Sunday, February 09, 2014

The Insanity of Concessions in 2014

My next Taking Wing column is coming out in a few days in Flying's March 2014 issue, and takes on the much-discussed (and sometimes disputed) pilot shortage. It was sparked by a string of articles in major newspapers over the past year, cockpit conversations I've had on the subject, and the sudden, inexplicable concessionary environment that has emerged at the regionals. As usual, the column is written mostly for a non-airline, general aviation audience. Therefore I wrote another essay, somewhat on the same subject but written more for an airline pilot audience and addressing the concessions more directly. I posted it to the Airline Pilot Central forums, where it received quite a bit of attention, and it went a bit viral after that, being reposted on various forums and email lists. This essay is copied below. If you like it, check out the March issue of Flying when it comes out. In a few days I'll also write a post containing the retirement and new commercial pilot statistics & analysis used in writing both articles.

The Insanity of Concessions in 2014

It’s just about all that pilots are talking about these days: in classrooms, at flight schools, in cockpits of airplanes big and small, the pilot shortage is on everyone’s mind and everyone’s lips. Mind you, not everyone is a true believer: many of us have been hearing about the pilot shortage our entire careers, even as we were furloughed, stuck on stagnant seniority lists, and forced to start over at poverty-level wages. Much of the loudest hype comes from the flight training industry and others with something to gain. Every time the shortage seems to be gaining steam, something unforeseen comes along and pushes it back another five years. It’s not surprising that so many pilots – regional pilots especially – are so cynical about the current shortage talk.

And yet, the numbers are incontrovertible. The three remaining legacy megacarriers (Delta, United, & American) will see a huge pilot retirement spike in the coming years, peaking in 2023 and not really easing until another decade after that. In the next five years alone, they will lose 5098 pilots to mandatory retirement. By 2023, that number increases to 15,235; by 2027, the number is 23,850, or 64% of the current seniority lists. Add in FedEx and UPS, and the 14-year total is 28,450. The national and non-legacy majors add thousands more.

Now, there is still a lot of flight training infrastructure in this country, and we certainly have the capability to train 30,000 new pilots in the next 14 years. The problem is that historically low numbers of people are investing $80,000 or more in training for a career and industry whose troubles have been widely publicized in the general media. The FAA issued fewer commercial certificates in the last three years than any other period since the early 1980s, and a large portion of these were issued to foreign nationals who plan to return home to fly for their national carriers. Even if the pilot shortage publicity sparks a renewed wave of flight training, there will be a 3-4 year lag before these new entrants are qualified to fly for an airline, by which time the effects of the shortage will be very deeply felt and rapidly multiplying.

Of course, these effects will not be felt equally by all sectors of the industry. The three airlines retiring the most pilots will be almost entirely unaffected. They know that their pay and benefits will attract enough pilots from the military, corporate world, lower-paid national carriers, and regional airlines to easily replace their retirees. In fact, the regionals alone have over 21,000 pilots, most qualified to fly for the major airlines and many planning to do exactly that. It is who will replace these regional pilots that is the real problem – especially since the modern regionals represent such a large share of the major airlines’ domestic networks. Already, with the shortage barely underway, the lowest-paid regionals like Great Lakes have been absolutely crippled by a dearth of qualified pilots willing to work for them, and more established regionals like American Eagle are already offering signing bonuses of $5000 or more to meet their rather modest demand for pilots. In the very early stages of major airline hiring, airlines like Endeavor are already losing many more pilots than they can entice to show up for class. If you look at the retirement numbers discussed above, it becomes clear that the later effects of the shortage will be far, far more pronounced.

Any first-year Econ student could tell you that in this situation, with a shortage of qualified labor, one can expect wages to rise. And yet, here we have a peculiar example of an entire industry defying the laws of economics, for the very opposite is presently true: there is strong downward pressure on regional pilot wages. This is because the newly emboldened mega-legacies are treating their erstwhile regional partners much like Walmart treats its suppliers: smaller, vulnerable targets to be bullied into submission and forced to slash costs, even to their own detriment, because the alternative is annihilation. Regional management has grown increasingly desperate, having seen their peers unsuccessfully attempt branded flying (ACA, ExpressJet), merging with other carriers (Pinnacle, ASA), or diversifying their partnerships (Mesa, Republic) in an effort to survive the storm. They are now willing to slash costs no matter the consequence, even if it eventually robs them of pilots to fly the airplanes, so long as it lets them live to fight another day. To do this, they are preying on their pilots’ insecurities about their careers, forged in the turmoil of the post-9/11 era and not yet attuned to the opportunities of a labor shortage.

Pinnacle was the first to do this, with Delta pulling the strings and assisted by a bankruptcy court. They were able to convince their pilots that rejecting concessions would result in an even worse contract being imposed by the court, Delta slashing capacity at the airline, and the loss of many jobs. This was the stick; the carrot was a promise of future mainline jobs. Together it was enough to lure the pilots into massive concessions only a year after securing a very hard-won contact that took years to negotiate. PSA was next. Outside of bankruptcy, they were able to convince their pilots that their 50-seat exposure spelled eventual doom, and only voluntary concessions to secure 76-seat flying could save them. And now American Eagle, the second-largest regional airline in the nation, is telling its pilots that they must endure a second round of draconian concessions only 18 months after approving the first round – or be shut down as Comair was. This, even while they offer $5000 signing bonuses to attract new pilots! The sheer nerve of it is breathtaking.

The problem here is that the turmoil and stagnation of the last 13 years, coupled with a seniority system that traditionally ties a pilot’s career to the health of his airline, has made it very easy to convince pilots that the death of one’s employer means the death of one’s career. In the context of the regionals and the pilot shortage from 2014 forward, it’s simply not true. First off, the major airlines are not looking to reduce system capacity. Their yields are consistently high, they are making record profits, and they have begun ordering airplanes. While they will continue to shift capacity from the regionals to mainline, they will not cut overall capacity. Coupled with the massive retirements at the majors, this means ample job opportunities for regional pilots regardless of how long individual regional airlines survive. Secondly, any shutdown of a regional airline – due to lack of concessions, or more likely, due to other industry conditions – will necessarily be long and drawn out, as Comair was. Delta taking possession of Pinnacle in bankruptcy rather than risk a shutdown, at a time Delta was actively trying to get rid of 50-seaters, shows that they could not afford to cut or shift that capacity suddenly. If Eagle is shut down – with or without concessions – I expect it will be drawn down at roughly the rate of pilot attrition, not with massive furloughs sending starving FOs to the unemployment dole. Thirdly, it’s not clear where capacity could be shifted to, if not mainline; few regionals can easily staff their present flying, to say nothing of growth.

The reality is that concessions will not save the regional airline industry; they will only prolong its demise. The regional business model of the past 20 years is essentially dead. It was always based on cheap fuel, a cheap and plentiful labor supply, low employee longevity, new airplanes with inexpensive maintenance, expensive and unproductive mainline pilot contracts, and nearly endless growth. None of these conditions apply anymore. The pilot shortage is the final nail in the coffin. Going forward, the industry will slowly return to its roots of the 80s and early 90s: a niche player in small markets where high yields can justify high costs. It benefits none of us to prolong this process, keeping more of us at the regionals longer. It benefits none of us to put downward pressure on wages of airplanes that will likely end up at mainline in the long run. It benefits none of us to accept smaller paychecks at a time that our skills are becoming increasingly valuable.

Finally, regional pilots of all people ought to recognize the moral repugnance of freezing pay for newhires who will work for the regionals after we’re gone, consigning future pilots to even worse wages than the ones we’ve spent so much time lamenting. How many times have we decried major airline pilots selling scope and creating a C-scale? And yet there are many of us prepared to do essentially the same thing to those who follow in our footsteps! It’s utterly shameful, and given current industry conditions, more than a little insane. The only thing that can prompt us to do something so illogical – the only tool in management’s toolbox these days – is fear. The pilots of ExpressJet are to be commended for taking a clearheaded look around the industry, realizing that there is nothing to fear but fear itself, and making a stand for their chosen profession. It is my sincere hope that the pilots of American Eagle will heed their example, reject the poisonous whispers of the fearmongers, and make us proud. 


Joe said...

Great post Sam! Do you have any comments or suggestions for someone in college considering going through the commercial pilot track?


Anonymous said...

Do you have the thread name on APC? I'd like to look up the discussion there.


Anonymous said...

Always wanted to fly the line and still CFI part time and charity transport flights but when my first full time college CFI job came along I couldn't take the 50% pay cut and the go to the airlines for even less. Then six months after completing my college CFI program was offered a power plant operations job with average income well over $100K and first class benefits.
NO way I can even think of a regional job at $30/hour with a 80 hour guarantee.

BTW, was in Dubai last month and meet up with my cousin who flies the 380 for Emirates and they need 500 new pilots in 2014 and US pilots are making the move. If you can live in the desert it looks like a good package.

Anonymous said...

Sam Weigel said...

Joe-- The low end of the industry is an absolute mess right now and if you choose to go into it you need to go it with eyes wide open to that fact. The upside is that I think you'll spend a lot less time getting to the majors than those of us who started in the last 90s-2000s. I have a lot of suggestions most of which I've made on this blog over the years, but to keep it brief: 1. Go into as little debt as possible. This may mean avoiding a major flight school or collegiate aviation program in favor of doing it piecemeal in your own airplane or at a mom-n-pop FBO; good training is possible but will require you to be a lot more proactive. 2. Be prepared to make very little money for quite a few years. Family & other financial commitments will really reduce your options. 3. Be flexible about moving for jobs, across the country if necessary. Again, opens your options a lot. 4. Keep your ear to the ground and do a lot of research before making choices. There's so much more information out there than was available even 10 years ago, but it requires digging and some of it will be conflicting.

Sam Weigel said...

Anonymous 10:02-- Stickied at the top of the Regional subforum. Here's a direct link:

Anon 7:39 -- Saw that BusinessWeek article, there have actually been quite a few to come out in the general & business media in the last two weeks explaining the pilot shortage in terms of starting regional compensation.

Anon 5:42 -- There are a whole lot of people like you out there. The "shortage" would evaporate instantly if regional FO pay was livable and anywhere close to what a reasonably smart, educated person can make in other industries.