British Airways pilot deal, what does it tell us?

Another victim of COVID-19?

British Airways reportedly reaches union deal for pilot reductions

According to media reports, a deal has been reached between British Airways and its pilots which will see pilot numbers reduce by 650, with 350 permanent job losses and 300 pilots placed into a “rehire pool” on 50% pay. Working pilots will take a 15% pay cut, half of which is permanent and half will “snap back” once all the pilots in the rehire pool have been brought back.

What does this deal say about BA’s short and longer term plans for capacity and for its attempt to rebuild profitability in a post COVID world?

Implications for capacity

650 pilots represents about 15% of BA’s pilot force. Capacity reductions during 2020 have been and will continue to be much greater than that. So I think that 15% lines up with reduction in the number of flights that BA is planning for summer 2021, compared to the pre-crisis level. The flying reduction might be a little more than this due to “natural attrition” of pilots every year. The reduction in flying could be less, if the deal contains any pilot productivity elements, although that looks unlikely to me.

The “rehire pool” suggests that BA intends to add back close to half of those flights quite quickly, maybe within 1-2 years, depending on how well demand recovers and how the competitive environment develops.

Is this the end for the 747-400?

In terms of overall capacity, it is highly likely that BA will be skewing its flight reductions towards the larger aircraft types, trying to retain its overall network shape whilst aligning seat count to reduced demand. Almost certainly the ageing 747-400 fleet will bear the brunt of the reductions, consistent with reports that the majority of the “pooled” pilots will be from that fleet. When they return from the pool, I’m sure they will be retraining for different aircraft types.

The big question is the future of BA’s largest aircraft type, the A380, of which it has 12. Air France KLM have already taken the decision to retire its A380s and Lufthansa have reduced their fleet and withdrawn them from Frankfurt, although it may still operate the aircraft from Munich from 2022. Personally, I think that BA will continue to operate the A380, preferring to accelerate the retirement of the entire 747-400 fleet whilst minimising capital spend on new aircraft. BA has just started taking delivery of A350-1000 and 787-10 aircraft, which will be the most fuel efficient of all its wide-body aircraft types. I would expect BA to continue taking deliveries of these types, albeit at a reduced rate.

What does the deal mean for unit costs?

Taking into account the impact of focusing reductions on larger aircraft, I would expect BA’s seat capacity to fall by more than its number of flights or flying hours. So a 15% reduction in pilots probably equates to at least a 20% overall reduction in capacity, which would align with the reduction in demand expected by most commentators for next year compared to pre-COVID levels.

Whilst the pilot pool is in place, the cost per operating pilot would be reduced under this deal by 10.9%. This is less than the headline 15% pay cut due to the non-flying pool pilots getting half salary. That means that pilot pay costs during this phase fall by 24%, which should be at least in line with the capacity cut. That will be needed, as it is clear that average yields will be down too. Business travel seems certain to recover more slowly than leisure and prices will be under pressure as airlines fight to rebuild their businesses and stimulate demand.

Once the pooled pilots have been brought back, total pilot costs will be down 15%, with cost per pilot down 7.5%. Again, a helpful contribution to counteract ongoing yield pressures.

In conclusion

Overall, this looks to me like a carefully crafted deal which should help BA get back to profitability, provided that demand recovers at least as well as expected in 2021 and government restrictions are lifted to allow airlines to meet that demand.

Profits are certainly going to be needed, as BA will need to start rebuilding its balance sheet after what looks set to be a brutal 2020 of eye-watering losses and rapidly mounting debt levels.