- A month ago, Delta Air Lines 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 with a strong 74% majority.
- 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.
- 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.
- 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.
- 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.
Business and leisure travel demand will return
- There is still no real substitute for in-person meetings, especially when it comes to establishing the rapport and trust necessary to win new business.
- After all, it was widely predicted at the time of the telegraph, telephone, the fax machine and email that these new technologies would slash the need for travel. The opposite occurred. Each one enabled even more business travel.
- Ultimately, travel is a global phenomenon that is not going away. It’s a badge of a middle-class lifestyle and an experience that millennials value more highly than goods.
Proper government action is crucial
- As of the end of August, 81 separate countries and EU-level entities had committed up to $158 billion in support for the airline industry, according to industry reports.
- Overall worldwide spending on air transport was estimated at $873 billion in 2019.
- There is no consensus on the proper path nations should take, but it’s safe to say the viability of the airline industry worldwide hinges in large part from a balanced border control strategy that accounts for both needs of safety and openness.
Airlines will experiment with pricing and cost structure
- The strength of leisure travel rebound will depend, in part, on how effectively airlines can use pricing to stimulate demand.
- If passengers have positive experiences, the airline would have effectively “broken the seal” on their reluctance to travel, giving way to more frequent excursions and positive word of mouth stemming from their positive (and safe) experiences.
- Look for creative ways airlines are shifting operations and cost management which will allow for demand-stimulating pricing and business model innovation.
More airline bankruptcies and consolidations, but also new entrants
- Here’s a near certainty: Only the stronger airlines will survive coming out of COVID-19. Those that were well capitalized and well-operated are best positioned to be victors of the consolidation game — a much-needed strategy to weather a multi-year recovery of passenger demand. Other winners include airlines that have coordinated government support.
- The airline industry is no stranger to bankruptcies and consolidations (remember TWA, Northwest, Mexicana and Pan Am), so we should expect orderly restructurings and mergers in the months (and years) ahead.
- But consolidation creates a window for new entrants who are able to start-up at the bottom of the cycle leveraging available surplus skilled labor and assets (aircraft) at their disposal.
These four trends illustrate the tensions the airline industry face now and the moves that are being made in response. The airline industry will survive and thrive once again, but how it changes, who the key players will be, what the passenger experience will be and how all stakeholders work to operate in the black will be a fascinating case study in organizational management, competitive positioning, and operational efficiency. And with all of that change, there is opportunity.
- Airlines are on track to lose up to $157 billion between this year and next year, according to the International Air Transport Association (IATA) – a sharp increase over their June projection of $100 billion in losses they made in June for the same period.
- The new projection includes a $118.5 billion deficit for 2020, and at least $38.7 billion for 2021, according to Reuters, which suggests that the bleak outlook “underscores challenges still facing the sector despite upbeat news on development of COVID-19 vaccines, whose global deployment will continue throughout next year.”
- Passenger numbers are expected to drop to 1.8 billion this year from 4.5 billion in 2019, IATA estimates, and will recover only partially to 2.8 billion next year. Passenger revenue for 2020 is expected to have plunged 69% to $191 billion.
- IATA recommends that governments stop travel-killing quarantines and instead implement widespread testing for COVID-19.
- Meanwhile, air cargo is doing extremely well during the pandemic – and will likely see global revenues rise 15% to $117.7 billion in 2020 despite a decline in volume of 11.6% to 54.2 million tons according to the IATA