Introduction
Dating back to 1903 the Wright Brothers first introduced the single engine powered control airplane. This began an era of love for aviation. Not only did this allow for individuals to fly leisurely but also to introduce this new and exciting opportunity to the economy. As new companies started to emerge in the market place, the overall demand for pilots came with it. Whether it be for companies or for general aviation, the demand for pilots is constantly changing. Currently, the industry has a large need for aviators demanded by many commercial airlines worldwide. By meeting this demand, the pilots indirectly help the aviation industry by helping the global economy, as well as the communities they are a part of. Some of these include :
– Provide the only worldwide transportation network
– Transports 40% of interregional export of goods
– 25% of all companies’ sales are dependent on-air transport
– Generates 29 million jobs globally
Historically, the aviation industry has been crucial in helping economies worldwide. Without pilots, the industry will see vast downfalls which will reflect the economy. The industry is constantly changing especially when certain countries evolve from pure command models to laissez-faire, this changes how the airlines can adapt to such externalities. Industry growth, baby-boom generation retirement and expensive training are all factors that are affecting the supply of pilots worldwide.
Industry Overview and History
The aviation industry’s future growth is challenging to predict due its volatility. Some years in aviation, the industry is very successful resulting in an influx of pilot hiring, but just in a few years the industry can fall into a depression resulting in layoffs and cost reductions . Airlines began in the 1950s as World War II ended, pilots were in an excess of supply, working for low wages just to gain pilot experience. At this time period, the governments primarily owned the airlines and were under many risks associated with government failure. Since the flight demand was low and prices were high at this time, flight was considered a luxury item. Historically, the airlines had a pool of experienced pilots to choose from when they initially begin to hire pilots. This pool had consisted of formerly furloughed pilots, retired military pilots and regional airline pilots who had built up enough Jet Pilot-In-Command experience to be attractive to join the major airlines . This trend has been constant in the aviation industry for many years where there is an excess of capable pilots ready to get hired by major airlines until rather recently. In the last 10 years the supply has dried out and airlines are running out of both pilots and aircraft maintenance engineers. These positions have a detrimental effect on the airlines and how efficient they can operate both financially and physically. The economic implications of how much an airline can grow is restricted on the recruitment of pilots and aircraft maintenance engineers. There are currently 2,500 unfilled technical positions in the U.S. The association projected in 2017 that unfilled positions cost U.S. maintenance companies $1.95 billion in lost opportunity and foregone revenue each year .
How Shortage Is Created
There are numerous ways that the current aviation shortage has come to be. First, most national regulators imposed a mandatory retirement age of 65 for airline pilots. Other reasons for leaving the workforce include early retirement, the pursuit of another career, or loss of medical fitness, etc. . The pilot workforce in the Americas have the highest average pilot age. North America’s high percentage of senior pilots reflects the significant recruitment activity in the 1980s and 1990s as airline deregulation expanded the industry and major hubs were developed .
As well, the recent consolidation of network carriers with a focus on efficiency slowed new hiring of pilots that are needed today. Europe has gone a different route and has seen an influx of younger professional pilots over the past 15 years. This can be partially attributed to the rapid expansion of Low-Cost Carriers in Europe sooner than North America. In addition, many experienced European pilots have moved to the more rapidly growing Middle East and Asia-Pacific regions due to competitive salaries and benefits . This has left Europe with the youngest average pilot group of any region. When experienced captains retire, a chain reaction of pilot upgrades and new hires is triggered. For example, the departure of an experienced widebody captain creates the need to upgrade a first officer to fill the vacant seat. This then creates downward pressure on airlines to develop and upgrade more first officers and captains.
Another cause of current shortage is the high cost of pilot training as students must pay for their own flight training in most cases. This can be very costly as costs can easily exceed $100,000, especially considering an uncertain future. Many are simply unwilling to take the risk and high opportunity cost. With the lack of military operations there are less routes to be funded by the government to help mitigate the risk .
Airline operations have also hindered the market for pilot training compared to previous years. After 9/11 there were several years of hiring freezes in markets such as the United States and Australia, which have deterred potential aviators from entering an industry that would be unlikely to hire. On average, a regional pilot in the U.S typically start between $20,000 and $40,000 per year . This is quite problematic as it does not attractive many prospects entering field considering they can find a job such as a car mechanic which make similar earnings and considerably less amount of stress and prior education investment involved. Considering the upfront costs of training, this starting wage is terribly unattractive. There are many other even aviation related businesses that have much higher starting salaries where it is more attractive for students. Currently, over 50% of the pilots who will fly the world’s commercial aircraft in 10 years have not yet started their training
Forecasts of increases of air travel growth also sparks the need for more pilots. Airlines are preparing themselves for the future and what will happen over the next 10 years. The International Air Transport Association forecasts 4.2% annual passenger growth and a market of 4.8 billion air passengers by 2027 . That’s an additional 1.6 billion passengers which is very significant within a 10-year span. By 2027, we expect the global commercial fleet to grow by 12,000 aircraft to roughly 37,000 aircraft .
The number of pilots required per aircraft is primarily determined by aircraft utilization and related regulations. European regulations are stricter and cause pilots to have less duty time hours per day than North America. Introduction of European duty hours to the north American market is projected to occur causing more shortage as more pilots will need to be hired to work. Over the last 10 years, the increase in aircraft utilization resulting from efficiency improvements has driven a slight growth in the average crew ratio and is expected to remain at a similar level over the next decade.
This perfect storm of pilot shortage activities has contributed to the massive lack of pilots in the airlines.
Economic Analysis
Industry Overview
Overall, air transport can help a country’s integration into the global economy resulting in many direct and indirect benefits. As economies grow so does the air transport industry. On the other hand, air transport can be a key facilitator of economic growth . For instance, an investment of $1.8 million CAD at Vancouver Int’l Airport (CYVR) was estimated to have an impact of a 5.4% increase in connectivity for Canada as a whole. This essentially means that the investment was able to raise Canada’s productivity by 0.04% which ultimately results in an increase in Canadian GDP by $348 million CAD. This illustrates how large of an affect the aviation industry has on the economy. Figure A shown in the appendix shows the contribution of aviation to vast countries’ GDP worldwide. According to IATA, we are expected to spend 1% of the world GDP on air transportation itself in 2018 . In North America alone, there is an expected increase in RPK (Revenue Passenger Kilometers) of 5.0% as shown in Figure E in the appendix That is if airlines can keep up with the demand by the passengers and economy.
Effects on the Economy
With the ongoing crisis of decreasing supply of pilots as well as aircraft maintenance engineers and the increasing demand for air travel, this poses significant threats to local and global economies. It is a given that airplanes make airlines money when they are in the air and not on the ground. With the decrease of pilots, airlines are forcing to cut back on flights resulting in major delays and in some cases, total flight cancellations. Moreover, to compensate for the increase in demand, many airlines are pushing their pilots to the limits and demanding more out of them while failing to add in incentives. For instance, the pilots of the European airline Ryanair recently became unionized. The pilots demanded better working contracts which resulted in Ryanair increasing benefits, cancelling flights and reconsidering some of their existing routes . Although this strategy helped keep the aircrafts generating revenue, it also increased the operating costs for the airline.
Furthermore, the global pilot shortage not only affects certain financial characteristics of airlines but can potentially throw off their entire business model. For instance, to keep up with pilot demand, airlines such as Ryanair invest millions of dollars into new training devices to speed up their training process as well as adding in additional aircraft fleets in hopes of hiring pilots from a bigger pool of candidates. This directly alters airlines’ cost structure which consequently alters their business model .
With a shortage of pilots two things occur, an increase of turnover to different companies and an increase of salaries. With increased turnover, training new pilots is slow and expensive costing as much as $160,000 for an airline pilot . A prime example of this effect is Great Lake Airlines in the U.S. The airline had 304 pilots in February 2013 and in 2018 that number reduced significantly to 78. Another regional airline Silver announced a $12,000 bonus for any new first officer that joins the airline. These incentives are offered to better compensate for pilots who leave to airlines that offer better career opportunities and higher wages .
Companies are forced to increase incentives and salary to keep their pilots flying their aircrafts and continue generating revenue as mentioned above. However, this results in a reduction in profit margins due to the airlines increasing their fixed costs (pilot salary) leading them to increase ticket prices. As seen in Figure C in the appendix, the example shown depicts an arc price elasticity for ticket prices ranging from $100 to $200. As an example, if Great Lakes Airlines had competition with ticket prices of $120 and the average annual income in the market was $40,000, increasing Great Lakes ticket prices by 10% would decrease their passenger demand by 4.3%. This could lead the airline as well as the destination they provide a significant loss in economic benefits.
External Economic Factors
Aviation is susceptible to external factors of the economy and to remain successful, airlines need to adapt to various externalities. In addition to the rising costs associated with pilot shortage, there is a global increase in fuel prices. Considering fuel represents approximately 24.4% of operating costs for airlines . With an increase in fuel prices, airlines are seeing a cut on the profit margins year after year forcing them to cut back on other costs including labor costs. One of the ways to offset labor costs is to implement new technology introduced to aircraft to help increase the efficiency as seen in Figure D in the appendix.
As air travel continues to grow, airlines need to hire additional labor to support their operations. Due to increase of external factors such as fuel costs as mentioned above, the unit labor costs are rising significantly at an average rise of 2.2% in 2018 . Combining rising fuel costs and labor costs, this has significant impacts on the operations and economic stability of airlines whether it be rising ticket prices or reducing the quality of service provided.
Additionally, costs of maintenance are quite considerable, however since safety is the most important factor, maintenance costs are not under as much scrutiny as wages. There are different ways airlines can strategize the way they do their maintenance to reduce overall costs . Maintenance costs can be calculated by using:
Maintenance Costs = ASM x (maintenance labor and materials/block hour)/ (ASM/block hour)
The formula is dependent on the block hours flown and the maintenance costs is proportionate to the hours flown in between checks therefore a new plane that has less maintenance checks has a dramatic effect on the overall maintenance cost.
One way to strategize maintenance is to outsource some segments of the maintenance to 3rd party companies for efficiencies. Jet Blue for example has one of the lowest maintenance costs per flight hour in 2011 and they outsource their heavy aircraft checks but internalize their line maintenance checks. Another successful strategy includes keeping specific types of airplanes to operate out of specific hubs. This allows maintenance to only carry spare parts for the few types of aircraft that operate there and not every type of aircraft the airline operates with .
Solutions
Given the analysis above of how pilot shortage is created and the economic impacts, there needs to be viable solutions implemented to help reduce these outcomes. First off, offering a competitive salary to both pilots and aircraft maintenance engineers can help attract more talent and keep retention levels high. With an average starting salary of $20,000 to $40,000, this is not attractive compared to other countries such as the UAE (see Figure F in appendix) that offers pilots a starting salary of approximately $85,000. This strategy helps retain and attract pilots but poses significant increases in operating costs which reduce airline profitability .
Labor costs are one of the largest costs for airlines. It is imperative for airlines to keep labor costs low and improve the productivity of the labor force. Southwest is an interesting example as it offers competitive wages unlike other LCCs, yet Southwest still has low labor costs per hour of productivity. This means it can incentivize pilots to fly for Southwest to earn high wages, yet the increased productivity helps airlines. This increased productivity includes flying more hours per month and pitching in to help cleaning and carrying baggage that results in more efficient operations for the airlines in the long run. In the short run, airlines can offer lower wages because of the lack of experience in the company or type of aircraft. As the airline matures the company wants to retain pilots, therefore it needs to increase wages to keep up with industry standard. Ryanair is great example of how wages need to be fair to maintain pilots. Ryanair were forced to cancel 20,000 flights in the autumn due to Union disputes on unfair salaries do to the pilot shortage. In August, Ryanair had to cut 1/6 of their flights because of Union issues. On October 1st, blaming the strikes, the airline cut its profit forecast resulting in their share price falling by 13% .
Additionally, to help attract more pilots and aircraft maintenance engineers to the workforce, the government can help compensate some of the training costs. The average costs to become a pilot at an employable level is approximately $75,000 .Many will find this is too high of an opportunity cost to attend school to become a pilot and end up receiving a starting salary at almost less than half of the total tuition costs. Much like the Essential Air Service grant offered to airports to help airline retention, a similar program could be developed for airlines or even directly to students to help aid the training costs and keep retention levels high.
Finally, an effort can be made to reform the minimum qualifications required by airlines but also increase the level of technology to offset the risk of low time pilots. Traditionally, pilots needed minimum of 1500-2000 flight time hours to be given an opportunity for an interview. Reducing this time can help airlines hire pilots earlier and to increase their pool of candidates to better meet the demand. Similarly, with aircraft maintenance workers, prospects needed minimum of 48 months of total experience before being able to apply to major airlines. Again, by reducing this number, this should allow airlines to meet the demand of maintenance workers. By reducing the minimum requirements, this poses inherent risks to the airlines which can be very costly in the longer run. To prevent these risks, the airlines need to introduce new technology to their aircraft fleets and general flight operations which can help reduce these risks. An example is Heads Up Displays (HUD) which allow certain aircrafts to operate landings in reduced visibility where traditionally it would not be able to do so especially with low time pilots. This also helps airlines operate into new airports where lack of airport equipment can increase risks, but aircraft technology can help overcome these risks ultimately allowing the airlines to not only meet pilot demand but reach new markets.
Conclusion
The aviation industry is a key player in the world of economics. Allowing different markets to integrate with the global economy and enabling new countries to trade on a larger scale are just a few examples of the benefits of air transportation. However, in order to see full potential of this ever-growing industry, we need airlines to consistently meet the demand that comes with it. With the global pilot shortage, airlines are under great pressure to meet these demands. Whether it be flight training compensation or reduction of minimum requirements for pilots and aircraft maintenance workers, there are many viable options available to overcome the shortage and keep aircrafts in the sky where they can continue to generate revenue and connect the world one flight at a time.
Work Cited
Boeing . 2018. 2018 Pilot & Technician Outlook. https://www.boeing.com/resources/boeingdotcom/commercial/market/pilot-technician-services/assets/downloads/2018-pto-oshkosh-presentation.pdf.
CAE. 2017. Global Pilot Shortage. https://www.cae.com/media/documents/Civil_Aviation/CAE-Airline-Pilot-Demand-Outlook-Spread.pdf.
Conferance Board of Canada. 2013. The Economic Impact of the Air Transportation Industry in Canada. http://www.cacairports.ca/sites/default/files/Docs_2013/CAC_Economic-Impact-Study_FINAL_April-2013.pdf.
flyingmag. n.d. Aviation Technician Shortage Gathering Storm. https://www.flyingmag.com/aviation-technician-shortage-gathering-storm.
IATA. 2018. "Aviation Economic Benefits." International Air Transport Association. https://www.iata.org/publications/economics/Reports/Industry-Econ-Performance/IATA-Economic-Performance-of-the-Industry-mid-year-2018-report-final-v1.pdf.
ICAO. 2004. The economic & social benefits of air transport. https://www.icao.int/Meetings/wrdss2011/Documents/JointWorkshop2005/ATAG_SocialBenefitsAirTransport.pdf.
InterVISTAS Consulting. 2017. THE PENDING PILOT SHORTAGE: A 2017 REGIONAL INDUSTRY ISSUE AT WORK. Accessed 2018. http://www.intervistas.com/downloads/articles/InterVISTAS%20Pilot%20Shortage%20White%20Paper.pdf.
Marisa Garcia. 2018. "59,054 viewsJul 27, 2018, 06:09am." Forbes. July 27. https://www.forbes.com/sites/marisagarcia/2018/07/27/a-perfect-storm-pilot-shortage-threatens-global-aviation-even-private-jets/#700995771549.
Phoenix East Aviation. 2015. Airline Pilot Salary. Accessed December 04, 2018. https://www.pea.com/airline-pilot-salary/.
Shetty, Kamala I., and R. John Hansman. 2012. CURRENT AND HISTORICAL TRENDS IN GENERAL AVIATION IN THE UNITED STATES. https://dspace.mit.edu/bitstream/handle/1721.1/72392/ICAT%20REPORT%20SHETTY.pdf.
Spears, Tom. 2018. "Canada faces severe shortage of pilots and aircraft workers." Ottawa Citizen. October 2. Accessed December 04, 2018. https://ottawacitizen.com/news/local-news/canada-faces-severe-shortage-of-pilots-and-aircraft-workers.
Toronto Star. n.d. City to strategize on how to stop Toronto from becoming ‘playground for the rich. https://www.thestar.com/news/city_hall/2018/02/09/city-to-strategize-on-how-to-stop-toronto-from-becoming-playground-for-the-rich.html.
Vasign, Bijan, Ken Fleming, and Thomas Tacker. 2013. Introduction to Air Transport Economics. Ashgate Publishing.
viewswire. 2018. Europe business: Labour pains. October 13. Accessed 2018. http://viewswire.eiu.com/index.asp?layout=VWArticleVW3&article_id=1537239137.
Appendix
Figure A
Figure B
Figure C
Figure D
Figure E
Figure F