Delta and United have reported losses on the back of airline pilot salary increases and looking forward, they appear to be unsustainable.
United, Delta Earnings Report Losses
Two of the nation’s largest carriers reported losses this quarter despite very full planes and very high fares. We begin with Delta.
“Delta posted a net loss of $363 million, or 57 cents per share, citing, in part, a new, four-year pilot contract that includes 34% raises. That’s still an improvement from the year-ago period, when travel demand was still recovering and the company reported a net loss of $940 million, or $1.48 per share.
Adjusting for one-time items, the company reported net income of $163 million, or 25 cents per share, up from a loss of $748 million, or $1.23 per share, during the first quarter of 2022.” – CNBC
Included in those numbers was a staggering 16% operating margin on flights and $1.7bn from co-brand partner, American Express. Most loyalty programs run at 50% margin or better. Delta reports that corporate bookings have returned to 85% of 2019 levels (a shocker to me.)
United Airlines also gave downward guidance on its quarterly earning despite an ideal condition for earnings on the back of a new pilot agreement.
“The Company has determined that it is appropriate to accrue expense in the first quarter 2023 related to a potential new collective bargaining agreement with employees represented by the Air Line Pilots Association,” the filing said.
The airline’s statement said it expected unit revenue to be higher than in the corresponding months in 2019. Lower demand months such as January and February grew less in 2013 than it anticipates for higher demand months.” – The Street
Airline Pilot Salary Increases
Some American Airlines pilots will earn as much as $590,000/year under the new proposed contract. While that will require years of experience and will only be available for those with the most flight experience, type of aircraft, and time with the airline. The Bureau of Labor Statistics website was inoperable at the time of writing, but according to Indeed, the job listing website, the average cardiologist makes $435,000/year. Both jobs place lives in the professionals’ hands, both require experience to achieve and lots of money. The average airline pilot’s salary across the board is still far less than these figures, but absorbing over half a million dollars a year will be costly.
We’ve covered the pilot shortage in depth over the last few years here on Live And Let’s Fly. The root cause of this is an arbitrary 1500-hour requirement for commercial airline pilot type ratings in the United States coupled with the exceedingly high cost of receiving an airline transport pilot (ATP) certificate, accruing hours, and flight training. Additionally, fresh-out-of-school airline pilots received a very low hourly rate from regional carriers (as low as $18/hour) reduced the ability for First Officers to pursue pilot training out of near minimum wages strapped with $70-150k in student loan debt.
The invisible hand of the market would suggest that the market rate for a limited (and shrinking) number of available professionals is determining the wage of these pilots. International pilot salaries (especially those in the Middle East) have grown but not to the same level.
Future Setbacks Could Cripple Airlines
As United stated, it’s already pricing in the expected elevated costs to prepare investors and adjust for the future. Delta is marking some of that increase as a one-off cost. However, both airlines continue to forecast a banner year for travel. Delta indicated that future bookings were some of the highest levels it had ever seen.
Forget a market-wide recession, who knows if and when that will happen and what sectors of the economy will be deepest affected. At some point, the current run of increased demand is likely to slow. If airlines are struggling to make profits at record booking levels with high fares, what happens when that demand drops off?
Let’s take an example of a flight like Dallas-Hong Kong, a former favorite of mine when I was an American Airlines loyalist. That flight would feature no fewer than three pilots (perhaps four) all at the top earning level. That will nearly double the pilot cost for the (then) daily flight that already combats extensive parking time on the ground in between flights.
United is forecasting a 9% margin for the year, how much does demand have to drop before that’s suddenly a negative number? If demand drops, fares would initially drop too to capture market share, expediting a race to the bottom whereby labor costs are unsustainable.
The pilot shortage is real, it’s here, and airlines are paying big bucks for great pilots. However, these levels seem unsustainable outside of what is likely to be a limited boom. While this solves an immediate demand issue, my fear is that it leads to layoffs, or high fares for longer whenever demand subsides. The alternative is that true long-haul point-to-point goes away and is ceded to foreign partners that can carry passengers onward to their destinations. Flights to Australia that were non-stop add a connection in Tokyo, Taipei, or Beijing for example, to reduce costs for US carriers and keep fares low for US consumers. That’s bad for pilots too.
What do you think? Are pilot salaries sustainable? What will happen with market fluctuations?