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Delta is offering pilots a 34% pay raise – a signal for higher airfares in 2023

In Another sign of the leverage exerted by unions during an industry-wide labor shortage, Delta Air Lines has offered its pilots a 34% pay raise over three years in a new contract, Reuters reported this weekend.

In October, the Air Line Pilots Association (ALPA), which represents nearly 15,000 pilots at the Atlanta-based airline, said 99% of those who voted supported a strike if negotiators could not agree on a new employment contract.

If Delta pilots approve the deal, it is expected to trigger a domino effect in contract negotiations at fellow legend airlines where employment contracts have sunk.

“The unintended consequence of Deltas [agreement in principle]JP Morgan analyst Jamie Baker wrote in a note to investors, “is likely to ignite the negotiation afterburners at American, United and Southwest.” In particular, American Airlines has said it wants its pilots to be the highest paid in the industry.

As sure as the sun rises in the east, higher labor costs will eventually lead consumers to pay more for flights. “Increased input costs, whether in fuel or new employment contracts, will inevitably be presented to consumers in the form of higher tariffs,” Baker said. “Given an industry that is still smaller than in 2019, but an economy that is about 15% larger, we believe the market can absorb these costs and airfares will increase.”

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According to the draft contract that Reuters viewed, Delta pilots will receive an increase of at least 18% on the contract signing date, an additional 5% after one year, 4% after two years and 4% after three years. Pilots will also receive a one-time payment equivalent to a cumulative 22% of their earnings between 2020 and 2022 after the deal is ratified.

Baker estimates Delta’s initial incremental cost for the first year “at a substantial $900 million, excluding profit sharing and back pay, or approximately 0.35¢ ex-fuel, ex-profit sharing.” [costs per available seat mile].”

Meanwhile, the dust has yet to settle on the wages of the pilots. “To date, Alaska is the only major U.S. airline to get its labor organization in order (although, as noted, pilots will increasingly see a bump once the Big Three ratify),” Baker wrote, noting that he was convinced that “By mid-2023, the pilot economy will be locked in at the sector level, potentially improving the sector’s investability.”

Labor problems still hang over the airline industry just as it has largely returned to profitability. The largest airlines reported optimistic forecasts on their third-quarter earnings calls, and pilots have argued that airlines can afford to pay them more.