Earlier this week, pilots at Spirit Airlines (NYSE:SAVE) began voting to authorize the union leadership to call a strike if negotiations with the airline break down.
To the casual observer, it might seem like Spirit's pilot crisis -- which led to a rash of flight cancellations back in May -- is getting worse. However, the strike authorization vote is purely symbolic. The probability that Spirit Airlines pilots will actually strike remains minuscule, largely because they would need the approval of a federal mediator to go on strike.
Airline strikes are rare for a reason
Unlike most businesses in the U.S., airlines are covered by the Railway Labor Act for collective bargaining. One of the distinctive provisions of the Railway Labor Act is that contracts never officially expire. They simply become amendable after a certain time.
As a result, airlines and their unions generally aren't permitted to engage in "self-help" measures like lockouts and strikes. If they have trouble reaching an agreement, a federal mediator works with both sides to facilitate negotiations. A strike or lockout is only allowed if the mediator releases both sides from negotiations -- and even then, only after a 30-day cooling-off period.
Mediators rarely release airlines and their unions from negotiations. The last time it happened was during Spirit Airlines' 2010 pilot contract negotiations. Ultimately, Spirit's pilots went on strike for nearly a week before agreeing to a new contract with better terms.
Strike preparations are a dime a dozen
While the federally mandated mediation process means that airline employees don't go on strike very often, strike preparations are quite common. In fact, pilots at Frontier Airlines also began a strike authorization vote this week. And just in the past couple of years, pilots at Southwest Airlines (NYSE:LUV) and Hawaiian Holdings (NASDAQ:HA) have made plans to strike as their contract negotiations dragged on.
In both of those cases, the unions demanded industry-leading pay rates. Southwest Airlines and Hawaiian Holdings executives countered by offering smaller (but still significant) raises, arguing in each case that it was important to maintain a relative cost advantage compared to the big network carriers.
Both of these disputes were ultimately resolved without any labor disruptions. Notably, pilots at Southwest and Hawaiian eventually agreed to pay rates that are slightly below industry-leading levels. This highlights how the federal mediation process forces both sides -- but especially the labor unions -- to make concessions.
This isn't a repeat of 2010
The fact that Spirit Airlines pilots went on strike back in 2010 might appear to make a second work stoppage more likely. However, a lot has changed in the last seven years.
First, Spirit Airlines is much bigger. Back in 2010, the carrier operated about 30 planes, making it a very minor player in the U.S. airline industry. By contrast, Spirit ended last quarter with 104 planes in its fleet, and it continues to grow at a steady pace. As a result, a strike would be far more disruptive to the flying public now. This will make federal mediators hesitate to authorize one.
Second, Spirit Airlines claims that it has already offered a 30% pay increase to its pilots, at an incremental cost of $440 million over five years. This would get wage rates much closer to those of peers like Southwest Airlines. (Spirit would probably agree to even bigger raises in mediated negotiations.)
Meanwhile, Spirit Airlines alleges that the pilots' counterproposal would cost a whopping $1.9 billion over five years. That's clearly unaffordable, as it would eat up the majority of the company's profits. In the current situation, the union will have trouble convincing a federal mediator that Spirit is being unreasonable.
There's no telling how long negotiations might drag on. That said, both sides have an incentive to make a deal: The pilots want their raises and the company needs competitive pay so it can recruit more pilots. It will take some cajoling by the National Mediation Board, but in the end, Spirit Airlines' pilots are likely to get a new contract without a strike.
Adam Levine-Weinberg owns shares of Hawaiian Holdings and Spirit Airlines and is short October 2017 $50 puts on Hawaiian Holdings. The Motley Fool recommends Spirit Airlines. The Motley Fool has a disclosure policy.