So lets get down to the nuts and bolts of it. As the world grapples with the uncertainty of COVID-19, many pilots have been talking about furlough concerns.
Every airline is different but some things remain the same among carriers and can be used to calculate a general cost as to when a furlough might make economic sense.
What are furlough costs?
- The cost of a pilot’s training, is training an airline can no longer profit from when it lets a pilot go. Airline training in the developed world is comprehensive and therefore expensive. Pilots go through Indoc where they learn company procedures and policies as well as FAA regulations unique to that operation, followed by ground school dedicated to an aircraft type B737, A320, CRJ etc, followed by Procedures and Systems training and eventually Simulator Training. Training involves highly experienced instructors, expensive equipment, and time. All of which are not cheap. Costs for a pilot to pass through training often exceed 45,000$ depending on the aircraft type and previous experience and usually take 2-3 months of productivity away from that new pilot.
- In the case furloughs, there are often displacements as categories of positions shrink, pilots move to other aircraft or seats (CA, FO) that their seniority can hold. At carriers with many equipment types a furlough could domino in the form of multiple training events per furlough as pilots fall backward down a seniority list. Each training event has costs similar to the first bullet point.
- Displacements often come with contractual moving expenses as pilots are being relocated at company need and therefore depending on the pilot agreement provided a move.
- These displacements often come without seat locks. Meaning as soon as things start moving again pilots are permitted to change equipment(more training/costs). Airlines use seat locks to reduce the number of times a pilot may move equipment types (Full training) in a given time period (usually two years).
- Usually in pilot agreements there are work rule stipulations that act as a form of severance as a pilot makes their way out, this can come in the form of 2-5 months worth of pay after they have left depending on the agreement.
|Cascading Training Events||4||Training Cost||$ 225,000|
|Training Cost||$ 45,000||Furlough Pay||$ 21,280|
|Return Training Cost||$ 45,000|
|Total Cost||$ 246,280|
In the following table the article runs a simplified conservative example to show how this would play out over a period of months. This assumes 2 additional training events are caused by the cascade effect, 2 months of severance with a standard 76 hours per month at a pretty conservative narrow-body (737, 320) FO rate and assuming about 25% for health benefits, retirement, etc.
|Cascading Training Events||2||Training Cost||$ 135,000|
|Training Cost||$ 45,000||Furlough Pay||$18,240|
|Return Training Cost||$ 45,000|
|Total Cost||$ 153,240|
|Cost of Ancillarys Benefits||25%|
The blue line is a pilot being paid full wages/benefits while not producing, which is what happens when an airline is heavily overstaffed. In that scenario mathematically a certain percentage of pilots aren’t producing. Having said that in the chart below the break even point isn’t until 13 months from the point of furlough for this pilot. This means if the airline expects to need the pilot in the next 13 months they would usually be better off paying the pilot to do nothing until needed.
Where we begin to see some of the reasoning behind the recent agreements between the company and the unions with regards to paid leave is in the red line. In the red line the pilot is paid to be off on leave but at a reduced rate. In this scenario we used 55 hours. As can be seen this stretched out the break-even point for a furlough even further to 18 months.
Why would an airline do this? It allows them to maximize the use of their existing pilots, while keeping pilots it needs to be able to use in the next 18 months available and “on tap”.
Keep in mind this is a simplified example, but the time to break-even isn’t outside the ball field of where airlines will find themselves, somewhere between a year and two years depending on the airline. Sometimes that can be stretched with creative agreements between work forces.
As can be seen from a smart business case healthy airlines will usually do all they can to retain their skilled workforce, and only events that would truly jeopardize the survivability of a company would justify such large changes.