Industry Pilot Demand December 2017
Cyclical Pilot Demand Over the Last 40 Years Is This Time Different? Last 40 years saw two major hiring booms and one prolonged slump Primary driver for hiring in late 20th century was growth 1985 1990: High demand for Pilots Airline expansion after early 80s recession Vietnam-era retirements Major airlines hired over 10,000 Pilots 1996 2000: Post-recession rebound Economy rebounded from early 90s recession (little hiring for six years) After recalled furloughs, airlines hired over 8,000 Pilots 2000 2013: Decreased Pilot demand Tech crash began economic slowdown; 9/11 attacks reduced travel Multiple legacy airline bankruptcies/mergers Retirement age increased to 65 in 2007 Major recession 2008-2009 Result: No sustained industry hiring for 10-plus years Sources: RAND Corporation, Air Transport Pilot Supply and Demand, 2015 Today: A Pilot Shortage is Developing Since 2013, demand for Pilots has increased due to Sustained economic expansion, airlines return to profitability; grow fleets 2018 tax reform; will likely fuel higher rates of GDP growth Major airlines forecasting 2018 growth greater than 5%; UAL announced 4-6% annual growth through 2020 Changes to crew duty and rest requirements Retirements will surpass growth as main driver of Pilot hiring While the supply of Pilots is decreasing due to Significant regulatory change introduced after 2009 Colgan Air crash First Officer ATP/1,500-hour rule The high cost of flight schools, which is a barrier to entry Multi-engine IFR ratings, college tuition cost > $125,000 Low starting salaries has led to fewer student Pilot starts Constrained supply of military Pilots Approximately 1,000 Pilots per year leave military for airlines; small fraction of current need Sources: RAND Corporation, Air Transport Pilot Supply and Demand, 2015; Shrinking Pool of Future Pilots Keeps Major Airlines on Edge Bloomberg June 29 2016; UND study 2015, UAL earnings call, Jan 23, 2018. 2
FAA Rule Changes Are Restricting Pilot Supply In 2013, FAA tightened minimum qualifications (First Officer Qualification Rule) Part 121 First Officers need Airline Transport Pilot (ATP) rating (previously required only commercial) Basic rule for ATP is 1,500 hours total flight time Restricted ATP (R-ATP) available for: Grads of 2-year aviation school (associate degree) 1,250 hours Grads of 4-year aviation school (bachelor s degree) 1,000 hours Military-trained Pilots 750 hours Legislation is pending to lower these minimums Status is uncertain Knock-on effect of legislation: flight schools would suffer immediate loss of qualified flight instructors and cause major delays in the training pipeline Source: RAND Corporation, Air Transport Pilot Supply and Demand, 2015 The Situation at the Regional Carriers 15 largest regional airlines employ approximately 19,000 Pilots Regionals see 10-15% attrition annually to destination carriers Smaller regional airlines without flow-through agreements have a 25-30% loss rate of new hires in the first three years many are moving to larger regionals Regional airlines have started unprecedented incentives to attract Pilots Signing/retention bonuses ranging from $7,500 to $50,000 Starting pay for regionals approaching parity with majors Pay for ATP qualifications Guaranteed flow-through to major partner carriers More than 850 have completed the Envoy to American transition Endeavor offers guaranteed interview with Delta after 24 months as a Captain Source: RAND Corporation, Air Transport Pilot Supply and Demand, 2015 3
Regional Airlines Wholly Owned by Majors American: Envoy Airlines, Piedmont Airlines, and PSA Airlines 4,500-plus Pilots All offer hiring/retention bonuses of approximately $22,000 for a 2-year commitment and $60,000 first year pay. Guaranteed, no interview flow-through program to AA. Estimated to take 6 to 7 years. Aggressively hiring 1,000-plus Pilots in next 2 years. Cadet program partnership with numerous universities. 200% increase in students in program since July 2016. One program offers $22,100 tuition reimbursement and guaranteed placement with American. Delta: Endeavor Airlines 1,800-plus Pilots Offers $10,000 hiring bonus and $20,000 retention bonus. Bridge agreement with Delta offers guaranteed interview and a commitment to hire a certain percentage after two years as a Captain at Endeavor currently 65% success rate. Alaska: Horizon Airlines 800 Pilots $20,000 signing bonus for Q400 and $10,000 for E175. Agreement with Alaska to guarantee interview and hire a minimum of 30% of Horizon Pilots every year. Cancelled up to 500 flights a month in summer 2017 due to low Pilot manning. Management admitted non-competitive pay was to blame in Q3 earnings call. New contract with higher pay has solved much of the problem (now hiring 30 Pilots a month). Sources: Airline websites Regional Airlines Independent SkyWest Airlines: 4,300 Pilots Regional carrier for Alaska, American, Delta, and United Offers a cadet program through universities such as UND and Embry-Riddle for future employment after graduation $7,500 bonus for certain qualifications, but no signing or retention bonuses Offers longevity credit for Pilots from other regional airlines 18-month to 2-year upgrade Republic Airlines: 2,000-plus Pilots Regional carrier for American, Delta, and United Currently offers top starting pay of $41/hour $10,000 $17,500 signing bonus Will pay for ATP certificate and final 100 hours of flight time towards ATP Sources: Airline websites 4
Selected Regional Airlines Independent Air Wisconsin: 547 Pilots Offers $48,000 in total bonuses Member of Career Pathway Program with United Commute Air: 275 Pilots $22,000 signing bonus Total first year pay up to $74,000 Part of Career Pathway Program with United GoJet: 580 Pilots $12,000 signing bonus Will hire direct-entry Captains Pilot pathway program with Spirit (after 2 years of employment) Trans States: 600 Pilots Will direct-hire other regional airline Pilots without an interview Silver Air: 165 Pilots $12,000 signing bonus Pilot pathway program with Frontier Sources: Airline websites Airlines Are Reducing Requirements While Looking for Greater Supply Major airlines are reducing new-hire requirements SWA dropped requirement for B737 type rating, PIC reduced to 1,000 hours preferred JetBlue began ab initio (Gateway Select) program in 2016 Price dropped in 2017 from $140,000 to $125,000 Major airlines (including cargo) have 10,000-11,000 qualified applicants on file Will need to hire 3,000-5,000 annually how long can this pool support the current hiring surge? Aviation universities are seeing growth in applications University of North Dakota and Embry-Riddle have seen 30% higher enrollment Other Part 141 schools (e.g. FlightSafety, American Flyers) add to supply ATP just received its 300th aircraft and has interview agreements with some regionals Military historically has been a supply, but DoD is increasing incentives to stay Even the DOT recognizes national shortage of qualified Pilots Announced the Forces to Flyers program in November Offers tuition support for non-flyer veterans up to CFI-Instrument rating 5 Source: RAND Corporation, Air Transport Pilot Supply and Demand, 2015, www.fapa.aero, US DOT press release, November 2017
Selected Aviation Universities University of North Dakota Grand Forks, ND 2,000-plus students in aviation program, 1,500 in flight program 90 aircraft Guaranteed interview with regionals (ExpressJet, Delta Connection) Tuition $127,000 (in-state)/$171,000 Embry-Riddle Aeronautical University Daytona Beach, FL 1,900-plus students in aviation program, 1,350 in Pilot training 60 aircraft Numerous internships and guaranteed interview opportunities High cost at $246,000 for full program Florida Institute of Technology Melbourne, FL More than 750 students in aviation programs, 450-plus in flight program 35 aircraft Guaranteed pathway programs with Endeavor, ExpressJet, and Republic offer interviews for graduates One of the highest cost at $272,000 Purdue University West Lafayette, IN Approximately 300 students in aviation program 29 aircraft including 2 turbojet aircraft $146,000 (in-state)/$221,000 No guaranteed interviews offered at present Sources: University Websites Military Facing a Shortage and Increasing Incentives to Stay US Air Force has identified shortage as a crisis Total requirement: 20,000-plus Pilots USAF requires approximately 1,000 Pilots a year; looking to increase to 1,600 Will be 2,000 Pilots short by end of 2017 House Armed Services Committee 2018 DoD Authorization bill increases annual retention bonuses from $35,000 to $50,000 2015 bonus take rate: 410 of 745 eligible Instituted a voluntary recall program for recently retired Pilots Annual attrition to airlines is 900-1,000 annually US Navy also reacting to shortage Naval Chief of Personnel memo July 10, 2017, offered $75,000 to $150,000 to Pilots (depending upon aircraft) to stay extra 5 years Navy losses to separation and retirements is approximately 300 each year Source: RAND Corporation, USAF press releases 6
Future Pilot Marketplace Eight largest airlines (AA, ALK, DL, FDX, JBLU, SWA, UA, UPS) will retire more than 35,000 Pilots by 2030 Major airlines have dramatically increased hiring since 2013 SWA has added 1,800-plus in 3.5 years Delta has hired 3,600 and United 2,000-plus since 2013 Even small growth to seniority lists drives large additional demand Each 1% annual growth = roughly 10,000 additional Pilots through 2030 Military is increasing retention efforts to stem flow to airlines Retirements will exceed 3,000 annually by 2023 Total mainline hiring, assuming a growth rate of 2-3% through 2030, could exceed 59,000 2017 headcount at 8 largest carriers = 61,000 Sources RAND Corporation, Air Transport Pilot Supply and Demand, 2015; UND study 2015 7
Projected Retirements: 2018-2030 Projected Retirements at 8 Largest Carriers 3,500 3,000 2,733 2,794 3,003 3,037 3,053 3,108 2,917 2,933 2,840 2,700 2,500 2,352 2,053 Pilot Retirements 2,000 1,500 1,799 1,000 500-2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 AAL DAL UAL LUV FDX UPS JBLU ALK Total Retirements = 35,300 Projected Hiring: 2018-2030 (1% growth) Anticipated Hiring at 8 Largest Carriers (assumes 1% growth) 4,000 3,500 3,377 3,444 3,660 3,700 3,723 3,785 3,600 3,623 3,537 3,404 3,000 2,684 2,989 2,500 2,424 Pilot Hiring 2,000 1,500 1,000 500-2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Retirements 1% Growth 1% growth + retirements = 43,900 new hires Data includes: ALK, AAL, DAL, JBLU, LUV, UAL, FDX, UPS Source: Airline Pilot seniority lists 8
Projected Hiring: 2018-2030 (2% growth) Anticipated Hiring at 8 Largest Carriers (assumes 2% growth) 5,000 4,500 4,000 3,665 4,072 4,160 4,396 4,458 4,503 4,587 4,425 4,471 4,409 4,300 Pilot Hiring 3,500 3,000 2,500 2,000 3,061 3,340 1,500 1,000 500-2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Retirements 2% Growth Data includes: ALK, AAL, DAL, JBLU, LUV, UAL, FDX, UPS Source: Airline Pilot Seniority Lists Assumes 2% annual growth of seniority lists 2% growth + retirements = 53,800 new hires Projected Hiring: 2018-2030 (3% growth) Anticipated Hiring at 8 Largest Carriers (assumes 3% growth) 6,000 5,000 4,822 4,945 5,219 5,319 5,404 5,529 5,411 5,502 5,486 5,425 4,380 4,000 3,710 4,022 Pilot Hiring 3,000 2,000 1,000-2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Retirements 3% Growth Data includes: ALK, AAL, DAL, JBLU, LUV, UAL, FDX, UPS Source: Airline Pilot Seniority Lists Assumes 3% annual growth of seniority lists 3% growth + retirements = 65,100 new hires 9
8,000 Projected Hiring: 2018-2030 (4% growth) Anticipated Hiring at 8 Largest Carriers (assumes 4% growth) 7,000 6,000 5,628 5,804 6,134 6,293 6,439 6,630 6,580 6,742 6,801 6,820 Pilot Hiring 5,000 4,000 3,000 4,372 4,729 5,135 2,000 1,000-2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Retirements 4% Growth Data includes: ALK, AAL, DAL, JBLU, LUV, UAL, FDX, UPS Source: Airline Pilot Seniority Lists Assumes 4% annual growth of seniority lists 4% growth + retirements = 78,100 new hires Implications for Southwest Airlines & SWAPA No wide-body career path and slower upgrades (relatively fewer retirements) May drive an expectation for higher rates of pay SWA s traditional hiring sources have fewer candidates Lack of regional partner flow-though provides fewer first-year Captains to choose from Military programs to increase retention also thins potential hiring pool Source: RAND Corporation, SWAPA GAC Contact Information For more information, please contact SWAPA s Economic, Financial Analysis & Industry Research Committee at 214.722.4202 or efairc@swapa.org. 10