Many suggest the pilot shortage only impacts the regional airline industry, but its effect extends to mainlines, LCCs and ULCCs and goes far beyond putting qualified bodies on the flight deck of passenger and cargo carriers.
The pilot shortage is shrinking mainline revenues and yields and the ability of LCC and ULCCs to compete, according to speakers in the recent Flightpath Economics’ podcast which gathered an industry analyst, a labor specialist and a manufacturer to discuss the impacts.
The podcast revealed the industry will be short 5,000 pilots by 2021 and 15,000 by 2026 when one in 10 pilot positions will remain unfilled.
Bloomberg Business Intelligence Analyst George Ferguson said rising costs are affecting mainline revenues and margins, suggesting their ability to staff their aircraft comes at the expense of LCC and ULCCs and second-tier cargo carriers who can’t offer either the dollars or the career progression intercontinental carriers such as the legacies, FedEx and UPS can.
Ferguson noted the last round of contract negotiations yielded pilot increases of 20%, noting American added an additional increase mid contract, indicating the power pilots now have at the negotiating table. While a lot of that was bounce back from concessions, the shortage has only increased pilot power.
“United’s in the midst of discussing a new contract and my guess is they’re going to come out with a better-than-inflation raise again,” he said. “Pilots want to be at United, American, Delta, Southwest. 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.”
Sucking pilots out of the regionals, however, has its own economic impact on airlines.
“Airlines benefit from having a pilot and a flight crew on that airplane that’s much cheaper than the mainlines,” Ferguson explained of the shrinking regional footprint.
Bombardier Director-Sales North America Courtney Miller added reducing regional lift is counterproductive. “The regional connectivity is where the yields are, because that’s where the low-cost carriers are not,” he explained. “Down the line if they don’t have the connectivity into the mainline network to the tune 37% of revenue at present, and the highest yields, that has an impact on the mainline.”
Miller told Payload Connector regional contributions to mainline revenues could shrink further to 25% or 30% which does not bode well for the regional industry or mainline revenues since regional traffic is higher yielding because of the lack of competition.
“It could be somewhere in between 25% or 30%,” he explained. “The math isn’t too hard to run if you just look at seats. The compounding effect is the mainline fleets and revenues would grow as they take on more larger regional markets to mainline which would put more pressure on the regional revenues as a percentage.”
Fleet changes mitigate some of the impact. “What they have done is upguage aircraft to defray the cost of pilots over more seats but that exacerbates capacity increases which means they have no pricing power which impacts their cost performance,” said Ferguson. “They’ve been buying back shares to grow the EPS, but margins remain under pressure and the cost of flight crews is a big portion of this pressure. If they don’t have pricing power and costs rise, you are diminishing profitability over time. Those with best balances will survive. The rising cost of pilots from not having enough pilots, is a constraint on growth and revenues and that is what investors should be paying attention to.”
Impact on regional fleet
Miller discussed regional fleets with Payload Connector. “The problem I see is a fleet of 50-seat jets with no replacement,” he said. “The 70/76-seat jets are scope limited. There may be some relief there, but by-in large, I think you are looking at an industry that will grow by the remaining 70-seat jets that can be converted into 76-seaters, and whatever incremental scope room is negotiated. That is then offset by the number of 50-seat jets that will retire.
“The pilot shortage matters because it makes it too expensive (or impossible) to replace this lift,” he continued. “Mainline carriers will continue to compete at the mainline level for pilots, and the regionals will struggle to keep the through-put balanced. Essentially, the regionals are running out of airplanes to fly, which is fine because they don’t have pilots to fly them. The two problems are cancelling each other out, and preventing the problem of no 50-seat replacement from being solved. So, I would take the number of CRJ700s and E170s still over 65 seats, plus whatever scope clause relief you think regionals may get over the next five years, and subtract the entire 50-seat fleet. That would be my 5-year forecast. It will be a smaller fleet. There would be an increase in average seat gauge as 50-seaters leave, which would help with your revenue break-down. Mainline will likely absorb the remaining seats. I think it bodes well for the E2/A220, but poorly for the regional carriers.”
However, upgauging is finite. Miller indicated once fleet changes are complete, the number of growth opportunities through upgauging in the entire industry will go down.
Ferguson worries less about staffing levels at mainlines than at second-tier cargo and passenger airlines. “I’m not worried about big four and even Alaska will be fine. The challenges in recruiting will be at the faster growing LCC/ULCCs like JetBlue, Allegiant, Spirit and Frontier [and, by extension, DHL and Atlas, among cargo carriers]. Mainlines are using the pilot shortage as a competitive weapon against LCCs and ULCCs.”
And LCCs and ULCCs are finding it hard to cope. “Regionals,” said Miller, “have proven capable to finding creative solutions to the supply problem. That problem has declined in the last couple of years as block hours have been reduced across the regional industry. The challenge is not the loss of pilots but managing the inflow and outflow and regionals have been doing a fantastic job of managing that. That is not so at ULCCs and LCCs. They’re getting smaller and smaller pieces of the pie because they’re not producing economics competitively that some of the other carriers are. Mainlines say they don’t have a pilot shortage problem, and they would probably be right but that’s because they are putting the most dollar signs on that portion of the pie. The question is where is that coming from? As the legacy contracts get better and better anything below that is considered a steppingstone.”
Akin agreed. “They’re having a difficult time right now,” he said. “Pilots aren’t viewing those carriers as viable long-term career airlines. I look at the cargo industry as being sort of two different groups of players, the FedEx, UPS group, which has experienced a 30%, 40% increase in pay over the past bargaining round. And then the other groups, which have also experienced huge increases in pay as a result of the need to attract and retain cockpit crew.”
He cited another factor at play. There is a disconnect between what management thinks and what pilots think,” said Akin. “Management thinks their airlines are career destinations while pilots think of them as a steppingstones. Pilots see chaotic schedules because of the pilot shortage at these second-tier cargo companies resulting in a huge churn. And at the worst analysis, the management team doesn’t really know how to cope with someone who wants to fly a 777 when they’re only flying 737s. Southwest, interestingly, faces this problem. It takes 10 pilots to staff a plane and if you lose 10 pilots you can’t fly the aircraft. That is what is happening at these contract carriers, the subgroup below FedEx and UPS.”
Speakers concluded the pilot shortage affects every passenger and cargo carrier and has serious implications for investors as well as the competitiveness of an already challenging industry. While regionals and legacies have put in systems to cope, that may not be enough, and it may mean business models have to change to accommodate the fact the pool of pilots is largely static and not promising to increase.