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Can Airlines Avoid Pilot Layoffs With Creative Solutions?

The COVID-19 pandemic crushed U.S. air travel demand this spring, because of widespread stay-at-home orders. And while domestic travel started to rebound in May, that recovery has stalled out as COVID-19 case numbers have surged across much of the United States. In recent days, throughput volume at TSA checkpoints has averaged just 26% of year-ago levels.

Nevertheless, airline workers have kept their jobs so far, as the CARES Act provided payroll support grants to airlines in exchange for agreeing not to implement any involuntary job cuts before Oct. 1. However, with air travel demand remaining weak, airlines have started sending out WARN notices telling employees about potential furloughs and layoffs this fall.

Yet airlines have significant incentives to minimize pilot furloughs. As a result, several U.S. airlines -- including Delta Air Lines (NYSE: DAL) and United Airlines (NASDAQ: UAL) -- are trying to reach agreements with their pilot unions that would make it economically feasible to delay, mitigate, or avoid furloughs.

Airlines don't like furloughing pilots

No business enjoys furloughing employees, but airlines are particularly loath to furlough pilots. First, pilot furloughs are based on seniority, so the most junior (and lowest-paid) employees are furloughed first. This also potentially leads to a cascade of more-senior pilots needing to retrain at great expense to fly different aircraft types. Second, the need for extensive training means that airlines can't instantly recall furloughed pilots to duty if market conditions change. Third, some airlines' pilot contracts require costly changes to their regional flying arrangements when mainline pilots are furloughed.

A Delta Air Lines plane landing on a runway

Furloughs can have costly consequences for airlines. Image source: Delta Air Lines.

That said, senior pilots at major airlines earn hundreds of thousands of dollars a year, so it can be prohibitively expensive to keep them on if there isn't enough work available.

All of the largest U.S. airlines have rolled out voluntary early retirement plans for pilots to try to limit the need for furloughs. These programs have offered substantial cash payments and other benefits for pilots who leave before the mandatory retirement age of 65. However, early retirements alone won't be enough to align staffing levels with demand.

New measures to reduce or eliminate furloughs

JetBlue Airways was the first airline to find a solution to the pilot furlough issue. Early this month, its pilots' chapter of the Air Line Pilots Association (ALPA) announced an agreement under which the company guaranteed that it would not furlough any pilots until at least May 1, 2021. Neither the airline nor the union provided many details, but it's likely that JetBlue gained short-term flexibility to reduce its minimum monthly pay guarantee from 70 hours to some lower level.

The stakes are higher for full-service network airlines. Because of their reliance on business travel and long-haul international travel, they will likely recover more slowly than carriers focused primarily on the domestic leisure market. Furthermore, they have diverse fleets and large regional operations, dramatically magnifying the potential cost and disruption from large-scale pilot furloughs.

Last week, United Airlines and its chapter of ALPA reached an agreement that will give pilots the option to take voluntary leaves of absence or work fewer than the normal minimum number of hours. These programs, along with an early retirement offer, should reduce the number of furloughs necessary. For pilots it does furlough, United agreed to cover health insurance premiums. Moreover, those pilots would keep up with their training requirements while on furlough, allowing them to return to work quickly when demand rebounds.

Meanwhile, Delta Air Lines told its pilots last week that it could avoid furloughs for at least a year if the union agrees to a temporary 15% reduction in the minimum hours guarantee (currently 65 hours per month). More than 1,700 Delta pilots have accepted early retirement offers, and management proposed the reduced guarantee as a way to distribute the available work evenly among the remaining pilots. The initial reaction from Delta's chapter of ALPA was cool. Union officials recommended starting with additional voluntary measures like partially paid leaves of absence.

A step in the right direction

Given how slowly air travel demand is recovering, few airlines will be able to avoid pilot furloughs entirely. However, delaying and minimizing the number of involuntary furloughs will still help junior pilots, while also saving airlines big headaches related to pilot training, both now and in the future.

The next few weeks and months will offer an interesting window into airlines' labor relations. Airlines that can work collaboratively with their unions may have opportunities to implement solutions that benefit both employees and shareholders. Those that are marred by poor labor relations could be forced to settle for the suboptimal alternative of mass furloughs.

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Adam Levine-Weinberg owns shares of Delta Air Lines and JetBlue Airways and is long January 2022 $10 calls on JetBlue Airways. The Motley Fool recommends Delta Air Lines and JetBlue Airways. The Motley Fool has a disclosure policy.

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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