The COVID-19 pandemic has crushed air travel demand this year. Fortunately, the CARES Act has provided critical support to airlines and their employees. The pandemic relief bill's Payroll Support Program has allowed hundreds of thousands of airline workers to keep their jobs by covering a substantial portion of airlines' payroll costs from April to September. In exchange, the airlines agreed not to involuntarily lay off or furlough any employees until at least Oct. 1.
However, Oct. 1 is approaching fast, and air travel demand remains weak. As a result, some airlines are preparing to implement furloughs and layoffs. But not Spirit Airlines (NYSE: SAVE), which recently reached an agreement with its pilots that will eliminate the need for pilot furloughs in the months ahead.
Airlines are trying to limit pilot furloughs
While airlines would like to avoid as many furloughs as possible, it's particularly important in the case of pilots. Furloughed pilots need to undergo an extensive retraining process when they are recalled to work. In addition to offsetting a lot of the short-term labor cost savings, the training requirements mean that an airline that furloughs too aggressively may struggle to restore capacity quickly when demand returns.
Southwest Airlines has already told employees that it won't implement any furloughs before the end of 2020. The low-fare airline giant can afford to bear extra costs in the short run because it has the strongest balance sheet in the industry by far. Additionally, JetBlue Airways announced last month that it had struck a deal with its pilot union that gives the airline more flexibility around scheduling in exchange for agreeing not to furlough any pilots until at least May 1, 2021.
However, other airlines still plan to furlough substantial numbers of pilots at the beginning of October. For Spirit Airlines, about 600 of its more than 2,500 pilots were at risk of being furloughed.
Spirit Airlines makes a deal
Two months ago, a nascent recovery in air travel demand gave Spirit Airlines' management hope that furloughs wouldn't be necessary. Unfortunately, the turnaround didn't last, as rising COVID-19 case numbers across much of the country caused demand growth to peter out in early July. That forced Spirit to plan reductions to payroll and staffing to line up with expected weak demand this fall.
Like many other airlines, Spirit Airlines has tried to mitigate the number of furloughs necessary through various voluntary leave initiatives. These programs have been quite effective in addressing the short-term overstaffing issues. As of a week ago, Spirit and its chapter of the Air Line Pilots Association (ALPA) had agreed that only 117 pilot furloughs would be necessary.
It didn't take long to find a way to prevent those last 117 furloughs. On Tuesday, the ALPA announced that close to half of Spirit's pilots had agreed to work fewer hours each month, enabling the airline to cancel all of its planned pilot furloughs. (Other Spirit Airlines work groups still face potential furloughs, though.)
Counting on a recovery in 2021
The voluntary leaves that Spirit Airlines pilots are taking mainly cover the fourth quarter of 2020 and the first quarter of next year. These tend to be seasonally weaker parts of the year for airlines, including Spirit.
The hope is that air travel demand will recover sufficiently by next spring (and certainly by next summer) that Spirit Airlines would be able to fully employ all of its pilots. That's certainly possible. While most airline executives don't expect the market to recover fully for at least two or three years, Spirit mainly serves leisure travelers -- a market segment that is likely to bounce back much faster than business travel. Furthermore, Spirit's rock-bottom fares will appeal to consumers eager to get away on a budget.
Yet if the novel coronavirus is still circulating widely next spring and there is no approved and widely available vaccine, travel demand could remain low. In that gloomy scenario, Spirit Airlines will once again find itself overstaffed. Unless it secures another round of voluntary leaves and other concessions from its pilots, furloughs could become necessary at that time.
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Adam Levine-Weinberg owns shares of JetBlue Airways, Southwest Airlines, and Spirit Airlines and is long January 2022 $10 calls on JetBlue Airways. The Motley Fool owns shares of Spirit Airlines. The Motley Fool recommends JetBlue Airways and Southwest Airlines. The Motley Fool has a disclosure policy.
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