Update: Delta Preemptively Strikes A Deal With Pilots

| About: Delta Air (DAL)
This article is now exclusive for PRO subscribers.

Summary

Delta agreed to handle flights to London internally.

The deal does not contain any specific punishments if Delta backs out.

By dealing nicely with the ALPA (Air Line Pilots Association), Delta weakens the competitive position of the Delta Pilots Association that would like to replace the ALPA.

I expected Delta to continue improving its business structure, but I didn’t see this move coming.

The intelligent technique reinforces my expectations for management to keep improving the underlying business.

Delta (NYSE:DAL) is preparing for union contract discussions in April by appealing its pilots. The company just released a deal that is the first of its kind, according to Rick Dominguez. Mr. Dominguez is the executive administrator of Delta's chapter of the Air Line Pilots Association. The interesting feature of this deal is that Delta is providing assurances to the union that it will use Delta's planes and pilots for flights to London. The union wants to ensure that Delta does not transfer the flights to Virgin.

According to the report on Bloomberg, the deal "would let Virgin add eight more wide-bodies to its current 38." After that point, Delta would be forced to ensure it was expanding rapidly enough to maintain its share of capacity relative to Virgin. However, the deal does not contain any specific penalties for Delta if the firm fails to follow through on the assurances it has provided. Tim Caplinger, who started a union (Delta Pilots Association) that hopes to replace the Air Line Pilots Association, has held a more confrontational stance than the current union.

In my most recent article on Delta, I discussed the ways Delta is trying to leverage its competitive advantages. The company has worked hard to reduce debt and acquire attractive pricing on fuel, but management is showing another side to their strategy. By offering concessions to the ALPA, management may reduce the appeal of another union that wants to make stiffer demands. In my opinion, this is an intelligent move for Delta to prevent disruptions in service and keep the pilots happy. By dealing with the more favorable union, Delta stacks the deck against a replacement union that could be much worse for the airline. I supported the changes management made to the company strategy, and I think this is another smart move.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.