With U.S. airlines awash in cash these days, one of the big questions in the industry has become how much of that wealth will pilots seek next year when contracts at several carriers come up for renegotiation.
Contracts at four large airlines—Delta Air Lines (DAL), Hawaiian (HA), Spirit (SAVE), and Jazz Aviation, a regional operator for Air Canada—are up for talks in 2015, covering nearly 15,000 pilots represented by the Air Line Pilots Association, the largest pilots union in North America. JetBlue Airways’ (JBLU) 2,500 pilots are also hoping to secure their first contract next year, after voting this spring to join ALPA.
U.S. carriers are producing enormous profits after years of consolidation. In the most recent quarter, the six largest U.S. carriers collectively earned $3.97 billion, with American, Southwest, Alaska Airlines (ALK), and JetBlue all reporting record net income for the period. U.S. carriers lost almost $60 billion from 2000 to 2009.
“This is really a good story,” ALPA President Lee Moak said Tuesday during a visit to Bloomberg Businessweek in New York, part of a quick tour to assure Wall Street analysts that ALPA’s contract demands won’t prove onerous to airlines. “I almost can’t stand it, it’s so good.”
Shareholders have started to realize returns in the form of dividends and stock buybacks. Thanks to the profits, pilots now see themselves as collaborators with management—they increasingly lobby alongside airline executives in Washington. That, says Moak, deepens the working relationships. “All of a sudden, you find yourself on the same side of 95 percent of the issues,” he says.
Another boost has come from profit-sharing schemes adopted by the airlines as a way of rewarding employees when times are good—and the deals carry no commitments should profit shrink. In February, Delta paid employees, including its 11,900 pilots, a record $506 million in profit sharing, equal to about 8 percent of annual salaries. The airline forecasts that amount to increase next year, given higher profit this year.
Southwest expects to pay out $228 million to workers this year in profit shares, nearly double the amount from 2013. United paid $190 million in February tied to its income last year. (Delta and United make the payments on Valentine’s Day.) Several airlines also pay workers monthly incentives for meeting performance targets, such as more on-time arrivals and improvements on the rate of mishandled bags. United paid employees an extra $125 for meeting on-time arrival and departure goals in July. Delta says it paid nearly $92 million last year in similar incentives. “The employees are now coupled to the airlines,” says Moak, a Delta captain who is stepping down at year’s end after four years as president.
Of course, all the cash an airline generates can go to shareholders or employees, and that basic dynamic is likely to play out in the 2015 contract negotiations—especially at Delta and Spirit, both industry leaders when it comes to superior financial returns. Moak contends that ALPA pilots at the larger carriers enjoy what he calls “mature, good contracts” already. Radical overhauls aren’t in the cards, he says.
Most of the contract talks are likely to center on basic compensation—hourly pay rates and how much carriers pay into pilots’ retirement plans. “There will be a business discussion of pay as it relates to revenue,” Moak says. “You can argue about $2 or $2.05, and that matters to the crew member,” but “you’re working on the margins” on the new contracts, he says.
Airlines have been mum on what they’ll seek in the contract talks, despite some analyst queries on quarterly earnings calls. “We have a productive and proactive relationship with our pilots and ALPA, focused on winning in the marketplace and addressing our business challenges and opportunities together,” Delta spokeswoman Kate Modolo said in an e-mail. A Spirit spokesman, Paul Berry, declined to comment, as did a spokeswoman for Hawaiian, Alison Croyle.
The real test of all this bonhomie will come when the talks turn to money—and who will get it.