This week, Delta accomplished something incredibly rare… it came to a new tentative agreement with its pilots 6 months BEFORE the contract was amendable. How the heck did that happen? Both sides wanted something and there was time pressure for it come together. If the rank and file approve, Delta pilots will get big raises, but most importantly for travelers, the airline will shift to bigger jets with better passenger amenities.

Union contracts in the airline industry are different from most others in that they never expire. Instead, at a certain point they become amendable. This is supposed to avoid disruption in service, but in reality, it’s just an awful process that draws out contracts negotiations over several years. It’s only when the stars align that things get done in a timely manner. But a timely manner would be soon after the contract is amendable, not the 6 months beforehand that we see here. So what’s the story?

There was a unique opportunity on the table for Delta to get a hold of AirTran’s fleet of 717s that Southwest has decided it no longer wants as part of its acquisition. But for Delta to get those airplanes, it had to get the pilots to agree to fly them for a rate that would make this move a smart idea. So there was some urgency for Delta to come to an agreement sooner rather than later to make this work out. Sure enough, the pilots were interested and the deal came together. Let’s talk about what this means for everyone.

Delta Pilots Fly the 717
If this is ratified, Delta will take the 88 717s in the AirTran fleet today. I don’t know the terms, but you know that they’re getting a smoking deal on these aircraft. The Delta pilots will fly the 717s at the same rate they’re paid to fly the DC-9s today. In the last quarterly report, Delta still had 21 DC-9-50 aircraft in the fleet, but those are on their way out to be retired soon. The 717s, which are just a bit shorter, will take over for those DC-9-50s with 110 seats split between First, Economy Comfort, and coach.

50-Seat Regional Jets Slashed by 65 Percent
But that’s not a one for one replacement; there are still an extra 67 airplanes if we do the math. Delta says it wants to keep capacity flat, so what else will happen? The airline will slash and burn the 50 seat regionals. Here’s how Delta lines up with 50 seaters as of the last quarter:

That’s 353 of those 50-seaters buzzing around. And you know what the new contract would allow? No more than 125.

Holy cow, that’s a massive decrease. Delta is happy about this because with oil where it is, those 50-seaters are completely uneconomical. The pilots are happy because they get rid of a ton of outsourcing. But wait, we’re still out of balance. Let’s do some math. The DC-9s have 120 passengers, so multiplied by 21 airplanes and you have 2,520 seats. The 717s have 110 seats, so multiplied by 88 airplanes and that adds 9,680 seats. The RJs have 50 seats, so multiply that by 228 airplanes that are going away and you have 11,400. So right now, we’re removing 13,920 seats and adding back only 9,680. What about the rest?

70 More Big Regional Jets
It’s the bigger regional jets that balance this out. At last check, Delta had contracted for 102 aircraft in the 65 to 70 seat range. Those are a mix of CRJ-700s and Embraer 170s. In addition, Delta had contracted for 153 of the 76-seat jets, which are a mix of CRJ-900s and Embraer 175s. As part of this deal, the pilots will allow them to contract for up to 70 more of those 76-seat jets as long as Delta adds new mainline aircraft at a rate of 1.25 to 1. It’s pretty convenient that 1.25 times 70 is … 88 (if we round up), the number of 717s that the airline would acquire.

The Final Tally = Better Customer Experience
That means Delta adds another 5,320 seats, or about a total of 1,000 more seats than it will remove from the fleet. In the end, Delta gets rid of 228 money-losing 50-seaters and the terrible, cramped, single class experience that comes with them. It gains 158 bigger jets with First Class, wifi, and just a bigger more comfortable cabin. This will give Delta a more consistent offering for customers, and it’s going to come at a pretty nice price as well. I’m sure Delta is getting a great deal on the 717s, and all Southwest has to do is push them to the other side of the Atlanta airport.

The Losers
That’s great news for both sides. Who loses? Small cities may potentially lose out. The lucky ones will see fewer flights on bigger airplanes. The unlucky might lose out, but hopefully those 125 50-seaters that remain will be able to keep service to most of those cities, if not all. The other losers here are some of the regionals. I say “some” because some stand to gain 76-seat flying while others will lose. The biggest loser in my opinion is likely to be Delta’s wholly-owned subsidiary Comair. The airline has been shrinking for years, and now it will likely lose half its fleet. (It is the only operator of the older CRJ-100 so those are most likely going away.) This could be the end of that airline entirely, with the remaining big airplanes merged into Pinnacle?

The Rest
So is that everything here? Not quite. The pilots are also getting big pay raises out of this. Over the three-year term, rates will increase by 20 percent, sometime more depending upon the aircraft. Is Delta insane? How the heck is going to pay for that?

Well, buried in the contract somewhere are productivity gains. I don’t know the details on exactly what Delta gets, because those rules are pretty tough to get through. But Delta is going to get better production out of its pilots, and that will help to offset the hourly rate increase. Another offset is a reduction in profit-sharing. As we’ve seen many times before, variable compensation starts to shrink as unions fight for more in base pay.

Wrap Up
In the end, I like this deal as a passenger because the customer experience will dramatically improve. And I like this as someone who watches the industry as well. While I start to hyperventilate when I see such big pay increases, Delta is really getting a lot out of this deal in return. It helps when both sides have goals that align and are motivated to strike a deal. It sure paints a stark contrast to what’s been happening over at United lately. Now, we just have to wait to see if the pilots vote to take it or not.

[If you'd like to read the entire mind-numbing 400+ pages of the agreement, I've got it right here thanks to Holly Hegeman over at PlaneBusiness.]

February 1 was a big day at American. It was the day that the airline went over its (not really) new and improved business plan with employee groups, and that meant detailing the cuts it was going to ask for. As you can imagine, this brought some outrage but also a lot of sadness. American is asking for very deep cuts from employees (and elsewhere), and it’s not really presenting anything new. This seems like the same plan it’s been operating under, just free of some employee contract limitations.

Admittedly, American hasn’t shared all the details of its plan. That wouldn’t be very smart at this point, I suppose. But it’s shared enough at a high level so that it can make its case for massive cost reductions. You can read CEO Tom Horton’s letter to the troops with the high level plan to “not just to compete, but to win.” There’s the “win” phrase again. Ugh.

In short, Tom outlines a strategy of increasing revenue by $1 billion a year while cutting costs $2 billion a year, more than half of which ($1.25 billion) will come from employees. This is the magic plan. Let’s take this one side at a time.

Plan to increase revenue by $1 billion a year
The revenue plan has three parts to it. The $1 billion a year is expected to come from “network scale, fleet optimization, and product improvements.”

Network Scale
American has laid out an ambitious (and quite likely overly aggressive) plan to increase departures by 20 percent over five years from its cornerstone markets of LA, New York, Chicago, Miami, and Dallas/Ft Worth. That’s right. TWENTY percent. For the relatively mature industry we have here in the US, this seems to be very aggressive. I was going to guess that much of this would be from smaller airplanes with fewer seats, but then I saw Tom tell Terry Maxon that the increase would be more in the international arena than domestic. That makes me think that it’s less about regional jets and more about larger aircraft growth. That could mean some serious capacity growth. It’s starting to sound like the days of old when airlines mistakenly chased market share only to hurt themselves and everyone else in the process.

This isn’t just about the 20 percent increase under the American brand, however. This is also about increasing codesharing. Right now, it can’t grow its domestic codesharing business but it has proposed eliminating those shackles. Hello, JetBlue.

Fleet optimization
At first, this seems like a cost savings and not a revenue savings, right? I mean, the airline keeps talking about adding newer, more fuel efficient airplanes and retiring older ones. That has nothing to do with revenue. But that’s not what I think the airline is talking about here. This is really American talking about growing its regional fleet. Today, there is a very tight cap on outsourcing of flying on aircraft with more than 50 seats. American has maxed it out with 47 CRJ-700s, and that’s the only aircraft American has between 50 and 136 seats.

That’s a huge disadvantage for American versus Delta and United, both of which operate about 200 to 250 regional aircraft with more than 50 seats. American is getting aggressive, shooting for the right to outsource a boatload of flying on airplanes all the way up to 88 seats. In a minor bright spot for American’s own employees, American has also ordered Airbus A319s that will give it an option below 136 seats (maybe in the 120 seat range). That’s what American means by fleet optimization, having more aircraft in between the 50 and 136 seat range that it can use to better match seat supply with demand.

Product improvements
This is something that really has nothing to do with bankruptcy. American has already suggested it would improve the onboard product, but what can it do to actually goose revenues? Well, the new flat beds that it’s putting in business class on the 777-300ER aircraft are a good start. Hopefully that expands to the rest of the international fleet, because people aren’t willing to pay a premium for the inferior product in business class today. The new premium economy section could help as well, though that also reduces the number of seats so it relies on American being able to generate a good premium to make it worthwhile.

So that’s what we see on the revenue side. Bankruptcy should allow for more liberal codesharing and regional flying contracts. That’s really it. Now let’s look at the flip side.

Plan to decrease costs by $2 billion a year
Of the $2 billion in annual savings that American wants to see, $1.25 billion will come from employees. The rest will come from a variety of things that allow American to reduce costs – get out of expensive contracts, reduce rates for suppliers, ditch assets it no longer needs, etc. But as expected, American rests the bulk of the weight on employees.

The basic proposal (and it’s only a proposal at this point) is for every work group to give up 20 percent of compensation. That doesn’t mean salaries get cut by 20 percent, but it’s a combination of all types of compensation from benefits to productivity. The cuts vary by each group, and you can read all the union term sheets here.

Some will see pay reductions, all will see pensions terminated, and benefits will cost more for the employee if American has its way. There will also be major increases in productivity. For example, for flight attendants, American wants to increase the maximum monthly hours from 77 (domestically) to 100 which will result in an average of 80 to 90 hours scheduled per person month. I won’t get into the details of each workgroup’s proposed changes, but you should definitely take a look.

In return, what will employees get? There will be company-wide profit sharing that starts with the first dollar of income. Of course, that’s for the employees that don’t get a pink slip. American will be laying off 13,000 employees, about 15 percent of the airline’s total today, and it will come from all groups. We’ll see 1,400 management positions gone, 2,300 flight attendants, and 400 pilots.

But the biggest cut comes to mechanics and fleet service workers – more than 4,000 each. Those deep cuts will come thanks to more outsourcing. American will shut one maintenance base (Alliance, in Ft Worth) and it will start to outsource a lot of work so that it doesn’t need all these employees anymore. The TWU represents both these groups and leadership sounded downright sad in its conference call discussing the proposed cuts. The pilots and flight attendants, on the other hand, sound more angry. At least the pilots don’t sound surprised. The flight attendants strangely acted like they didn’t see this coming.

Let’s back up for a second. Twenty percent more departures in five years but 15 percent fewer employees? Seems strange to think about it, but it really is all about outsourcing.

We do need to keep in mind that these are not final. There will be negotiations and the ultimate resolution will undoubtedly be less dramatic than what we’re seeing here. Regardless, the employees that remain will need to be more productive and they won’t be compensated as well for the work they do. There will need to be more flexibility with work rules, including codesharing and regional flying.

In the end, this doesn’t sound much like a turnaround plan at all. It sounds like an airline continuing to push forward with its same old strategy, just with a new fancy lower cost structure to help it stumble into profitability. I find it hard to really become a believer in this plan, since it’s nothing really new at all. If anything, US Airways, Delta, and other potential buyers should be thrilled to see the current team not really proposing anything game-changing. It gives them a bigger opening to walk through.

Toward the end of the year, the FAA announced the final rule regarding changes in pilot rest requirements. [Read the entire final rule] This has been in the works for years, though it moved to the front burner after the Colgan Air crash in Buffalo a couple years back. The new rule will require more rest for most pilots, and that is generally a good idea. What isn’t a good idea is that cargo pilots are left out. They’re the big losers here, but small cities will also feel pain for a different reason. I’ll explain below.

The new rules don’t go into effect for a couple of years, but the impacts will likely start being felt sooner than that. After all, when pilots are given more rest, that means the airlines need more pilots to fly their schedules. So the airlines will need to start ramping up before the rule becomes law just to make sure that they’re in compliance. How many more pilots will an airline need? It’s hard to know since every airline is different. It’s not like they’re going to need to double the number of pilots they have or anything, but there will need to be more. Combine that with the end of the retirement holiday we’ve been living under for the last 5 years, and there are going to be a lot of job opportunities for pilots. (When the retirement age for pilots was raised from 60 to 65, that meant 5 years where no pilot would be forced to retire, and we’re getting to the end of those five years.)

Of course, when airlines need to hire more pilots to fly the same schedule, that means costs go up. Again, I’m not saying this is a bad thing. It’s just the way it is. So why do I say that small cities will be hurt most here? It has to do with the Flight Duty Period (FDP).

Today, pilots can be on duty up to 16 hours straight, and that’s called the Flight Duty Period. During that time, they can actually fly up to 8 hours (or more if there are unforeseen circumstances). Now, those numbers are changing depending upon when they fly and how many flights they have. So if a pilot comes on duty between midnight and 4a, then he can’t be on duty for more than 9 hours no matter what. If he comes on duty between 7a and noon, then he can max out at 14 hours on duty because that’s more normal for the body’s clock. (There are adjustments required depending upon how long the pilot has been in that time zone.)

But even if the pilot comes on duty at 8a, he can only be on duty for 14 hours if he has no more than 2 flights during that time. It slowly decreases the amount of time he can be on duty until you hit 7 flights. At that point, he can be on duty no more than 11.5 hours.

See how this is coming together? Small cities are the ones served by short hops, and regional pilots have the grueling task of flying many short hops during the day. That kind of flying is exhausting, and that’s why it’s those pilots who are going to see the biggest gains in terms of rest. Costs will go up most as a percentage for the regional airlines, it would seem to me, and that again puts pressure on costs to small cities that are already in trouble.

The rest of the rules impact pilots more broadly. While pilots could actually fly only 8 hours in a duty period before, it’s now up to 9 hours only if reporting between 5a and 8p. Overnight operations are still capped at 8 hours, but it’s important to note that there is no exception anymore. These times are hard cut-offs now. This changes when you have additional pilots on board for longer haul flights, but the framework is roughly the same.

When it comes to rest in between duty periods, that’s changing as well. Today, rest can be as little as 8 hours between the time a pilots is released from duty until the time he’s back on again. That hardly gives the opportunity for adequate rest in many cases. The new rule is 10 hours between periods, and that’s designed so that pilots can get 8 hours of sleep. That won’t always happen of course, but it is an improvement in the rule. And pilot are supposed to tell the company if they haven’t had enough sleep during that rest period. (I imagine that sounds better in theory that what will actually take place.)

There are other rules as well but we don’t need to get into the weeds here. The point is that this will help pilots to be more rested, and that’s a good thing . . . at least, most pilots.

There is a crazy carve-out here that exempts cargo carriers from the new rules, as I mentioned up top. Apparently, the cargo lobbying group earned its money, because this seems impossible to justify in any normal situation. Last time I checked, cargo pilots had the same value to their lives as commercial pilots, so if a certain amount of rest is deemed necessary for commercial pilots, then it should be the same for cargo. It’s probably even more important for cargo since they do much more of their flying overnight, against their natural body rhythm.

So are these rules good? I’m not a sleep scientist, so I can’t comment on if this change is enough, but the method that they settled on – trying to adjust to the body’s clock – seems smart to me. Yes, there will be a cost increase, but at least pilots will be better rested. It does, however, mean there’s even more pressure on the already-struggling small cities.

When you think about airline labor disputes, you probably think about strikes. After years and years of negotiating, the unions gain the right to walk out and that shuts the airline down, or it at least hampers its operations significantly. This weekend, we were faced with something else. Fans of the National Basketball Assocation (if there are any left) certainly know this tactic well: lockout. Qantas management decided to shut down the airline and lock out labor to force an agreement. Unlike the NBA, this required a quick resolution, so the government stepped in and made the airline fly. It’s exactly what CEO Alan Joyce wanted, but he’s going to get a lot more than he bargained for.

In Alan’s mind, he’s saving the airline from ruin.

There has been an ongoing dispute with labor for years at Qantas. This issue in particular centered around the pilots, mechanics, and baggage handlers. Most of the problems stem from a couple things. Qantas employees believe they deserve all the compensation in the world while Qantas management disagrees. Qantas is actively trying to go around them by setting up subsidiaries elsewhere, most notably with low cost carrier Jetstar which has employees with different work rules and pay rates.

This move has had the Qantas employees steaming for years, and it only got worse when Qantas announced it would set up a new premium airline in Asia as well. The assumption is that Qantas employees are not going to be a part of that enterprise because the pay and work rules for the Australian airline just don’t work in the world today.

Labor likes to point to the continued profitability of Qantas and how the airline can’t just push them aside in favor of cheap labor just to goose profits further. But Qantas is quick to respond that profits don’t come from the core international airline operation. That has been a money-loser and there needs to be changes in pay/work rules to get closer to what other airlines pay. That point is certainly up for debate in my mind.

The reality is that like in everything else, a compromise is necessary, but just as we see in the US political scene these days, none is at hand. There has been increasing industrial action from the labor groups with little strikes here and there. The mechanics have been working to rule and Qantas has seen performance suffer significantly.

Alan Joyce is Crazy … Like a Fox?
So what can Qantas do? It could keep negotiating in a situation where no deal will ever be made, or it could do something drastic. Alan chose Option B; he went scorched earth and shut down the airline.

Now why the heck would someone do that? It’s actually a clever move. (Don’t read that as me supporting it, but it is clever.) First, it shows the labor groups that Qantas is not screwing around. Alan is willing to shut the place down if the unions won’t come to the table and get serious about an agreement that works. Note that Jetstar, Qantaslink and JetConnect subsidiaries all kept running – it’s just Qantas itself that shut down. Qantas wants the unions to think that this will be a permanent solution if things don’t get resolved.

But more importantly, it pushes the government to get involved. The expectation had to be that by doing this on Saturday, the government would have acted swiftly and had the airline up and running again by the end of the weekend. That’s exactly what’s happening, though cancellations are likely to persist into the week as operations ramp back up. I think it probably took a little longer for the government to act than Qantas thought.

Qantas spent the weekend shut down but now, with the government’s urging, Fair Work Australia made the airline start flying again. The airline was deemed to be too vital to the economy to let it stay shut down, and that’s exactly what Alan was banking on. The airline was forced to re-start operations and labor has to stop all industrial action. Labor and management will enter into intensive negotiations over a 21 day period. if that doesn’t work, they go to binding arbitration.

And that’s probably what needs to happen here, because both sides seem completely loony to me with their thoughts about what’s right. If someone rational gets in the middle and strikes something fair, both sides will be unhappy but at least this will all be over.

So does that make this a smart move? It’s certainly a creative way to force the government into action, but it is also highly destructive of the relationship with every single employee as well as with the traveling public. Sure, it will end the industrial action but at what cost?

Some employees may have supported Qantas management before; not the unions, perhaps, but others. Now with this reckless grounding, employees have to be livid and somewhat nervous. I would start looking for a new job if this is how my senior management behaved. I certainly would have lost a great deal of respect for management.

If you pull a stunt like this and inconvenience thousands of travelers, you run the risk of pushing them off permanently. In the past, Qantas really didn’t have much competition within Australia or even to and from the country, but that has changed dramatically. Internationally, there are more flights every day from Asian/Middle Eastern carriers, and Qantas management isn’t shy to talk about it. That’s why it wants concessions from the union.

Virgin Australia Must Be Smiling
The biggest winner, however, is Virgin Australia. Even though Qantas wasn’t putting people on other airlines, Virgin responded quickly by offering discounted fares to Qantas fliers, lounge access for Qantas elites, and a bulked up schedule to accommodate the stranded folks. It also saw partners step in to help. Etihad offered to start flying routes on the airline’s behalf to pick up the slack.

For Virgin, it’s exactly what it needs. The airline has changed itself to focus on business travelers over the last year or so, and this is the perfect way to show Qantas loyalists what it can do. Those who have been burned by Qantas may not go back, or so Virgin Australia hopes. But Alan Joyce thinks that he’s found the way to success and he’s making that gamble.

Will people, employees and travelers alike, leave Qantas over this and look for better options? Qantas is betting that won’t happen, but I wouldn’t be so sure. Qantas has probably done serious harm to itself here. I would expect calls for Alan Joyce’s head to get louder and louder. But maybe that’s what the airline wants? Maybe, as the unions think, Qantas wants to shut down the old airline and start anew with cheaper labor and lower costs.

Now there’s a scary tale that you can tell at your Halloween party tonight.

Earlier this week, US Airways finally got the preliminary injunction it had asked for against its pilots related to the operational disruption that’s been going on for a few months. This was a clear victory for the airline as the judge seemed to agree with US Airways in great detail. I would highly recommend reading the 45 page ruling for some of the juicier tidbits. Chime in with your comments below.

And I thought I’d throw in a bonus topic this week for its insanity. Not sure how much readers know about Stelios Haji-Ioannou, but he is the man behind the “easy” name. The best known easy brand is easyJet, one of the largest airlines in Europe. While Stelios is still the largest shareholder, he doesn’t run the company. He has, however, inserted himself at times and made life difficult for all involved. Now, it appears he’s fed up and wants to start a rival airline, Fastjet or E-jet, to compete with, um, the airline he owns a big chunk of? Riiight. This one is just downright silly.