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March 16 , 2011

In this Issue...

The Way It Has To Be, Part 4  

ALPAWatch Think Tank Paper

The Way It Has To Be

Part 4 of 5

 

This is Part 4 of The Way It Has To Be.

Click here the entire Paper, The Way It Has To Be

 

The Numbers

There was the day when pilots had the power to deeply affect the bottom line of airlines.  Due to a 30 year slide (adjusted for inflation) in compensation and a dramatic increase in fuel costs, that is no longer the case.  This is truly the double edged sword.  The bad news is major airline pilots don’t make that much money.  The good news is major airline pilots don’t make that much money so increases are possible.

At this point we don’t know what pilot compensation has to be to make the profession stable and sustainable.  That will be determined by the research required to implement this plan.  But in the absence of that hard data, let’s play with some numbers.  If the pilots of Delta Airlines (pretending for a moment that Delta and NWA were merged for all of 2008) had worked for free, Delta would not have made a profit.  On the other hand, if they had received 50% more pay, it would have meant an additional $800- 900 million cost to Delta.  For the 12,000+ pilots of Delta, the total compensation is less than $ 2 billion a year.  Let’s examine that number as it relates to fuel costs.

From Delta's 2008 annual report filed with the SEC…

“During 2008, fuel prices fluctuated dramatically. Fuel is one of our most significant costs. At the beginning of the year, crude oil prices hovered around $100 per barrel, escalating to $145 per barrel by mid-summer.”

“Throughout the summer months, fuel prices remained at record high levels and were forecasted to continue to rise. Based on this outlook, we added fuel hedges to protect against further escalating fuel costs. However, fuel prices fell dramatically during the third and fourth quarters, creating sizable losses on our fuel hedge contracts in the fourth quarter.”

“In 2009, we expect to use approximately four billion gallons of jet fuel. At that level of consumption, a $1 change in the average annual per barrel price of crude oil can impact our financial results by approximately $100 million. Accordingly, the volatility of fuel prices will continue to have a major impact on our financial results.”

Using these numbers, the Fluctuation in Fuel Cost for Delta (not total fuel costs, but only the change in price) would have been about $10 billion in 2008, excluding any hedging.  Let’s assume for a moment that the entire increase in pilot compensation necessary for stabilization and sustainability of the industry is a 50% increase in pilot compensation, and the current total compensation is $ 2 billion a year on the outside, then that would mean a $ 1 billion increase in cost to Delta.  Putting it another way, the total increase would be 1/10th of the fluctuation in the price of fuel for 2008.  Then consider the probability that any increase in compensation would be phased in, over several if not many years and the argument of non-affordability becomes laughable.

What is the take away message?  Reasonable changes to pilot compensation rates do not and cannot make Delta profitable or unprofitable to any significant degree.  The biggest determining factor in the profitability of all the major airlines lies in its ability to properly manage fuel costs, not the level of pilot compensation.

Of course we are making the assumption that there will be customers and the airline will have a reliable, safe service to offer them.  However, there is no guarantee that Delta will survive the extreme turbulence known as the U.S. airline industry.  There is no guarantee that Delta will not be forced back into bankruptcy at some point.  But the two salient messages are, without the right kind of people in the cockpits, there is no chance for success and low or appropriate pilot compensation does not guarantee profit or loss for any given year.  Proper pilot compensation will not cause Delta’s demise but putting experienced, well-trained pilots on the flight decks will enable Delta’s long-term success.

How much should Delta Pilots be paid?

This has always been one of the hardest questions to answer.  Under the concept of stability and sustainability, there are several approaches to that answer.  Both seek a solution that places the pilot profession on par with other professional choices.


One approach is a comparison study that would examine the requirements of the pilot profession and compare those requirements to other professions.  From that, inferences could be made as to what the profession would have to pay to attract its share of talented people.  Given the uniqueness of the pilot profession, such as the fact that no matter how educated, experienced, or determined a person may be there is no guarantee of landing that major airline job, it seems unlikely that such a study could answer this problem.  Nonetheless, ALPA National has the means to conduct such a study and that should be done.

In the absence of a clear answer from the comparison study, another method would be to go with proven, historical results.  Every pilot at Delta hired on knowing what the pay rates were at that time.  It is fairly safe to assume that a similar rate (adjusted for inflation/CPI) would attract similarly qualified pilots now and in the future.  It would be a simple process to take the pay rates in effect at the time each Delta pilot was hired, adjust those rates for inflation and come up with an aggregate pay rate for today as well as the future.  That would establish a pay rate for today the next contract and all those to come.  The only question left to negotiate would be how many years it will take to phase in those rates.  Equally over several years?  Front-end loaded to make up for all that we have sacrificed to help Delta?  The timeline becomes the negotiation, not the pay rates.

One other very important element is not just how much but when.  These pay rates need to take effect now.  Waiting for the next contract could mean a delay till sometime in 2014.  You don’t know what that rate will be then.  You don’t know what negatives might occur between now and then that could wipe out any chance of an increase and because of the future value of money, the pay rates then would have to be much higher (about double) in that contact to equal the same amount today.

Whatever method is used to set the rates our negotiators will approach the company with, it needs to happen quickly.  We have a very narrow window of opportunity.  An opportunity exists now because of Delta’s positive trend of profitable quarters, a well functioning MEC, the absence of a number of other negative factors that have finally abated, and the mindset of the pilot group.  The pilot group feels that they have sacrificed, adapted, and invested greatly in the last 8 years.  They see the recent successes of Delta as evidence of the investments they have made.  Currently they are willing to be reasonable about a return on those investments, but if the union fails to engage the company about mid-contract pay rate increase or if the company declines, they may not be so reasonable going into next contract.

The window of opportunity is small because if this process drags on till late this year without results, the debate will shift to an early contract opener (Railway Labor Act Section 6, April 2012), which could easily postpone a result till the summer of 2014.

How does this plan help Delta?

Delta Air Lines needs a Stable, Sustainable pilot workforce to produce reliable, safe air travel it can sell to the public.  Assuring stability and sustainability are long term benefits.  In the short term this proposal offers Delta the very attractive possibility of predictable and stable labor costs for the next 7 years or possibly much more.  One of the points of this plan is that any and all increases in pilot compensation costs will be orderly phased in over time but starting immediately.  This would be done by jointly agreeing to amend the pay rates in the current PWA.  The amendment could cover just the remaining time in this PWA, but ideally it would set the rate for much longer.  There are several formulas that could set the base line of pay rates for now on. 

Mid-contract pay rate changes would not necessarily change the amendable date of the PWA, December 31, 2012 but it could.  If the new pay rates agreed to went far enough into the future and were sufficient, then the PWA amendable date (Section 6) the compensation section of the PWA would be complete before negotiations started and therefore no adjustments to that Section would be needed.  This should be our Plan A.

The alternative method is Plan B, the traditional contract negotiation route.  The problem with the traditional approach is that it usually ends in a confrontation.  Neither side wins in these battles.  Such confrontations do not serve either party well.  If Delta management were to pursue this option for the next amendment of the PWA, it could be a disaster.

In this situation, the only way Delta management could avoid a huge money grab by the pilots would be if at the amendable date, Delta is a financial failure.  In such a climate, management would probably be successful in avoiding a money grab by the pilots, but would nevertheless suffer from the confrontation.  On the other hand, if management’s plans for Delta are a success (as recent profits seem to indicate), then expectations for increased compensation combined with a sense of righteous indignity on the part of the pilots will rule of the day.  The pilots will be incensed if the pay increases sought in Plane A are rejected.  The stakes will go up.  The end result will be either a crippling work stoppage or a pay out far in excess of the sane, moderate, sustainable compensation this plan proposes.

Management could think of Plan A as insurance policy.  Not only would it give Management the ability to do long-term labor cost (for the pilots) planning, but would almost assure a smooth, reasonable contract process at the amendable date or an extension to that amendable date.  One other benefit, of Plan A would be a highly motivated, energetic pilot workforce, a workforce that could greatly benefit Delta, its customers and its investors.

 

 

The last section, Part 5, will cover

  • Why is it the pilot’s responsibility...
  • The Pilot Image

 

 

Thank you again for participating in ALPAWatch.  With the participation of pilots such as you, ALPAWatch will be successful in obtaining the Union Leadership that the Pilot Group deserves, and in doing so regain our fair compensation, our quality of life, our future, and our dignity.
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