Amy Robinson:
Today's SWAPA number is $1.2 billion. That's the dollar figure increase from TA 1 to TA 2 during our last round of contract negotiations. The analysis and costing that went into that increase was calculated by SWAPA's EFA committee.
Kurt Heidemann:
But assisting us at the time was industry analyst and former ALPA Chief of Staff, Jalmer Johnson. Today on the show, we'll talk with him about where he sees current trends and negotiations at some of our peers that he's working with, what the market currently looks like, and where he sees pilot pay heading during this contract cycle.
Kurt Heidemann:
I'm Kurt Heidemann.
Amy Robinson:
And I'm Amy Robinson, and here's our interview with Jalmer.Okay, Jalmer, for those of our pilots who are unaware of your involvement with us during our last TA, can you give us a little bit of background on your resume?
Jalmer Johnson:
Sure. So I've been doing this work for a bit over 40 years. I first started, I worked at ALPA for 30 years. The first half of my tenure at ALPA, I developed and ran ALPA'S economic and financial analysis department. So I had a staff of 12 that worked with me, and we built a department that focused on financial analysis of the airlines, evaluating their strategic plans, helping to value proposals, and analyzing issues, like ability to pay, willingness to pay, affordability, et cetera. During that period, I was the lead professional negotiator for ALPA on economic issues.
Second half of my tenure at ALPA, I was the general manager, which is the chief of staff at ALPA. So I was the chief operating officer, chief financial officer, and most importantly, I oversaw all of the professional work that ALPA's 400+ staff did relating to contract negotiations and enforcement. I retired from ALPA 10 years ago, and during the past 10 years, I've had my own consulting practice. I've worked with a variety of independent pilot unions, including SWAPA, IPA, APA, and ACPA, which represents Air Canada, working to do financial analysis and advising in [inaudible 00:02:48].
Amy Robinson:
So you've had a lot of vast experience with other carriers. Tell us a little about some of the most recent activity you've been tracking in terms of pilot contracts.
Jalmer Johnson:
Much of the work that I've been doing in the past three or four years has focused, not just on a lot of the COVID related work at carriers, such as UPS and American and Air Canada, on behalf of their pilots, but also assisting them in either negotiating contract extensions, which was negotiated between IPA and UPS, as well as working with the Air Canada pilots and their contract negotiations, and currently working with APA at the table, evaluating the Company's proposals, helping to develop counter proposals, and trying to get to a deal. As well as in that context, obviously tracking what's going on at all the other major airlines in their negotiations.
Kurt Heidemann:
Jalmer, I know that the regionals aren't necessarily who we compare ourselves to, but we can't help but see some of the incredible rates of pay that are being offered at some of those carriers. I know that SkyWest is now offering a first-year pilot more than they're making here at Southwest. What can you tell us about those specifically, and do you think that they'll have an impact at the majors?
Jalmer Johnson:
Kurt, I have been, I guess, rather surprised at the order of magnitude of what a number of the major airlines have been either willing to offer or the amounts that they have agreed to to ink deals. We've seen what American Airlines Group has done with PSA Piedmont and Envoy, putting just over a two-year period, my valuation approximately $700 million, increasing check airman pay up into the to the low 400s. We've just seen announcements about similar type deals between Horizon and Alaska.
I think that the airlines are realizing that the pipeline for pilots has become smaller. Whether it's temporary or whether it's a longer term trend, it's difficult to fully predict, but I think the airlines, and most particularly at American, has decided that they want to keep hold of their regional pilots and maximize the likelihood that they're going to transition up to American, to the main line. They were experiencing a lot of poaching by United and Delta and also by Southwest, and they have close to 150 RJs currently parked. So they made a business decision that they need to not only try to keep as many of their RJs in the air, but to maximize the likelihood that they're going to be able to have those pilots transition up to the main line.
Some of the problems obviously tie back to the COVID period. When the airlines decided to use some of the PSP money to actually transition pilots, older pilots, out and put them on a track towards early retirement, the industry lost 3,000 to 4,000 active pilots, and we're seeing that that has created a sizeable shortfall in the near term as the airlines try to ramp themselves back up to 100%. So I think what we are going to see is upward pressure on the low end of the major airlines' salary scales in order to make sure that they can hold onto these pilots, and that will be its own competitive pressures with the shortages that we're currently seeing. So I think that over the next several years, the major airlines are going to have to come to terms with that as well.
Amy Robinson:
Talk a little bit about pattern bargaining. You talked about this pretty extensively back in 2016, but it's, I think, one of the things that our pilots don't really understand fully. So kind of give a background on how that works.
Jalmer Johnson:
Sure. So the airlines recognize that when things are going well, when the industry is making money, when the outlook is positive, which is the circumstance we're finding ourselves in now, there is going to be a sequence of contracts that are negotiated and ratified and implemented. Not all the contracts obviously occur at the same time, so-
Amy Robinson:
But a lot of them are currently in contract negotiations. Is that not accurate?
Jalmer Johnson:
A lot of them are in contract negotiations, which is creating a bit of a complication for management, which for the pilots, I think, is a good thing. But what typically happens in pattern bargaining, and we've seen a bit of it, even as proposals roll out this summer, is that when one pilot group gets an agreement, particularly on major economic issues, pay, pensions, profit sharing, other major elements related to certain scheduling items, that it really does set a floor for the remaining groups that are in bargaining to improve upon, because those groups are not going to accept something less than what's already been established. So there is a pattern of progressive bargaining that pilot groups go through.
What we saw with, and what we're still seeing between United and American, is rather unique in terms of its timing. A TA was negotiated at United with 4%, 5%, 5% raises within weeks. American tabled a higher package of pay raises for the APA of 6%, 5% and 5%, which ultimately led to United MEC at ALPA pulling that proposal and going back to the table, even after it had been approved and was in the process of going out for ratification. So in my 40+ years, that's never happened.
So we are not only seeing the process of one-upsmanship in the bargaining process, but I think that because of that, there is a greater focus on what are referred to as snap-up clauses, so that if one group settles, ratifies, they don't want to be harmed by another group in a very short period of time coming in with a better deal. And that is, for example, an element in the negotiations that I'm working on right now between the APA and American.
Kurt Heidemann:
So Jalmer, is there an advantage or a disadvantage do you see? If you had to put your management hat on, would there be an advantage to them going first, or would it be in their interest to delay, and then reverse that and look at it from the union side of it?
Jalmer Johnson:
What we're seeing is that with the major airlines looking at what their capacity plans are, a lot of it driven by the complexity of their fleets, they realize that they need to enhance their pipeline within their training programs. Both United and American have shortages of check airmen or line check airmen, whatever the titles are in the training department, and both believe that without improving the compensation of such pilots or such training folks, that they will not be able to train enough pilots to fly their schedule next summer. So there is a strong motivation by both United and American to try to get a deal done as quickly as possible.
And so I think they're trying to gauge how best to get an agreement done but also get an agreement done that would be ratifiable. I think what we're seeing is the managements probably would prefer going first, at least at those airlines, because of the tie between the contract and their business plans.
Kurt Heidemann:
You mentioned the United deal. They offhandedly refer to it as the To-Me TA, because they offered free luggage as part of the deal, but from your perspective, have you had a chance to look at that, and do you have any ideas of the positives or negatives that you saw in that deal, particularly?
Jalmer Johnson:
I think that there were a number of positives as it related to obviously looking at a starting point for increases in pay rates that are higher than the norms, which have obviously been in the 3% range, in some ways trying to address not only not having raises for three-and-a-half years, but also taking into account inflation. There are some other aspects to it, the increase in training pay, as an example, and some of the improvements on the training side are all steps in the right direction.
I think both ALPA and the United management kind of underestimated several things. One is they did not meet the expectations of the pilots regarding the data signing raise. Secondly, any change in SCOPE, regardless of whether it changes the weight limit of RJs that can be flown under co-chairing by 6,500 pounds, which really will have de minimus, if any, impact on the aircraft being flown. But SCOPE, as we know, is a religious issue, and the ALPA team really underestimated the strong negative reaction that came out of that.And the third aspect, I think, which contributed to the failure of the TA, really related to not recognizing the need to take into account bargaining beyond their borders. Specifically, United really broke new ground, let's say, back in 2016 when they did a snap-up clause related to a contract extension, and the snap-up clause was tied to the ongoing negotiations that were taking place at Delta. So they protected their flank, they got good raises in that negotiation, but then because the pilots knew that if Delta was going to improve on it through pattern bargaining in a very short term that they piggybacked on it through the snap-up clause. This agreement didn't have any snap-up clause, and I think that that left them short when the announcement came out from Robert Isom in his public way of presenting the proposal that American made to APA at the end of June. I think that all of those three together really, the TA collapsed under its own weight, and they have forced him back to the table.
Amy Robinson:
So one thing that Southwest has started talking about with our negotiating group is aircraft group pay. I know American has that and UPS has a single pay rate, so those are two sort of differing things. Can you tell us a little bit about the history behind that and the pros and cons of structuring pay in that manner?
Jalmer Johnson:
Sure. So at American, the pay groupings really came out of the bankruptcy in 2012 there. 2012, CBA was subject to the 1113 process, which is a bankruptcy code that if the parties don't agree on terms that the company believes are necessary to restructure and get out of bankruptcy, they can go to the judge and reject portions or all of the contract. And so the American pilots were put in a position where they ended up having to agree to that. Otherwise, it would've been crammed down their throats.
And the reason why the company pursued that, plain and simple, relates to training savings, and the pilots have looked at various ways of trying to change that and go back to the old method. In 2019, we, being advising the APA, put a proposal on the table regarding aircraft pay. It has not survived in this targeted negotiations process for a two-year contract, but the American pilots are very focused on long term, recreating that differentiation between pay for aircraft based on productivity.
And you mentioned UPS, they do have a single rate. They have four or five different aircraft types, and the rate has been kind of targeted to be approximately somewhere between a triple-seven and potentially larger aircraft. So everyone who's flying, it could be a 757, it could be an A300, it could be 747-400, it could be 767s, they're all paid the same rates, but it is a very high rate. I think that where we're at now in the profession, in the industry, the advice that I provide to all the pilot groups that I work with and negotiate for is don't go to groups, stay aircraft specific or aircraft-type specific in order to focus on ever-changing productivity, that we can capture higher pay rates from that.
Kurt Heidemann:
Actually, Jalmer, I have a question for you. The NC was doing some research on this specific issue, and one thing we were looking at were the different rates over at Delta. You can plot the rates of pay versus the seats to give you an approximation of that productivity line that you're talking about, but it isn't linear. Do you have any insights, since you were over ALPA for so long, as to how do they get to that? Is it stage, is it gauge, is it seats? How do they come up with those numbers? Do you know?
Jalmer Johnson:
Yeah, it clearly has been a lot of focus on seats. It also has taken into account, I guess what I'll call stage length or the lengthening of ability of aircraft to fly long distances and, therefore, bypass hubs, like the 787s, like what we're starting to see with the 321XLRs. So I think that those two metrics are probably the best. They just so happen to be the metrics that we put into the APA aircraft pay rate proposal, so I obviously have been doing a lot of analysis on it as well. I think that those two are the right metrics, but it does take both, particularly trying to reverse what happened in bankruptcy at a carrier like American, trying to get everyone to see not only what the benefits are, but also that not everybody is going to be benefit from it equally day one, but they will all benefit from it over their career.
Amy Robinson:
Moving on to a different topic, Southwest has not given SWAPA pay rates yet. I would assume it's pretty hard to do an evaluation model over an entire contract without that. Is that accurate?
Jalmer Johnson:
Looking at it really from the big picture, it's difficult to figure out where the gaps are and what the order of magnitude is. When one group, SWAPA, puts a full language proposal on the table, and the Company works in bits and pieces, cherry-picking, trying to position themselves, so you can measure what the differences are and what's on the table, but it really doesn't give you the full picture. So trying to say that one group's proposal is much more expensive than the other when you don't have all items on the table, it's kind of hard to do. So you really need to have what the pay proposal is per TFP from the Company, compare that to what you guys have on the table to really give a true measure of what's being asked for, what's being offered, and the gap between the two.
Kurt Heidemann:
And to carry that a step further, I would say in addition to what we're asking for, it's also an affordability issue. So talk a little bit about that. You've worked with SWAPA in the past. That's a main concern of ours.
Jalmer Johnson:
And I understand that, and you both have the affordability issue as well as the willingness to pay issue. I've seen a lot of situations, the killing the golden goose-type metaphors back 20 years ago regarding Delta and United, and I think that it's very important for both parties to recognize affordability, because your careers are tied to your airline in whatever form it takes, and you don't want to overly burden it with something that the company can't afford. But at the same time, there is quite often a gap between a proposal that's affordable and what the company is willing to pay. And we definitely saw that back in 2016, as we pulled the Company from under a billion dollars for a deal in the failed TA to about $2.4 billion in the final agreement. So the two have to go hand-in-hand. If the companies recognize that what unions put on the table as fitting within this affordable metric, they need to come to the table and put proposal on the table that shows that they're willing to make a deal.
Kurt Heidemann:
Jalmer, one thing you did say earlier, you were talking about the American wholly-owned subsidiaries, and you said that their pay to increase for those guys was going to cost American, I think you said $700 million. Is that the number you were throwing around?
Jalmer Johnson:
Yes, $700 million over two years.
Kurt Heidemann:
So that money impacts the affordability that they can then pay their main-line guys. Southwest does not have that headwind, right?
Jalmer Johnson:
Correct.
Kurt Heidemann:
That applies, I would think, to the other carriers, maybe to a lesser degree than American, but they all have headwinds that they would have to cover for those higher rates that the regional carriers are having to pay.
Jalmer Johnson:
Kurt, as you said, Southwest does not have that headwind. They also historically have had a stronger tailwind, and that is that their profit margins have been historically higher than the big three. So you have a carrier that is not having to put out money to preserve regional feed and to preserve pilot pipeline, and you also have an airline that historically makes more money. So both, I believe, and it makes sense, that both strongly work in the pilot's favor and, again, need to be taken into account when you're trying to realistically negotiate an agreement.
Amy Robinson:
Sort of along those same lines, Jalmer, I have a question regarding timelines. How long does it typically take to negotiate a CBA?
Jalmer Johnson:
That's a good question. It really all depends on the environment in which you're negotiating. Obviously, many of the airlines, American, Delta, United, all started before COVID. The CBA negotiations were paused and then restarted in mid to late 2021 and really have picked up much more this year. If you don't have that type of environmental disruption, CBAs should be negotiated in less than two to two-and-a-half years. The timeline can be affected by the gaps that exist between the proposals, the state of labor management relations, the financial condition of the company, et cetera, so there are a lot of things that go into it. But when I was running the finances at ALPA, we planned on about 30 months for a normal bargaining cycle.
Kurt Heidemann:
And then at the end of that cycle, what's a typical contract length or what do you think is an appropriate one? Four years, five years, something like that?
Jalmer Johnson:
Again, it depends on the circumstances in which the contract's being negotiated and what's being negotiated. So for example, the APA is seeking a two-year agreement, trying to get on the front end of the bargaining cycle, so that they reopen in 15 months and get on the back end of the next bargaining cycle, which for them, I think, is the right strategy. But if you are negotiating, not tactically for timing purposes, we have seen contract durations lengthen over the past 20 to 30 years. Three years was the norm. We have gotten much more to three-and-a-half to four years. If there are certain issues that are unique, whether it be the order of magnitude of the give from the company in agreeing, or if there are certain business related matters, then something longer can be appropriate. But I think three-and-a-half to four years, historically in the past 20 years, has been a real sweet spot.
Amy Robinson:
So Jalmer, we have fairly recently filed for federal mediation with the National Mediation Board. In your experience, is it helpful, less helpful? What is your take on it?
Jalmer Johnson:
Sure. So the way I kind of describe when pilots or any union and airlines go into and seek mediation from the NMB, there usually is a factor of failure in the bargaining process, such that one party may not be putting effective proposals on the table or may be engaging in delay tactics, or there are just certain issues that parties can't find a way to work their way through on their own. I think I've always preferred that if you can get something done on your own, that is great, but if the parties can't get things done on their own, I think that having a mediator as a role to enhance communications, but also to kind of nudge each party, and maybe more sometimes than just nudging, try to move them to conclusion, I think can be an effective role.
A lot of it will ultimately depend on who your mediator is, who your board member is that's overseeing the mediation, and the company and the union's willingness to work with a third party. Sometimes, it can't be avoided, and based on what I understand in talking with folks on your NC that this is something that just can't be avoided.
Kurt Heidemann:
Jalmer, the NMB actually assigned us Jim MacKenzie as our mediator. I think you know him. You've worked with him in the past, haven't you?
Jalmer Johnson:
Yes. So I've known Jim for probably 30 years. He was a Northwest pilot. He was the creditor committee representative for ALPA, even after he retired when Northwest was in bankruptcy in the middle part of the aughts. He actually played a role of a second mediator in your mediation back in 2016. I have the highest regard for Jim. I think he's one of the best they have.
Amy Robinson:
So I guess my next question is do you think that the RLA favors the company or the union during mediation?
Jalmer Johnson:
It all depends on what the environment is within the industry. The circumstances that we find ourselves in today, and we found ourselves in in the past decade or more, is when the industry is more profitable, airlines are not looking for concessions. The nature of the agreement will be simply cost-plus. Many airlines will try to use the bargaining process under the RLA to delay reaching an agreement. So it has benefited both parties, depending on which way the pressures go.
Kurt Heidemann:
So this isn't exactly mediation, but since you are an industry analyst, as you look forward, there's risks of recession, there's risks of high inflation, those type of negative economic issues. But balance that with this pilot shortage that obviously is growing daily or weekly, do you see it long term being a concessionary or non-concessionary environment over this next contract cycle
Jalmer Johnson:
Non-concessionary. With years having gone by without raises, with all of the stretching of pilot schedules and the fatigue, reassignments, inflation, pilots don't have any appetite, and airlines are going to have, I think, an impossible job of proving, let alone securing, concessions. So even if there is an economic downturn, the industry is still on a revenue rebound, and it may not get up to what would be considered to be 100% revenue, even by next year relative to the size of the economy, and I think that that plus the airline's ability to show that they can pass on fuel costs in a high fuel environment, they are getting back to normal levels of profitability, even if the economy is slightly weakening. I am a believer that we are not going to see a concessionary round within the next several years. This will continue to be pattern bargaining and cost-plus.
Kurt Heidemann:
Thanks to Jalmer for talking with us today. We appreciate his expertise and historical perspective on the airline industry and labor contracts.
Amy Robinson:
And as always, we'd like your feedback. If you have any podcast ideas, subject matter experts you'd like for us to speak with, or any other suggestions, please drop us a line at [email protected].
Kurt Heidemann:
Finally, today's bonus number is 1,529. That's the number of days from the amendable date until we ratified our current CBA in 2016. That equates to roughly four-and-a-half years, and it looks like we might be on track for that length of time for contract 2020. Hopefully, Southwest Airlines senior leadership realizes the need to close the deal quicker and starts pushing Labor Relations to start talking economics.