you want, then when is it?” says Kristin Dziczek of the Center for Automotive Research in Ann Arbor.

Here a few indicators showing automaker profitability compared with 2010, the first year after the GM and Chrysler bankruptcies:

Sources: S&P Capital IQ, Center for Automotive Research. Revenue, income and EPS figures are based on S&P Capital IQ estimates for full-year 2015. Labor cost data are from 2010 to 2014.
Sources: S&P Capital IQ, Center for Automotive Research. Revenue, income and EPS figures are based on S&P Capital IQ estimates for full-year 2015. Labor cost data are from 2010 to 2014.

There are some anomalies in those numbers. The 2010 figures for Fiat don't include Chrysler, which it fully acquired in 2014. That explains the huge jump in revenue. Fiat Chrysler is actually weaker than GM and Ford today, which is one reason its CEO, Sergio Marchionne, keeps pushing for a merger with GM. Plus, net income and earnings-per-share for GM and Chrysler would probably be higher if not for significant expenses associated with high-profile recalls.

But overall, the numbers show clearly that all three automakers have slashed overcapacity, cut costs and essentially risen from the graveyard. Revenue gains at GM and Ford have been modest for the right reason: Both automakers have stopped cranking out millions of vehicles at a loss and focused only on products they can make money on. Chrysler’s numbers would show the same thing if broken out from Fiat.

Big gains in net income, meanwhile, reflect the profitability that occurs when automakers slim down and produce cars consumers want to buy. Ford’s numbers for 2015 look weak because its comparable numbers in 2010 were much stronger than its crosstown rivals, which lost customers to Ford after accepting unpopular government bailouts. Ford has also struggled this year from the delayed launch of its F-150 pickup, its most profitable vehicle.

A key contributor to the fortunes of the D3 is a huge decline in labor costs, which used to be a major disadvantage compared with Japanese and European automakers, especially those with nonunionized factories in the United States. In 2007, the D3 spent about $3,000 more on labor costs per car than foreign automakers operating in the U.S., according to the Center for Automotive Research. That gap has plunged to less than $1,100.

The U.S. automakers mostly acknowledge their good fortune during the last few years, especially since American taxpayers had a hand in it. And auto company CEOs seem far more conciliatory toward their unionized workers now than during past eras of management-labor hostility, such as the prolonged strikes of 1998 or 1970.

But that doesn’t mean a crisis will be averted. In contrast to prior union negotiations, there now seems to be a notable gap between the interests of the UAW rank-and-file and union leaders some members consider too cozy with automaker management. That may explain why UAW members rejected a four-year deal leaders thought they had finalized with Fiat Chrysler in late September.

There also seems to be a split between older “Tier 1” workers in the UAW who mainly want to protect their own pay and benefits, and younger “Tier 2” workers who get paid less and want a faster route to the first tier. Provisions that benefit one group, such as a limit on the number of lower-paid workers the automakers can hire, won’t necessarily benefit the other. So even if the Detroit automakers have rediscovered prosperity, it may elude their unionized workers.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.