“In a case for recovery ” the website took a step towards discussing ways airlines could adjust staffing for fleet reductions without needing to resort to the old playbook of furlough. It was shown how reductions in line values could bring the recovery curve close enough to the staffing curve to mitigate the need for large furloughs in an acceptable time horizon.
Incentivized early retirements are another option out of a fresher playbook. So what are the benefits to the company and the pilots with this approach?
Setting the stage
The airlines are in an environment unlike any in the history of flight, demand had dropped to virtually zero, but what do we know?
- (Travel) A depressed demand environment won’t stay forever. Our world has become so connected that “not” being able to get up and travel in a single day across the country or world for that matter seems foreign. Granted, Skype and Zoom have taken their place in the world of communication, but in many ways, they have only increased our desire to connect with other people in real and tangible ways, and have highlighted the part that’s missing when we only communicate virtually. Virtual communication is probably here to stay, as it fills an important and effective role cheaply. However, it is this author’s opinion that humans have always, and will always desire to gather together or explore. It is simply in our DNA it is in who we are as Human beings, and as air travel has become increasingly more economical, it hasn’t created the need or desire to travel, it has simply unlocked it ….. Demand will come back and air travels’ best days are likely still in front of it (most would agree that this is a good thing for our world).
- (Retirements) Like death and taxes, age happens to us all. Pilots are getting older and retirement is inevitable. The industry is approaching the peak of the largest retirement wave in 30+ years. Granted this exposure isn’t equal across all carriers but it does play an important role in setting the stage. No one would question that this helps.
- (Aircraft Types) The aircraft currently available in the market from manufactures are it. No other aircraft are on the drawing board in the commercial airline sector. The aircraft that have been talked about like the 797 is at least a decade out from whenever Boeing can get the Max back in the air, giving us a little more predictability in predicting the need for pilots over the next ten years.
Advantages of early outs vs furlough
Without early outs airlines like Delta may have a hiring wave that looks something like this.
These projections’ assumptions have been talked about in the article on Delta Pilot Demand projections. The blue line is the estimated aircraft returns to service or orders with a net increase of about 50+ per year coupled with the mandatory pilot retirements. Due to the combined effect of an effective fleet growth of (8-10%) YoY (after resizing the airline to a carrier two thirds the size it is today), plus planned retirements the airline will need to “onboard” over 1,500 pilots per year in 2024. Has Delta or any airline for that matter onboarded over 1,500 pilots in a single year? It will likely be expensive and limiting for an airline in a similar situation to build the infrastructure necessary to have that kind of bandwidth. Early outs could help to soften the curve to something more like this.
This assumes roughly 1,000 pilots take early retirements from the ranks of those who were supposed to retire in the next 3 to 4 years.
Not only does this reduce the need to furlough by a significant amount, but it also lessens the peak training to something closer to 100 pilots a month (a number airlines have seen).
Potential savings from early outs
1.) Training Bandwidth
This leads to the next question, what are some of the variable costs for adding enough training bandwidth to cover an additional 250 pilots per year?
This analysis assumes about 23-46,000$ per pilot in additional bandwidth compared to a steady hiring curve. Those rough/basic assumptions have been included at the end of the article for those interested.
2.) Furlough Costs
We went through furlough costs in detail in the cost of staff reductions article. We can estimate about 150,000$ in costs due to lost training/retraining, furlough pay, etc as a pretty conservative number.
3.) Demographic costs
When a furlough occurs an airline loses its cheapest pilots. By paying a senior pilot to stay home they effectively keep a 1-3 year pilot (depending on how deep the furlough) in the right seat, instead of paying a 4-12 year pilot to do that same work. Depending on an airline’s demographics they may have almost entirely FO’s on the 12-year scale making these junior furloughs more expensive. The difference is roughly 30-70$ per hour depending on the airline/aircraft and demographics. That 30-70$ also percolates through retirement contributions and other wage dependant costs.
For an average 75 hour line this equates to 50$ (Average difference) *75 hours = 3,750$ more per month in demographic costs to furlough.
On the demographic costs alone the airline could send that 3,750$ per month to the early retired pilot for the next two to three years to sit at home before the FO yearly longevity increase narrows the pay gap significantly. If the airline has the majority of its furloughed pilots in a 1-2 year longevity category this number could also be larger.
Adding this all up
How much could an airline pay an early retired (or maybe just extended leave ~ 18 months) pilot to sit at home in place of a furlough? How much would an airline save by avoiding the associated furlough training, demographic shift, and training bandwidth costs?
- Estimated furlough cost = 150,000$ per pilot
- Demograhic Costs = 3,750$*18 months = 67,500$ per pilot
- Training pressure on bandwidth = 23,000-46,000$ per pilot
- Depending on the carrier it could be 240,000$-265,000$ per pilot
If a carrier were to pay a senior airline pilot at the top of their pay (a reduced line value) 50 hours per month at 300$ per hour for about 18 months (on average) to sit at home they would pay about 270,000$. 270,000$ is not too far from these basic assumptions. With more robust calculations there may be more savings, not to mention the goodwill this would purchase. There may also be less, depending on airline circumstances.
Here is the catch. The longer airlines wait to offer early retirements (or paid leaves for that matter), the more value they lose in these concepts. Airlines don’t experience the savings that come from paying pilots on leave a reduced value of 50-55 hours when they continue to pay them 75 hours to produce essentially the same thing (which is almost nothing) up until Oct 1st. In the same vein the more training events they process through large rebids the more value they lose, as they in essence are already incurring some of the furlough costs of the cascading training.
Delta is an example of this; by potentially stapling 2,500 pilots to the bottom of the cheapest aircraft they sidestep some of the cost and incur much of the training costs associated with a cascading furlough before Oct 1st, making it difficult for them to see the savings associated with early retirements.
Only the airlines can answer why they have or haven’t offered early retirements vs planning for furlough, but in this author’s mind there could be a business case for creative solutions similar to incentivized early outs for management teams to consider that can benefit the company and the pilot groups.
Appendix A.) Rough Assumptions for increased training bandwidth
- 25 to 30 hours of IOE per pilot
- average of 2-3 pilots per check airmen per month = 10 additional line check airmen + 10 simulator check airmen
- simulator training (5-10 sim sessions per pilot) = the cost difference between inhouse and contract simulator time (plus the hotel/per diem)
- an additional group of ground instructors (for some airlines the cost of lost pilot utilization, and ground instructor pay so this could vary)
- can existing overhead handle the increase (classroom bookings for Indoc and ground school, hiring and interview resources)
In the following scenario, we can try to model what those costs might look like.
- 10 line check airmen = (50% cost increase per year, per check airmen. 1,000,000$)
- 10 Simulator check airmen (contracted out) = (80,000$ per instructor = 800,000$) or 10 Simulator check airmen (inhouse) = (250,000$ per check airmen) includes the opportunity cost of losing them on the line. (2.5 Million $)
- Cost difference between inhouse simulators and contract = (big guess) 100$ per hour (100*4 hours*10 days of simulator *250 pilots = 1 Million $)
- Ground instructors (90,000$ per instructor) 7 needed = 650,000$
5.95 Million or roughly 23,000$ per pilot of bandwidth over existing training costs in this “spitballed” scenario for a year.
If we add two years of additional bandwidth due to a steep hiring curve (assets aren’t used as efficiently when training is not stable)
Possibly 46,000$ (over two years) for an increase in training bandwidth per pilot vs hiring through more stable hiring curve