Can Delta’s pilots derail a joint venture success story?

When the US Department of Transportation granted tentative approval to Delta Air Lines and its partners for a renewed and revised transatlantic joint venture most of the associated parties celebrated. For the carrier’s pilots, however, the approval is a reminder of promises made six years ago and thus far unfulfilled. The Master Executive Council (MEC) for Delta’s pilots union filed a comment in response to the DoT approval, seeking additional conditions be placed on the agreement with respect to “the balance of Delta-operated flying opportunities and US aviation jobs in joint venture markets.”

The MEC cites data noting that Delta’s share of the New York – London market operating in conjunction with its partner Virgin Atlantic (where Delta is a 49% owner) has reduced since that initial joint venture was approved by the DoT. Delta added a token number of flights since 2013 between the US and Heathrow, the pilots argue, while Virgin Atlantic’s operation saw a 40%  increase in that same time. Virgin Atlantic’s growth was fueled by cuts to other routes, including Vancouver, Tokyo, Mumbai and Capetown. Indeed, from early 2015 the joint venture operated like “Delta Atlantic,” with service from Delta’s hubs to the UK seeing a major boost from Virgin metal.

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Delta’s pilots’ union sees this as objectionable, and said as much in its filing with the DoT.

By using the joint venture to outsource Delta flying to a foreign carrier with less favorable wages and working conditions, the Joint Applicants have effectively used the immunized alliance mechanism to engage in labor arbitrage. Among other disparities, Virgin pilots who fly between the US and UK are compensated at a significantly lower rates than are Delta pilots. In addition, all of Delta’s US-UK operations are currently staffed by a three-pilot crew, while the majority of Virgin’s flights between the US and UK are crewed by just two pilots. Thus, in allocating joint venture capacity growth almost exclusively to Virgin, Delta has utilized the alliance mechanism to functionally reduce labor costs and circumvent the higher negotiated labor standards to which it agreed in its pilot collective bargaining agreement. Such conduct is fundamentally inconsistent with the Department’s public interest objectives of encouraging fair wages and working conditions.

Similar language around labor standards and wages has been used by US carriers in objecting to Norwegian and Air Italy, among others.

Enforcing Market Share

Citing the joint venture’s profit sharing accounting terms, the MEC continues its objection, noting that, “disparity between Delta’s existing capacity and its share of incremental profits under the Amended JVA settlement mechanism significantly reduces any incentive Delta would have to continue to grow its own operations or maintain its existing share of flying relative to the other Joint Applicants. The MEC is therefore concerned that the Amended JVA could expose Delta’s pilots to a scenario where—as happened under the Delta-Virgin joint venture—Delta’s own flying in the Amended JVA markets remains static for multiple years while its partner carrier operations in those markets continue to expand.”

As a result, the MEC is requesting an “interim review” of the approved JV at the end of 2019. It wants to ensure that “Delta’s third JFK-LHR frequency has been restored, that the total number of transatlantic frequencies scheduled to be operated by Delta in 2020 meets or exceeds those operated by Delta in 2019, and that Delta will generate an equitable share of any new flying scheduled to be initiated under the joint venture.” In other words, the MEC wants more flights operated by Delta metal within the JV markets.

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One challenge for the pilots’ claim is that the carrier does fly more transatlantic routes now than it did in 2013. UK frequencies may be flat, but there are more flights and destinations overall. The MEC calls out this growth in the filing, noting that Delta flies so many routes and block hours across the Atlantic relative to its JV partners. The 2018 summer season saw a peak of 85 daily Delta-operated flights each direction across the Atlantic.

The carrier has also expanded in other international markets in the interim. No, they are not Heathrow, but for an airline that’s part of the point of having a joint venture. Partners can focus their efforts on markets where they have the greatest strengths, allowing the overall network to benefit.

Could Delta further shrink its transatlantic frequencies to partner hubs, favoring secondary cities or new markets? Perhaps. New services from JFK and Boston slated for 2020 will help on that front, though that growth will also be shared with Virgin Atlantic.

The union complaint also relies on a clause in the US law that encourages the Secretary of Transportation to “at least ensure equality with foreign air carriers, including the attainment of the opportunity for air carriers to maintain and increase their profitability in foreign air transportation.” Arguing that the Joint Venture is sufficiently stilted that it fails this test is a stretch. Ultimately, however, it seems practical to come up with as many plausible challenges as possible and the hope one sticks.

Separate from the MEC comment, the airlines filed a joint comment seeking a small revision on wording to ensure that Alitalia is only excluded if it fails to come to a new agreement with the group (the current DoT ruling forces Alitalia out no matter what). It also seeks to clarify that the recent Delta-Korean JV is not affected by this approval. While the MEC complaint appears unlikely to succeed these requests will almost certainly be approved by the DoT.