Sunday, February 22, 2004

Delta faces long haul with pilots

By James Pilcher
The Cincinnati Enquirer

Of the nearly 101/2 cents it takes Delta Air Lines to fly one passenger one mile, almost a nickel goes toward labor. And nearly half of that nickel goes to just two people - the pair flying the plane.

The Atlanta-based carrier - in the throes of the worst financial stretch in its 75-year history - is prodding its pilots into a possible confrontation over compensation. It's a struggle the company hopes will bringcuts in pilot salaries and benefits, which are the highest in the industry.

But it could be a discussion that turns very sour very quickly, experts warn. They say the pilots and the airline, which has lost about $3 billion over the past three years, have no choice but to compromise.

As talks have hit a standstill and the two sides remain hundreds of millions of dollars apart, key questions remain. Will a deal come after a short round of talks that wind up saving heartache and cash? Or will they take months - perhaps years -- causing rancor and even more damage to Delta's bottom line?

"There will be some white-knuckle moments at Delta in the coming months as resolution of the pilots' contract issues drags on into 2005," wrote Jim Higgins, an airline analyst with the Wall Street firm Credit Suisse First Boston, in a research note this month.

The two sides met late last year in the first formal bargaining session for a mid-contract adjustment. But Delta's branch of the Air Line Pilots Association said the company's offer was not acceptable, and that it was preparing for normal contract negotiations, set to begin later this month.

Salaries, which make up 45 percent of all Delta's costs, rose 2.9 percent in 2003. The airline's 8,000 pilots, roughly 900 of whom are based at the Cincinnati/Northern Kentucky International Airport, account for about 40 percent of Delta's labor costs.

The pilots' contract gave them a raise last year. That increased Delta's costs at a time when the airline was looking to cut spending.

The airline industry continues to struggle for revenue. Ticket prices continue to remain depressed, thanks in part to the growth of low-cost carriers and continued pressure from Internet sales.

Many analysts have noticed a change in the company's positions since Gerald Grinstein took over as chief executive officer Jan. 1. They say the new Delta leadership is mentioning the possibility of bankruptcy much more often than retired CEO Leo Mullin ever did.

In a previous report, Higgins wrote that if Delta could match current rates at competitor American Airlines, it would save $800 million annually - reducing total costs by 5.7 percent and turning the airline back into the black.

Company officials, while not commenting on ongoing negotiations, continue to say cuts are the only way Delta can survive.

"Lowering the company's pilot cost structure is vital to enable Delta to remain competitive in the current industry marketplace," said spokesman John Kennedy, adding that the cuts must produce "a long-term sustainable cost structure." He would not comment on any future talks.

Delta lost $773 million in 2003. And despite major efforts to cut spending, costs rose 1.6 percent on the year while revenue was flat year over year. Delta's pilot costs are over 50 percent more than the industry average, and more than double any low-cost carrier that competes against it.

American, US Airways and United all were able to cut labor costs last year, with bankruptcy aiding United and US Airways, and the threat of bankruptcy helping American win new deals with its unions. That left Delta and Northwest as the only major carriers that haven't gotten pay cuts from their pilots.

Delta's pilots are the highest paid in the industry, and signed their current contract in June 2001 - just before the Sept. 11 attacks that sent the airline sector into a financial crisis.

Willing to sacrifice

The pilots have a different view of the situation, especially since they are not obligated to listen to any proposals to change the contract at midstream or take concessions.

Their union agrees some cuts are needed, but the pilots differ on how to make them.

Delta is asking for cuts of 30 percent, counting salary and pensions, additional productivity measures and a ban on future raises.

But the pilots say quick, deep cuts won't address the company's long-term problems, most notably its debt. Delta owes more than $20 billion. They say their initial proposal of about 9 percent in cuts plus a ban on salary raises is a better starting point.

"We took a longer view of Delta's financial straits, and did our own economic analysis with an outside investment firm," said Delta pilot and ALPA spokesman Chris Renkel. "We identified an annual cost savings and then put together a proposal that would help get there."

Renkel would not comment on what that figure was, saying that such numbers were part of the negotiation process. He also would not comment on what it would take to get the pilots talking again.

But when asked if the pilots were willing to sacrifice somewhat to keep the company going, he said, "Of course."

"It's in our mutual interests to do it. ... It's not like the pilots can start over somewhere," he said. "We've taken a businesslike approach to this."

But given the large disparity between the two sides, there is skepticism whether they can come to an agreement soon.

The union has said that it is willing to listen to more company proposals. But it also has told its membership to concentrate on getting ready for normal contract negotiations. Those are scheduled to begin in August for the current contract, which becomes renewable in May 2004. That contract runs its term in June 2005, although airline labor contracts don't officially "expire" under federal law.

'Very deep cuts'

One analyst thinks the two sides would do better to work with each other than fight.

"Very deep cuts await pilots at (Delta and Northwest). ... Ultimately, it's up to labor to decide how to take its medicine," wrote Sam Buttrick, airline analyst at UBS Investment Research, in a note dated Feb. 11. "... Labor is generally better off negotiating with management - no independent party is going to offer a better deal than management, in our view."

Still, Buttrick also wrote that "managements must compromise. ... Each month that passes without a pilot deal is costing shareholders (at Delta and Northwest) tens of millions of dollars. Paying above market wages for a prolonged period to get market wages later is not a noble exercise."

In the end, both Buttrick and Higgins agree a deal will be reached that will cut costs and enable Delta to better balance costs versus revenue.

Higgins wrote after a meeting with Delta executives that those officials made it clear that "the company's pilot cost savings needs, are, as we interpret it, non-negotiable."

That could turn into some tough talk at the table, prolonging the bargaining process.

"Market forces will prevail," Buttrick wrote. Still, "we have little conviction as to the relevant timing."


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