A month ago, Delta Air Lines (DAL 0.39%) reached a tentative agreement with its pilot union -- the Air Line Pilots Association (ALPA) -- to avoid pilot furloughs. The deal offered partial pay for more than 1,700 pilots who would have been furloughed, in exchange for a modest reduction in the number of guaranteed hours for the rest of Delta's pilots.
Last week, ALPA announced that Delta's pilots had ratified the agreement. This is great news for both the company and its pilots. Let's see why.
Delta gets the cost savings it needs
While the U.S. airline industry is past the worst part of the COVID-19 pandemic, demand is recovering very slowly. Passenger throughput at TSA checkpoints remains well below 50% of year-ago levels. As a result, airlines like Delta have had to shrink quite dramatically. Back in October, Delta estimated that it would reduce capacity 40% year over year in the fourth quarter.
Of course, that means Delta doesn't need as many employees. The company addressed much of its overstaffing through a voluntary early retirement program, which reduced its headcount by about 18,000 (nearly 20%). As of October, Delta still had 12,000 employees out on voluntary unpaid leaves of absence as well. These programs -- along with reduced work schedules for non-union employees -- enabled Delta to avoid involuntary furloughs for virtually all work groups.
However, the airline still had far too many pilots. Delta proposed reducing all pilots' guaranteed hours by 15% in exchange for forgoing furloughs. ALPA (the pilot union) refused, suggesting that Delta offer pilots partially paid leaves instead.
The two sides reached a compromise in late October. Delta will pay all of the pilots who would have been furloughed for 30 hours of flying per month: less than half of their normal guarantee. (They won't have to work.) Meanwhile, the rest of its pilots will have their minimum guarantee reduced by a modest 5%. That will still provide meaningful cost savings for Delta, as the more-senior pilots who are still working have much higher hourly wages than the junior pilots getting partial pay. ALPA also secured various other favorable contract amendments. Last week, the rank-and-file pilots ratified the deal with a strong 74% majority.
Ready for the recovery
Delta will benefit in two main ways from avoiding pilot furloughs. First, the airline should be able to avoid some unnecessary pilot training events that would have been inevitable had it furloughed lots of pilots.
There will still be plenty of pilots moving to new aircraft types over the next few years and requiring associated training. After all, Delta has retired all of its MD-88s, MD-90s, and 777s this year: more than 10% of its fleet entering 2020. It has also parked many of its 717s ahead of that type's final retirement in 2025. Meanwhile, the early retirements of nearly 2,000 senior pilots will open up coveted wide-body captain positions. All of these developments will lead to pilots switching to new aircraft types. Furloughing and subsequently recalling more than 1,700 junior pilots would have put Delta on the hook for even more expensive training events, though.
Second, by keeping all of its pilots on the payroll, Delta will have more flexibility to restore capacity as demand recovers. The furlough recall process can be slow, and frankly, airlines have no idea what demand will look like over the next two years. Being able to react to booking trends by adjusting flying on short notice will be an important competitive advantage in the near term.
Both Delta and its pilots had to make sacrifices to reach a no-furlough agreement. However, both sides will win in the long run if Delta is able to consolidate its position as the strongest network airline in the U.S. over the next few years.