Matt Barton:
Not enough pilots in the US airline industry, a supply of new pilots that isn’t growing fast enough. Several small airlines have already gone out of business and major US airlines are feeling the financial pinch.
Matt Barton:
Welcome to the Flightpath Economics Pilot Shortage Podcast. This is where you’ll hear insight about the supply and demand for professional pilots. I’m your host, Matt Barton. In this episode we invited a labor economist, a Wall Street analyst, and an aircraft manufacturer to talk openly about the financial impacts from pilot scarcity on US airlines.
Matt Barton:
The discussion you’re about to hear was recorded in September 2019. Our first panelist was Courtney Miller from Bombardier Aircraft where he is the director of sales for North America. Prior to joining Bombardier, Courtney worked for DHL’s Network Planning Group. Not coincidentally, Courtney is also a pilot.
Matt Barton:
Our second guest was George Ferguson from Bloomberg Business Intelligence. George is Bloomberg’s Senior Analyst covering airline, aerospace and defense equities. Before joining Bloomberg George was at BlackRock where he specialized in high yield funds and the aerospace and defense sectors. George has been in the finance world for over 30 years and is also a chartered CFA.
Matt Barton:
Last, but not least, our final guest in this discussion was Dan Akins from Flightpath Economics. Dan has been at the table in airline labor negotiations for over 35 years. He began his career as a financial analyst at the Air Line Pilots Association. He’s been a labor economist working on behalf of nearly every class and craft of airline employee.
Matt Barton:
Let’s now turn to the topic.
Matt Barton:
As many listeners know, airline pilots are required to retire when the reach age 65. Almost half of the US airline pilots flying today will retire in the next 10 years. To replace those retiring pilots there’s a great demand for new pilots to enter the profession. But it isn’t easy to become a pilot, it’s a job that requires substantial training, experience and funding. The regulatory and financial barriers to entry for new pilots are incredibly high. As a consequence, as an industry and as a country, we simply aren’t producing enough pilots to replace the ones who are leaving. On balance that means that the US aviation industry is likely to be short 5,000 qualified pilots by 2021 and 15,000 pilots by 2026. In round numbers, one in 10 pilot jobs will not be filled. That shortage is producing a range of unintended consequences. There’s an economic impact to cities and towns that have lost airline surface, there’s a business and financial risk for airlines, and there are safety and quality issues that are emerging.
Matt Barton:
And while all of those problems are real, today in this podcast we’re going to focus on the impact to airlines. The impact on cost and the bottom line, the impact for investors and the viability and continuity of those businesses.
Matt Barton:
To start off I’d like to ask Courtney Miller to give us a sense of what’s going on in the industry. Courtney when you talk to airlines, what are you hearing?
Courtney Miller:
We’ve heard about the pilot shortage for years. I mean this isn’t anything new. I think what is new is that the regional airlines have proven capable to respond to the current iteration. They are finding creative solutions to go out after the supply problem. And quite frankly through the entry they’re staying ahead of it.
Courtney Miller:
I think next iteration and the next concern is okay we’ve had a group of airlines who’ve really gone out of their way and come up with innovative ways to address the supply chain challenge. And now we’re just getting into the bow wave of retirements. So have we had the demand requirements, which actually have been coming down the last couple of years as black hours have been reduced across the regional industry. Well now you’re going to have the giant sucking sound of retiring pilots leaving off the top of the list and that’s going to cascade through.
Courtney Miller:
So that’s what we’ve over the last couple of years in the industry. They’ve really done a fantastic job at dealing with the existential crisis. We’ve had one airline go through bankruptcy as a direct result of the pilot shortage and have come out the other end with just some great policies and ideas on how to approach this in a different way. And now we’re approaching the next bow wave of okay the stress testing in a massive way like you talked about in your introduction of this retirement bow wave that is coming. So that’s kind of where we are today.
Matt Barton:
Great, thanks.
Matt Barton:
Dan, George can you add anything else on what you see, how the pilot shortage is perhaps impacting other parts of the aviation business? Not just the regional airlines, do we see this impact for instance at any of the mainline carriers or low cost carriers or others?
George Ferguson:
Yeah I mean I think what we’re seeing at the majors is that the pilots have negotiating power for the first time in a really long time, right? So the last contract negotiation the airlines went through, Delta, American, United, Southwest they all went through it but those guys led it off in I think it was sort of 16-ish, 17-ish. We saw pilots get 20% pay raises. Some of this was a bounce back from the years prior that were pretty lean years but now we’re back into another negotiating cycle. United’s in the midst of discussing with their unions a new contract and my guess is they’re going to come out with a better than inflation raise again. So for the first time in a long time you see the pilots finally have again some negotiating power for their contracts.
George Ferguson:
And look, we would expect that those pilots want to be at United, American, Delta, Southwest, and so they’ll raise the cost of those pilot salaries. Those airlines won’t have a hard time finding pilots to fill the cockpit, they’ll just suck the pilots out of the regionals and the smaller carriers and carriers that aren’t as good a career destination. So the problem will be lower but we’re seeing it manifest itself at higher costs at the big carriers.
Dan Akins:
Yeah and I think you know George that’s right, we have seen a wave of new leverage kind of ripple through the industry for all types of skilled labor, not just pilots but mechanics and others. And I think that part of what we’ve seen is that in the last 20 years the airline industry has morphed into something different than it was, it’s much more concentrated and consolidated. Four large carriers that we all know, American, United, Delta and Southwest control over 80% of everything that flies overhead. That tier of the industry I think is uniquely positioned to avoid at least the initial impacts of pilot supply issues. I think the feeder carriers (excepting for Southwest without any kind of feed relationship with carriers), we’re seeing the impacts dramatically affect the regional industry, the feeder business, the contract carriers that fly as express or connect. And those carriers as you mentioned have pilots leverage of 20% or greater at the mainlines, those carrier’s entry level pay rates for new pilots have doubled since 2015.
Dan Akins:
And so there is a shift of leverage from a buyer’s market, which would be the airlines after 9/11 having all the power, to a seller’s market where as a result of a number of changes in the industry that we’re going to discuss, some organic to the 9/11 incident and resulting from that, which is a lot of furloughs, and the airline business not being a great place to be an employee, to all the changes that have taken place within the regulatory framework that airlines operate from the FAA in terms of who can become an airline pilot. And so as a result of that, we’re looking at an industry now that is facing something I don’t think anyone in the industry has faced before which is a dramatic increase in the demand for pilots and a very constricted supply.
Matt Barton:
United, Delta and American rely heavily on their regional partners. Can you tell us how you see the pilot shortage impacting yields and networks?
Courtney Miller:
The regional connectivity is where the yields are, because that’s where the low cost carriers are not. Right? So when you get into these big networks like this it’s one thing to say, and I’ve heard this, that, “Well look, Delta’s not having any problem finding a triple seven captain.” Yeah, of course they’re not. If you have trouble finding a triple seven captain that means there are no other pilots anywhere. Right? That’s how this industry works. However, you can take that idea and kind of project it forward and say, “Well look, through the Delta seniority list they will be the first one filled.” But what impacts are they going to have in filling that? And then down line if they don’t have the connectivity into the mainline network to the tune 37% of revenue, and the highest yields, how does that effect an airline? And we keep using Delta as the example, but any of the legacy carriers you know even to include I guess Alaska in that, right?
Courtney Miller:
And the one exception before that you talked about was Southwest without regional feed.
George Ferguson:
And I would even go further I mean I’d say that it definitely impacts revenue, but I think it would impact profitability too right? So I think if you’re Delta, American and United you have to keep a real close eye on this because like you said Courtney, some of the highest yields come out of those parts of the network that the regional guys are flying. And you’re getting the benefit of having a pilot and a flight crew on that airplane that’s much cheaper than the mainlines. So there’s a bunch of profitability down there. So even though they may not, American, Delta, United, may not want to focus on this problem now. They don’t see it up at their level. But it will have an effect on their profitability over time so they have to pay attention to this at some point. They have to get involved.
Dan Akins:
Right.
George Ferguson:
And make sure it works.
Dan Akins:
And I think George that’s right, the mainline carriers we’ve seen in the last year was last summer of 2018 where they all got into the act of creating new ways to attract pilots into the industry. And we saw Delta, American, United almost within a month of each other all announce similar types of programs that were incentivizing would-be pilots to look at these carriers as potential career paths. And I think in terms of where the mainline carriers are right now, and Matt and I have seen this from our work with Flightpath Economics is that the mainline carriers also view the pilot shortage as a competitive weapon against lower cost, more marginal carriers, smaller carriers, low cost carriers that they’ve had to contend with.
Dan Akins:
So the pilot pool is generally going to be attracted to the jobs that Courtney mentioned, which is triple seven, wide body, international flying at the end of your career. That’s where most pilots want to be at the end of their career. So you look at the industry now as either career oriented airlines or stepping stones. And the worst position to be in is to think from a management perspective that you’re a career airline when pilots who are in short supply look at you as a stepping stone, it’s misaligned, right?
Dan Akins:
And so these carriers, the smaller ones that used to be kind of the sponge that would absorb this latent capacity, those ones are now facing the biggest challenges because they’re now viewed as stepping stones at the best analysis. And at the worst analysis the management team doesn’t really know how to cope with someone who wants to fly a triple seven when you’re only flying 737s. Southwest interestingly I think faces this problem.
Courtney Miller:
Yeah and so your stepping stone analogy I think is really appropriate and really interesting in that you know the majority of the airlines that would fall in that category would be I would suggest the low cost carriers, right? So JetBlue, Spirit, I think Southwest is kind of in a place of its own there. But so these are very cost conscious carriers who need pilots to accomplish a flight that they’re flying. However, attrition is not a bad thing. Right? Especially for cost conscious airlines. To allow pilots to move on before they become these expensive senior pilots is not a bad thing, right? Regionals have built entire business models around this. The challenge isn’t in how do I keep senior pilots, the challenge is how do I just manage the inflows versus the outflows? And again and this is where it’s really getting challenging.
Courtney Miller:
So I guess my suggestion in that is for the different degrees that you would see this pilot shortage, the first being, “Yeah, we have a bunch of guys showing up.” The second is, “We’ve got people leaving at the top, we’ve got people coming in the bottom, life is good, I’m keeping my average seniority down.” We’re past both of those to, “Hey, wait a minute, I don’t think I can manage inflows to match the outflows like I have been in the past.” And that’s kind of the third degree when you start hearing these concerns. We’re already fairly far down the path.
Dan Akins:
Right.
George Ferguson: I mean I think as well I mean the supply is one issue but also the airlines have been growing, right? And so that also adds to more demand for pilots, right? Coming out of recession the ’07, ’08, sorry, ’08, ’09 downturn we had a lot of capacity cut. We had a lot of constraint coming out of there, that’s where the airlines really came back to some really nice profitability, 11, 12, 13. But the party’s been on sort of since then and the airlines have been adding capacity at above GDP rates, right?
Dan Akins:
Right.
George Ferguson:
Four, five percent in the US market, globally as well. And so that also adds the challenge of finding enough pilots.
George Ferguson:
I think one of the things too is the fact that fuel prices are so low now that they haven’t been this low in a long time. They seem like they’re going to be lower for longer giving fracking dynamics in the US where we really found a lot of supply of oil. And that means ticket prices are lower and more people are demanding flying. Right? And you’re introducing ultra low cost carriers into the US, which hadn’t seen as much as the ultra lower cost phenomena. That brings the price of flying down as well, which just means there’s more demand and we’re growing the industry. And that’s the challenge, right? As these guys retire, and we grow at the same time there’s a real challenge filling cockpits because of that.
Matt Barton:
So let’s talk specifics. Which air carriers are exposed and why? I think everybody probably would agree that regional airlines are exposed to the problem, but what about mainline airlines or ULCCs or cargo operators?
George Ferguson:
We’ve seen it pretty broadly distributed, meaning everybody’s having to pay more for pilots all through the ecosystem. You know I think some of the strategies we’ve seen out there to combat this though. One I think some of the low cost carriers kind of dragged their feet as they went through the negotiating rounds before they finally gave their pilots a decent raise, right? And so look dragging your feet is always an interesting strategy for a couple quarters, or a year to try to keep your advantage from a cost standpoint.
George Ferguson:
The big, big trend I’ve seen at the airlines is that they’re very, very focused on driving down costs per available seat mile and so what do they do? It’s all about up-gauging right? If you look at almost every carrier, every major carrier, they’re in the midst of an up-gauging strategy where they’re increasing the size of the airplane so that they have two pilots in the front that are taking care of a lot more seats and trying to drive those costs back down and keep them contained. We see too much capacity in the marketplace, that’s just from my Bloomberg Intelligence perspective. We don’t see much pricing power at the carriers. The MAX has changed things a little bit this summer.
George Ferguson:
So we’ve seen profitability start to bounce back for some of the major airlines this summer. But 16 was sort of the top tick for profitability and we’d seen things fall off after that because we just didn’t see pricing power. There’s a lot of capacity in the marketplace, so airlines had to find a way instead of passing along those increased costs of the pilot, to the passengers in the form of a higher ticket price, they had to go out and find a different strategy. And again, what they’ve done is they’ve up-gauged these airplanes so that they can defray the cost of that pilot over more seats. I mean we expect that to sort of continue and again we think the challenge is there is too much capacity continuing to come to the marketplace so we don’t see pricing power coming back anytime soon.
George Ferguson:
So we think at the end of the day, this pilot shortage is going to cost financial performance. It’s going to hurt profitability. Another strategy we’ve seen the carriers use is they buy back shares pretty actively to kind of get into the finance world here, right? The Wall Street finance world. They buy back shares a lot so they can grow EPS. But generally what we’re seeing is margins are under pressure and again pilots are a big portion, pilots and flight crews are a big portion of this pressure.
Matt Barton:
We’ve talked about passenger airlines, we’ve talked about mainline carriers, their regional partners, we’ve even touched briefly on low cost carriers. What about the cargo side of business? We have you know FedEx, UPS, where pilots are paid very well. You can go as a pilot if you can get the job at FedEx or UPS, your career earnings at either one of those companies would be probably in excess of what you would get at Delta or Southwest. What sort of problems if any are they facing, these cargo carriers?
George Ferguson:
I think they have the same problem, right? They’re not immune to higher costs from pilots. Air freight though has been one of those areas of the market that hasn’t been performing well. So you know there’s a little bit of trade challenge here, right? The only things that move in air freight are things that are very expensive items and usually somewhat lightweight. So electronics are a big portion of air freight, fresh flowers, and things like this during certain seasons.
Courtney Miller:
Fresh stuff and Amazon.
George Ferguson:
Yeah.
Courtney Miller:
And now Amazon’s pulling their stuff off those airplanes.
George Ferguson:
Yeah, well I think you know FedEx I think found the Amazon contract was not very profitable for them. Again, they had a customer that was squeezing them, they had no pricing power. And so they’ve been trying to pull back from some of that.
Dan Akins:
We’re talking about folks that fly for DHL, people that fly for Amazon, companies that are involved in the non-integrated business that is not door to door but some portion of it, trans-oceanic or trans-continental or local flying. That’s opposed to FedEx and UPS that will pick up the package in the origin country and deliver it to a door someplace in some other country.
Dan Akins:
Those pilots are actually I think in that bucket where it used to be a career path and now since there’s so many other options out there, those carriers are now turning into stepping stones. And that’s the carrier group that I think is more identifiable with a management team that’s used to the place being a career airline and the pilots thinking of it as a stepping stone. And there’s a disconnect there and you can see some of the disconnect in some of the information that Matt and I get from the internal union suggesting that the schedules are chaotic. That they’re taking bids away, bid lines away from senior pilots simply because they don’t have enough pilots to fly the line.
Dan Akins:
And that world, there’s a huge churn and there’s a huge need to find capable pilots. And again, I think of it in real simple terms. Since about 2013 or ’14, the market has shifted from a buyer’s market to a seller’s market. Okay? So if you’re a seller, companies have to perceive that the value of having a pilot, you need 10 generally, wide bodies are more, but 10 bodies to fly a single hull. So you buy an aircraft, you need 10 more pilots. You lose 10 pilots, you can’t fly an aircraft.
Dan Akins:
And so looking these essentially contract carriers that are in the sort of subgroup beneath FedEx and UPS, they’re having a difficult time right now. And I think it’s because the sellers, pilots, aren’t viewing those carriers as viable long-term career airlines, they’re stepping stones. I look at the cargo industry as being sort of two different players, groups of players, the FedEx, UPS group, which has experienced this 30, 40% increase in pay over the past bargaining round. And then the other groups, which have also experienced for the most part huge increases in pay as a result of the need to attract and retain cockpit crew.
Dan Akins:
So I think across the industry the biggest signal that Matt and I have seen, I think you guys have seen, is that nobody’s on furlough but all airlines or almost all airlines are hiring actively and that pay has gone up an inordinate amount. And so if there wasn’t a pilot shortage, would carriers be opening their contracts in mid collective bargaining process and say, “We’ve got a contract for five years but I’m going to give you guys a pay raise in two and a half or three years into that contract.” That’s never happened. I’ve been in the industry for 35 years, what’s causing that? Underneath that has to be a recognition by these companies that we’re not getting the people in the door we need to keep this operation going. We’re at that phase three that you talked about Courtney, which is we’re churning a lot of people out of here.
Matt Barton:
Courtney here’s a question for you. Are airlines that are either unwilling or unable to offer what I would describe as career track earnings and benefits, are airlines that are not offering those things, is there a business model for those types of companies?
Courtney Miller:
Yeah, I mean look, you just described the regional industry, what Dan calls the stepping stones. Of course there is, and by the way they’re experienced at doing that. These are airlines who manage the inflows and the outflows, the outflows are not retirements by in large, they are movements to other airlines. I think the question though gets to really a deeper implication, which is as pilot wages have increased over the last 10 years, are airlines able to attract more pilots in terms of the big pool of pilots? Or are they just taking from other carriers?
Courtney Miller:
And I think this is the challenge that there are two unique problems. One is the micro problem of an airline saying, “Well how do I get enough pilots so that I can achieve my financial results, carry on, Bob’s your uncle.” That’s a different problem from, “Do we have enough pilots?” And what we’re finding is that there’s a pie of available pilots. You could slice that pie any different direction, but we’re not growing the pie and that’s the challenge.
Courtney Miller:
So the question to some of these carriers is it exaggerates the problem for them. If they’re getting smaller and smaller pieces of the pie because they’re not producing economics competitively that some of the other carriers are. I think that’s why you see airlines in the regional space with especially where everything’s kind of exaggerated. That’s why you have this large and wide spectrum of airlines from those who have no problems whatsoever recruiting pilots, to those who can’t find a pilot to save their life because it’s a self-feeding issue. They’re all racing to provide pay, to provide the, what do we call it, the signing bonuses. And all we’re really doing is just slicing the pie in different places.
Matt Barton:
So what you’re saying is it’s a bidding war in effect that isn’t producing a larger pie?
Courtney Miller:
The pie is not growing.
Dan Akins:
It’s just being distributed to those with the highest bid.
Courtney Miller:
Right. So when you hear, and it goes to majors as well, so when you hear airlines and we’ve been using Delta as an example, and I don’t know that they have said this. But I would assume that Delta would say, “Look, we don’t have a pilot shortage problem,” and they would probably be right. That’s because they are putting the most dollar signs on that portion of the pie. Right? So they will take their share of the pie. The question is where is that coming from?
Matt Barton:
And who loses.
Courtney Miller:
Who’s losing out the bottom end of the pie.
Matt Barton:
And yet having said that, and I don’t disagree, but having said that these exact carriers have gone out and created pathway programs to recruit pilots. Delta has a very interesting program, American has a number of different programs, United has a program, Southwest has a program, FedEx, UPS all have programs. These carriers offer exceptional pay and benefits over a longterm piloting career. Why are they doing that if they don’t see the pinch or if they don’t see the pinch coming?
George Ferguson:
I think they do see the pinch, is the answer. I think they’re using, to me what I see is sort of them just using multiple channels, any channel they can to feed the airline. I think they do see the retirements coming and so I think it’s all real. I just think it means that if you’re lower on we’ll call it the career destination list, right? If you’re a regional or if you’re a freight operator or a small operator it means you’ll have to connect yourself even deeper into the training programs to make sure you’re getting that source of pilots. American, United, Delta, they can do some of that, Southwest can do some of that, that’s a source. But if you’re lower down on that destination list you’ve got to really dig into the training world and figure out where your pilots are coming from or you run the risk of not having enough, right? It’s part of their business plan.
George Ferguson:
So you could even argue that the low cost guys are further down the road with the remedies and while the majors probably still have a bunch of remedies they could pull, right? So yes I think if this keeps going, I would anticipate the problems would be again more complicated down at the ultra low cost end.
George Ferguson:
There comes a point in the business cycle where if you don’t have pricing power, which we don’t have pricing power right now in this business, again save the MAX grounding. Once the MAX comes back I anticipate even more pressure on the pricing, on ticket pricing. If we don’t have pricing power, costs are rising, essentially what you’re doing is you’re diminishing your profitability over time and the end game looks like those with the best balance sheets and the best businesses, they survive, and those without the best balance sheets and best businesses they don’t survive.
Courtney Miller:
The next sector to really feel it, I’m concerned about the low cost carriers. I’m concerned about that middle tier who require not only they are still stepping stone-ish, right? There are still a lot of pilots that are moving through the airlines onto the legacies. That will continue, right? As the legacy contracts get better and better. So they are a stepping stone, they are having the throughput, you’ve got input as well as the output that they’re managing. And on top of that they’re growing at 20% a year.
George Ferguson:
Yeah.
Courtney Miller:
Right? So and I would throw in an even more challenging issue on top of that which is what happens if they stop growing 20% a year? Does the business case still make sense?
Dan Akins:
Regardless of the pilot shortage?
Courtney Miller:
Well, but the pilot shortage may be will be a constraint, whether that be they can’t find pilots. I’m not convinced, they can still suck out of the regionals as well as the next guy, but at what rates?
Dan Akins:
Right.
Courtney Miller:
And then the question is how do they continue to grow? Right now they’ve found a lot of that growth through up-gauging. They have hit the largest aircraft that they can up-gauge to. Right? We’re in 321s, we’re in 739s, but it’s more the 321. That also reduces the number of growth opportunities.
Dan Akins:
Right and that’s the impediment that they’ve got to a pilot, again the seller, and I hate to keep using that as the sort of reflection of what a pilot is, but selling their services, they don’t offer and can’t offer regardless of the number of dollars they pay people. Or like Allegiant has a home every night kind of policy, they can’t offer enough stuff to compensate for the lack of having wide body international-
Courtney Miller:
Right.
Dan Akins:
Flying.
Dan Akins:
And if you’re a young pilot is that a second tier stepping stone? You go from a regional to an LCC to a mainline. Are LCCs prepared to be that door that the regionals are now? I mean is it a second tier stepping stone? Have you adjusted your business model?
Matt Barton:
So we’ve got an environment right now where we have rising costs from pilots. We also have in some cases a constraint on growth due to not having enough pilots, which ultimately means that you’ve got a constraint on your revenue. Constraint on revenue, rising costs, potential limitations on growth. What in this equation should investors be very concerned about? Is there something and what should they be paying attention to?
George Ferguson:
Well I mean I think when pilot costs start to rise I think it’s as an investor I would have been paying very close attention to that. I think they ought to be paying a very close attention to this round of negotiations because you know like we talked previous, United is in the middle of their negotiation with their pilots, Delta’s up right after that, American’s coming after that. We talked about how American gave the pilots pay increases mid cycle, which is absolutely unheard of, right? So you know the pilots are a smart workforce, they’re an organized work force in these airlines. They’re going to extract some of the gains that the shareholders probably wish they could get.
Matt Barton:
Let me then ask another question about the profitability of airlines as a business. Is there something that airline management teams need to be communicating about future costs associated with the pilot workforce? Is there some information that they should be supplying to investors, either through earnings calls or otherwise, which would suggest, “Hey, we don’t have a problem and here’s why.” Or, “We do have a problem and here’s how we’re managing it.” Is there something like that that needs to be communicated that currently isn’t?
George Ferguson:
Look I think at Delta, American, United, Southwest, the big four, one they don’t like to comment on negotiations. Nobody likes to admit that they’ve got an organized party inside the company that has a lot of leverage on them and the pilots have a lot of leverage because they’re a skilled workforce that’s not easily replaceable. Right? So again they’ll keep saying that they don’t want to comment on negotiations, that’s why they could be very interesting for investors to see how we come through this round with United and with Delta.
Matt Barton:
Let’s go into a portion of the podcast here where we try to make some predictions about the future. So I’m going to ask each of our podcast participants to offer some predictions about the future with respect to the pilot shortage. George, why don’t you tell us what do you think is going to happen to different types of airlines over the next few years as they encounter an increasingly constrained market for pilots?
George Ferguson:
Thanks Matt, yeah I think from a fundamental standpoint you know as we move from let’s call it the smaller carriers to the larger carriers, I think you’ll see less effect at the larger carriers than at the smaller. So I’m not worried about Delta, American, United, Southwest. They’re flying at the right number of pilots to fly their schedule. I think even the Alaskas of the world are probably fine. I think there could be challenges when you start to get into some of the faster growing low cost carriers because they’ll really try to put a lot of pilots into those companies both for growth reasons as well as they lose pilots up to the majors. And so I think challenge will be sort of the Spirits, the Allegiants and the Frontiers to continue to recruit and keep pilots there to fly their schedule.
George Ferguson:
And then I think the fundamental challenge gets even more acute as you get down to the regionals because the regionals will be feeding the low cost. I can see the low cost offering more money to take pilots out of the regionals. So I see the regionals having to offer more money. So that’s going to hurt the expense levels at both the regionals and the low cost. But I think it looks acute in the regionals as the regionals will really struggle to sort of pull pilots in and have them going out the other door on the way to the low cost carriers or to the majors.
Matt Barton:
What about some of the other parts of the industry that we maybe haven’t talked about as much, corporate aviation being one of them, second tier cargo carriers, obviously Amazon is attempting to standup almost an independent freight delivery service associated with airlines. How do those companies look as far as their ability to recruit, retain pilots at a cost that’s acceptable?
George Ferguson:
Yeah I think it even gets harder down there, right? I think the other challenge is that if a pilot is going to want to be, you know his destination airline is going to have to have decent not just pay but also benefits, right? The larger a firm you work for, the better benefits you’re going to get. I think pilots are really going to see those small cargo carriers, small fractional operators, things like that, bizjet jobs. Unless there’s a certain lifestyle reason for being there they’ll really see those as stepping stones as they move up let’s call it the chain. And so I think that means those people are going to have to increase pilot pay as well. A lot of times they’re smaller firms, they have no pricing power, they can’t turn around and ask their customers to pay more money because the pilot costs them more money. So I think it hurts their financial performance.
George Ferguson:
I think if it’s something that hurts the financial performance at those lower tier, again cargo, bizjet operators, and it’s going to hurt financial performance into and it might not hurt financial performance as much in the regionals only because they are so tethered to the full service carriers that they may be able to pass along the cost to the full service carriers because it’s an important part of their network. But I could see it impacting the low cost carriers because you’re still going to lay the extra cost off onto them.
Matt Barton:
Thank you, thank you. Courtney, any difference of opinion there with respect to the risks and the exposure of these different types of air carriers to pilot supply?
Courtney Miller:
I think the only thing I would add to that is you know pilot costs are going to continue to increase, even at the airlines that are at the front lines of the pilot shortage. We’ve seen that over the last well really over the last 10 years. Snapping back from bankruptcy was a big part of that. I think it’s going to continue. I think the pilots, again, you have a very educated unionized group, they know when they have leverage and they have leverage. And so I think we’re going to continue to see that.
Courtney Miller:
I’m really interested to see the consolidation that will probably continue in the regional sector. I’m interested to see if it starts on the low cost sector. And I don’t expect much that would be pilot related anywhere north of that. The interesting thing is going to be following these ACMI carriers, the cargo, a lot of the carriers that we’ve lost. A lot of these carriers, which by the way right now are being used to backfill 737 MAX flying, and they have stumbled across a windfall of very high ACMI rates and what’s going to happen when all those airplanes magically come back and when pilots are swept off into other airlines? But that’s an interesting kind of near term dynamic that I’ll be watching.
Matt Barton:
And there you have it folks. Large US airlines are primarily exposed to the pilot shortage from rising contract costs and from relying on their regional partners to transport high yield passenger traffic into their networks. Low cost carriers are likely to become stepping stones. Regional airlines will continue to shrink and second tier cargo carriers will have to adjust their business models to recruit and retain pilots.
Matt Barton:
As conditions evolve we’ll be excited to see how US airlines adapt to the challenging market for pilots in the years ahead. As we wrap up this edition of the Pilot Shortage Podcast, I’d like to thank our panel: Courtney Miller from Bombardier Aircraft, George Ferguson from Bloomberg Business Intelligence and Dan Akins from Flightpath Economics. I’m Matt Barton signing off and looking forward to the next discussion.
Matt Barton:
Any references to this podcast or reference to specific content in this podcast should credit Flightpath Economics as the source.
