Pilots at Republic Airways Holdings, Inc. Hold Out for Bigger Raises

Pilots at regional airlines are angry. More importantly, for the first time in their careers, they feel powerful due to the growing pilot shortage in the U.S. Considering that some regional airline pilot pay scales start around the minimum wage and experienced co-pilots often earn less than $40,000 a year, it's easy to see why they feel underappreciated.

Last week, Republic Airways Holdings (NASDAQ: RJET  ) learned firsthand just how unhappy many regional airline pilots have become. Pilots there overwhelmingly rejected a new contract offer that would have improved pay and work rules. This vote could herald the beginning of another wave of downsizing in the regional airline industry.

Regional airline pilots strike back
Republic Airways is far from being alone in its labor issues. In just the last six months, pilots at American Airlines (NASDAQ: AAL  ) subsidiary American Eagle, SkyWest (NASDAQ: SKYW  ) subsidiary ExpressJet, and Silver Airways have all rejected contract proposals.

However, whereas most of the other contracts rejected by regional airline pilot unions called for concessions by the pilots, the Republic Airways contract would have raised pilot pay and increased scheduling flexibility. Nevertheless, a whopping 85% of pilots who voted on the agreement opted to reject the offer.

Regional airline pilots are demanding massive pay increases. Source: Republic Airways.

It made perfect sense that pilots at American Eagle were unwilling to pay more for medical coverage while having their salaries frozen when virtually every airline in the U.S. is hiring. By contrast, the Republic Airways pilots rejected a raise, which could only mean that they are holding out for an even bigger raise.

Where's the money?
The immediate consequence of Republic Airways pilots rejecting the tentative agreement is that they will not get the negotiated signing bonus and wages will remain at the current paltry level. Pilots who voted no probably wanted to send a message to management and didn't fear the consequences because they're hoping to quit soon anyway and move to larger carriers.

However, not every pilot at Republic Airways is going to find a major airline pilot job in the next few months -- or years. For those who stay, it's hard to see how they could improve much on the contract terms they just rejected.

Regional airlines like Republic Airways and SkyWest do most of their flying under long-term contracts with the legacy carriers that pay a fixed rate (with minor performance-based incentives or penalties). Pilot pay raises will cut directly into the regional carriers' profit margins -- and these are very low in the first place.

Another blow to 50-seat regional jets
In all likelihood, the increasing militancy of regional airline pilots will hasten the demise of 50-seat regional jets. ExpressJet -- the SkyWest subsidiary where pilots recently rejected a new contract -- is overexposed to small regional jets, and as a result it has been persistently losing money. The most likely way out for SkyWest is gradually winding down this 50-seat-jet flying.

Similarly, after American Eagle pilots rejected their contract offer, the CEO bluntly stated that the company would start downsizing. The same outcome has already begun to play out at Republic Airways. Earlier this year, Republic announced that it would not renew its short-term flying contracts for 27 small regional jets in order to free up pilot labor for more profitable 76-seat-jet flights.

At the end of 2014, Republic expects to have 41 small regional jets left flying under short-term contracts. However, Republic will have trouble recruiting new pilots as long as wages remain frozen at their old levels. As a result, the company may have to continue parking these smaller planes as its pilot ranks thin out.

Foolish final thoughts
Regional airline pilots have been frustrated about low wages for years. However, changes in federal regulations have simultaneously increased the demand for pilot labor while shrinking the supply of qualified pilots. Pilots are now exploiting their newfound bargaining power to quash deals that don't provide adequate raises (let alone deals that try to reduce pay or benefits).

For the most part, regional airlines are locked into long-term contracts with legacy carriers that make it impossible for them to meet the pilots' demands. As a result, regional airlines are likely to shrink significantly in the next few years as their pilots defect to higher-paying major airlines faster than they can be replaced.

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