Over the past decade, the U.S. airline industry has significantly turned itself around, helped largely by a sharp decline in fuel prices and a high level of industry consolidation. Although airlines are now operating in an unprecedented period of sustained profitability, future growth could face a new and unique challenge in the form of a pilot shortage.
Which, it turns out, could be a blessing in disguise.
The pilot shortage issue first came into the spotlight in early 2016 with the bankruptcies of regional airlines such as Republic Airways and SeaPort Airlines. Both companies cited a lack of pilots as the key factor behind their bankruptcy filings.
According to the Federal Aviation Administration (FAA), U.S. passenger traffic is expected to grow at an average annual rate of 2.1 percent between 2016 and 2036. At the same time that the number of air travelers is increasing, there’s a consistent decline in the number of people eligible to fly the plane. Indeed, the number of active pilots is expected to decrease from more than 101,000 in 2015 to fewer than 89,000 by 2036.
Because of declining fuel costs, labor now represents the largest expense for U.S. airlines, accounting for 32.9 percent of network carriers’ budget and 34.5 percent for value carriers. Driven by falling fuel costs, the cost per available seat mile fell 12.6 percent on a year-over-year basis to 11.5 cents during the second quarter in 2015, the largest such decline since 2009. With labor now the largest cost component, the issue of a pilot shortage becomes more pertinent.
Factors Influencing the Pilot Shortage
Following the 2010 crash of Colgan Air Flight 3407, Congress raised the minimum flight time pilots-in-training must spend in the cockpit before they can serve as first officers on a commercial airline, from 250 to 1,500 hours. This mandate led to a sharp rise in training costs, with no materially significant change in compensation at the regional airline level. It’s likely that this has dissuaded many would-be pilots from earning their wings.
In addition, the FAA revised rest rules. Pilots now must get at least 10 hours of rest between shifts and are permitted to fly only eight or nine hours in a single stretch, depending on their start times. They also need 30 consecutive hours free from work every week, a 25 percent bump up from previous requirements. These new rest rules are expected to increase staffing needs by 3,600 to 6,000 in the next eight years.
Pilot training costs are high, in time and money. Although salaries at the big commercial airlines are competitive, new recruits at regional carriers once earned as little as $20,000 a year.
The situation is made more severe by the fact that regional airlines were able to hire only 50 percent of the pilots they needed last year.
Meanwhile, thousands of senior pilots at major airlines are reaching the mandatory retirement age of 65 years old, as hiring was heavy in the 1980s yet relatively thin over the past decade. Since mainline airlines hire pilots away from the regional carriers, these airlines might struggle to find new recruits with adequate experience.
Pilot Constraints, Hidden Positives
The pilot shortage will almost certainly have an impact on capacity expansion plans. However, recent consolidation within the industry and technological advancements are expected to provide airlines with the flexibility to adjust to this new reality.
Capacity discipline has become the norm these days among airlines, not only as a response to major catastrophes but also in an attempt to undertake a strategic overhaul without incurring additional cost. To that end, airlines are increasing capacity without increasing the size of their fleets. They accomplish this by adding more rows to existing planes and replacing smaller aircraft with bigger ones.
For instance, JetBlue Airways, which historically flew only 100-seat Embraer jets and 150-seat Airbus A320 jets, began flying 190-seat Airbus A321s in December 2013. From 2014 through 2017, it will increase its fleet by taking delivery of 48 of the A321s but only three of the smaller A320s. Similarly, Southwest operated 683 aircraft in 2014, compared to 698 two years earlier, and yet it was able to serve 4.6 percent more passengers as a result of improved capacity usage. With fuel prices on the decline and pilots in short supply, the bias toward bigger planes seems reasonable.
Delta is well ahead in its plan to reduce its regional jet fleet and plans to retire another 50 aircraft over the next year to bring its aggregate number of flights to only 125, down from nearly 500 at the end of 2009. United reduced the number of small regional jets flown by its partners from an estimated 380 in 2012 to 242 by the end of 2015, with a target of reducing further to 100 by 2019. It is adding 85 Embraer 175s to its partners’ regional fleet to partially replace the reduction in small jet flying. Meanwhile, American Airlines is planning to reduce its small regional jet fleet by 29 aircraft in 2016, after removing 31 jets in 2015.
In 2000, 10 airlines accounted for slightly more than 90 percent of available seat-mile capacity in the United States. By early 2012, those 10 airlines, through mergers, were reduced to five, which today control close to 85 percent of the domestic passenger market. These industry mergers have enabled the newly combined airlines to cut costs by reducing previously competing flights and redundant hub operations.
At present, any further consolidation could run into regulatory obstacles. But improving availability of air transport and connectivity between new commercial airlines for economic development might force regulators to change their stance toward airline mergers and acquisitions (M&As).
Airlines are making up on any revenue losses from capacity discipline by simultaneously building up on ancillary, or non-ticket, revenue. Ancillary revenue refers to all charges imposed by an airline, excluding the fare. This might include, but not be limited to, the fees on checked baggage, preferred seating, in-flight meals, drink and snacks, hotel check-ins, early check-in and early redemption of frequent flyer points. According to the CarTrawler Yearbook of Ancillary Revenue, revenues from these services increased from $49.9 billion in 2014 to $59.2 billion in 2015, an increase of nearly 19 percent.
To counter pilot shortage, major players have already taken measures to mitigate its impact. A pilot candidate at Southwest, for instance, will no longer be required to have a Boeing 737 rating. The airline has additionally attempted to cut down on the time between interviewing a pilot and potentially offering a job.
Regional carriers such as Envoy Air, PSA Airlines and Piedmont Airlines have beefed up their signing bonus amounts to $15,000. As part of this new initiative, they are also offering $1,000 to employees who refer new pilots to the airline, a bonus that’s expected to increase to $5,000. Similarly, Endeavor Air, which works with Delta, now pays a signing bonus of up to $23,000 a year and offers a competitive first-year salary, between $47,000 and $50,000.
The highest salary for new hires now belongs to Envoy Air and PSA Airlines, both wholly-owned subsidiaries of American Airlines. The two airlines recently announced dramatic changes to their pilot pay programs, effectively doubling the starting pay to $58,000 a year.
Monetary compensation aside, airlines have been thinking along deeper lines to counter another major cause of pilot shortage, seeking to fix what hurts the most—training costs.
Many regional airlines have joined the Tuition Reimbursement Program (TRP), partnering with Airline Transport Professionals (ATP) and more than 40 additional aviation training institutions, as a way to replenish the dwindling number of aspiring pilots. Under such programs, regional airlines guarantee selected students first-officer positions, and once qualified, the hires-in-waiting work as flight instructors to build the 1,500 hours of flight time required for an ATP rating before moving up to the regional carrier’s cockpit. Tuition reimbursement payments of $500 per month commence while the pilots serve as instructors and continue during the first year of airline employment, totaling up to $11,000.
These are just a sampling of the innovative strategies airlines have implemented to not just mitigate but transcend the pilot shortage issue.
Sources: Bloomberg, FAA, Oliver Wyman, Time, New York Times, Dallas News, IATA, Disciples of Flight, Flying Magazine, company reports
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