Scope Clause is something that is almost certainly an issue, along with furloughs, that is causing US headaches.  So, what are some of the options or scenarios that could play out?  Let’s look at the big three US airlines that have the scope agreements.

To start with, our baseline assumption is that when airlines restart their business and travel starts to bounce back, the initial active fleet will focus on smaller aircraft, especially the regional jets.  (Pilots we spoke with do not agree with this assessment) Regional jets have the capacity that is easily sold (typically 76 seats) and also be the quickest aircraft to reach, and beat, breakeven load factors.  Focusing on regional jets immediately draws attention to the scope limits.

American Airlines reported that it would accelerate the of four regional jets (E-140) to before June 2020, to remain in compliance with the terms of its scope clause agreement.  “We’ll comply with our agreement with pilots. To do that, we are making minimal regional fleet adjustments, including retiring up to four regional aircraft a few months early,” spokesperson Andrea Koos said.  So where are we in terms of the scope clauses?  The following table is a summary of these deals.

There are nuances, i.e. American requires 65% of shuttle flights to be mainline, Delta has furlough protection tied to large RJ penalties (76 seaters) and United has the same protection and also allows more RJs if the mainline gets a new small single-aisle jet.  The table captures the essential numbers.  The big three airlines cannot utilize the newest generation of RJs like the E175-E2 and the M-90 because they exceed the MTOW weight.  These newest aircraft offer state of the art fuel burn, but with fuel at the lowest prices ever, this is no attraction.  From a fleet renewal point of view, there is no need to even have a conversation.

But we are in a whole new world from the overall fleet perspective.  With demand near zero, these airlines have parked just about everything they can. And it is fair to say, that may not be enough.  However, even though the airlines are focused on cash preservation right now, they also have to be on the lookout for the earliest green shoots emerging in their reservation systems. Air New Zealand is already seeing this.

When these little bits of good news appear, networks will need to be brought back.  But ever so gently and almost certainly focused, in our view, on selling RJ capacity first.  And it is here that we need to revisit Scope.

Let’s start with what these airlines looked like, in single-aisle fleet terms, in January.  This is a very busy chart that lists this fleet by units and age.  The red group are those aircraft we assume will not come back from being parked – they are over 20 years old.  The orange group is likely to see retirements too, though maybe not all of them. The age shown is average and so, for example, American has many 737-800s over 20 years old that probably won’t come back. But the others will. The E-190s are being retired though. The yellow group looks to mostly remain active and useful, and the green we believe to remain in service.  On the other hand, United can add another 20 RJs.  Its decision on the CRJ550 may yet play out very well.

Below the colorful section, we have some key numbers of Scope – with current and potential future units.  The potential fleet is smaller and varies widely among these airlines.  The potential is what we think the single-aisle fleet might look like by the end of 2020.

Of great concern to the pilots (and other employee groups) at these airlines will the reduction in fleet numbers.  Based on our data and pilot numbers from the unions, the fleet cutback will remove the need for thousands of pilots.  As we noted before, this takes us from a pilot shortage in January 2020 to a pilot surplus 60 days later.  But it also means, potentially, an even greater pilot shortage three years from now when networks are, we all hope, fully reactivated.

So what are the possible strategies for scope clauses? First a few thoughts on mainline.

Pilots

  • As has been made abundantly clear to us from several conversations, pilots are in no rush to move on Scope. They remember the previous furloughs and pay cuts and have noted how stock buybacks have enriched management.  In Biblical terms, one might say, this experience has “hardened pilots hearts”.  Pilots routinely refer to scope as “religion”.
  • That was fine as long as there was a pilot shortage and aircraft were operating at 80%+ load factor. 
  • Pilots have some protection, but the world has moved beneath their feet as it has for the entire industry.

Airlines:

  • The airlines no longer need to fear any work from its pilots.  There is, understandably, no longer a pilot shortage. 
  • Moreover, even with the federal financial support, the big three must hold on to employees only through September.  Even if there’s more federal support to come, these airlines may choose not to accept it because it ties their hands with respect to layoffs. 
  • America’s big three are certainly going to shrink.  So they won’t need as many pilots.

The new reality
We estimate these airlines could have a vastly different fleet by year’s end. Restarting the industry likely will focus on RJs and this means an immediate break in scope limits.  How long this goes on for, and how long the will accept this is unclear. For example, how long would it be necessary to use an RJ between and New York before mainline jets are required?  We think this could take less than a month. But, in truth, nobody knows.

Moreover, all three airlines have to be careful which pilots they let go – for example, they need to keep a large group of check airmen who are senior for the restart.  Seniority among pilots is a big union item and junior pilots rightly fear they will be first to be furloughed.  For the airlines, it would be financially better to furlough and offer early retirements to the more expensive senior pilots.  There are tough choices coming for both sides.

Conclusion
No matter how we slice up the single-aisle fleet, it seems the current scope deals are outdated.  The key issue here is who has the most negotiation power.  It is a delicate balance. Neither side should overplay their hand because karma comes within three to four years.

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