By Rajesh Kumar Singh
CHICAGO (Reuters) -Delta Air Lines' offer to give pilots a 34% cumulative pay increase in a new four-year contract has boosted hopes of similar raises at rivals United Airlines, American Airlines (NASDAQ:AAL).
While Delta's offer still requires the approval of union leaders and then a ratification by its pilots, aviators at United and American told Reuters the Atlanta-based carrier has "raised the bar" with a "very strong" proposal.
"This is going to be the benchmark," an American pilot said.
Delta's offer also includes a lump-sum one-time payment, reduced health insurance premiums, and improvements in holiday pay, vacation, company contributions to 401(k) and work rules.
Its union estimates the proposed deal represents more than $7.2 billion of cumulative value increases over the next four years.
Both American and United have promised an "industry-leading" contract to their pilots. As a result, any proposal seen as inferior to Delta's will likely have no takers.
"United leadership has said that they want to see what the market is," a pilot at the Chicago-based carrier said. "If this contract gets accepted and ratified by the Delta membership, then that'll be the new market."
The Allied Pilots Association, which represents American Airlines pilots, sent a message to its members on Saturday calling Delta's proposed deal "a significant event" and said it would "stimulate other ongoing labor negotiations".
Last month, American pilots rejected a proposed 19% pay hike over two years that would have cost the Texas-based carrier about $2 billion. Similarly, United pilots turned down an offer that included more than 14.5% cumulative wage increases and enhanced overtime and training pay.
COST IMPLICATIONS
Some airline executives are concerned that hefty pay raises for pilots would inflate fixed costs and make it tougher to repair debt-laden balance sheets.
Analysts at Jefferies estimate Delta's offer could hike non-fuel operating costs by 450 basis points in 2023 vis-à-vis 2019.
Strong travel demand has been allowing airlines including Delta to mitigate inflationary pressure with higher fares. But Colin Scarola, an analyst at CFRA, does not think Delta will be able to fully offset wage increases with ticket prices as the industry is "so intensely competitive."
However, a deal with its pilots is expected to do away with any staffing uncertainty, making it easier for Delta to plan its schedules and utilize resources. Analysts say the improved efficiency can ease Delta's cost pressures.
BARGAINING POWER
The deal showcases the bargaining power pilots are enjoying as carriers staff up to meet booming travel demand.
American, for example, has hired 2,000 pilots this year and intends to hire another 2,000 next year. Similarly, Southwest Airlines (NYSE:LUV) is aiming to hire 1,200 pilots this year and 2,100 next year.
Analysts at Jefferies estimate the United States is short of 10,000 pilots. This supply-demand gap is projected to last until 2027.
Casey Murray, a pilot and the president of the Southwest Airlines Pilots Association, said Delta's proposed deal will help it in the competition for a shrinking pool of pilots.
"It's a pilot market today," Murray said. "Pilots can decide and choose where they want to go."