Only a couple of years back, airline stocks were having a hard time as oil prices hovered above the $100 a barrel mark. As fuel costs represent one of the largest input costs for airline companies, the rise in oil prices naturally led to operating expenses surging, in turn, hurting the bottom line of carriers.
Oil prices started declining from the second half of 2014. But then, another challenge came along – the dreaded Ebola virus, global fears of which sent airline stocks tumbling. However, gradually, as Ebola-related fears subsided and oil prices continued to plunge due to an over-supplied oil market, especially in the face of lackluster global demand, airline stocks began to enjoy a dream run.
Free Fall of Oil Cushions Financial Health; Labor Deals on the Rise
The magnitude of the fall in oil prices is indeed mammoth given that currently, oil prices are hovering around the $30 a barrel level — down from the $100 plus mark reached in Jun 2014. The extent of the fall has naturally resulted in huge savings for carriers which in turn have made them financially strong.
The financial rebound is indeed worth noting, as the scenario was quite the opposite a few years ago. American Airlines had filed for bankruptcy in 2011. American Airlines Group AAL, as it exists in the present form, was formed in 2013 following the merger of AMR (American Airlines' parent group) and US Airways. The merger turned around the fate of the carrier and since then, there has been no looking back.
Evidently, the improved financial health of the carriers has not gone unnoticed by their employees, who too are eager to get a share of the pie. This has propelled frequent new labor deals and related issues across the labor-intensive airline industry.
Through 2015, negotiations between various carriers like American Airlines, Southwest Airlines LUV, United Continental Holdings UAL and multiple labor groups on new contracts and terms pertaining to pay and other benefits were rampant in the airline industry.
Labor Costs Spike
With labor talks/deals largely in vogue in the aviation space, labor costs have been on an upswing. One detailed look at the fourth-quarter 2015 earnings of carriers like Delta Air Lines DAL, JetBlue Airways Corp. JBLU, Alaska Air Group ALK and Southwest Airlines, and one can easily reach the conclusion that expenses related to salaries, wages and related costs are currently the largest cost component for carriers, having relegated fuel expenses to the second position.
With carriers’ financial health expected to be sound going forward, courtesy soft oil prices, we expect labor talks and new pay-related deals to be a key determinant in 2016 as well.
Southwest Airlines: Good Tidings on the Labor Front
To begin with, the year 2016 has ushered in good news at Southwest Airlines, on the labor front. Shortly after the union representing its ground service employees ratified the pay-related deal, flight instructors of the Dallas-based carrier too followed suit, giving their nod to a contract that assures them higher pay.
Recently, members of the Transport Workers Union Local 557, representing the flight instructors of Southwest Airlines, ratified a four-year contract with the carrier, which guarantees them higher pay, other financial benefits and improved working conditions. Approximately 68% of the votes cast were in favor of the deal, which becomes amendable on Dec 31, 2019. The tentative deal was inked in Jan 2016.
However, things haven’t been so rosy for United Continental in the same regard. Last month, mechanics at the Chicago-based carrier voted against the latest contract offer on their pay. More than 93% of the 9,000 plus mechanics under the International Brotherhood of Teamsters turned down the offer, which failed to match their expectations. Following the failure of the deal, threats of a strike loom large at United Continental.
To Wrap Up
In view of the observations made herein, it can be concluded that labor talks/deals will dominate the airline space as carriers continue to be profitable, thanks to soft oil prices. That carriers will continue generating huge profits can be gauged from the International Air Transport Association’s (IATA) 2016 upbeat projection. IATA expects profitability in the space to increase to $36.3 billion which is more than double the figure recorded in 2014, when oil prices were higher.
The forecast further strengthens the view that good times are here to stay in the airline space. Stay tuned for more updates on the labor front as we go move further into 2016.
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