Can Delta Air Lines And Its Pilots Achieve A Win-Win?

Delta is in the midst of adding 50 new regional jets to its fleet, but it can't configure these planes with the number of seats they're designed for.

Delta Air Lines planes are shown parked at their gates at the airport in Salt Lake City, Utah, Jan. 12, 2018. Photo: REUTERS/Mike Blake

By Adam Levine-Weinberg, Motley Fool.

Last week, Delta Air Lines (NYSE:DAL) became the launch customer for an upgraded version of Bombardier's (NASDAQOTH:BDRBF) CRJ900 regional jet, ordering 20. This marks the third time in the past year that Delta Air Lines has opted to replace some of the older jets in its regional fleet. In late 2017, regional airline SkyWest placed two separate orders for a total of 30 Embraer Brazilian Aviation Co. (NYSE:ERJ) E175 SC aircraft that it will operate for Delta.

All 50 of the new regional jets will be models that hold 76 seats in a typical regional airline layout. Yet Delta is configuring them with 70 seats instead. That's because its pilot contract doesn't allow the carrier to increase its fleet of 76-seat jets any further.

However, Delta and its pilot union are set to begin contract negotiations next year, as the current labor agreement becomes amendable at the end of 2019. Easing the restrictions on 76-seat jets would be a fairly harmless concession on the part of Delta Air Lines pilots, while it would help Delta afford bigger raises in the next round of contract talks.

It's all about scope

Over the past quarter-century, regional jets have become a key piece of legacy carriers' domestic fleets. Pilot pay is much lower at regional airlines than it is for mainline carriers. Facing growing competition from low-cost carriers, larger airlines tried to take advantage of that pay disparity by outsourcing small-jet flying to regional affiliates.

This quickly sparked a backlash among mainline pilots. They fought back by insisting on the addition of scope clauses to their contracts. Scope clauses at the likes of Delta put strict limits on how much flying can be outsourced to regional airlines and what planes they may use.

Like most of its peers, Delta Air Lines is currently using its full scope authority, which permits it to operate up to 223 76-seat jets, up to 102 70-seat jets, and up to 135 50-seat jets. As a result, if Delta wants to replace any of its regional aircraft, it must do so with a like-sized aircraft.

Good for passengers -- but not as good for profits

The oldest jets in most regional airline fleets are the 50-seaters, of which a ton were sold between the 1990s and the early 2000s. However, top regional aircraft manufacturers Bombardier and Embraer have stopped building 50-seat regional jets due to low demand. As a result, there's no obvious replacement available, given that scope clauses prevent a wholesale switch to larger jets.

By contrast, regional airlines are starting to replace their 70-seat Bombardier CRJ700s. The oldest CRJ700s have now been flying for about 17 years, with 20 years being a fairly typical replacement age for regional jets. The CRJ700s have cramped cabins and insufficient space for carry-on bags compared to newer models like the Embraer E170 and E175, as well as the upgraded CRJ900 equipped with the new "Atmosphere" cabin.

However, Bombardier and Embraer are emphasizing sales of the E175 and CRJ900 models and have invested in upgrades for those larger aircraft rather than their smaller 70-seat siblings. As a result, Delta has ordered these 76-seat models to replace older CRJ700s that it wants to retire -- but it's configuring them with 70 seats to stay within its scope limits.

That's good news for passengers in the economy cabin. Removing six seats means they will get at least one inch of additional legroom, and the E175 and CRJ900 (when equipped with the Atmosphere cabin) are already fairly spacious compared to many mainline jets. Still, this seating configuration is clearly suboptimal for Delta's profitability.

Time for a bargain?

In recent years, mainline pilots have been loath to relax their scope clauses, for fear of losing jobs to regional airlines. For example, Embraer's upgraded E175-E2 regional jet may never make it to the U.S. market because it is too heavy under the legacy carriers' current scope clauses (and could potentially hold more than 76 seats).

That said, Delta Air Lines has maintained a fairly healthy working relationship with its pilot union, notwithstanding a flare-up in tensions during the last round of contract talks. Back in 2012, the two sides reached an innovative agreement that allowed Delta to take more 76-seat jets in exchange for adding 88 110-seat Boeing 717s to its mainline fleet.

There's a clear opportunity here for another win-win compromise between Delta and the pilot union. The most customer-friendly regional jets available today are designed for 76 seats, and it's wasteful to equip them with only 70 seats just to comply with a scope clause. Meanwhile, it's hard to imagine that allowing Delta to put an additional six seats on its 70-seat jets would threaten mainline pilots' job security or career-advancement opportunities.

Delta Air Lines could offer slightly larger raises or commit to further expansion of its small mainline jet fleet, in exchange for the ability to replace its 70-seat jets with 76-seat jets.

In the short term, 70-seat E175s and CRJ900s are a given. All 30 E175 SC aircraft (the SC stands for "special configuration," referring to the 70-seat layout) will arrive in 2018 and Delta's regional affiliates will add the 20 CRJ900s with Bombardier's new Atmosphere cabin to their fleets between late 2018 and 2020. But adding an extra six seats to those planes would be easy, if the Delta scope clause changes. I expect this to be a key issue discussed in the 2019 pilot contract negotiations at Delta Air Lines.

Adam Levine-Weinberg owns shares of Delta Air Lines and Embraer Brazilian Aviation Co. The Motley Fool recommends Embraer Brazilian Aviation Co. The Motley Fool has a disclosure policy.


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Business News: Can Delta Air Lines And Its Pilots Achieve A Win-Win?
Can Delta Air Lines And Its Pilots Achieve A Win-Win?
Delta is in the midst of adding 50 new regional jets to its fleet, but it can't configure these planes with the number of seats they're designed for.
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