Verizon Inks Deal With Unions

Verizon Communications Inc. (NYSE: VZ) has reached agreement on the terms of a five-year contract with two unions, representing 79,000 of its employees (see Verizon, Unions Reach Tentative Deal).

Basically, Verizon traded its ability to downsize the company for smaller wages.

Verizon says the new contract, which it began negotiating in June, will slow the growth of employee-related expenses by lowering union wage increases, health-care costs, and employee absentee rates.

Verizon expects the contract to save it about $300 million a year. The company anticipates $240 million a year in employee-related costs, compared with the $570 million a year in such costs under the old contract.

The International Brotherhood of Electrical Workers (IBEW), one of the two unions representing Verizon's employees, concedes that it lost out on wages, but gained in three other key areas.

"Regarding layoffs, they [Verizon] are going to have to do it in a much more humane way, by offering early retirement and other measures," says Jim Spellane, spokesperson for IBEW. "We got what we wanted on job security, health care, and retirement, which were the three key issues, not wages," he adds.

Still, the settlement provides workers with an immediate cash bonus of 3 percent, averaging $1,600, as well as guaranteed base wage increases in 2004 through 2007 – an increase of 10.6 percent over a four-year period.

Verizon, for its part, is happy with the outcome, particularly since it managed to get a five-year contract to replace the old three-year one. "By achieving a longer-term contract, we have removed the threat of a strike until 2008... This is the longest contract in the telecom industry, providing certainty to our operations," said Larry Babbio, Verizon vice chairman and president, on a conference call with press and analysts today (see Verizon Strike Averted (for Now), Verizon Hits Rocky Road).

At least one analyst agrees with Babbio. "The settlement removes any last vestiges of investor fear that a union strike would disrupt operations," wrote Bear Stearns & Co. Inc. analyst Robert Fagin, in a research note.

Merrill Lynch & Co. Inc. analyst Adam Clinton wasn’t quite as comforted by the news, since it means the carrier won't have the ability to cut costs as easily through layoffs. "Frankly, it’s worrying that they [Verizon] haven't been able to change the wording on labor flexibility to downsize the organization, except for new employees, as this is a key component of reducing costs."

Verizon's Babbio said on today's call that a couple of things will take care of this problem. The company has a retirement window coming up, which he thinks a lot of people will take. What's more, as the economy improves, workers will likely opt to move around more from job to job, naturally reducing the workforce, he said.

— Jo Maitland, Senior Editor, Boardwatch