Across the airline industry, pilots have scored big raises in the past year. Last week, Hawaiian Holdings (NASDAQ:HA) became the latest airline operator to agree to pay increases for its pilots.
The tentative contract agreement will get Hawaiian Airlines pilots much closer to the industry-leading pay enjoyed by their colleagues at Delta Air Lines (NYSE:DAL). Of course, it will come at a cost in terms of the company's profitability. However, Hawaiian Airlines should remain highly profitable -- and it will get cost certainty for many years to come.
Tensions ratchet up
The Hawaiian Airlines pilot contract became amendable in September 2015. (Labor contracts never formally expire in the airline industry, which helps to minimize work stoppages.) For most of the past year and a half, management and the union didn't seem to make much progress in negotiations.
Hawaiian Holdings has reported a string of record profits and its stock has soared tenfold since 2012. As a result, Hawaiian's pilots have been understandably upset about being paid less than peers at many other airlines. The union has picketed the airline on multiple occasions in the past year. It has also threatened to strike, although it would have needed approval from the National Mediation Board to follow through on that threat.
Successful labor negotiations at other airlines added to the discontent at Hawaiian Airlines. For example, last fall, Delta Air Lines reached a new contract with its pilots that raised wage rates by as much as 30% over four years.
A Delta captain with at least 12 years of experience now makes $316 an hour for flying an Airbus A330. By contrast, a Hawaiian Airlines captain with the same amount of experience earns $207 an hour flying an A330. That's a wide gap to close in a single contract.
Big raises on the way
Last week, Hawaiian Airlines and the Air Line Pilots Association union reached a tentative agreement on a new contract that would run from April 1 through July 1, 2022. It would provide immediate raises of up to 45% and raises ranging from 36% to 86% over the life of the contract. The pilots will also get $42 million in retroactive pay covering the period since the previous contract became amendable.
Fittingly, some of the biggest raises will go to Hawaiian's most senior pilots. Most notably, the top-of-scale wage for A330 captains will rise 40% -- from $207 an hour to $290 an hour -- on April 1 if the new contract is ratified. That will get them a lot closer to the comparable Delta wage rate of $316 an hour.
What it means for investors
There's no guarantee that Hawaiian's pilots will ratify the tentative contract agreement. Delta's pilots rejected the original tentative agreement their union reached with the airline, and many other airline labor groups have done the same in the past few years.
Interestingly enough, Hawaiian Airlines union leader Hoon Lee voted against approving the deal, because he felt it was still a below-market offer. While he was outvoted by three other union officers, the lack of support from the union head could encourage other pilots to vote against ratification.
Assuming that the pilots do ratify the contract, it will drive significant cost inflation at Hawaiian Airlines. Last year, Hawaiian's management stated that the pilots were asking for 50% raises, which would cost the company about $74 million a year.
Not surprisingly, the first-year raises are not quite 50%. It's also possible that Hawaiian Airlines is getting some offsetting productivity benefits -- the company has not provided any official details on the contract. Still, it seems quite likely that the cost increase for the first year will be at least $50 million.
Even before this tentative agreement was reached, Hawaiian Holdings' management expected a mid-single-digit increase in adjusted non-fuel unit costs this year. The pilot contract will likely push non-fuel unit cost inflation into high-single-digit territory.
That said, Hawaiian Airlines earned an adjusted pre-tax profit of more than $450 million in 2016. It can certainly afford the raises. Furthermore, Hawaiian has been producing industry-leading unit revenue growth for the past few quarters, helping it to offset rising costs.
All in all, it would be better for shareholders if this tentative agreement is approved. Hawaiian Airlines has ambitious growth plans for the next few years. It will be easier to execute those plans with a happier pilot workforce and more certainty about the company's long-term cost structure.