American Airlines may be regretting its decision last year to unilaterally hike regional pilot pay to historically high levels, according to Raymond James analyst Savanthi Syth.
The Fort Worth, Texas-based carrier fundamentally changed the economics of regional flying when it raised pilot pay at its three wholly-owned affiliates — Envoy, Piedmont Airlines, and PSA Airlines — to nearly the level earned by its own pilots. The move doubled the cost of regional operations, which have long been a lower cost capacity option for major airlines like American to serve small cities and, at least as recently as October, had yet to solve the pilot staffing issues that American’s affiliates face.
“American made a bet last year in June, and the bet went wrong,” Syth said at the U.S. Transportation Research Board Annual Meeting in Washington, D.C., on Monday.
Rather than siphoning away the available pilots from competitors to Envoy, Piedmont, and PSA, other carriers have matched the pay rates and prompted an industry-wide shift in regional airline economics. Mesa Airlines was the first to match in August and has been followed by much of the industry, including heavyweights Horizon Air, Republic Airways, and SkyWest Airlines.
Syth did not comment on what pay rates for regional pilots should be, only that the raises American gave crews at its affiliates had reset the economics of the industry without immediately eliminating staffing issues.
“Increases to wholly-owned pilot pay and other investments to support the operation are near-term investments that will drive long-term value,” an American spokesperson said in response to Syth’s comments. They added that the airline will continue to be “aggressive in tackling the regional pilot constraints affecting the U.S. airline industry.”
In August, American Chief Revenue Officer Vasu Raja said the airline could afford to pay affiliate pilots the new rates because its deep regional connectivity generated higher yields — in other words, fares — than competitors.
“The value we’re able to go and create, especially [with] the regional network, has less to do with the expense profile of a regional jet and really everything to do with the yield profile of being able to go and serve a ton of these really unique markets,” he said.
But competitors’ decision to match American’s affiliate pay rates has potentially left it with fewer regional pilots than hoped, and the industry with significantly higher regional costs. In October, CEO Robert Isom and other executives repeatedly cited “regional pilot constraints” as limiting the airline’s capacity recovery through 2023. This includes both hiring, and the slow process upgrading first officers to captains.
In addition, American lost partner Mesa to United Airlines in December when it declined to cover Mesa’s higher pay rates. American has gained Air Wisconsin as a partner, which itself dropped United, but that feed is with smaller, 50-seat Bombardier CRJ200s while Mesa takes larger and more profitable 76-seat Bombardier CRJ900s to United.
The industry view is that U.S. pilot staffing will normalize, both in terms of hiring and training, by 2024. Bank of America analyst Andrew Didora and others estimate that major U.S. airlines will hire roughly 22,000 pilots in 2022 and 2023. Didora estimates that the industry needs to hire roughly 5,200 pilots annually — 1,300 more than it hired annually from 2017-19 — from 2024 through the end of the decade.
Dwindling Air Service
Staffing numbers may be returning to pre-pandemic levels, but airlines must deal with the long-term ramifications of the new cost of regional flying set by American.
“Regional pilot pay doubling is really going to hurt communities,” Syth said. “In the smaller communities, it’s really going to have a longer term impact.”
American confirmed Monday that it will end service to three small cities — Columbus, Ga., Del Rio, Texas, and Long Beach, Calif. — by April. An airline spokesperson cited the pilot shortage and weak demand for the cuts.
Delta and United have also exited markets. Chicago-based United has more aggressively cut cities with more than 30 — including ones served under the Department of Transportation’s Essential Air Service subsidy program — removed from its map. Casualties have included Evansville, Ind., Flagstaff, Ariz., Hilo, Hawaii, and Shenandoah Valley, Va.
Since the pandemic began, 14 U.S. airports have lost all scheduled passenger air service, according to data released by the Regional Airline Association (RAA) in November. Roughly 60 airports have lost half of their air service, and 161 airports a quarter.
One frequent critique pushed by the Air Line Pilots Association (ALPA) of the U.S. pilot shortage is that it is a matter of too little pay, and not too few pilots. The argument goes that if pay increases, more people will become pilots, and lost air service will return.
The issue with that argument is, with the new industry standard pay rates, the cost of flying to small cities has risen dramatically but not every market can support a commensurate increase in airfares. Historically, as planes have grown larger and costs have risen, small cities have lost flights — even when there were enough pilots. In the 1990s, cities including Groton, Conn., Inyokern, Calif., and Naples, Fla., were served by affiliates of major airlines United and US Airways; none of these cities have scheduled air service today.
Subsidies or Buses?
The pilot shortage — and rapidly rising costs — is driving innovation. The segment of small regional airlines, including Contour Airlines and Southern Airways Express, that fly planes with 30 seats or less has grown as the traditional regionals have pulled back from small markets. Executives at these airlines tout their models as, in the words of Southern CEO Stan Little, a form of “pilot creation” for the larger industry and a way to maintain small city air service. Even the largest U.S. regional, SkyWest, has proposed to create its own such airline, SkyWest Charter. However, some pilots at these small airlines have said they face long hours amid ambitious growth plans and slower-than-expected hiring.
Contour Airlines CEO Matt Chaifetz went as far as to suggest small communities create their own funding sources, in other words a local version of the national EAS program, to subsidize air service. “With labor rates, and fuel where it is, a lot of these markets are going to need continuous subsidy if they want to retain service,” he said in August.
Another option is ground transportation. Bus operator Landline has pushed its bus-as-a-flight option to airlines — and air travelers — since debuting with Sun Country Airlines in 2019. It now partners with American and United, as well as Sun Country, at four major hubs across the U.S.
“If we can find a way forward with the government on [EAS], with communities, it’s a way to lower the cost to the government and probably provide a better service experience for these communities,” Landline Vice President of Regulatory and Corporate Development Howard Kass said at TRB. Small communities “are in a downward cycle as it relates to air service because of the stress on the regional industry,” he added.
The DOT allows a bus operator like Landline to apply for EAS contracts under an alternative service program. However, communities are disinclined to support such proposals because government funding for airports is based solely on the number of passengers that board a plane, and not a bus.