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Airlines in Pink of Financial Health: Laborers Seek More Pay

The weakness in oil prices , which has lasted for well over a year, is nothing short of a godsend for stocks in the airline space. As fuel costs account for a significant chunk of an airline company's operating expenses, the decline in oil prices has significantly boosted the bottom lines of carriers.

Currently, oil prices are hovering around the $45-a-barrel mark. This represents a significant decline from the approximate $105 per barrel that oil traded in July, last year. This steep fall in fuel expenses, one of the major input costs for airlines, has naturally resulted in huge savings for carriers. Despite the fact that most carriers hedge at least some of their fuel costs, the majority of them should still continue to benefit considerably from the plunge in oil prices.

American Airlines Group AAL , which does not hedge fuel costs, expects to generate savings to the tune of $4.8 billion in 2015 courtesy of soft oil prices. Delta Air Lines Inc. DAL , which has restructured its fuel hedge portfolio in the wake of the soft fuel price environment, expects to generate savings over $2 billion in 2015. Other carriers like United Continental Holdings UAL and Southwest Airlines LUV are also on track to generate huge savings in 2015 due to the massive reduction in oil prices.

Employees Demand Higher Share

With most airline companies enjoying a robust financial health, it is quite natural that their employees want higher pays. And as airline employees are looking to boost their pay, negotiations between carriers and various labor groups on new contracts pertaining to pay and other benefits are raging in the airline industry.

For example pilots of the Dallas, TX-based Southwest Airlines will decide on their pay structure following a decision by the 23-member board of directors of the Southwest Airlines Pilots' Association . The company inked an "agreement in principle" with the union last month. The ratification voting procedure is scheduled to commence later in the month and close a month later. The tentative deal offers higher pay for pilots over the next four years.

Apart from the pay raise, the deal also contains clauses on retirement benefits as well as provisions to improve the working conditions for pilots. Moreover, last week, American Airlines Group announced a tentative pay-related agreement with the union representing its reservations and gate agents. American Airlines already has contract deals with its pilots and flight attendants.

Labor issues have been the talking point at the Indianapolis-based Republic Airways Holdings Inc. RJET for quite some time now. Last week, the possibility of the company filing for Chapter 11 bankruptcy protection weakened to a great extent following the tentative agreement with its local pilots' union (Teamsters Local 357) regarding the terms of a new three-year contract for the regional carrier's 2,100 pilots represented by the International Brotherhood of Teamsters.

Following the consensual tentative agreement, the pilots will vote on the same after a thorough review. The ratification voting procedure is scheduled to conclude by Oct 31, 2015. The contract, if accepted, will ensure an industry-leading pay, apart from job security and improved work rules for the pilots at Republic Airways.

Updates on employee pay also emanated from the Atlanta, GA based Delta Air Lines. Last month, the carrier announced that the base pay for most employees (mainly ground staff and flight attendants) will see a hike of 14.5% (effective Dec 1). The profit sharing plan has been tweaked slightly for the payouts from 2017 onward.

Moreover, the carrier also intends to increase its 401(k) contribution match by 1% to 6 % beginning Jan 1. We remind investors that Delta had suffered a setback on the labor front earlier this year, when its pilots turned down a contract in July.

Labor Deals to Continue?

With the fate of quite a few new contracts on employee pay and benefits expected to be decided in the coming weeks, investor focus will surely remain on the same going forward. Carriers that will see a favorable outcome to the labor issue will have a major overhang on their shares removed.

Apart from the ones discussed above, we expect updates on further labor deals/negotiations to grab headlines in the labor intensive airline industry going forward. This is because carriers are likely to continue amassing huge profits at least in the next couple of quarters as oil prices are unlikely to touch the mid-2014 highs any time soon. So it is natural that employees will continue to seek higher pays in view of a hugely profitable business scenario.

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SOUTHWEST AIR (LUV): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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