Since U.S. airlines have been on the upswing for so long, airline workers are now preparing for how the next downturn will erode their gains in recent years.
U.S. airlines are posting record profits, awarding hefty pay raises and winning over longtime skeptics like Warren Buffett’s Berkshire Hathaway Inc. The missing ingredient: proof that the industry can weather a downturn.
Previous airline booms were followed by busts that eventually forced all the biggest full-service airlines into bankruptcy. The difference this time is an eight-year era of mergers that stabilized the industry by shrinking the number of major carriers to four from nine. Adding to that is a profit-boosting, 56 percent drop in the price of jet fuel since early 2014.
Airline labor groups have taken advantage of the good times to claw back some of the pay surrendered as the industry restructured and racked up $53 billion in losses in the decade ending in 2011. New labor contracts have added at least $1.35 billion to the operating costs of the four biggest U.S. carriers this year, and will add $1.9 billion more in 2017, according to Savanthi Syth, a Raymond James Financial Inc. analyst. That’s raised concern that the payouts may come back to haunt the companies.
“You have to be a little leery of just going crazy when it comes to pay and benefits,” said Jerry Glass, president of consultant F&H Solutions Group and a former US Airways executive. “This is an industry that is always hit by some kind of extraneous event. We don’t know when, we don’t know how severe it’s going to be, but it will happen at some point.”
The six biggest U.S. carriers have earned $39.5 billion in the four years since 2011, nearly half of it in 2015 alone. With a new focus on returns, margins and reducing debt — by almost $60 billion since 2010 — carriers also have spent billions to buy back shares, restarted or initiated dividends, and paid record profit-sharing.
“This is a historic moment,” said Robert Mann, president of aviation consultant R.W. Mann & Co. “Investors are doing a hell of a lot better, employees are doing a hell of a lot better and despite all that, industry profitability is quite a bit better. And consumers are still getting a bargain.”
The industry is rebuilding after shedding more than 27 percent of its jobs from 2000 through 2010. Airlines have added more than 30,500 workers since 2011. And as many as 10,000 pilots will be hired yearly, said Kit Darby, a pilot consultant based in Atlanta.
It’s reminiscent of the late 1990s, when carriers came off a difficult period into an expanding economy. They agreed to rich labor deals that were too costly once the dot-com bubble burst, corporate travel declined and terrorists attacked the U.S. in 2001, said Tom Kochan, a professor at the Massachusetts Institute of Technology’s Sloan School of Management.
“Things are good now and wages are growing, jobs are expanding, that’s all good news,” he said. “But we’ve been here before. When uncontrollable costs go up, the first bad instinct is to return to the workforce they see as a controllable cost and start cutting.”
The Bloomberg U.S. Airlines Index has risen 6.5 percent this year, compared with increases of 8.8 percent for the Dow Jones Industrial Average and 7.5 percent in the Standard & Poor’s 500 Index.
Delta Air Lines Inc.’s 2015 profit sharing of $1.5 billion was the largest in the history of such corporate programs, the airline said. United Continental Holdings Inc. shared $698 million, while Southwest Airlines Co. paid out $620 million. American Airlines Group Inc. adopted a profit-sharing program this year after acknowledging the issue had become a stumbling block to improving labor relations.
Contracts approved, or being voted on, by pilots and flight attendants at Delta, Southwest and United included retroactive raises of between 15 percent and 18 percent, followed by smaller annual increases. United airport ground workers got 30 percent raises over five years. Since the US Airways merger in December 2013, wages at American have risen more than 35 percent on average, primarily as workers moved to unified contracts.
Syth of Raymond James was “completely surprised” that the latest contracts return pilots to peak pay levels from around 2000 on an inflation-adjusted basis. And that’s on top of profit sharing.
“Clearly the higher costs are going to make it tougher to weather a downturn,” Syth said. “But they’re probably also in a much stronger position to weather it as long as it’s not an extreme event.”
While airlines may still be a cyclical business, American Chief Executive Officer Doug Parker said he believes restrained growth in a concentrated industry means future peaks will be higher than in the past and the swings less drastic. Carriers may face lower margins but won’t be caught up in massive losses that led to past bankruptcies and furloughs.
“Those type of actions belong to an industry that can’t manage itself and weather through the vulnerabilities the marketplace has always had,” Elise Eberwein, American’s executive vice president for people and communications, said in an interview. “We’ve built a company that can withstand those shocks because the industry is stable across the board.”
The gains in wages aren’t limited to the major airlines. Wages at many regional carriers — the source of a large number of pilot recruits — also have risen recently. American increased pay at its three wholly owned regionals, including Envoy Air, where the starting rate for new hires rose 47 percent to as much as $58,000 for the first year. The airline also offers retention and signing bonuses of $20,000.
Even so, the improvements don’t bring veteran employees back to benefit levels of the late 1990s or early 2000s, and don’t make up for lost or reduced pensions. Tim Caplinger, 48, who joined Northwest Airlines in 1999, estimates that his future monthly pension payment, which was frozen in bankruptcy, will be just $500 a month. Caplinger now flies for Delta, which acquired Northwest.
“People went through some really, really challenging times personally, and they remember that,” said Sara Nelson, international president of the Association of Flight Attendants and a former United flight attendant. “That’s what they know. So to get some wages back, yeah, morale is better.”
Kris Kelley, an analyst at Janus Capital Management, agreed with American’s Parker, saying “the balance sheets are in so much better shape, the risk of bankruptcy, for all intents and purposes, is off the table.” Janus has owned airline shares for eight years.
Paul Jacobson, Delta’s chief financial officer, said his airline has rebuilt itself with a focus on “sustainability and durability,” including reducing debt to provide a protective cushion in bad times. American is holding a higher level of cash as protection.
“Its different from the way the industry behaved historically,” Jacobson said in an interview. The old ways of taking things away from customers or employees during hard times “doesn’t work anymore.”
©2016 Bloomberg L.P.
This article was written by Michael Sasso and Mary Schlangenstein from Bloomberg and was legally licensed through the NewsCred publisher network.
Photo credit: Airline workers are worried about how a potential industry downturn will affect them. A frame from the American Airlines New Plane Smell commercial is pictured. American Airlines