ANALYSIS: US airlines trade higher wages for more flexibility

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Labour costs at US airlines are on the upswing.

Pilots at American Airlines, Delta Air Lines and United Airlines have all received significant salary bumps during the past two years, and flight attendants and other groups have either received raises or are in negotiations for them now. In exchange, the carriers have garnered labour support for their respective mergers and increased employee productivity and flexibility.

“In order to get those mergers done successfully, they had to make a choice,” says Helane Becker, an analyst at Cowen Group. “The easiest thing for them to do was to raise salaries to get everyone on the same page.”

Delta Air Lines led the market with wage increases. The Atlanta-based carrier reached a joint agreement with its pilots union, the Air Line Pilots Association (ALPA), before closing its merger with Northwest Airlines in 2008, and then agreed to significant pay increases in exchange for regional aircraft scope changes and productivity improvements in 2012.

Salaries and related costs increased 10.5% to $1.97 billion at the airline in the first quarter compared to the same period in 2012. Delta nearly doubled its operating profit to $620 million and expanded its operating margin by 5.3 percentage points to 7.9% over the same period.

“We had some serious catch-up on wages and salaries with our employees,” said Ed Bastian, president of Delta, at a financial conference on 7 May.

American is having a similar experience. Salaries, wages and benefits expenses rose 13.4% to $2.12 billion at the end of March from the same time in 2012 based on combined expenses at both American and US Airways. It reported a $730 million operating profit and an operating margin of 4.1% in the first quarter.

“We already have, embedded in our numbers, all of the negative synergies, particularly from labour deals, which, by the way, we are happy to have,” says Scott Kirby, president of the Fort Worth, Texas-based carrier, at an investor conference on 7 May. “We want our employees to share in the success of the new American.”

While analysts expect another $300 million to $400 million increase in annual labour expenses by 2016, American says that these will be offset by more than $1.4 billion in revenue synergies from the merger that will allow it to preserve its operating profit and margin.

Labour expenses have increased commensurately at United, but without the profits. Salaries and related expenses increased 13.5% to $2.15 billion in the first quarter versus the same period in 2012, while its operating loss widened by $78 million to $349 million. Operating margin was -5.6%.

The Chicago-based carrier plans to counter the rise in labour costs with productivity improvements and other costs savings that will total $2 billion by 2017. This includes $250 million to $300 million in productivity and sourcing savings in 2014.

HIGHER COSTS, HIGHER FARES

“If costs are going up, fares have to go up or they will become a drag on revenues and a drag on margins,” says Becker, on how airlines are supporting rising labour expenses.

US carriers are benefitting from rising demand and a reasonably strong domestic economy that has allowed them to raise airfares without negatively impacting demand.

Average round-trip domestic airfares including fees increased more than 15% to $284.79 in 2013 from their previous low in 2009, data from airline industry group Airlines for America (A4A) shows.

The test will come during the next economic slow down when demand – and potentially airfares – slump, says Becker. However, increasing segmentation in the US market where the most price-sensitive customers are moving to ultra low-cost carriers, for example Allegiant Air or Spirit Airlines, is a positive trend for the mainline carriers who are focused mostly on business and less price-sensitive leisure customers.

The wage increases do not cover the entire industry.

“There is no current shortage of qualified pilots in this country,” says captain Lee Moak, president of the Air Line Pilots Association (ALPA), at a recent congressional hearing. “There is, however, a shortage of pay and benefits for qualified pilots,” he continues referring to the regional segment.

MIT's Airline Data Project shows that average annual wages, salaries, pension and benefits for pilots in the USA fell 17% between 2001 and 2012 to $184,901 when adjusted for inflation.

Asked why mainline carriers continue to attract pilots despite the drop in pay, Moak says: “Because the pay is substantially higher [than regional carriers] and the future is very bright.”

Moak and other labour leaders are focused on the disparity between wage rates at mainline carriers and those at regional carriers, where starting wages for some pilots can be in the low $20,000 per year range.

Republic Airlines is one regional carrier that has been unable to attract enough pilots. It recently decided to park 27 small regional jets when it could not fill 500 open pilot positions due to a lack of “qualified” candidates that meet both new US Federal Aviation Administration (FAA) guidelines and the airline’s requirements, says chief executive Bryan Bedford.

“First officer pay does need to increase,” he says. However, he adds that the International Brotherhood of the Teamsters has blocked Republic’s attempts to increase salary and benefits by more than 25%.

Labour costs at US airlines are likely to continue rising for the foreseeable future, albeit at more gradual rates than the double-digit jumps they have made since 2012. Record profitability and reduced debt loads will likely only heighten this trend.

Pilots at JetBlue Airways voted in favour of ALPA representation in April, with the union citing the recent round of mega-mergers as a driver in the decision. While the move is not expected to impact costs significantly in the near term, it could have a long-term impact on wages and work rules that negatively impact the company.

The question over the long-term will be whether airlines can continue to trade increased costs for productivity improvements, and match them with fare increases.