Please ensure Javascript is enabled for purposes of website accessibility

Delta's New Pilot Contract Offer Puts Southwest Airlines in a Bind

By Adam Levine-Weinberg – Oct 8, 2016 at 2:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Less than two months after reaching a tentative contract agreement with its pilot union, Southwest Airlines may be forced to renegotiate, after Delta offered big raises to its pilots.

After four years of contentious bargaining, Southwest Airlines (LUV 1.80%) finally reached a tentative agreement (TA) with its pilot union for a new contract in late August. The deal calls for Southwest to increase pilot wage rates by nearly 30% between now and 2020. Two weeks ago, the union's board voted 21-2 to send the proposed contract to the membership for a ratification vote.

Southwest reached a new tentative agreement with its pilot union in late August. Image source: The Motley Fool.

There's just one problem. Last week, Delta Air Lines (DAL 2.60%) finally reached a TA with its pilot union that would raise their wage rates by 30% by 2019. As a result, union leaders at Southwest now want to renegotiate their deal before sending it out for a vote. Unfortunately, Southwest Airlines may not really have a choice.

So much for industry-leading wages

The Southwest Airlines TA would boost pilot wages by 15% immediately, followed by 3% gains in each of the next four years. That would give Southwest aviators the highest wages in the industry among Boeing 737 pilots, edging out pilots at United Continental.

The new Delta TA completely upends this calculus. Right now, wage rates for the 737 tend to be slightly higher at Delta than at Southwest, although it depends on seniority level. However, Delta's TA calls for an 18% pay increase retroactive to Jan. 1, followed by a 3% increase at the beginning of 2017 and annual raises of 3% and 4% in the next two years.

This means that if Southwest pilots are currently about 1%-3% behind their peers at Delta on average, they would be 7%-9% behind by January, assuming both TAs are approved.

Delta Air Lines pilots negotiated faster raises than Southwest's pilots. Image source: The Motley Fool.

Furthermore, Delta 737 pilots have advancement opportunities: They can move up to fly widebodies. A top-of-scale widebody captain at Delta earns as much as 24% more than a top-of-scale 737 captain. By contrast, Southwest only operates the 737.

The union wants a mulligan

Not surprisingly, leaders of the Southwest Airlines Pilots' Association (SWAPA) are not satisfied with this state of affairs. After news of the new Delta pilot deal broke, SWAPA President Jon Weaks began angling for revisions to the TA that was about to go out for ratification.

Presumably, wage increases are the main improvement SWAPA is seeking. In any case, the airline still wants pilots to vote on the existing TA.

Time to make a deal?

The problem for Southwest Airlines is that a tentative agreement is just that: tentative. While the company may be able to strong-arm the union into putting the contract up for a vote, it would probably just result in the pilots rejecting the TA.

Indeed, that's just what happened a year ago, when Southwest's pilots rejected a TA that would have given them smaller (but still substantial) raises by a 62%-38% margin. Given how unhappy Southwest pilots seem to be with their contract status, it would be fairly surprising if they accept anything less than industry-leading pay.

Southwest Airlines obviously wants to keep labor costs in check. However, rising pilot pay is simply a fact of life in the U.S. airline industry right now, due to a growing shortage of qualified pilots. It would be better for Southwest to increase its wage offer before putting the TA up for a vote rather than alienating its pilots all over again and allowing labor discord to persist.

Either way, the end result is likely to be the same: big raises for pilots at Southwest Airlines.

Adam Levine-Weinberg owns shares of Boeing and United Continental Holdings and is long January 2017 $40 calls on Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.