How Delta’s New $7 Billion Pilot Agreement Puts Pressure on Airlines Struggling With Costs

Photo credit: Three Delta pilots walking Delta Air Lines

Delta Air Lines and its pilots, represented by the Air Line Pilots Association, have reached an agreement-in-principal that ends an acrimonious negotiating process but also adds to the cost pressure airlines already face.

The deal, unveiled late on December 2, does not come cheap. It includes a 34 percent pay increase over four years, an agreement to snap pay rates up to 1 percent more than those at competitors American Airlines and United Airlines if they surpass Delta, and increased 401K matches, according to ALPA documents shared with pilots and viewed by Airline Weekly. And pilots, when the company flies them to where they are needed to work a flight, get to fly in first class on most flights over three hours. All in, ALPA estimated that the new contract is worth about $7.2 billion in cumulative value over four years.

“There are no concessions in this agreement,” the union said.

The pay increases, while expected, will only add fuel to the cost pressure airlines face. Airlines for America (A4A) estimates that the cost per available seat mile, or CASM, excluding fuel at U.S. carriers will increase roughly 19 percent this year compared to 2019. For comparison, yields — which roughly translates to airfares — were up just 17 percent compared to three years ago during the first nine months of 2022.

Delta is not immune from this cost pressure. During the airline’s third-quarter results call in October, Chief Financial Officer Dan Janki said CASM excluding fuel was up about 18 percent compared to 2019 during the first nine months of the year. A “normal” annual percentage increase, barring an unforeseen or one-time expense, is typically in the low single digits or flat. The metric jumped 22.5 percent in the third quarter when Delta, and other airlines, had to pull back on planned capacity following operational issues in the spring. And the carrier forecast another 12-13 percent year-over-three-years increase in the fourth quarter.

“It’s taken significant resources to rebuild the airline with industry-leading reliability,” Janki said at the time. “We are nearing the final stages with the workforce now in line with 2019. From here, we expect further benefit from scale as we reach full network restoration and better utilization of our fleet, our hubs and our workforce.”

Janki added that scale and efficiency — in other words flying capacity comparable to the size of the workforce, and eliminating juniority and other inefficiencies among new staff — were “Delta’s largest CASM levers.” The airline plans to fully restore its network to pre-pandemic levels by next summer, including the accelerated introduction of used Boeing 737s to make up for a shortfall of regional capacity.

An important note on Delta’s pilot pay increases: They come at a time of elevated inflation in the U.S. Seasonally adjusted consumer price index, or CPI, was up 15.8 percent in October compared to the same month three years earlier, according to Bureau of Labor Statistics data. And compared to CPI in December 2016, when Delta’s last pilots contract was ratified, it was up 22.8 percent this October.

The question now, with the agreement with Delta’s pilots, is whether the airline can continue to raise fares enough — or drive efficiencies elsewhere — to cover the additional costs. J.P. Morgan analyst Jamie Baker estimated that the new agreement will add at least $900 million in additional labor expenses in 2023.

And Raymond James analyst Savanthi Syth estimated that the agreement will likely raise CASM excluding fuel by roughly 3 points in 2023 compared to pre-pandemic.

What is telling is that, even with the added costs, Baker for one did not revise J.P. Morgan’s profit estimate for Delta next year. The bank expects the airline to generate a roughly $4.13 billion pre-tax profit. That suggests a belief that the airline can make up the additional expenses in other ways, whether through higher fares — which would be dependent on Delta CEO Ed Bastian’s bold statement that travel is “countercyclical” to the global macroeconomic headwinds — or savings elsewhere.

Neither analyst expects Delta to speak meaningfully on the pilots deal at its upcoming investor day on December 14. Airline management typically does not comment on the impact of an agreement until after staff vote, which in this case is expected to take about two months — or until early February.

Delta’s deal is expected to kick off a series of agreements at its competitors. Contracts are open at most major U.S. airlines, including American, Southwest, and United. Pilots at Alaska Airlines ratified a new contract in October that gives them a roughly 21 percent pay increase over three years.

“We anticipate [American, United, and Southwest] pilot negotiations to meaningfully accelerate, potentially removing the entirety of the industry pilot overhang by mid-year 2023, and thereby significantly improving the market’s labor cost confidence for at least the next four years,” Baker said.

Pilots at United, who are also represented by ALPA, rejected a tentative agreement with a nearly 15 percent pay increase in November. Since then, the airline has given its cockpit crewmembers a 5 percent pay increase months earlier than planned under a short-term deal during the pandemic. United has also unveiled plans to open new pilot bases in Las Vegas and Orlando where, according to the airline, there is the highest concentration of crewmembers living outside of its existing domiciles.

American has offered its pilots as much as a 20 percent cumulative pay increase over three years in order to reach a deal. Its union, the Allied Pilots Association (APA), has yet to accept the terms, and pilots have picketed the airline in order to reach a deal.

One potential unknown in the Delta agreement is what ALPA calls a “me too” clause where pay would snap up to 1 percent more than those at either American or United if rates at either airline exceeded those at Delta. Alaska’s new contract has a similar clause that, if Delta pilots ratify the potential agreement, would come into play.

And, on the topic of regional aircraft scope, ALPA told pilots that the agreement-in-principal includes “increased restrictions” on the number of small regional jets and turboprops in the Delta Connection fleet. Under Delta’s last pilot contract, small regional jets — or those with 50 seats or less — were capped at 125 aircraft. Airline executives have said they plan to phase out this fleet in the coming years.

Updated to include U.S. consumer price index inflation data.