Why investors should track labor cost in the airline industry

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Labor cost

The second largest cost component for airlines—after fuel cost—is salaries, wages, and benefits. Employment in the U.S. airline industry increased in the last couple of years. Employment increased after the U.S. economy recovered from the recession. The demand for air travel also increased.

Labor is highly unionized in the U.S. airline industry. As a result, wage rates are comparatively higher. Most major U.S. airlines—including United (UAL), American (AAL), and Southwest (LUV)—have the majority of the workers representing unions. Delta (DAL) and JetBlue (or JBLU) are exceptions.

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Employment growth

According to the Bureau of Transportation Statistics (or BTS), there was a year-over-year (or YoY) increase in U.S. scheduled passenger airline employment for the ninth consecutive month in August 2014. Full-time equivalent (or FTE) employees increased by 1% to 384,478 in August 2014.

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The network carriers employed two-thirds of the total employees. All major U.S. airlines—including DAL, Alaska (ALK), AAL, LUV, and JBLU—reported a YoY increase in FTE count. Although UAL employed the highest number of FTEs among the network carriers in August 2014, its FTEs reduced from August 2013.

The number of employees decreased from 520,600 in 2000 to 378,066 in 2010. However, this increased over the last three years. Average employee compensation increased from $85,372 in 2010 to ~$93,856 in 2013 according to Airlines for America.

Recently, there has been a substantial increase in profit-sharing expenses related to the employees. Major U.S. airlines’ profitability increased. Airlines use this as an incentive to align employee interest with the company’s objective.

Higher stock profitability increased returns from exchange-traded funds (or ETFs) like the iShares Transportation Average ETF (or IYT) and the SPDR S&P Transportation ETF (XTN).

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