Dec 09, 2021

There are several generally accepted reasons for the current pilot shortage. Reasons range from the 1500 hours requirement for first officers enforced by the Federal aviation administration (FAA), early retirement practices by airlines, and the effects of the pandemic. Across the aviation industry, two segments stand to be impacted the most by a pilot shortage.  These are the airlines and pilot training institutions. Whatever the accepted or unacceptable reasons are for the pilot shortage, it is clear that It currently has and will have future implications for players and stakeholders in the aviation industry, particularly airlines and pilot training institutions.

Key takeaways

• It is generally excepted that the pallet shortage is caused by the 1500 hours requirement for pilots in the airlines, increase demand for air travel, and the effects of the pandemic.
• The pilot shortage has varying effects on the airlines and pilot training institutions.
• In response to the pilot shortage, airlines will seek to minimize the risk, while pilot training institutions will seek to maximize the upside.
• There are unforeseen implications of the pilot shortage, and stakeholders must be aware of these to respond to them appropriately.

The generally accepted reason for the pilot shortage

It is generally accepted that there are three main causes for the current pallet shortage. The first is the FAA’s requirement that all first officers of airlines (operating under Part 121 of Title 14 of the Federal Code of Regulations) must have 1500 hours before flying real passengers. This was triggered in part by the crash of Colgan Air Flight 3407 on February 12, 2009, in Clarence Center, New York. The second is that over the past few years airlines have been taking the opportunity to early retire their most senior pilots. From the airlines' perspective, the most senior pilots are the largest segment of the largest investment in their operations, that is pilot and personnel. In an increasingly competitive industry lowering costs is seen as expedient. The third general accepted cause for the current pallet shortage, Is the pandemic itself. The airline industry has always been vulnerable to Shocks. While it is the backbone of our global trade and commerce as it relates to people, it is highly susceptible to sudden changes that affect its overall operation. While the industry has proven itself to be resilient over the years, the adaptation needed for such resilience takes time. As with the 1973 oil crisis, the September 11, 2001 terrorist attacks, and the 2008 Great Recession, The pandemic has had a tremendous effect on the industry. There is a lot to be said here on the pandemic, its effects, its magnitude, and unlike other crises before, it is 100% global, sudden, And for the first time causes global air travel to dip to approximately 10% at one point. However, to Discuss all these would require a separate article.

The pilot shortage and its effects

With the recent increase in the pilot shortage, various commentators and experts have had a lot to say about what this means for the aviation industry in general. In this article, we will discuss possible causes for the shortage, why the problem persists, how the aforementioned stakeholders will be impacted by it, and how they might respond to it.

The generally referenced market in this article is the US aviation industry. However, notwithstanding the details and specifics, this article applies globally.

Increasing travel demands

Notwithstanding the effects of the pandemic, which we are currently recovering from. Global travel is increasing. The number of individuals using air travel as a means of transportation has been steadily increasing over the years. This increasing air travel may be attributed to two specific variables. The first is that airlines over the past decade I’ve found ways to operate more efficiently and cost-effectively and have been passing that lower cost of operations to their paying customers in the form of decreasing available seat miles (ASM). Available seat miles in “lay terms” is taking an aircraft seat, raising it to the flight levels approx 25,000 to 40,000 feet, and moving it 1 mile across the ground. As the cost of ASM declines, so do the costs of airline tickets. The second variable is the general increase in the wealth of the world’s population. Over the past 20 years the world’s population, particularly in Asia has been acquiring more and more wealth, with more people rising above the poverty line worldwide, and a growing middle class.

The effects of the pilot shortage on airlines

There are several noteworthy effects of the pilot shortage on airlines themselves. These effects are primarily adverse and airlines are trying their best to cope, Or even thrive in spite of these adverse effects.

• The inability to take advantage of increased demand for air travel. In spite of  the periodic ups and downs of the demand for air travel as a result of the pandemic, airlines have been challenged by the pilot shortage as they are unable to take full advantage of the overall increased demand for air travel. In recent weeks due to being short-staffed as a result of numerous factors Southwest and American Airlines have had thousands of cancellations. 
• Increase in the cost of operations for maintaining leases in upkeep for aircraft facilities. As airlines, peak efficiencies and resource utilization decrease, the cost of operations relative to revenue gains increases. This means that relative to total revenue the overall cost of their operations is on the rise. For an industry with slim margins, this is not a good place for airlines to be. 
• Profitability. As a result of the aforementioned decrease in overall revenue and increase in relative operating cost, airlines have been struggling to get in the "black". 
• Company valuation and stock prices for the public traded companies. Since the majority of the airlines are publicly traded companies, decreased revenues, increased relative operating costs, and in most cases, net losses have had a significantly negative impact on these companies’ stock prices and company valuation.
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The effects of the pilot shortage on flight schools and aviation training  institutions

Unlike the airlines, flight training institutions have more of a “mixed bag” as it relates to the effects of the pilot shortage on them. Some of the main effects of the pilot shortage on flight schools and aviation training institutions are:

• Increased demand for pilot training. As Individuals try to take advantage of what they believe are opportunities to become commercial or airline pilots. This has led many flight schools to see an increase in the number of student pilots. This is further amplified by the practice of the regional airlines to offer signing bonuses to attract new pilots.
• Increase capacity. Some pilot training institutions Will increase their capacity such as increasing resources such as aircraft facilities to meet the Increased demand for pilot training.
• New entrants into the market. Since the barrier to entry in the pilot training space is very low, there will be new entrants into the space to provide pilot training. One corollary to this is the entrance of individual flight instructors entering the market space to take advantage of the increase in demand for pilot training. Individual flight instructors these days are very adept at using online/mobile solutions to help them become as close as efficient as a full-function flight school.
• Increase partnership with airlines. As airlines ramp up their recruiting activities for new pilots, the practice of partnering with flight schools will increase. Primarily because the airlines may find it advantageous to do so, but also that a flight school would see a perceived benefit from entering into a partnership with an airline.
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Possible responses and outcomes

The pilot shortage will evoke a set of responses from the stakeholders within the aviation industry, which then could lead to a certain set of outcomes. Some of these responses and outcomes are highlighted below.

Possible response or outcomes for the airlines

• Seeking greater partnership with pilot training institutions. As discussed above airlines may want to seek greater partnerships with flight schools to reduce some of the uncertainty in training and recruiting their future pilots.
• Restructure operations. To cope with the pilot shortage which has the effect of reducing overall revenue for the airlines, they may seek to restructure their entire operations to reduce the shortages' effect on its bottom line.
• Create their own pilot training academies. Airlines may seek to create their own pilot training academies, either wholly owned or in partnership with a reputable flight school(s). In recent years American Airlines through its American Airlines Cadet Academy has done the latter. While Lufthansa is known for having its own pilot training academy.
• Providing bonuses and outsized incentives. Recently we have seen airlines re-introduced bonuses and incentives in their attempt to recruit pilots. This move is particularly attractive to those pilots already in the industry but not in the airlines. It could also expand the airlines’ recruiting activities by attracting non-pilots.
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Possible responses and outcomes for flight schools and pilot training institutions

• Increase flight training activities. There will be increased flight training activities due to the increased demand for pilot training as outlined above in this article.
• Flight schools increases capacity. As discussed earlier in this article, flight schools may see the need to increase their training activities by increasing capacity to take advantage of the increase in demand for flight training across the sector. They would do this by increasing their overall capacity by investing in resources such as aircraft, facilities, and personnel.
• A shortage of flight instructors. As instructors rush off to take advantage of the greater incentives to become airline pilots or start their own small operations flight school, this will open up a gap in the demand for flight instructors. 
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One outcome for flight schools that is not readily seen

Established flight schools might misunderstand the economic conditions that will cause increased demand for pilot training to reach a point of equilibrium. They might misread the boom in pilot training demand thinking it is a long-term trend, and increase their resources and capacity to take advantage. Yet find that over time as the demand reaches equilibrium and begins to taper off they are stuck with excess capacity. New entrance to the market believing that the boom will last for a long time will set up shop with this expectation, only to find out that it will reach a point of equilibrium and the demand that they expected will not continue to grow and fall off over time. As the demand reaches equilibrium there will be a shakeout of those flight schools or individual instructors operating in the space that was not entrenched or strategically prepared for a gradual reduction in the demand, and will be shaken out of the market space.

Key recommendations for flight schools

1. Unless absolutely necessary, do not invest in excess capacity or resources such as airport facilities and aircraft. This will lead to having less excess capacity to get rid of once the market space reaches an equilibrium.
2. Understand that there will be a lot of new entrants to take advantage of the increasing demand for pilot training, as a result, the increasing demand will not be absorbed by any particular school in a particular geographical location or its key competitors, but also by new entrance into the market space
3. Rather than increasing capacity, increase efficiency by using flight school total management systems, and by increasing efficiencies across the board. Therefore, once The demand tapers off and the industry is in a state of relative equilibrium, there will be no excess capacity to get rid of.

It is clear that there is a shortage of pilots overall in the industry, and that the shortage has various effects on stakeholders and players in the industry. Understandably, these players and stakeholders will take reasonable action to either mitigate the downside of the shortage or take advantage of the upside. The stakeholders must be aware of the hidden factors at work, and be guarded against those as well. It is an exciting time whichever side of the fence you find yourself in the aviation industry, yet, we must be wise in our response and prepare for the outcomes of our’s and others' responses 

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