The global 'pilot shortage' – a reality or artificial crisis?

Lets face it, our industry is afflicted by industry commentators who apparently work tirelessly and selflessly in order to have information at hand that is vital to our industry but upon closer questioning don’t fully have the grasp on their topic of choice that they profess to do. One topic that such commentators have commandeered as their own ‘tour de force’ is ‘the global pilot shortage’. This topic has baffled me personally for some time and yet in itself has grown beyond the confines of the industry and into the mainstream media. One aspect that perplexes me is that there is plenty of empirical evidence presented as fact but largely this is done so without any sort of quantative supporting analysis. I do not profess to have a full analysis of my own to counter the various claims being made (and I don’t intend to create one!) but it is nevertheless important to question the claims being presented. To assess whether there is a pilot shortage or not is not as simple as it seems as a good many factors can have a bearing. 

Forecasting the long-term need for airliners

In the airline industry demand is typically represented by revenue passenger kilometres (RPK’s) but on a super basic level the demand for all goods and services in the supply chain that sits below the physical operation of a commercial aircraft is a derived demand. The same goes for the demand for piloting skills. Another factor driven by in-service aircraft is the employee to aircraft ratio, their productivity and of course when looking at profitability, cost. When trying to predict demand most industry commentators don’t provide much analysis beyond regurgitating predicted aircraft delivery numbers presented by Airbus and Boeing in their long-term market reports. These reports have always been bullish in outlook.

Airbus has gone from strength to strength since entry to market

Boeing delivered its first ever market outlook in 1964, more than 50 years ago. Airbus began publishing its own long-term market studies in the late 1980’s. The reality is that these reports are marketing departments bestowing confidence and creating a view that supports their own product strategy. In the mid 1990’s the viability of the Airbus twin deck ‘superjumbo’ then known simply as the ‘A3XX’ was a hot topic, these manufacturer’s reports were a key source material for creating arguments for and against and the fierce competition between Airbus and Boeing was already apparent then. What was surprising was how these industry giants could come up with such different views of the future with such surety. Both manufacturers failed to predict the boom in regional jets and also the meteoric rise of business aviation. They also both had very different views about the viability of a 500 seat plus airliner.  

Market outlooks are generally bullish

Arguments for a 500 plus seat airliner largely revolved around future infrastructure and capacity constraints. The spoke-hub paradigm lends itself to high capacity aircraft flying hub to hub at full capacity between networks where spokes feed the hubs and ensure that the economics of large high capacity aircraft work. What we have actually seen is the significant development of point to point transit (especially as a consequence of LoCo’s) and where a hub and spoke network exists, a desire for higher frequencies between hubs. This trend affects sales of 500 plus seat aircraft it also means more-lower capacity aircraft operating higher frequencies. With hindsight and perhaps more by chance than design Boeing’s analysis appeared more accurate, pairing back its 747 program whilst Airbus forged ahead with the A380 based on their own predictions.

With this trend and all the other market fundamentals that drive growth (emerging economies, expansion in world trade, etc.), it is fair to argue that this leads to a greater demand for aircrew to operate those aircraft. However, demand alone does not create a shortage, a shortage only exists when there is insufficient supply. 

Lack of consolidated statistics

Supply and demand is the most fundamental concept of economics. If we take long-term airliner demand as a rudimentary yardstick for demand (with a bit of leeway for ‘shock’ factors) let’s then tackle supply. Unlike the law of demand the supply relationship has a time factor. When looking at the elasticity of supply at any given point in time a number of considerations need to be acknowledged; forecast aircraft retirement rates, number of new workers into the industry (today and projected) and increases in productivity (although this can be capped according to flight time limitations). The unique challenge in completing this exercise is driven by the high potential mobility of this workforce as its skills are easily transferable from one part of the world to another. Another factor is that the available supply of particular qualifications and experience (at any given point in time) is finite. Consolidating this data to build anything close to an accurate picture of what global supply looks like at any given point in the future would be a very complicated exercise indeed. 

Although there are no consolidated statistics available there are some useful market studies that have a specific market focus, specifically for the US and for China, both being important markets, the US for its sheer size and China for its anticipated growth. 

At the 2016 World Aviation Training Conference in Orlando, supply of pilots to meet growing demand was a key topic. One clearly well researched and informed presentation was given by Dassault. Their presentation looked in detail of the demographics of the US pilot group. Some interesting highlights from this included; a general aging of the pilot population (more active ATPL holders from the ages of 45 to 64 comparing 2014 to 1996) and an average retirement and attrition rate of 2150 with an average ATPL graduate trend of 6100 (using actual data between 1990 and 2015 and forecast data for 2016 to 2022 for US Majors/LCC’s). What this data suggests is that these airlines (typically employers of choice for new graduates) can take their pick of the cream of the crop. This comes as no surprise as the average F/O starting salary for the majors was USD$78000 and USD$55000 for LCC’s with average regional airline salaries considerably lower at USD$33000. With regard to China between the years of 2010 and 2015 the numbers of pilots employed by Chinese Airlines has increased from 13500 to 25200 which equates to an increase of 86.6% in 5 years, and China has not been idle on the training front either. In 2010 China trained 3200 with this figure rising to 4200 in 2014 with a total of 18,100 new Chinese CPL graduates over this period (with a significant number trained at flight schools outside of China).

According to various commentators the long-term outlook for Chinese commercial aviation remains bullish and its domestic air travel market is anticipated to become the largest in the world. The airline industry in China is led by three big state-owned airline groups; Air China, China Eastern and China Southern, however their business model differs significantly from Western counterparts with higher yields on short haul domestic flights and with a relatively low share of international traffic. With the rise of a number of independent full-service airlines, LCC’s and high speed rail services in the Chinese domestic market, the competitive landscape is shifting with more pressure likely on margins and as a consequence the impact of any shocks (financial or otherwise) could have more serious impact on future anticipated demand.

All in all the view is less than clear but a rudimentary analysis of these two markets indicate a significant number of new entrants into the future workforce. Clearly it is also important to look at which operators are claiming a shortage of candidates for their flight deck roles and their attractiveness compared to alternative opportunities.

A final anomaly to consider is the number of unemployed pilots. If there is such an acute shortage of pilots then how is it possible that unemployment rates amongst newly trained pilots are significant? As a business we are continuously approached by applicants lured into the industry by the promise of a rewarding profession and a glamourous lifestyle. But achieving this dream job is often done by riding on the back of massive indebtedness, a decision often taken on the basis of anticipated shortages that make finding employment a ‘sure thing’. To individuals in this position the 'pilot shortage' is nothing short of a pure myth. 

The lure of a rewarding flight deck career remains strong

So who benefits from a perceived pilot shortage?

Clearly training organisations do and it appears that pilot training is big business. As of 2016 there were more than 4200 flight training organisations/clubs with a global fleet of more than 25,000 training aircraft. Most of these organisations (approx. 90%) are small operations with the rest being medium/large businesses with a combined capacity to produce between 30,000 to 40,000 commercial pilots annually.

By way of an example, in a December 2016 press release UK based CTC aviation announced its largest ever single graduation of 320 student pilots, a 40% increase over 2015 numbers amid claims that 91% of the pilots trained had already secured employment with one of their partner airlines. US based L3 Communications acquired CTC aviation in the second quarter of 2015 for USD $220m, citing its attractiveness as a ‘high-margin’ business. 

The rise of the ‘retail model’ of flight training means that the supply of pilots is significantly in the hands of young pilots entering the industry who are then available on the open market. Depending on the type of course completed prospective commercial pilots have to find anywhere between ￡70000 and ￡100000 to complete their flight training. Hence, very few airlines and operators today have complete control of the quantity and quality of training conducted.

SWISS still trains according to its own requirements

Typically when airlines recruit cadets they are looking to recruit future captains. Cadets entering the industry that have conducted their training by a training organisation that has links into an operator, will typically be screened on their ability to transition to the left had seat. Taking easyJet as an example, they claim a cadet entering the airline will achieve second officer rank once they have completed 12 months as a contractor, thereafter typically 2 years to senior first officer and thereafter to a command. Let’s assume this is a possible 5 year career path to the left-hand seat. For any operator to achieve this either they have to participate in the screening process from the outset or de-risk their future planning by alternative means. These alternatives can now mean a cadet spending a spell as a contractor prior to being offered a permanent contract. Accordingly both CAE and CTC offer a pilot provisioning service as part of a vertically integrated business model designed to generate revenue at every step of a pilot’s career. 

DA42 - popular and contemporary training aircraft

Considering the aforementioned cost of training and the fact this is often achieved by an individual taking a commitment to a significant debt burden at the start of their career, there must surely be an ethical predicament to overcome; increasing business targets whilst maintaining standards. At the very least it would seem that the only sure fire way to maintain integrity is for the training organisation to delegate screening to a third party whose independence remains intact and unmolested. 

Dark night of the soul; the pay to fly phenomenon...

Pay to fly or simply ‘P2F’ is basically self-sponsored line training where a commercial airliner with fare paying passengers is operated with a commercial pilot at the controls who is paying the airline for the experience. The pilot becomes a source of ancillary revenue for the airline. This issue is particularly prevalent in the US where a 1500hr rule is imposed by the FAA. In February 2009 Continental Connection flight 3407 crashed on approach to Buffalo, NY and what followed had a cathartic effect on pilot experience requirements by increasing the required amount of minimum hours from 250 to 1500 in order to be able to operate as a first officer for an air carrier. Whatever the merits of this approach, an unexpected and unwelcome side-effect was more money spent on P2F schemes. ICAO supports an alternative model ab-initio MPL model and given the sheer size of the US market the effect of potentially unblocking this 1500hr ‘bottleneck’ could have a significant impact on not only the supply of new CPL graduates (by offering a quicker route into a salary earning job) but also speed up the supply of type qualified and experienced pilots. It could also land a major blow to P2F, an ugly and highly questionable blot on the industry. 

Capacity discipline

Historically backlogs for aircraft orders have been significant and discussions often revolve around whether or not current and planned airframe production output can be absorbed or whether there is risk of future cancellations and deferrals. Despite improved profitability in recent years the airline industry as a whole has lost more money than it has ever earned. In a capital intensive industry the balance between supply and demand is the key driver for profitability hence many airlines have learned the art of capacity discipline. Despite long-term forecasts the airline industry has always been characterised by cyclicality as a consequence of macroeconomic and geopolitical activity and in order to maintain margins airlines increasingly seek to restrict capacity in times of weakened demand.

When considering capacity aircraft deliveries are one part of the equation, other factors include permanent retirement and/or the storage of older airframes. Industry average fleet growth has traditionally been stable at around 4.5% but in previous years this has crept up and is forecast to be 7% or more in 2017 (according to IATA). This is partly driven by higher volumes of new deliveries and lower oil prices offsetting the increased maintenance costs of aging aircraft. As oil prices increase it is questionable whether or not this growth is sustainable as margins come under pressure as a consequence. Hence overcapacity undermines profitability and to maintain margins we are likely to see increasing capacity rationalization. To keep load factors up when there is overcapacity airlines have to slash fares. Herein lies the conundrum; margins improve when available seats are restricted.

To summarise, airlines will increasingly seek to aggressively adjust capacity in order to deal with any short or medium terms factors that could impede profitability and when it comes to order backlogs for airframes it is fair to argue that these are bullish in outlook. By way of recent examples in 2016 Delta Air Lines cancelled a deal with Boeing for 18 787 Dreamliner aircraft as it sought to rationalise its fleet plans. 2016 was also a rough year for the A380 program with several cancellations and deferrals announced. Airlines will not take delivery of aircraft that undermine even short-term profitability or if they simply do not have the flight deck resources to operate those aircraft. 

What it boils down to...

On the face of it the demand for pilots is and will continue to be buoyant in the long-term but whether or not we will see the crippling shortages that are being predicted is questionable. Despite the costs associated with qualifying as a pilot, a profit hungry flight crew training industry appears to be responding to anticipated demand. As a consequence of the retail model of flight crew training, many airlines are meeting their demand for pilots but at almost zero upfront cost for basic or type training. This lack of necessary initial investment would be considered unusual to a bystander armed with a basic knowledge of economics and a viewpoint that there is a looming and critical shortage on the visible horizon.

One consequence of putting the responsibility for supply into the hands of pilots is that airlines do not ‘own’ those skills and will have to demonstrate attractiveness as a future employer in order to attract applicants to fill their own cockpit seats. This is the same reason we are seeing unprecedented remuneration being offered to expatriate pilots to meet current demand in high growth and emerging markets such as China. However, it is important to note that such demand is for crews with specific skills, nationality requirements and experience levels and of an age consistent with fairly restrictive requirements. It is noted that the contract terms are also of fairly limited duration with typically three year contracts on offer.

Another consequence is that so long as flight training is big business and airlines do not train according to their own needs, reaching an equilibrium between the demand and supply of pilots will be much more difficult to achieve. To draw an analogy, in order to attain a stable and safe approach path pilots are taught not to “chase the needles”, something as an industry we run the risk of doing if the claims and statements of fact about future demand for skills are not challenged and analysed in more detail. However, one fact we can hang our hat on is that airlines offering market appropriate terms (even without providing training), stability of work patterns, a base close to home and with a decent working environment, stand a much better chance of attracting candidates that continue to be drawn into the industry.