The hit came quickly in March. Traffic literally disappeared and US airlines scrambled to reconfigure their businesses. The switch was exceptionally tough because the industry had just completed its best year ever – record load factors, unfettered growth, and great profits.
But the switchover from boom to bust has been more shocking than anyone could have predicted. The pandemic is global and shut down air travel – something that no previous health scare, war, or act of terrorism has accomplished before.
The US airline industry went from a pilot shortage to a pilot surplus in about 60 days. Pilots are an industry Achilles Heel – their role in the industry is fundamental to its ability to perform. Pilot and fuel costs are the two biggest cost components of airline flight operations. We are going to focus on pilots for this post.
The US airline industry has a long history of finding ways to cut pilot costs and benefits. Despite being unionized, and effective in lobbying, pilots have seen their compensation shrink. This has been driven by industry consolidation but also by the vagaries of the airlines. Airlines have proven to be highly risky businesses – most fail. Pilots from a failed airline are moved to the bottom of the seniority list at their new airline if they find a job. Many US pilots have found work overseas at fast-growing airlines in the Gulf, for example.
The professional airline pilot career is not easy. When it’s good, it’s very good. But most of the time it’s not that good. The happy airline pilot is one that gets tremendous satisfaction from flying and can live with the salary. The job comes with substantial responsibilities – the equipment is very expensive, the training needed is expensive and then we need to add the value of crew, cargo, and passengers. Top it off with a 100% safety requirement – there is no margin for error. To make things interesting pilots are expected to perform their work in every kind of weather with that 100% safety requirement. In short, a commercial airline pilot’s job is highly specialized with regular testing for skills and health. You might have thought this job paid commensurately – and it does for a small fraction at the top of the seniority list.
The US airline industry cutting pilot benefits have been driven by a desire to reduce operational costs. This is rational. But at the same time, the industry has increased workload when it can, while pilots also have had to meet steadily rising costs of entry (training) to the industry and stricter regulations. This is a profession that has been steadily squeezed.
In order to protect the profession, pilots unionized to ensure collective bargaining. This has been somewhat successful. But the squeeze has continued. Relentless industry needs for reducing costs drive creative ways to undermine pilot benefits. Unions and airline bargaining, consequently, have become more fractious. The main reason is that they are fighting over ever smaller bargaining space. When you have fewer centimeters to work with, millimeters count.
One of the most fractious issues for US airline pilots is the Scope Clause. Pilots we have spoken with are emphatic – they will not entertain any easing. Decades of seeing airlines go through bankruptcy and renegotiate contacts have shown pilots that they depend on one certainty – the industry will make conditions worse at every opportunity. Pilot unions are in virtually ongoing combat with airline management.
Pilots tell us that despite being more senior (i.e. years flying and accumulated hours) mergers have seen captains pushed back into FO seats. Union seniority is a touchy subject and there have been lawsuits. Pilots tell us the language in their seniority contracts has become less definitive because of these lawsuits. Senior captains near the end of their careers are finally at the magic spot where they can select the routes they want to fly. They make good money in the last few years. These pilots are the least likely to want to see any changes.
This means that as furloughs start, it will be the less senior pilots that get sidelined first. Which is a pity since they come with lower costs for the airline. Airlines know this and are offering senior pilots early retirement packages. Considering these pilots are in the “best days” of their careers, this can be expensive. But airlines are in a race to survive – our estimates are that US airlines are about 80% overstaffed. Layoffs are not as simple as they look – these are people with skills that cannot be found easily. Laying off senior pilots has a long tail effect – for example, these pilots are the line check airmen that help newer pilots with ongoing training and ensure all pilots comply with established procedures. A deep skill pool ensures the safety and with a 100% safety requirement, losing these skills is a sensitive subject. It is also a decision with long-tail financial implications. American Airlines’ SVP Of Network and Revenue said at the May 2020 Bernstein conference that to “crew up” (pilots trained in the down cycle then up) can take “12-15 months”. So as this virus crisis ends, airlines win or lose the recovery with decisions made today on pilot staffing. Those who cut too deep will be facing another pilot shortage (due to training time and funnel). When an airline furloughs pilots from the bottom it causes a tremendous amount of disruption and that creates a tsunami of training that is time-consuming and expensive.
Back to Scope Clause for a moment. Scope is item #1 in US airline pilot contracts because if any leeway on this issue is given, a lot of other pilot contract protections could be undone. Currently, the US airline industry load factors favor smaller aircraft, like the E-175 and A220. The former is defined as a regional jet and subject to Scope limits. That means mainline pilots limit how many can be deployed to ensure mainline pilots are not substituted. The A220 is a mainline aircraft and currently only flown by Delta.
When asking a pilot about this situation, we were told: “Our airline is free to fly as many E-175s as Scope permits on our ratio formula. There will not be any changes to that language. We will not tolerate it and the airline is not asking. They can buy and fly heavier E-175 E2 and M90 anytime, however, mainline pilots will fly them, and they’ll need to negotiate pay rates. That trench in the sand is filled with lava and it will not be crossed. Scope particularly in turbulent times like this is an even more monolithic religious issue. It’s a, “You buy ’em, we fly ’em, situation. “
Just when US airlines need to have the most flexibility, their history of poor pilot relations has come to haunt them. There is no goodwill. One senior pilot said, “I’ve got nothing to give”. The lack of trust is well placed. US airline pilots must watch their unions closely to make sure hard lines are not crossed or eased. They also must watch the industry go through yet another convulsion and this one is the worst any pilot has seen. Is it any wonder that so many senior pilots are taking the early retirement packages?
In summary, US airline pilots have seen careers as bumpy as some of their flights. The current pandemic will ease, even if it takes until 2024. By then airlines will be scrambling for pilots again. Those pilots that are still flying will enter “happy days” again. But we are several years from then and the industry has to, somehow, survive.