DALLAS ( TheStreet) -- At a time of crisis in the regional airline industry, leaders of the 3,000 regional pilots at American Eagle will decide Wednesday whether to authorize a union vote on a new contract agreement that accepts pay rate concessions in return for two key benefits: a fleet upgrade and an increased likelihood of flying for mainline partner American Airlines ( AAL).
The decision comes at a time when regional jet operators face multiple problems. Republic Airways (RJET) said Tuesday it will not extend leases on 27 smaller aircraft "due to a lack of qualified pilots." United (UAL) closed its Cleveland hub, primarily because it will halt 70% of its regional aircraft flights. New federal safety regulations limit the flexibility in pilot scheduling, requiring more pilot hiring.
The lack of pilots has been widely proclaimed. But Lee Moak, president of the Air Line Pilots Association, has called it "a shortage of qualified pilots who are willing to fly for U.S. airlines because of the industry's recent history of instability, poor pay, and benefits." Others say the problem is not too few pilots but rather an inability to profit from flying small airplanes with 50 or fewer seats.
The decision by the nine members of Eagle's master executive council (MEC) will have a significant impact on the regional jet industry, where Eagle is among the biggest players as the principal regional partner of American, the world's largest airline following a merger with US Airways.
"The company is saying they can't find pilots to fly as regional first officers at the same time as they are looking to lower our earnings potential," said Sam Pool, a LaGuardia-based first officer representative and MEC member. "It's ironic that with the media discussing the pilot shortage, here is a major player in the industry that is attempting to pay even less."
Throughout the recent history of the airline industry, executives including Bob Crandall at American and Steven Wolf at US Airways have designed contract proposals linking concessions to the promise of growth and expanded career opportunities, enabled by new aircraft.
American Eagle's proposal generally follows that pattern. It offers an increased chance for Eagle pilots to flow through to mainline American, where pilot salaries are generally higher, although some veteran Eagle captains would take steep pay cuts to start at American. Also, Eagle would promise to acquire new airplanes to replace the many 50-seat and smaller planes in its fleet.
The proposal doesn't reduce anyone's salary, but it reduces salary caps and freezes them until 2018 in a contract that would extend for 10 years. Pilots would get a 1% annual increases starting in 2018.
First officers, who receive notoriously low starting salaries throughout the regional airline business, start at Eagle at slightly above the industry average of $21,285 plus benefits. Under the agreement in principle, they would cap out after four years at about $38,000. Captains currently earn $70,000 to $100,000. Under the agreement, they would cap out after 12 years at about $90,000.
Bill Sprague, chairman of Eagle's ALPA chapter, said pilots already agreed to $40 million annually in concessions, primarily in work rule changes and reduced benefits, during American's bankruptcy. Now "we are back at the concessionary table while working for a company that has $10 billion in cash and cannot find pilots," he said. Without the concessions, he said, "They will place the aircraft elsewhere, allow us to shrink and shut us down."
Asked what the MEC will do, Sprague responded: "It's hard to say. (We) are split right down the middle as to whether the MEC will decide to send it out, decide the contract language doesn't fit the agreement in principle or is not something the pilots would entertain." The MEC has nine voting members -- a captain representative and a first officer representative from each of four pilot domiciles, and a representative from the training center. The chairman, who is elected by the MEC, doesn't vote.
In a letter to pilots on Jan. 20, American Eagle President Pedro Fabregas said Eagle would commit to a minimum fleet size of 170 aircraft for the 10-year duration of the contract. The commitment includes 60 Embraer new E175s seating 76 passengers and up to 90 additional E175s if American exercises options on the aircraft. The current fleet of 225 aircraft includes 44 and 50 seat Embraer planes as well as CRJ 70-seat aircraft.
Additionally, Fabregas wrote, the agreement includes "unprecedented flow through to a mainline partner. No other regional airline will have pilots moving from first officer to captain and then to the mainline as quickly." Specifically, the agreement provides that Eagle pilots will account for 50% of each American training class. The existing agreement sets a minimum of 20 Eagle pilots in each class; the new one would up that to 30 pilots and would eliminate a requirement for job interviews.
Sprague said the flow-though provision "is a step in the right direction." But he noted, "We have decades of history with this company agreeing to something and then reneging on it. The flow-through agreement in 1997 guaranteed everybody here then would be at American in five years. So there's a real credibility gap."
The merger with US Airways brought a new management team. "They do things differently," Sprague said. "Whether they are better or worse, we don't really know."
Aviation consultant Bob Mann said the regional jet industry is characterized by low salaries that fail to incentivize pilots, resulting in a perceived pilot shortage. First officer salaries are so low that "they are not designed to be anything other than a four-year path to upgrade to captain," he said. But over the past decade, the Eagle path didn't lead to mainline jobs because both Eagle and American were stagnant or shrinking. "It used to be a stepping stone," Mann said. "Now it's a stagnation zone."
The proposed contract doesn't change the equation, said Pool, in his sixth year as a first officer. "It is not going to lure young men and women into investing the time and treasure necessary to becoming an airline pilot," he said, because salaries are low and the potential to upgrade is limited. He added: "Nobody ever sets out in life to be a regional airline pilot."