MIAMI — The Air Line Pilots Association (ALPA), union that represents pilots at Delta Air Lines, is seeking a 40% raise compounded over a three-year period. The raise in the pilot’s base pay would be front loaded at 22% in 2016, followed by a 7% raise in 2017 and 2018. The counter-proposal from the union comes after more than two thirds of Delta’s pilots voted against a deal this summer, that would have granted them a 22% raise over three years.
Pay increasing across the board for US airline employees but benefits flat
The last couple of years have been excellent for workers at US airlines, as average total compensation for all employees increased 15.9% between 2010 and 2014, with several work groups at several different airlines signing new labor deals in 2015 that built on that momentum with sharp raises from 2016 onwards. Most of the increase has come in base pay, as non-salary compensation including pensions and benefits was essentially flat over that time period.
Delta’s pilots motivated by relative pay
Pilots have done better than their peer employees, with average total compensation rising 25.9% from $185,133 to $233,100 between 2010 and 2014. But Delta’s pilots outstripped the market entirely with total average compensation rising a remarkable 40.6% to $261,773 from $186,099, allowing Delta’s pilots to surpass those at Southwest Airlines to become the best compensated in the industry.
While these absolute numbers are huge (putting the average pilot in the top 5% of income earners in the U.S.), pilots, as with many labor groups, tend to define themselves relative to their peers. And while Delta’s pilots were far and away the best compensated in the industry by the end of 2014, that relative position has eroded in 2015 thanks to increases in pilot pay at peer legacy carriers American Airlines and United Airlines.
In January 2015, pilots at American signed a new five-year deal that would give them a cumulative 42.5% raise over the period. Then, later in the year, United’s pilots inked an agreement that gave them a 13% raise in 2016, followed by 3% and 2 % in 2017 and 2018 thereafter. Thus it is no surprise that Delta’s pilots are looking for a raise that restores their relative (pay) superiority over peer pilots: it’s basic human psychology.
Delta’s pilots are deserving of a raise and pay still lags due to post 9/11 givebacks
If there were a pilot group in the industry that deserved a rise, it would be those at Delta Air Lines. A key theme in the airline industry for the last couple of years has been Delta’s stunning transformation into an operational juggernaut that consistently delivers 80%+ on time performance and 99.5%+ completion percentage on a day-to-day and month-to-month basis. Delta’s pilots have played an essential role in this performance improvement both on the ground and in the air. And the financial payoff to Delta’s new position as operational top dog in terms of customers and corporate contracts won and retained has been huge; on the order of hundreds of millions of dollars per year in revenue. The pilots deserve a piece of that.
Beyond their strong performance, Delta’s pilots (and actually pilots across the industry) also argue that they are entitled to see pay return to its pre-bankruptcy levels. At Delta, pilot compensation peaked in 2003 and 2004 at $365,000 and $383,000 in 2015 dollars before concessions were made. Thus while 2014 compensation was up 40% over 2010 levels, it was still 32% below the pre-bankruptcy peak.
40% is too high – annual cost of $750 million by end of contract.
But the fact that Delta’s pilots still haven’t recovered their pre-bankruptcy compensation doesn’t justify a 40% raise, which is simply too high for a pilot group that is the best-compensated in the industry. There’s a reason Delta and other US carriers collapsed into bankruptcy – those labor contracts were too rich and simply unsustainable in a high fuel environment.
A 40% raise in base pay wouldn’t necessarily drive up total pilot labor costs by 40% as total compensation would rise by a smaller overall amount. And depending on what work rules or scope concessions pilots were willing to give up, Delta could also recoup some of the costs via productivity improvements.
But to do some back of the envelope math, Delta’s year end labor costs should be about $8.8 billion for 2015. Pilot costs represent about a third (32.5%) of Delta’s overall labor compensation, or a projected $2.86 billion for 2015. Applying a 22% raise in 2016, and assuming that it cascades into a 14% increase in total pilot compensation, this contract would cost Delta roughly $400 million in 2016.
And maintaining the same ratio of increase in compensation to increase in base pay, the annual cost spirals to $750 billion by the end of 2018. Delta is projected to earn a profit of $5 billion in 2016 according to consensus analyst estimates, and the pilots are asking for 8% of that to accrue entirely to them in addition to profit sharing that they already get.
The early 2000s comparison isn’t entirely on point… yet
Naturally, when such large numbers are being thrown around, the immediate gut reaction is to wonder whether we’re entering another cycle of overly generous labor contracts that end in bankruptcy. The point of comparison here is probably the late 90s early 2000s cycle, where labor expenses peaked in 2002 at 41.8% of total operating expenses for the legacies plus Southwest.
But despite the across the board raises, we’re nowhere close to those figures, as for the first nine months of 2015 Delta’s labor expenses were 30-32% of total expenses including regional carriers. The round of Chapter 11 bankruptcy undertaken by US carriers in the mid-2000s unwound a lot of the toxic labor contracts and it will take a while before the industry reaches such a bad state.
More to the point, operating margins in 2002 were -14.1% for the same set of carriers. Today, they are exactly flipped at 15-20%. So the airlines do have some buffer room to deal with increases in labor expenses. It’s not the same industry as it was in the early 2000s, so at the end of the day the warning signs are not as rawly worrisome.