At the outset, I want to make clear that I am making no declarative statements, but rather am simply thinking out loud. Could it be that the unexpected quarterly loss United Airlines now forecasts for Q1 is primarily aimed at contact negotiations with pilots?
Why Did United Airlines Choose To Declare A Q1 Loss?
In its regulatory filing explaining updated guidance reflecting a very unexpected first quarter loss, United offered this explanation:
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. This accrual represents a shift in the timing of the associated expense from the second quarter 2023 into the first quarter 2023. With this accrual added to the first quarter, the Company now expects first quarter 2023 CASM-ex2 to be flat to up 1.0% year-over-year. For the full year 2023, the Company continues to expect CASM-ex2 to be approximately flat versus full year 2022, which includes the full-year expected impact of all anticipated new labor contracts.
Delta Air Lines and its pilots recently wrapped up contract negotiations. Senior widebody captains can expect to earn up to $590K/year and also will gain a number of new work-related benefits. In an unexpected move last week, American Airlines CEO Robert Isom announced that AA would match DL’s contract with pilots.
But Delta and American are quite different than United. While AA and DL fly all around the world, their combined international route network is much smaller than that of United’s alone. United’s concentration on flying longhaul routes on widebody jets creates additional labor costs, since long international flights require a third and sometimes fourth pilots.
These costs are not trivial and are also not easily passed on to consumers in a competitive marketplace.
Put simply, a pilot contract matching what Delta and American are offering to their pilots would add significant labor expenses. So could it be that the strategic decision to revise the Q1 forecast from profit to loss could be aimed at ensuring that, at the very least, pilots at United do not demand an even more lucrative contract than Delta?
“Accruing expense” is arbitrary. While United CEO Scott Kirby apologized for the unintended update, this expense could have been accrued later. In other words, the loss was arbitrary and has negatively impacted United’s stock price. Taking the loss now rather than later in the year could be a strategic move to get the bad news out of the way and then report consecutive quarters of profit and record revenue, but why couldn’t it be a bargaining chip?
“See, we lost money last quarter. The economy is fragile. We cannot afford to pay you what Delta pilots make due to our route network.”
Let me put it this way: does a quarterly loss strengthen or weaken United’s hand when it comes to negotiations? I think the answer is clear: it helps.
United Airlines is blaming “a potential new collective bargaining agreement with employees represented by the Air Line Pilots Association” for its quality loss. But that’s all theoretical since there is no contract at the moment. Thus, is it really so far-fetched to wonder whether this is all part of a strategy aimed at tempering the new contract?
image: United Airlines
When 2 of the 3 majors offer the same pay, it’s going to be hard for the third to avoid it without wrecking morale. I wonder if airline consolidation is going hurt United here. If there were still 6 majors and only one or two offered high pay it would be easier to avoid matching, I think.
He’s still wearing a cloth mask lol, why’d you use that (old?) pic, if not to make him look more of a clown
I think it’s a really smart move that shows what will happen to profit sharing at all three airlines. DL pilots feel like they got a huge win with their big profit sharing, but what they don’t realize is that the amount of profit will be smaller.
So what?? Profit sharing is a crap shoot. It’s gravy. It’s not for paying your monthly nut…
What you’re proposing here Matt is very risky indeed. United at this stage and point is totally committed to at least matching if not even surpassing what Delta’s offering. Failure to do so would only guarantee more chaos, walkouts and even the vote to strike. In the end, that’ll risk even more losses further down the road for United. Bottom line, don’t play with the pilots’ feelings. A certain form of fait accompli IMO.
Breaking News UA peeps, as per JONNYC, NEW MEAL ENHANCEMENTS COMING TO UA PREMIUM CABINS ( both Polaris and domestic first) beginning April 1st. Hmm coincidence much with these financial statements???
Gravelly Point. I like your optimism. Let’s see UA do this
If what United is saying it’s true, that they will have a 1Q loss, this is indeed very frightening for the entire industry. It shows how fragile they still are and that even with higher fares, full planes, and reduced schedules, making money is not going to be easy going forward. Add to this huge increases in labor costs and this could spell trouble for all of them. Maybe now they will be reminded of just how important business travelers are and begin to pay attention again to loyalty with their top customers.
I feel like I’m in the minority saying this, but I really don’t think we need to be paying pilots $600k per year, and I think the United management team hopefully sees that as well. They are in a tricky spot though because of what DL and AA have done.
United has so many routes that require 3 and 4 pilots compared to AA and DL this would really hurt them.
Management always touts an income number of the most senior wide body Captain. You are talking about a 25 to 30 year career mark at that particular company, not previous career time in the military or with regional carriers.
Not even close to the average annual income of a pilot at that carrier.
Yeah we shouldn’t pay ball players so much. We shouldn’t pay actors that much. We shouldn’t pay YouTubers that much as nauseum. If they bargain for it and the market will support it, they deserve it.
You are clueless as to what pilots at this level should be paid, with all due respect. I would be curious how much you think top attorneys and surgeons should be compensated as well? I’m curious because a pilot at UA, AA, DL are only responsible for the brand image of the airline and safety of its passengers every flight.
Airlines are required to accrue for reasonable and estimable increases in open labor contracts. As others have stated pilot unions have gotten too powerful to not receive comparable pay increases across the entire industry and so United is accruing up to the latest Delta deal, And if you’re surprised that costs are increasing so much, you either haven’t been paying attention or doing poor math. I think Delta called out an (ADDITIONAL) $7B comp to pilots over the new contract life. To all the flying public out there, get ready for airfare to increase substantially over the next several years to cover these insane 30-40% contractual increases. To me, I don’t think the pilots care about these carriers’ long term profitability though
“pilot unions have gotten too powerful”
Are you actually serious? Describe the balance of power under the Railway Labor Act and the decline of private sector organizing in the last 40 years, then come talk about “too powerful.”
“To me, I don’t think the pilots care about these carriers’ long term profitability though“
You mean the 30+ year career employees who are more tied to the ship than ANY senior executive? Where were ANY of those executives during the longest airline bankruptcy in history? Why did those executives like Glenn Tilton and Rono Dutta get massive bonuses while career employees lost their life savings in terminated pensions and employee stock plans. Even now, Mr Kirby has had double-digit pay increases every year while he and his team has been stalling on a pilot contract for four years.
Don’t try to tell long-term employees about who really cares about long-term profitability. We know the truth far better than you do, because we’ve lived it.
Respectfully, “Accruing expense,” especially of this magnitude, is not arbitrary. United’s Finance team are staying in compliance with Generally Accepted Accounting Principles and I suspect they vetted this accrual with their external auditors before making the final decision. If management has a reasonable expectation a new labor agreement will have retroactive effect, then they have to book the accrual to recognize the expense in the respective period of retroactivity.
the loss has to do with the narcissistic behavior of United’s CEO. You are in trouble when you start to believe your own rhetoric. His bombastic suspender snapping proclamations are inappropriate and distasteful, he should cut it out, and for pete’s sake, quit believing all his BS.
Remember the old accounting maxim. “Cash flow is a fact, profit is an opinion”
That will tell the true story.
When things go sour (and they will) the union contract maxim is “Last Hired, First Fired”. The current atmosphere of “Laissez Le Bon Temps Rouler” will only last so long. United (and the others) will be left with the most expensive down sized flight deck crews and Uncle Sam won’t be there to bail them out again. All these kids in the pipeline via pilot schools and such will be saddled with mountains of student loans.
What kind of advantage and what kind of savings does United enjoy since over half its employees don’t have pensions??
Aldo what’s the % costs of labor in total??
One thing to consider is that there is probably at least $400 million in back owed pay since the contract lapsed years ago. This was the case with Delta as well. I don’t think they are posturing but simply putting aside money for that inevitable payment.
I want to echo what @Walt said above… Unless United wants to risk fines, an SEC investigation, a qualified opinion being issued by their auditors, and fraud charges against the CFO, they’re probably not manipulating their accruals to get a leg up in contract negotiations.
Another company with a large presence in Houston tried that once. It didn’t end well.
Any idea if this was done by AA or DL or is this unique to UA??