Verizon rejects idea that labor was the big winner

Savings expected of over $100m a year

By Peter J. Howe, Globe Staff, 9/6/2003

Facing some Wall Street concerns that it cut too sweet a contract deal with its unions, Verizon Communications Inc. insisted yesterday that its tentative five-year pact with 79,000 East Coast workers provides unprecedented, "historic" reductions in operating costs for its competition-battered local phone business.

Lawrence T. Babbio, Verizon's president and vice chairman, who led company negotiators, told analysts the contract agreed to Thursday night would increase total payroll and benefit costs for the 79,000 workers by $240 million annually through 2008 -- less than half the $570 million annual increase in the prior contract, signed in 2000.

That $240 million would represent an increase in operating costs of about 1 percent for Verizon's domestic telecom unit, which reported expenses of $15.8 billion in the first six months of 2003 and $4 billion in operating income.

Given the deep telecom slump and sour economy, Verizon, the nation's largest phone company, had been expected by some analysts to push for major concessions from the Communications Workers of America and the International Brotherhood of Electrical Workers. Their old contracts expired Aug. 2.

Unions agreed Thursday to the first five-year contract in Verizon history -- past deals have generally been for three years -- and a modest 10.6 percent wage increase through 2008. In exchange, they got Verizon to agree to no-layoff contract protections for all current workers and no change in restrictions on shifting work out of the high-wage Northeast. They also maintained a marquee no-premium health insurance plan that unions staged long strikes in 1989 and 2000 to keep.

"I would call the settlement a modest positive for the stock," said Patrick Comack, an analyst with Guzman & Co., a Coral Gables, Fla., money-management firm. "The company got a good deal on the wage increase, which was pretty light compared to some other recent industry agreements, but they didn't come away with the changes in job security language that I thought were the biggest issue on the table."

Craig Nedbalski, managing director of Victory Capital Management, a Cleveland investment firm that owns 3.5 million Verizon shares, said, "I can't say they are where they need to be" in terms of work force management flexibility. Competition from wireless and Internet services -- as well as local service offerings from AT&T, MCI WorldCom, and cable TV companies -- have contributed to a loss of 7 million Verizon local phone lines in service over the last three years.

UBS analyst John Hodulik, who has a neutral rating on Verizon stock, said in a research note, "The company's ability to hit its numbers in the near term will be tied more toward voluntary [employee retirements] than previously expected, likely increasing the cost of right-sizing the business as competition intensifies."

Verizon will offer a one-time 5 percent pension increase to workers agreeing to resign in the fourth quarter of this year to shrink its payroll.

But Babbio, in a conference call with analysts and in a television appearance on CNBC, insisted Verizon "absolutely and unequivocally" has enough flexibility to control payroll costs to deal with competition. Based on normal attrition, Babbio estimated that through 2008 as many as 20,000 of the 79,000 CWA and IBEW workers covered by the pact will retire, to be replaced by lower-paid workers who can be laid off more easily if needed.

"In the course of about three to five years, we'll probably have enough new people on the payroll, who incidentally will not be subject to the job security language, where we'll have good flexibility in the organization," he said.

Verizon spokesman Jack Hoey said the company conservatively estimates that it will save more than $100 million a year, mainly through offering union workers a "preferred provider" health insurance plan that will be less expensive than so-called indemnity, fee-for-service plans, with some company savings also coming from higher copayments and deductibles for union members.

Unions said they considered the five-year deal a solid win, and several were proud of the tactical decision to keep working without a contract last month, avoiding the wage losses, disruptions, and possible public backlash a strike could have provoked.

Don Trementozzi, president of CWA Local 1400, which represents 1,700 Verizon call center workers in Massachusetts and northern New England, said, "We feel very good about what we achieved on job security and movement of work, which were always the most important issues for us. You can get an 18 percent wage piece, but if they can lay you off and move your job to Idaho, that's not worth anything."

Peter J. Howe can be reached at howe@globe.com. Material from Globe wire services was used in this report.