Pilot Shortage Looms for Regional Airlines Amid New Rules

Regional airlines are finding it difficult to fill their pilot hiring requirements, as a shortage of qualified applications because of a change in a federal rule that raised the minimum number of flight hours for an entry-level first officer from 250 to 1,500 hours, a 500% increase. Of course, without enough pilots, regional airlines cannot operate optimally. Republic Airways has grounded 27 aircraft due to a shortage of pilots, more regional airlines are likely to follow. There are a number of factors that lead to the pilot shortage, but the single factor that most exacerbated the change is the regulatory change. This law alters the economics and mechanisms of flight training through which most entry-level pilots enter the business. An accident near Buffalo, New York on February 12, 2009 involving a Colgan Air Dash 8-400 operating as Continental Connection flight 3407, highlighted pilot training and proficiency as major contributing factors to the deaths of 45 passengers and 4 flight crew members. The NTSB report concluded that a number of factors impacted the crew: fatigue, training, and poor decision making resulted in the fatal crash. Inappropriate pilot response to icing and a subsequent aerodynamic stall resulting in the fatal crash.[1] Subsequent to that crash and investigation, Congress mandated new rules for the FAA to implement via “The Airline Safety and FAA Extension Act of 2010” that resulted in co-pilots being required to hold Airline Transport Pilot (ATP) ratings instead of Commercial Pilot licenses to become first officers on regional airlines. On August 1, 2013, new rules raised the minimum number of flight hours for a first officer from 250 to 1,500 hours. There are typically four career paths for an aspiring pilot to obtain an ATP certificate: General Aviation unstructured training General Aviation structured training (e.g. flight schools) College and University Professional Pilot Degree Programs Military Aviation The change in rule-making mandated by Congress dramatically changed the economics for a prospective pilot looking to build the flight hours to obtain an ATP certificate and a co-pilot position in the industry. Military aviation candidates are generally unaffected by these changes. But the typical civilian routes to a job have become considerably more expensive. For civilian pilots, gaining an additional 1,250 hours of flight time is expensive, with a typical light aircraft renting for $200 per hour, including fuel. That means an expenditure of roughly $200,000 per student to meet the new requirements, a princely sum when one considers that entry level first officer salaries at regional airlines average $22,400. The return on investment simply isn’t there for a student. While some can mitigate a portion of that expense as flight instructors, the number of student pilot starts is not rising as fast as the potential pool of flight instructors seeking to gain additional hours to meet the new requirements. As a result, with the choice of accumulating an overwhelming debt that will be difficult to repay, or walking away from their dreams, many potential pilots have taken the latter route, shrinking the pool of candidate for regional airlines. Looking ahead, the 2014 FAA forecast calls for a drop in student pilot certificates from 2014-2034, as shown in the following chart. At the same time, it calls for an increase in the number of active ATP pilot certificates. Clearly, there is an emerging gap, and either the rate of students reaching ATP certification must increase, or shortfall will occur. The FAA forecast also calls for an increase in the overall airline fleets, as shown in the chart below combining mainline and regional carriers. If one computes the ratio of active ATP pilot certificates to aircraft, it becomes clear that the number of available pilots per aircraft will drop in the future, indicating a potential shortage of pilots. Using the FAA forecast data from the above charts, the ratio indicates that the number of pilots per aircraft today will drop from 25 ATP pilots per aircraft in 2014 to 23 ATP pilots per aircraft in 2034, an 8% decrease. Becoming an airline captain is no longer the lucrative job it once was. Starting first officer salaries at major airlines average about $61,000 per year[1], a significant step-up from that of a regional airline first officer. Until recently, a pilot would begin his career working for a regional, after obtaining a Commercial Pilot certificate and instrument rating, which would typically require about 250 hours of training, and then step-up to a major airline after 2-3 years of regional airline cockpit experience. Today, that stepping stone simply is no longer easy to reach. The current crisis will be exacerbated by the requirements of the major airlines, which will have some 18,000 pilots reaching mandatory retirement age by 2022. The 2,250 pilots required per year by the majors will likely come from regionals, who in turn need to recruit new pilots to replace those who step upward in their careers. But candidates to replace those regional pilots are no longer coming forward like they once did, because of the economic burden and heavy requirements for a job with a paltry annual salary. How Can the Industry React? One way of reducing the need for pilots is to fly larger aircraft, so more people can be flown on fewer planes. But scope clauses in major airline contracts typically restrict regional carriers to aircraft that are 76 seats or less in the US, so the new 100-130 seat jets from Embraer and Bombardier must be flown by mainline pilots by the major carrier itself. A change in scope clauses to allow larger aircraft by regional airlines may become necessary if there are too few pilots to fly aircraft. Republic Airways announced in February that it was taking 27 smaller 50 seats jets out of service, replacing them with larger 75 seat Embraer E175 models due to the pilot shortage. Earlier this year, United announced closure of its Cleveland hub, and elimination of 70% of regional flights, citing both losses and the new pilot training rules[2]. While that increase in gauge can help in the short-term, it certainly doesn’t alleviate the problem, which will be exacerbated with the retirement bubble over the next eight years. Mesa Airways closed its “Go!” unit in Hawaii, and will either retire its smaller aircraft or attempt to redeploy them in mainland service. Those pilots will likely be transferred to other Mesa units. While the “Go!” unit may not have been profitable, the need for pilots on Mesa’s more profitable routes was a contributing factor to their decision-making process. Earlier this year, American Eagle announced that it was reducing its flight operations significantly after pilots rejected a new contract offer from the carrier that would have raised wages. With smaller aircraft come higher seat-mile costs, which can often be as expensive as prevailing revenue yields in highly competitive markets. At American Eagle, the decision appears to be to cease flying rather than fly unprofitably. Other carriers, including Great Lakes Airlines and Silver Airlines, have reduced flights due to pilot shortages. These may be the first shots in the war for survival, and there is a strong possibility that we will see several regional airlines in financial difficulty due to a lack of flight crews and be forced to cease operations. The General Accounting Office recently examined this issue, and issued a report in February 2014 entitled “Aviation Workforce, Current and Future Availability of Airline Pilots” that had mixed conclusions on the topic. Many in the regional aviation industry were quite critical, as the report did not conclude that there was a shortage in pilots, as it looked at the air transportation industry as a whole and did not focus on the impact of the recent regulatory changes on supply. This has provided politicians with cover to continue to support the regulatory changes that many in the industry fee have swung the pendulum too far in one direction. What can the industry do? There are international models that could be followed, but these will change the economics of the industry. Carriers like Lufthansa and Singapore airlines have traditionally had flight academies, with flight training in good weather areas like Arizona, to professionally train pilots and accumulate the necessary hours. But this is an expensive process, and requires student to commit to a period of employment with the carrier in exchange for the education. Paying for training would place an additional economic burden on regional carriers, which today are operating on paper thin margins. The economic burden to accumulate 1,250 additional flight hours, without productive income to offset that training, would then fall to the airline, which they frankly cannot afford. While the major carriers could step in, they would likely train their own employees, rather than those for the regional stepping stone, as most regionals today are not majority owned by their code-sharing partners, but operate under fixed price contracts. Could higher salaries prove more attractive? The answer is yes, but under current arrangements, this is virtually impossible give the slim financial margin of most regionals. Today, 36.6% of the US commercial fleet is operated by regional carriers. Without a continuing supply of pilots, those flights, from smaller cities to hubs and smaller cities to smaller cities, will be at risk. Poor public policy and politically mandated regulations with counterintuitive impacts are placing a segment of the aviation economy unduly at risk, and with the lure of much higher pay and job openings at major carriers, it will be impossible to keep regional pilots from jumping ship. When they can no longer be replaced, regional airlines will have a more difficult time remaining viable. Airline stocks have soared recently, with profitability at major carriers. But you might want to consider short-selling regional airline stocks, as in a couple of years, the pilot shortage will come home to roost, and if not inhibit their ability to fly, certainly inhibit their bottom line. [1] http://www.businessweek.com/articles/2014-02-11/yes-theres-a-pilot-shortage-salaries-start-at-21-000 [2] Source, USA Today: http://www.usatoday.com/story/money/business/2014/02/28/gao-pilot-shortage-airlines-colgan-crash/5894307/ [1] NTSB Accident Report NTSB/AAR-10/01 PB2010-910401

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