A strike threat by Delta Air Lines’ pilots, following a standoff with management over proposed wage cuts, has raised the prospect of the first shutdown of a major U.S. airline in seven years. At stake is the carrier’s survival — and a potential travel nightmare during the upcoming holiday rush.
“It’s doomsday if they go through with the strike — for everybody,” said Ray Neidl, airline analysis for Calyon Securities.
Delta agreed with that assessment, saying Monday that a pilots strike would be “murder-suicide” and in effect put the carrier out of business.
The strike threat comes as a U.S. Bankruptcy Court judge in New York is scheduled to hold a hearing on Wednesday to discuss Delta’s request to cancel its current labor contract with its pilots. The pilots union has raised the prospect of a strike if the contract is rejected by the court, and it has scheduled a rally for Tuesday.
Though a strike threat by Delta pilots at this point is a bargaining ploy, it’s a powerful one. A strike by Northwest mechanics last month fizzled after the union failed to win support from Northwest pilots. The company announced before the strike began that it had lined up enough replacement mechanics to keep flying.
But lining up replacement pilots is not an option, said Neidl. Delta said as much in an SEC filing Monday, warning Delta shareholders that it can’t predict whether it would be able to stop a walkout by its 6,000 pilots.
In its filing, Delta said a strike would be disastrous for all concerned. “Deny the motion to reject, the court is told, or the association will call a post-rejection strike that will kill the company and eliminate every pilot job — indeed every Delta job.”
And Delta argues that the Railway Labor Act prevents the pilots from striking. “Even if the threat were realistic — even if Delta’s pilots seriously intended to put the company into liquidation rather than agree to needed concessions — the threat would be a hollow one,” the airline wrote.
Management could also call on the White House to intervene and order the pilots back to work. But the administration made it clear ahead of the Northwest strike threat that it would not do so.
Delta Inc., which landed in bankruptcy court Sept. 14, last week posted a $1.1 billion loss for the latest three months of operations — and said it is borrowing money to cover continuing losses. The latest quarter brings the carriers Delta's losses to just over $11 billion since January 2001.
The losses come as the airline industry is on course to its best year since the Sept. 11 terror attacks sent the travel industry into a tailspin. U.S. airlines carried 5.2 percent more domestic passengers and flew 1.6 percent more domestic flights during the first eight months of 2005 than they did during the same period in 2004, according to the U.S. Department of Transportation. And those planes are fuller that last year: The industry’s so-called “load factor” is up 2.5 points so far this year.
So Delta isn’t having trouble filling its seats; the airline took in $4.22 billion in the latest quarter, up nearly 9 percent from the same period last year. The problem is that it costs Delta more to fly passengers in those seats than lower-cost carriers like Southwest and JetBlue. Though high fuel prices have hurt all carriers, Delta and other “legacy” carriers are still paying wages that were negotiated before low-cost competition began offering cheaper fares.
Meanwhile, heavy competition by low-cast carriers like Southwest has kept airfares too low for Delta to turn a profit. Despite increased demand for travel, airfares haven’t recovered to pre-Sept. 11 levels, according to the Department of Transportation’s Air Travel Price Index.
Sour note
To fend off the threat of low-cost competition, Delta tried setting up a separate airline, called Song, offering lower fares, bright green planes and Kate Spade-designed flight attendant uniforms. But Delta’s new management, which took over last year, apparently didn’t like the sound of the idea; it announced last week that it would cancel Song and fold it into the parent airline by May, 2006.
So the management’s focus has returned to further cost cutting. By going to bankruptcy court, Delta hopes to break contracts with employees and suppliers and renegotiate them at lower cost. So far, the court has let Delta cancel leases on about 50 aircraft as part of its goal to drop 80 planes from its fleet by next year and cut domestic flights by 15-20 percent.
But the biggest cuts are coming from wages. Delta has already won $1 billion in annual wage cuts from the pilots union, but says it needs another $325 million to keep flying. The pilots say the company can get by with only $90 million in wage concessions.
If Delta pilots follow through on a strike threat, air travelers can expect fewer available seats — and possible fare increases. So far this year, Delta carried one out of every a six U.S. air travelers, second only to Southwest, according to DOT data. With many competitors planes already full, the rest of the industry would be hard pressed to absorb stranded fliers — especially during peak Thanksgiving and Christmas holiday travel periods.
Corporate travel managers have already started making contingencies for employees that are holding tickets on Delta flights, according to Suzanne Fletcher, president of the National Business Travel Association, a trade group for corporate travel managers.
"Until today, this is the first time we said, ‘Wow, we might be in trouble,’” she said.
In the event of a strike, Fletcher said the biggest bottlenecks would likely occur at peak times for business travelers. "And god forbid you happen to be resident of Atlanta,” she said. “You’ve got to think, ‘How do do you get there from here?’”
Even a short strike could permanently ground the carrier, said Neidl.
“They have enough cash (to cover ongoing losses), but you can burn cash very, very quickly if you’re not operating,” he said.
Furthermore, even the threat of a shutdown could hasten Delta’s demise if travelers concerned about its long-term viability begin avoiding the airline for fear of being stranded by a strike.