Will Pilot Strikes Cripple U.S. Airlines?

By Markets Fool.com

Last week, the pilot union for Hawaiian Holdings (NASDAQ: HA) announced that it had opened a "Strike Operations Center" to serve as its headquarters in the event of a strike.

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Hawaiian Airlines pilots are threatening to strike. Image source: Wikimedia Commons.

Across the U.S. airline industry, there are plenty more airline pilots hoping to strike in order to get a larger share of the industry's record profits. However, investors and the flying public should recognize that the collective bargaining rules governing the airline industry make strikes extremely rare and difficult to pull off.

Hawaiian Airlines pilots are unhappy -- and they aren't alone

Pilots at Hawaiian Airlines claim that they earn 35%-45% less than their peers at other carriers. What's more, the pilot union has stated that Hawaiian Airlines' management is demanding onerous concessions in return for any pay raises.

The company and the pilot union have been in contract negotiations for 18 months, during which time the pilots have become increasingly restless. In May, 99% of Hawaiian's pilots voted to authorize the union to call a strike. This was followed by the opening of the strike operations center last week. The union has also asked the National Mediation Board (NMB) to declare an impasse in negotiations.

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The situation at Hawaiian Airlines is far from unique. Last year, Southwest Airlines' (NYSE: LUV) pilot union formed a "strike preparedness committee" after three years of contract talks had not produced an agreement. (Southwest finally reached a tentative agreement with the union last month, though.)

Why airline strikes are rare

Unlike most unionized industries in the U.S., airlines are governed by the Railway Labor Act. Under the RLA, union contracts eventually become amendable but never expire. To be allowed to strike, airline employees must first get the NMB (which oversees airline labor negotiations) to declare an impasse, then observe a 30 day cooling-off period.

The NMB hardly ever grants airline unions the right to call a strike. It is equally difficult for management to impose a lockout. Given the economic disruption caused by airline strikes, the NMB is extremely reluctant to abandon mediated negotiations.

That's why Southwest Airlines and its pilot union were still at the bargaining table last month, nearly four years after the previous contract became amendable. In most industries, the potential for a strike would have forced a quicker resolution of that dispute.

Southwest Airlines pilots were never permitted to strike during their long-running contract dispute. Image source: The Motley Fool.

Indeed, the last time that the NMB authorized a pilot strike was more than six years ago, when pilots at Spirit Airlines (NASDAQ: SAVE) walked off the job for several days. That came after more than three years of fruitless negotiations.

At the time, Spirit Airlines was a small airline, with annual revenue of less than $800 million. Hawaiian Airlines is roughly three times that size and has a large market share or outright monopoly on many of its routes. Thus, a pilot strike there would cause more disruption than the 2010 Spirit Airlines strike, making the NMB less likely to declare an impasse.

Look past the rhetoric

Given the legal restrictions governing strikes in the airline industry, rhetoric takes on an outsized role in union contract negotiations. That means it is important to take public statements and actions by either side with a grain of salt.

For instance, Southwest Airlines pilots picketed in Dallas (home to the company's headquarters) in late August to protest "negligible progress" in contract talks. Less than a week later, the union and company reached their tentative agreement, which suggests that the two sides weren't so far apart after all.

The upshot is that a pilot strike at Hawaiian Airlines is a lot further away than the union would have you think. It would likely take several more years of stalled negotiations for the NMB to declare an impasse. Pilot strikes are even less likely at larger airlines. For better or worse, airline management teams and labor unions will need to work out their disagreements at the bargaining table.

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Adam Levine-Weinberg owns shares of Hawaiian Holdings and Spirit Airlines and is short October 2016 $50 calls on Hawaiian Holdings and long December 2016 $30 calls on Spirit Airlines. The Motley Fool recommends Spirit Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.