Earlier this year, the CARES Act helped avert a tidal wave of layoffs and furloughs in the U.S. airline industry. In return for a total of $25 billion in grants to major passenger airlines (roughly 30% of which must be paid back), airlines had to agree not to implement any involuntary layoffs or furloughs before Oct. 1.

That date is just a few months away now. With the COVID-19 pandemic still in full swing and demand expected to recover slowly, airlines have had to start preparing for workforce reductions in the fall and beyond. For Delta Air Lines (NYSE:DAL), that could entail furloughing more than 2,500 pilots.

Demand isn't recovering fast enough

Without government intervention, most U.S. airlines would have needed to furlough the vast majority of their workers a few months ago, as demand plunged to just 4% of 2019 levels by mid-April. Yet many employees would have been called back within months to match returning demand. Part of the rationale for the CARES Act's payroll support program was to avoid short-term furloughs like this by giving airlines funding to get through the trough period.

Unfortunately, while demand has been improving, the number of travelers passing through TSA checkpoints is still just a quarter of year-ago levels. Furthermore, airlines have had to offer big discounts to stimulate that level of traffic. As a result, Delta expects revenue to decline about 75% year over year in the third quarter.

A Delta Air Lines plane parked on the tarmac

Image source: Delta Air Lines.

To make matters worse, the number of new reported COVID-19 cases per day has roughly doubled since mid-June. Numerous states with major hotspots have had to slow or reverse their reopening plans. That could dent the nascent recovery in leisure travel and further delay the return of business travel. In short, airlines must prepare to be much smaller in the near term.

Delta prepares furlough notices

Back in May, Delta Air Lines told its pilots that it would likely have 7,000 more pilots than it needed this fall, according to Reuters. However, management clarified that it intended to align staffing to longer-term needs and that it expected the number of excess pilots to moderate to between 2,500 and 3,500 by the third quarter of 2021.

In keeping with that lower estimate, Delta told its pilots last week that it would soon send out WARN notices to 2,558 pilots, notifying them of potential furloughs. (Under federal law, such notices must go out at least 60 days in advance of mass layoffs or furloughs.) This represents nearly 20% of Delta's pilots. As of the end of 2019, the company employed 13,082 mainline pilots, plus another 1,872 at regional subsidiary Endeavor Air.

Delta Air Lines is still likely to slash flying by far more than 20% this fall. However, it has some flexibility to reduce flying by limiting its pilots to the minimum hours guarantee in their contract. Over the past few months, Delta has also had considerable success in getting employees to volunteer for temporary leaves of absence so that it could better match staffing to demand.

Early retirements may be a partial solution

While some number of furloughs are inevitable, Delta still hopes that it won't have to furlough all 2,558 pilots it is notifying this week. The company and its pilot union have reached an agreement to offer pilots who retire early up to 36 months of pay at 58 hours per month. More than half of Delta's pilots are eligible for the offer. The higher the uptake, the lower the number of furloughs required.

This early retirement program could be extremely costly. Delta's wage scale tops out at $354 per hour, so some pilots could be eligible for over $700,000 of pay -- plus two years of health insurance -- if they take the early retirement option. On the flip side, Delta could potentially save hundreds of millions of dollars of training costs if it addresses overstaffing through early retirements and temporary leaves rather than furloughs. That's significant, particularly because Delta will already need to retrain thousands of pilots as it phases out certain older models from its fleet.

Delta's plans to shrink its pilot workforce confirm that there's still a lot of pain ahead for airlines. However, Delta Air Lines is doing a good job of addressing its near-term challenges in ways that will help drive long-term cost savings for the company. That sets the stage for what could be a big comeback over the next few years.