Delta’s Pending Pilot Contract To Sabotage Southwest’s Recently Approved Labor Agreement

October 5th, 2016 by Trefis Team
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Most U.S. airlines are enjoying booming profits, on the back of a two-year long slump in oil prices. The increased cash flows have been utilized by the airlines to renew their fleet, dispense their debts, and even placate passengers by offering deep discounts. At such a time, labor is also demanding its fair share of profits and pay hikes, not only in recompense to the cuts they undertook during the recession, but also to be an equal stakeholder of the recent success of the carriers. Consequently, a number of airlines have been suffering from agonizing negotiations with their pilots and support staff.

Delta’s New Labor Agreement

The labor turbulence at Delta Airlines has been continuing since 2015, when pilots rejected a tentative deal that altered the airline’s profit sharing formula and that featured a 21% pay increase over three years. Delta’s pre-tax profit in 2015 was $7.2 billion.

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5101In 2016, the pilots held protests at a number of airports to dissent against the stalled negotiations. After a change in union leadership, the airline’s pilots demanded a roughly 40% hike over a three-year period versus a proposal by management of 27.3% over the course of four years. As of 30th September, a new deal was compromised upon. According to the new agreement, the pilots will get a 30% hike in wages over a period of four years. The terms of the deal include the increase to be retroactive from 1st January, when the older contract expired. The deal awaits the approval of union leaders before it can become a tentative agreement sent on to pilots for a vote to ratify or reject.

Potential Disruption Of Southwest’s Labor Contract

After four years of tussle, Southwest reached an agreement with its pilots, to raise their pay by 15% with effect from late 2016, and then by 3% a year for the next four years (2020). The contract was decided to be back dated to when the discussion regarding the agreement began (2013), providing an overall increment of close to 30% to its 8,500 odd pilots.

4103However, post the news of the pending agreement between Delta and its pilots, Southwest’s pilots are looking to reopen discussions regarding the contract. If the agreement with the pilots is renegotiated, Southwest will likely have to expend an even larger portion of its revenues as labor costs, as opposed to our earlier estimated figures. This is not only detrimental to Southwest in terms of inconvenience of further negotiations, but higher operating costs.

Kick In Of United’s Hike Provision

At the onset of this year, United’s pilots approved of a two year extension in the carrier’s existing labor agreement. The two-year extension includes a 13% pay hike in 2016, followed by a 3% increase in 2017, and 2% in 2018. Further, it contains a provision that will boost the pay of United’s pilots if Delta pilots secure a more lucrative deal.

Conclusion

Pilots, at any airline, strive for industry leading pay during negotiations. If Delta’s contract proves to be more favorable, negotiations will reopen on the tables at Southwest and United, stalling the already prolonged discussions. The labor costs at most airlines have already increased consequently, as seen in the table below. These costs will go higher as the new contracts come into play.

4104

Further, the recent meeting between OPEC countries has led to a decision to establish a ceiling on its oil production. This will potentially lead to a restriction on their combined oil output to 32.5 and 33 million barrels per day, implying a reduction of 200 to 700 MBPD (thousand barrels per day) compared to the record high output in August, provided all the member countries adhere to this limit. If this happens, we may see oil prices bounce back, putting pressure on airlines who are battling negative unit revenues.

Thus, the airlines face the double challenge of negotiating contracts in dragged out negotiations to reward labor for its contribution to stable profitability, while also ensuring that the productivity in those agreements creates a minimum level of cost inflation to offset the impact of higher fuel expenditure.

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