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Delta’s Pilots Are Set for a Big Raise. It Could Create More Problems Than It Solves.

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Delta Air Lines
‘ offer to hike pilots’ wages by more than 30% over three years could finally herald an end to the industry’s long-running standoff over pay. 

But the agreement in principle, which still needs to be approved by union leaders and pilots, could cause more problems for the sector than it solves.

Delta’s (ticker: DAL) agreement gives pilots an 18% raise when the deal is actually signed and that could equal an additional $900 million labor cost increase in the first year of the contract, according to
J.P. Morgan
analyst Jamie Baker. He also expects the potential deal to accelerate negotiations between
American Airlines
(AAL),
United Airlines
(UAL) and
Southwest Airlines
(LUV) and their pilots—and for them to offer wage parity with Delta.

The pilots are currently under pay conditions and contracts negotiated in 2016. Talks over a new agreement began in 2019 but were halted in March 2020 after the outbreak of Covid-19.

In an emailed statement a Delta spokesperson said the agreement in principle “recognizes the contributions of our pilots to Delta’s success.”

The Delta offer also includes a clause guaranteeing pilots are paid 1% more than rivals
American Airlines
and
United Airlines,
the Wall Street Journal reported, potentially lifting costs higher still. Barron’s contacted Delta which did not comment about this.

Consumers could be caught in the middle if airlines need to pass rising labor costs through to airfares, which United CEO Scott Kirby has already said is likely to be the case. 

Airfares

There’s the question of whether airfares, already elevated in the current climate, could rise further as carriers tackle mounting labor costs.

Airlines have been able to hike airfares in the second half of the year on the back of strong travel demand. This has been seen across a number of segments–including leisure, business and international. It has been coupled with industrywide capacity constraints.

The average domestic flight airfare in November was $323, according to data from online travel agency Hopper. That’s an 8% increase on 2019 levels. For international flights an average ticket cost $1,015, a 16% jump from 2019 prices.

United Airlines CEO Scott Kirby said the Delta deal would lift pilot wages across the sector and ultimately lead to higher prices for consumers. 

“The biggest news for an investor perspective is cost convergence in the industry means that what is different now is all the low-cost carriers are going to have to come up to these much higher pay rates,” he told Reuters. “This is going to wind up like oil prices—it’s going to be a pass through,” he added.

Southwest Airlines
told Barron’s it continues to monitor the wider industry as part of its ongoing pilot negotiations but did not comment on whether Delta’s offer could lead to an increased offer, or whether higher costs may be passed through to consumers.

At its investor day Wednesday, the airline said unit costs, excluding fuel, could decline by 1% to 3% in 2023 as flying capacity grows 15%.

There may be some mitigating factors offsetting higher labor costs in 2023, though, in particular lower fuel prices.

Passenger yields, that is revenue generated per traveler, are expected to soften next year as lower energy costs are passed through to the consumer, according to the International Air Transport Association’s latest economic outlook.

Disruption

There is a positive for travelers in all this. A boost to pilot supply and the removal of the threat of strikes should improve the industry’s track record on disruption, or at least prevent any further chaos.

Delta pilots voted to authorize a strike at the end of October, if negotiations failed to succeed. If the agreement is approved that risk would be removed. 

Pilot shortages have plagued the sector as it has recovered from the Covid-19 pandemic, with carriers scrambling to hire amid surging demand. 

More than 52,000 flights into and out of the U.S. were canceled in June, July and August this year, more than 2% of scheduled flights, according to FlightAware data. In January this year, close to 39,000 flights, or 5.4% of the schedule, were canceled.

Airlines have taken steps to improve operations, by amending flight schedules and hiring more pilots. Apart from weather-related disruption on the Sunday after Thanksgiving, the moves have largely been successful up to now.

A shortage of pilots, as well as delays to aircraft delivery, has squeezed capacity this year. Industrywide pay agreements should resolve at least one of those.  

Smaller Players

Alaska Airlines
(ALK) is one of the only U.S. carriers to strike a postpandemic pay deal so far, after its pilots voted in favor of a new three-year contract in October. The deal offers pilots wage increases of up to 23% but, significantly, includes a market rate adjustment to “keep pilots in line with peers at other airlines in the years ahead.”

A deal like the one offered by Delta means Alaska pilots could be in line for a raise on top of their existing deal–particularly if United and American increase their own offers in the months ahead, J.P. Morgan’s Baker said.

That clause should help Alaska retain its pilots, at least that’s the plan.
Alaska Air Group
did not respond to Barron’s request for comment.

Alaska is a mainline carrier and has the clout to compete but for regional airlines, it throws up a costly conundrum which is not a new problem.

Over the past year regional airlines, suffering from a pilot shortage amid a strong postpandemic recovery, have faced a persistent challenge of losing pilots to the bigger names.

Phoenix, Arizona-based
Mesa Airlines
(MESA) is perhaps the clearest example of this. The company’s CEO Jonathan Ornstein said earlier this year that the airline lost close to 5% of its pilots in April alone as they were poached by larger carriers looking to deal with their own shortages. Mesa Air Group did not respond to Barron’s request for comment.

Mesa increased pay for entry-level first officers to $100 per hour from $36 per hour in August and now promotes itself as having the “highest pay rate in the regional industry.”

Since then other regionals have increased pay to similar levels, which Cowen analyst Helane Becker said was in line with pay at United, American and Delta. 

It should help them retain pilots but “these pay levels make it difficult for the regionals to be profitable,” she added.

Regional airlines will have to decide whether to hike pay again, in an environment where the industry’s big names are raising wages. If they do they face a dilemma of hurting profitability, or risk losing more pilots.

Write to Callum Keown at callum.keown@barrons.com

Credit: marketwatch.com

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