Verizon Communications Inc, the biggest US local-telephone company, is coming to grips with a union contract that limits its ability to cut jobs to compete with non-union cable-television operators such as Comcast Corp.
The accord, reached Friday after three months of talks, curbs Verizon's plans to fire and transfer employees, leaving buyouts as the New York-based company's main means of trimming jobs. That may slow efforts to move work from a local-phone business that's in decline to faster-growing areas, such as high-speed Internet access.
"Down the road, this is a major competitive disadvantage," said Daniela Spassova, an analyst at Principal Global Investors, which has US$57 billion under management and owns Verizon bonds.
Under the five-year contract with the Communications Workers of America and the International Brotherhood of Electrical Workers, which represent 78,000 Verizon workers, the company capped its health-care cost increases and won new powers to fire future hires. Wages will be raised 8 percent over four years, less than the three-year, 12 percent increase agreed to in 2000.
In exchange, Verizon backed off the job-transfer flexibility it had sought and said it will continue to pay all healthcare premiums for active employees and retirees.
The contract "absolutely and unequivocally" gives the company the leeway it needs to eliminate jobs, said Verizon vice chairman Lawrence Babbio in a conference call. Stipulations that include letting the company pay more to induce workers to retire mean that "by the third year we will have plenty of flexibility to manage the force up and down."
Verizon customers have disconnected 7 million local lines in the last three years, some defecting to companies such as AT&T Corp that lease Verizon's network at discounts set by the government. Verizon is also losing business to cable companies such as Comcast and Cox Communications Inc that sell high-speed Internet access and local calling along with television channels.
Under the previous contract the company couldn't fire workers solely to reduce expenses as technological innovation rendered some jobs obsolete. The new agreement eases those restrictions only in the case of workers hired after the contract begins.
The company may be able to reduce its workforce by about 15,000 people, cutting expenses by US$1 billion a year, through voluntary departures and early retirements allowed in the new accord, Lehman Brothers Holdings Inc analyst Blake Bath, who rates Verizon "overweight/neutral," said in a research note.
The contract lets Verizon give employees added incentives to retire early and will save US$500 million in healthcare expenses over five years, the company said.
"They discovered a way to get the flexibility they need without completely disenfranchising the current union base," said Ned Zachar, a New York-based analyst at Thomas Weisel Partners LLC. He rates Verizon "peer perform" and doesn't own the shares.
During the negotiations, Verizon said it wanted to transfer as many as 8 percent of workers in a given year, from 0.7 percent. This would allow the phone company to quickly move more workers to rapidly growing units. The company failed in this effort.
"The lack of flexibility and cost structure is something they have to live with," said Craig Nedbalski, managing director of Victory Capital Management Inc, owner of 8.8 million Verizon shares. "The past three years have been a difficult time for the telecom industry."
Verizon agreed to pay workers a 3 percent lump sum instead of a wage increase in the first year of the contract. That move will save US$600 million over the life of the contract, Babbio said on the call. The company will increase wages 2 percent in each of the remaining four years.
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