Fitch: JetBlue Unionization Poses Long-Term Cost Pressure

Cost pressures at JetBlue could intensify over the longer term as a function of the unionization of its pilots, according to Fitch Ratings.

More than 70% of JetBlue pilots Tuesday voted to join the Air Line Pilots Association (ALPA). This marks the third attempt as pilots previously turned down unionization in both 2009 and 2011.

JetBlue has been consistent in stating its intent to offer pilot wages that are industry competitive and already agreed to a 20% wage increase over the next three years prior to unionization. That agreement will not be affected immediately by yesterday's decision. Increased pilots' salaries under the agreement will equate to roughly $145 million in extra compensation expense over the three-year period.

That said, the potential for the unions to negotiate pilot productivity and work rules could further affect cost. JetBlue's pilots are known to be some of the most productive in the industry, which could be a point of negotiation. Fitch notes that any potential impacts will not be immediate, as the process of negotiating a joint collective bargaining agreement could take multiple years.

We note that other low-cost carriers (such as Southwest and Spirit) also have unionized pilots, but are still able to maintain their overall unit cost advantage compared with the network carriers.

A potential side effect of unionization could be a broader push to unionize other groups at JetBlue, such as flight attendants. If additional unionization occurred, this could push wages higher, adding to existing cost pressure. However, the impact would have to be sizeable to precipitate any negative rating action.

There is no immediate credit impact for JetBlue as a result of the unionization. JetBlue has been assigned a 'B' Issuer Default Rating by Fitch with a Stable Outlook.

JetBlue's ratings are supported by operating margins at the high end of its North American peer group, consistent profitability, solid liquidity and a growing presence in key markets. Fitch views JetBlue's credit profile as improving and may consider a positive revision to the Outlook or ratings in the near term if trends continue. The ratings remain constrained by high leverage, heavy upcoming capital requirements, a growth strategy that is more aggressive than its peers and a certain amount of geographic concentration in the East Coast.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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