The ongoing upheaval of the regional airline industry is claiming another victim. American Eagle Airlines (soon to be renamed Envoy) has been flying a large proportion of American Airlines' (NASDAQ:AAL) regional flights for a few decades. However, in a few years, it's not likely to be flying at all.
On Friday, the union representing pilots at Eagle announced that its members had voted to reject a recent contract offer by a (roughly) 70%-30% margin. As a result, American Airlines will not assign any new regional aircraft to Eagle, and the Eagle subsidiary's regional flying will wind down as its aircraft fleet is retired.
The shifting regional airline landscape
Regional airline pay has become a big issue in the past few months. The implementation of new pilot rest rules and more stringent pilot training requirements have caused most regional airlines to fall short of their hiring quotas.
However, the real reason for the sudden shortage of pilot labor is the low wage scales at regional airlines. The average starting co-pilot salary in the regional industry is $22,400, according to the Air Line Pilots Association union.
That's a very meager salary for a skilled profession. It reflects a business model where pilots were willing to work for low pay in order to build up enough experience to move to a much better-paying job at a major airline. However, under the new pilot training rules, a pilot now needs 1,500 hours of flight experience to be a co-pilot for a regional airline. This vastly increases a pilot's training costs while reducing the need for additional experience.
Battle over pay and benefits
Given the low-pay conditions prevailing in the regional airline industry today, it was no surprise that union leaders were outraged by a recent contract offer from Eagle (American Airlines' regional subsidiary) that called for additional pilot concessions. According to union leader Bill Sprague, the contract would have frozen pay scales until 2018, with co-pilot pay topping out at just $38,000. Pilots would have also been responsible for higher health-care contributions.
Last month, the union leadership voted to reject the contract offer without even putting it up for a membership vote. Eventually, they reversed themselves and allowed pilots to vote on the contract, but the result was the same, with 70% of the voters opposing the contract.
This result was particularly interesting because American Airlines management had used a carrot-and-stick approach to secure approval of contract concessions. The airline had promised to award 60 new Embraer E-175 aircraft to Eagle if pilots had approved the contract. On the other hand, it threatened to wind down Eagle's regional flying operation as older aircraft were retired if the contract was rejected.
Despite the explicit threat that they would eventually lose their jobs if they rejected the contract, American Eagle pilots did just that. With other airlines expected to need thousands of new pilots each year, Eagle pilots don't expect to have much trouble finding new jobs that will probably offer better pay and/or career advancement opportunities.
Now that Eagle's pilots have rejected its final contract offer, the spotlight turns to Republic Airways (NASDAQOTH:RJETQ), the second-largest regional airline in the U.S. Last month Republic reached a tentative 4-year contract agreement with its pilot union. Republic claims that this new contract will provide significant pay and benefits improvements for pilots.
Republic also recently highlighted a blog post by aviation expert William Swelbar that praised the tentative agreement and urged pilots to vote in favor of it. However, it's ultimately up to Republic's pilots to decide whether they want to hold out for an even better agreement.
The votes will be tallied this Friday. If pilots approve the deal, Republic will be in a much better position to recruit pilots in the future, compared to other regional airlines with lower pay scales. On the other hand, if the vote fails, Republic will continue to have trouble finding enough pilots to operate its schedule. This could force it to downsize its operations again.
Foolish bottom line
The regional airline industry is in flux today, as cheap pilot labor is rapidly becoming a thing of the past. Eagle pilots' decision to turn down a contract knowing that it would eventually lead to the loss of their jobs demonstrates how little bargaining leverage the regional airlines have. Qualified pilots have ample alternative job opportunities if their employers aren't willing to raise their pay to a more competitive level.
The strongest airlines in the regional sector are likely to survive, simply because network carriers still need the regional airlines to provide connecting traffic. However, other regional airlines like Eagle that can't or won't provide higher pay and benefits will quickly fall by the wayside in the next few years as their pilots leave for better jobs.
Adam Levine-Weinberg owns shares of Republic Airways Holdings. The Motley Fool recommends Embraer-Empresa Brasileira. Try any of our Foolish newsletter services free for 30 days. 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.