Interesting Article
05-10-2017, 07:15 AM
#1
Gets Weekends Off
Thread Starter
Joined APC: Nov 2015
Posts: 1,383
Interesting Article
https://seekingalpha.com/article/4071652-higher-costs-slower-growth-will-result-spirit-airlines-labor-problems?app=1&auth_param=17kbf8:1ch6a0q:0042d7903 66881030e7b30174b680dcb&uprof=45&dr=1#/alt3
Analysis
Summary
Spirit Airlines’ operational performance has tumbled in recent weeks.
The company has accused some of its pilots of engaging in unlawful work slowdown tactics.
Restoring Spirit’s operational reliability will likely lead to significantly higher costs and reduced growth.
The airline industry has recently generated plenty of negative news. While many of the issues so far have been customer service related and which don't yet appear to be having a long-term impact on any of the airlines involved, one of the latest series of airline stories comes from a long-term challenge in the airline industry and one which will affect the carrier's bottom line.
Not Just Weather Problems
While winter and spring 2017 has had plenty of bad weather throughout the US that has impacted airline operations, the eyes of industry analysts have been drawn to the operational performance of Spirit Airlines (NASDAQ:SAVE). During last week's prolonged weather events in the US Mid-Atlantic and Northeast when many flights were delayed or cancelled, Spirit's cancellation rate was higher than other carriers and did not return to normal levels even after weather improved. Spirit initially said that its higher cancellation rates were due to weather but were forced by the weekend to admit that labor issues were causing increased cancellations which have also been seen for several weeks.
Airline pilot social media sites such as Airline Pilot Central are popular places for airline employees to discuss industry and company-specific issues with their peers and colleagues in an anonymous format. While anonymous social media sites attract some users who speak out against issues in ways they would not do so in other settings, airline-related social media can provide indications of internal problems that could surface. Users who identify themselves as Spirit pilots have been complaining for months of short staffing, high rates of attrition, and most significantly difficulties in reaching agreement on a new contract.
Airline labor contracts are governed by the Railway Labor Act (RLA) which stipulates that collective bargaining agreements do not expire but rather become amendable. Spirit's pilots are represented by the Airline Pilots Association, the largest collective bargaining agent for US airline and an affiliate of the AFL-CIO. Spirit's pilot contract became amendable in August 2015. Under the RLA, both sides must maintain the status quo of the current contract during negotiations. As is often the case in the airline industry, the National Mediation Board has assisted in negotiations between Spirit and its pilots.
source: Spirit Airlines
Uncompetitive Pay Levels
Sites such as Airline Pilot Central include salary scales for most US airlines. Spirit operates the Airbus (OTCPK:EADSY) A319, A320, and A321 aircraft. The A320 family of aircraft, like similar generations of Boeing's 737, can be flown by the same pilots. The A320 family is also flown by most other large jet US airlines. Spirit pays a single rate for pilots to fly any model of the A320 family. A top of scale Spirit captain at 15 years makes $185 per flight hours while a first year first officer makes $38 flight hour. As at most airlines, pilots only are generally paid when the aircraft is away from the gate. US airline pilots are limited by federal regulation to 1000 flight hours per year and also have other periodic limits to minimize fatigue. In contrast, A320 family captains at the big 3 US airlines American (NASDAQ:AAL), Delta (NYSE
AL), and United (NYSE:UAL) make around $265/flight hour while first year first officers make approx. $85/flight hour. According to DOT data for 2015 (the most recent available), Spirit pilots had an average salary of $113,000 per year, approximately half of what Southwest (NYSE:LUV) pilots earned in the same time period. Entry level pay is similar to what US regional airlines offer and many of those regional airlines offer flow through agreements to one of the large jet airlines, giving regional airline pilots a career track to one of the large jet airlines and their higher salaries. The pilot contract is SAVE's only open labor contract.
The Tortured Nature of Airline Labor Negotiations
While many airline labor negotiations extend far more than two years beyond the amendable date of SAVE's pilot contract, the operational impact of pilot shortage induced cancellations is mounting and any outcome is likely to result in higher costs. Spirit's CEO sent the following message to Spirit employees and can be found on airline employee-related social media.
A Message From Spirit President and CEO, Bob Fornaro
Spirit Family:
As many of you know, for a little more than a week, there has been tremendous pressure on the Spirit operation. Unfortunately, the cause of the most recent operational issues is an unlawful campaign by the Airline Pilots Association, International (ALPA) to purposely disrupt operations. This has caused hundreds of flights to cancel and thousands of Spirit customers to miss important family events, vacations, and critical business meetings they had planned to attend.
So today, in order to protect Spirit's customers, the airline reluctantly filed suit in federal court to stop this unlawful job action.
As we work to get past this difficult time, I want to thank everyone for their hard work and dedication to our customers. I especially want to thank those who work in our airports, the OCC, and in other customer-facing roles. I know it has been and continues to be an extremely challenging time, and I truly appreciate your efforts.
The root issue of Spirit's complaint is that its pilots are not working extra hours as they have done in the past. Based on the status quo principle of the RLA, if airline labor groups have historically worked a certain percentage of overtime, they must continue to do so during negotiations. Spirit sought and obtained a temporary restraining order against its pilots' union to prevent the union or any of its pilots from engaging in a campaign to convince its pilots from working overtime or intimidating those who choose to work extra hours. Spirit provided evidence to the court that there were pilots who were engaging in activities that might reduce the willingness of some pilots to work extra hours. In previous similar cases at other airlines, labor unions have been required to compensate the company for damages due to withheld services.
The larger issue according to many Spirit pilots is that Spirit is understaffed and is not training new pilots at a fast enough rate to replace those who are leaving as well as support Spirit's aggressive growth rate. All of the four largest US airlines have signed new contracts in the past year with their pilots or gained additional compensation to offset rapidly increasing pilot work rates. The legacy US airlines slashed employee salaries during bankruptcy and are able to increase pay as profits have increased to historically high levels of the industry, even as fuel prices remain low. At the same time, thousands of US airline pilots per year are reaching mandatory retirement age. The same trend is taking place with aircraft mechanics but the demand for new mechanics is partially offset by the ability for airlines to outsource maintenance to foreign companies.
Costly Alternatives for a Low Cost-Focused Company
While it is impossible for few people outside of Spirit management and its pilot union representatives to understand the full scope of what is driving the increased number of cancellations, there are virtually no solutions that won't require significant increases in expenditures for the airline. Spirit has been cancelling approx. 15% of its flights which creates enormous passenger inconvenience as well as adds costs to the company as they seek to accommodate passengers on other airlines, a more costly task since Spirit, like many low cost carriers, does not have agreements to facilitate rebooking on other airlines. Flight tracking sites indicate that Spirit's cancellations continue into Wednesday even after the TRO. The cost of not doing so is damage to Spirit's reputation even as it has made improved operational reliability a cornerstone of its 2017 plans. Ultra low cost carriers in the US generally perform below average for on-time, flight cancellations and passenger complaints.
Spirit has committed to an aggressive growth plan and is operating at least 10% more flights than a year ago. Since pilots have limits on the number of hours they can fly, seeking extra hours from pilots during one season can short change the ability to maintain the flight schedule in other periods of the year. Because Spirit's business model is based on rapid growth to help keep unit costs down, slowing growth will inflate costs.
Attracting pilots and keeping the current Spirit pilots from leaving will require significant increases in salaries even as a number of Spirit pilots are reportedly leaving for other airlines. Indeed, increased labor costs are a greater threat to low cost carriers since the big 3 network carriers and Southwest attract higher percentages of more lucrative business passengers. It is possible that the larger airlines have both recognized the looming shortage of pilots and been willing to pay higher salaries to ensure not only they will have a supply of new pilots but which might also result in pilot shortages for low cost carriers.
Spirit's labor costs in 2016 increased at a faster rate than revenues due to the increased costs for its newly signed flight attendant contract. It is certain that resolution of the labor shortage will result in increased costs to Spirit, likely because of the need to sign a new, costlier labor contract. SAVE's growth plans may have to be slowed even if a new contract is signed to allow sufficient pilot reserves to be rebuild to restore operational reliability.
It is also possible that slower growth and increased costs might benefit other airlines throughout the industry. The big 3 US global carriers have added economy basic fare products to help compete with ultra low cost carriers like Spirit and can certainly allocate fewer seats to those fare classes if SAVE is able to offer fewer of its own seats. Reduced capacity at SAVE could also lead to reduced discounting and higher fares at other carriers, particularly during the peak summer travel season.
There have been a number of airline labor cost increases over the past several years and airlines generally have been able to adapt to their higher costs and the consolidated marketplace to match cost increases with higher revenue. Spirit will adapt as well but its near-term growth may be slowed and its cost advantage over other airlines will likely shrink as it combats an increasingly tight market for skilled airline labor and the deeper pockets of its larger competitors.
Disclosure: I am/we are long DAL, LUV.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Analysis
Summary
Spirit Airlines’ operational performance has tumbled in recent weeks.
The company has accused some of its pilots of engaging in unlawful work slowdown tactics.
Restoring Spirit’s operational reliability will likely lead to significantly higher costs and reduced growth.
The airline industry has recently generated plenty of negative news. While many of the issues so far have been customer service related and which don't yet appear to be having a long-term impact on any of the airlines involved, one of the latest series of airline stories comes from a long-term challenge in the airline industry and one which will affect the carrier's bottom line.
Not Just Weather Problems
While winter and spring 2017 has had plenty of bad weather throughout the US that has impacted airline operations, the eyes of industry analysts have been drawn to the operational performance of Spirit Airlines (NASDAQ:SAVE). During last week's prolonged weather events in the US Mid-Atlantic and Northeast when many flights were delayed or cancelled, Spirit's cancellation rate was higher than other carriers and did not return to normal levels even after weather improved. Spirit initially said that its higher cancellation rates were due to weather but were forced by the weekend to admit that labor issues were causing increased cancellations which have also been seen for several weeks.
Airline pilot social media sites such as Airline Pilot Central are popular places for airline employees to discuss industry and company-specific issues with their peers and colleagues in an anonymous format. While anonymous social media sites attract some users who speak out against issues in ways they would not do so in other settings, airline-related social media can provide indications of internal problems that could surface. Users who identify themselves as Spirit pilots have been complaining for months of short staffing, high rates of attrition, and most significantly difficulties in reaching agreement on a new contract.
Airline labor contracts are governed by the Railway Labor Act (RLA) which stipulates that collective bargaining agreements do not expire but rather become amendable. Spirit's pilots are represented by the Airline Pilots Association, the largest collective bargaining agent for US airline and an affiliate of the AFL-CIO. Spirit's pilot contract became amendable in August 2015. Under the RLA, both sides must maintain the status quo of the current contract during negotiations. As is often the case in the airline industry, the National Mediation Board has assisted in negotiations between Spirit and its pilots.
source: Spirit Airlines
Uncompetitive Pay Levels
Sites such as Airline Pilot Central include salary scales for most US airlines. Spirit operates the Airbus (OTCPK:EADSY) A319, A320, and A321 aircraft. The A320 family of aircraft, like similar generations of Boeing's 737, can be flown by the same pilots. The A320 family is also flown by most other large jet US airlines. Spirit pays a single rate for pilots to fly any model of the A320 family. A top of scale Spirit captain at 15 years makes $185 per flight hours while a first year first officer makes $38 flight hour. As at most airlines, pilots only are generally paid when the aircraft is away from the gate. US airline pilots are limited by federal regulation to 1000 flight hours per year and also have other periodic limits to minimize fatigue. In contrast, A320 family captains at the big 3 US airlines American (NASDAQ:AAL), Delta (NYSE
AL), and United (NYSE:UAL) make around $265/flight hour while first year first officers make approx. $85/flight hour. According to DOT data for 2015 (the most recent available), Spirit pilots had an average salary of $113,000 per year, approximately half of what Southwest (NYSE:LUV) pilots earned in the same time period. Entry level pay is similar to what US regional airlines offer and many of those regional airlines offer flow through agreements to one of the large jet airlines, giving regional airline pilots a career track to one of the large jet airlines and their higher salaries. The pilot contract is SAVE's only open labor contract.The Tortured Nature of Airline Labor Negotiations
While many airline labor negotiations extend far more than two years beyond the amendable date of SAVE's pilot contract, the operational impact of pilot shortage induced cancellations is mounting and any outcome is likely to result in higher costs. Spirit's CEO sent the following message to Spirit employees and can be found on airline employee-related social media.
A Message From Spirit President and CEO, Bob Fornaro
Spirit Family:
As many of you know, for a little more than a week, there has been tremendous pressure on the Spirit operation. Unfortunately, the cause of the most recent operational issues is an unlawful campaign by the Airline Pilots Association, International (ALPA) to purposely disrupt operations. This has caused hundreds of flights to cancel and thousands of Spirit customers to miss important family events, vacations, and critical business meetings they had planned to attend.
So today, in order to protect Spirit's customers, the airline reluctantly filed suit in federal court to stop this unlawful job action.
As we work to get past this difficult time, I want to thank everyone for their hard work and dedication to our customers. I especially want to thank those who work in our airports, the OCC, and in other customer-facing roles. I know it has been and continues to be an extremely challenging time, and I truly appreciate your efforts.
The root issue of Spirit's complaint is that its pilots are not working extra hours as they have done in the past. Based on the status quo principle of the RLA, if airline labor groups have historically worked a certain percentage of overtime, they must continue to do so during negotiations. Spirit sought and obtained a temporary restraining order against its pilots' union to prevent the union or any of its pilots from engaging in a campaign to convince its pilots from working overtime or intimidating those who choose to work extra hours. Spirit provided evidence to the court that there were pilots who were engaging in activities that might reduce the willingness of some pilots to work extra hours. In previous similar cases at other airlines, labor unions have been required to compensate the company for damages due to withheld services.
The larger issue according to many Spirit pilots is that Spirit is understaffed and is not training new pilots at a fast enough rate to replace those who are leaving as well as support Spirit's aggressive growth rate. All of the four largest US airlines have signed new contracts in the past year with their pilots or gained additional compensation to offset rapidly increasing pilot work rates. The legacy US airlines slashed employee salaries during bankruptcy and are able to increase pay as profits have increased to historically high levels of the industry, even as fuel prices remain low. At the same time, thousands of US airline pilots per year are reaching mandatory retirement age. The same trend is taking place with aircraft mechanics but the demand for new mechanics is partially offset by the ability for airlines to outsource maintenance to foreign companies.
Costly Alternatives for a Low Cost-Focused Company
While it is impossible for few people outside of Spirit management and its pilot union representatives to understand the full scope of what is driving the increased number of cancellations, there are virtually no solutions that won't require significant increases in expenditures for the airline. Spirit has been cancelling approx. 15% of its flights which creates enormous passenger inconvenience as well as adds costs to the company as they seek to accommodate passengers on other airlines, a more costly task since Spirit, like many low cost carriers, does not have agreements to facilitate rebooking on other airlines. Flight tracking sites indicate that Spirit's cancellations continue into Wednesday even after the TRO. The cost of not doing so is damage to Spirit's reputation even as it has made improved operational reliability a cornerstone of its 2017 plans. Ultra low cost carriers in the US generally perform below average for on-time, flight cancellations and passenger complaints.
Spirit has committed to an aggressive growth plan and is operating at least 10% more flights than a year ago. Since pilots have limits on the number of hours they can fly, seeking extra hours from pilots during one season can short change the ability to maintain the flight schedule in other periods of the year. Because Spirit's business model is based on rapid growth to help keep unit costs down, slowing growth will inflate costs.
Attracting pilots and keeping the current Spirit pilots from leaving will require significant increases in salaries even as a number of Spirit pilots are reportedly leaving for other airlines. Indeed, increased labor costs are a greater threat to low cost carriers since the big 3 network carriers and Southwest attract higher percentages of more lucrative business passengers. It is possible that the larger airlines have both recognized the looming shortage of pilots and been willing to pay higher salaries to ensure not only they will have a supply of new pilots but which might also result in pilot shortages for low cost carriers.
Spirit's labor costs in 2016 increased at a faster rate than revenues due to the increased costs for its newly signed flight attendant contract. It is certain that resolution of the labor shortage will result in increased costs to Spirit, likely because of the need to sign a new, costlier labor contract. SAVE's growth plans may have to be slowed even if a new contract is signed to allow sufficient pilot reserves to be rebuild to restore operational reliability.
It is also possible that slower growth and increased costs might benefit other airlines throughout the industry. The big 3 US global carriers have added economy basic fare products to help compete with ultra low cost carriers like Spirit and can certainly allocate fewer seats to those fare classes if SAVE is able to offer fewer of its own seats. Reduced capacity at SAVE could also lead to reduced discounting and higher fares at other carriers, particularly during the peak summer travel season.
There have been a number of airline labor cost increases over the past several years and airlines generally have been able to adapt to their higher costs and the consolidated marketplace to match cost increases with higher revenue. Spirit will adapt as well but its near-term growth may be slowed and its cost advantage over other airlines will likely shrink as it combats an increasingly tight market for skilled airline labor and the deeper pockets of its larger competitors.
Disclosure: I am/we are long DAL, LUV.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
05-10-2017, 08:35 AM
#2
Gets Weekends Off
Joined APC: Oct 2010
Posts: 4,603
Kind of sums it up. High block hours, attrition fueled by lacking an industry standard contract, all paired with a big wx event, and you have the perfect storm. It's not a work action, its mismanagement and when we prove that in court next week we will go ahead and collect managements measly $50k the put up to get the restraining order. Now come to the table with a real offer and maybe folks will stop leaving and you might recruit pilots that don't fail out of training.
05-10-2017, 08:37 AM
#3
Gets Weekends Off
Joined APC: Nov 2015
Posts: 1,120
That's one of the better articles I've seen. Unfortunately there's no way for the author to compare April May and June schedule bids to show that the schedule was unflyable from the beginning even at "normal" rates of people flying on their day off. An experienced captain showed me on the June package the numbers, saying they were unbelieveably unrealistic and couldn't be anything other than a setup so they can blame pilots for even more cancellations.
The article authors don't have our schedules so they can't include the glaring proof that it was the company that changed the status quo between April and May, with the wholly unrealistic schedule they dropped on us.
The article authors don't have our schedules so they can't include the glaring proof that it was the company that changed the status quo between April and May, with the wholly unrealistic schedule they dropped on us.
05-10-2017, 08:45 AM
#4
Gets Weekends Off
Joined APC: Nov 2015
Posts: 1,120
And... the elephant in the room that none of the analysts are mentioning is that our CEO is making nearly double "industry average" pay while overseeing the meltdown of what should be a wildly profitable operation. At $7/mil per year salary, the board MUST be happy with what is going on, ergo none of this is an accident.
There is something else going on here regarding the company's future, and we won't know about it until its already a done deal. Nobody pays a CEO that much money to try to force all its employees to quit and customers to go away unless there's something else at stake.
There is something else going on here regarding the company's future, and we won't know about it until its already a done deal. Nobody pays a CEO that much money to try to force all its employees to quit and customers to go away unless there's something else at stake.
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