Issues concerning labor
There is a host of issues that have been concerning the US labor workforce, including longer working hours, contentious relations with management, lower job security, work-life balance, and stability. However, the prime issue for regional airlines is that regional players pay much less than legacy peers, despite the regional sector accounting for more than half of all flying. Regional carriers are also important since they feed legacy carriers with customers on their networks.
Addressing the compensation issue
Most airlines, including Delta Air Lines (DAL), Southwest Airlines (LUV), United Continental (UAL), and American Airlines (AAL), have recently renegotiated contracts with pilots and other contract workers. According to the contracts, pilots will receive a significant pay rise over the next two years, followed by increases for two to three years after that. These renegotiations mean labor peace for airlines, at least for the next few years. The developments are especially good news for Southwest Airlines, which has been struggling to reach an agreement with pilots for the past four years.
US airline industry to suffer
While most airlines suffering from the labor crunch are mid-sized carriers, the issue is a potential threat for large carriers as well. Large carriers such as United Airlines (UAL) and Delta Air Lines (DAL) depend on mid-sized airlines to serve their rural consumers and to feed customers into their networks. If the dearth of pilots is not fulfilled soon, the industry could see a severe crisis.
As many as 30,000 pilots will reach the mandatory retirement age of 65 by 2026. According to a study by the University of North Dakota, if there are insufficient new hires to replace them, airlines could face a pilot shortage in about three years. In the next ten years, by 2026, the pilot shortage could be as high as 15,000.
While the shortage issue has not yet been fully addressed, some airlines, such as American Airlines, are trying to solve the problem by increasing fresh pilots’ pay, making training costs affordable. Investors can gain exposure to the industry by investing in the SPDR S&P Transportation ETF (XTN), which invests ~15% of its holdings in airlines.