Why Furloughs Make Airline Cost Problems Worse

United Airlines has said it could furlough as much as 45% of its front line employees. American is looking at furloughing 20% – 30% of flight attendants, and 10% – 20% of pilots.

Since union seniority is usually the driver of who stays and who goes, absent some other agreement (Ryanair cabin crew are avoiding furloughs by taking a 10% wage cut), the employees who are left are going to be the most senior – and the most highly paid.

To be sure, there will be captains bumped down to first officers and pilots who are moved down to work smaller equipment. Individual pilots may make less than before. But the average seniority of employees is going to be very high. In some cases we could be talking about lopping off hires from the past 15 years or more. And that’s going to mean keeping the expensive employees.

Put another way, for an airline doing major furloughs the average cost to crew a flight will be higher after the furloughs than it was before. Every flight will have nothing but flight attendants at the top of the scale. Not to mention increased benefits costs from an older workforce.

And that means that ultra low cost carriers are going to have an even bigger cost advantage against American, United, and Delta than they did before. When thinking about whether a big legacy airline like American might file bankruptcy in 2021, most of the attention is usually paid to debt levels – which will lead to even greater financial underperformance going forward. But won’t they be even more cost-uncompetitive, too?

To maintain competitiveness, outside of Chapter 11, doesn’t it make sense to ensure that people leaving the airline are higher cost employees not lower cost ones? To do that, in the context of a union agreement, means enticing those employees with voluntary buyouts. Each of the airlines has been offering those (Southwest’s have been relatively generous). It may make sense to really up those offers, to entice more senior crew to leave, recognizing that the buyouts will pay themselves back in lower operating costs going forward.

I dispute the notion that American Airlines has too much liquidity. They don’t know what the right amount is. If they undershoot they’re bankrupt, if they overshoot they have too much debt. It might make sense to use some of that liquidity to become more cost-competitive.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. In the late 80s, nobody envisioned a world without PanAm, Eastern and TWA. Its will happen again. I’m hoping its either United or AA (in that order)

  2. The Delta package is apparently quite attractive too, especially the medical component (targeted towards senior people to entice them to retire), hence why they have been able to get 17,435 non-pilot employees to sign up. Delta said today that they will take a charge of about $3B in Q3 to account for these early retirement packages.

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