The regional airline industry is being roiled by a pilot shortage that results from simple math: the cost to complete flight-training programs is high, and the entry-level pay at these carriers is low. How the problem gets fixed—which largely means how the bill will be divided and how much trickles down to passengers—is one of the big questions confronting the entire U.S. airline industry. “So far, no one can figure out whose dime it’s going to be done on,” says Dan Akins, an airline consultant and principal with Flightpath Economics.
For years, the large network airlines have exploited the cost arbitrage between flying their own planes and the far-cheaper rates they could find in a competitive marketplace where regional airlines bid against each other for routes. Under what’s known as “capacity purchase agreements,” the mainline airlines handle ticket sales, scheduling, and jet fuel. The regional carriers staff and operate flights, benefiting from the guaranteed income specified by their contracts. If the regional players keep their costs low, profit margins can be decent.
But the agreements also limit how much revenue a regional airline sees, and the arrangement doesn’t guarantee profit. The largest regional airline, Utah-based SkyWest (SKYW), recently disclosed that its ExpressJet unit flies at a loss under its current agreement with United Airlines (UAL). And costs are now rising in the face of what Cowen & Co. analyst Helane Becker describes as a broken business model. “The regional airlines will continue to have issues during the remainder of this year, and the sad reality is that some may fail,” she wrote in a client note earlier this month.
The cost differential has created a situation where roughly half of all U.S. flights are now on a regional airline, carrying 22 percent of passengers, and the system worked well for airlines for many years. Then came the 2009 crash of a Continental Express regional flight, which led Congress to mandate that airlines’ first officers hold an Airline Transport Pilot certificate. That document requires at least 1,500 flight hours, a huge increase in time and money from the 250 hours and commercial pilot certificate previously required. The crash, near Buffalo, was tied to errors made by pilots and traced to their lack of training and rest.
The low wages for new pilots flying for regional carriers shocked many lawmakers grappling with the aftermath of the 2009 crash. The new law was, in part, an attempt to assure higher salaries because of the need to recruit pilots who had spent the extra money to amass 1,500 flight hours. “The salaries are already going up,” Roger Cohen, president of the Regional Airline Association, said in a recent interview. He argues that the U.S. mandate for more hours doesn’t correlate with flight safety.
The meager economics have prompted regionals to begin cutting service and parking airplanes when they’re unable to staff cockpits—even higher pay isn’t provoking an influx of pilots who are qualified under the new rules. Salaries for first officers at regional airlines start at $22,400, according to the Air Line Pilots Association (ALPA), the largest U.S. pilot union. That might be an improvement but still falls short of initial pay in other fields open to trained aviators, such as test engineer ($52,500) and Air Force second lieutenant ($53,616). As a result, the pace of hiring hasn’t improved. A report today from the U.S. Government Accountability Office found 11 of 12 regional airlines have fallen short of their hiring targets in the past year, and pilots overall had an unemployment rate of just 2.7 percent from 2000 to 2012.
A mandatory retirement age of 65 is also going to pinch the big airlines in coming years, further squeezing the regionals because Delta Air Lines (DAL), United, and American Airlines (AAL) typically hire away experienced pilots when replacing retirees. The four largest U.S. airlines will lose at least 18,000 pilots because of the mandatory retirement age by 2022, roughly the same number flying for regional airlines today, according to a Flightpath Economics report (PDF) on the pilot issue. More than 60 percent of American’s pilots will be 65 by 2022, while Delta has almost half turning 65 by then. The Pentagon has also been paying hefty retention bonuses of as much as $225,000 to keep its pilots from retiring, further hindering one traditional source of U.S. commercial pilots. U.S. airlines will hire 1,900 to 4,500 pilots each year over the next decade, according to the GAO report.
ALPA contends that the industry has no lack of talent, just “a shortage of qualified pilots willing to fly for substandard wages and inadequate benefits.” The union points out that the average starting salary at elementary schools—around $35,000—contributes to the view that teachers generally are underpaid, even while rookie pilots make far less. Still, most pilot salaries rise after the first year of employment, and typical airline pilots can expect to earn millions over their working careers.
Airlines are dealing with turmoil in the regional industry in a variety of ways. Signing bonuses are now common—as high as $10,000—and some airlines are offering pilots the chance to win iPad tablets just to attend job fairs. Helping aviation students pay tuition is also beginning to enter the field, although it’s not clear that the current level of assistance will be enough to lure new students.
“That’s the $10,000 question, isn’t it?” says Peter Harris, president and chief executive officer of Spartan College of Aeronautics and Technology in Tulsa, which announced a new program that guarantees students a job interview with American Eagle and a $10,000 bonus after two years. “I think symbolically it’s a strong indicator that the airlines are recognizing the challenge that’s coming down the road.” Spartan’s program, and dozens of others like it, also qualifies for a federal waiver in which students with 1,200 flight hours can receive a restricted Airline Transport Pilot certificate needed for an airline job.
Still, most aviation students have spent roughly $90,000 by the time they finish a bachelor’s degree. “For the people who come to us and express interest … the economics are probably the most challenging part of it,” Harris says.
Another regional airline, Great Lakes, is pulling 10 seats from its 19-seat Beechcraft turboprops so its pilots can qualify to fly under different federal rules. One of the more interesting tactics is a scheme by Delta to replace regional jets with larger planes, part of a deal it struck in its last pilot contract. Delta acquired 88 Boeing (BA) 717s from Southwest Airlines (LUV), even getting the seller to kick in $100 million for new paint and other refurbishments, which it now deploys on short-to-medium routes such as Huntsville, Ala., and Savannah, Ga.
“The confluence of events suggested to me that [Delta CEO] Richard Anderson was reading the tea leaves,” Akins says. “He saw what was coming with the regionals.”