Lower pilot’s pay keeps the profit away?

During the last decade, airlines have added thousands of new destinations to their networks and are expected to carry over 3.3 billion people in 2014. At the same time, with oil prices still averaging at $108/barrel, they continue to struggle with profitability and thus implement different money-saving strategies, including those requiring significant personnel salary cuts. However, there are reasons to believe that these measures are in fact holding back the industry from further growth.

According to TeamSAI, workforce-related expenses currently account for up to 23% of airlines’ operating costs. This is second only to fuel – the largest operating expense – which accounts for up to 38% of the OPEX. As a result, it is only natural that apart from switching to more cost-efficient aircraft, airlines’ strategies of remaining profitable include significant workforce-related cost cuts.

For instance, in 2005 United Airlines abandoned its $9.8 billion employee pension obligation, while embarking on an aggressive MRO outsourcing campaign. One of more recent examples is Lufthansa. Only a few months ago, roughly 5 400 of the carrier’s staff were protesting for better pay and against changes that would make it more difficult for pilots to take early retirement.

On the one hand, these measures are indeed paying off. United’s stock has more than doubled since its 2010 merger with Continental Airlines and the airline recently posted record profits, while Lufthansa generated a net profit of $432 million last year. However, according to Skaiste Knyzaite, the CEO of AviationCV.com, this same strategy might be among the most significant reasons behind the industry-wide pilot deficiency.

“One of the most topical issues within the aviation industry today is the easily noticeable deficiency of qualified personnel. However, there are reasons to believe, that cutting pilot salaries might in fact be one of the primary reasons why airlines (especially the regional ones) are not able to find a sufficient amount of qualified staff for hire. To put it simply, there’s no shortage of pilots, only a shortage of pilots willing to fly for substandard wages and inadequate benefits,” explains Skaiste Knyzaite, the CEO of AviationCV.com.

According to the executive, while cutting salaries and benefits may be resulting in short-term profitability boosts for the carriers, they also risk alienating workers at a time when it can hardly be afforded. According to figures provided by ALPA, there have been 72 000 pilot jobs in 2012 in the U.S., with 137 658 active pilots under the age of 65 with ATP certificates and additional 105 000 pilots who could qualify for commercial certificates. The situation in Europe is also comparable. Cost-cutting measures that target these workers may provide short-term relief to airlines’ balance sheets, but endanger the long-term sustainability of the aviation industry. This is especially true since most of the airlines require the pilots to have flown last at least 12 months before hire, so it can be really difficult for them to resume a career in aviation after a significant pause. Therefore, Skaiste Knyzaite suggests a more flexible HR-management strategy as an alternative means of remaining profitable in a difficult economic environment.

“Aviation is a highly seasonal industry. This means that the demand for qualified cockpit crew changes alongside the demand for air travel, which depends not only on the fact that people tend to have their vacations mostly in the summer, but also on major holidays or other events. And while an aircraft may be grounded or sent for maintenance works in a period of lower demand, the pilots still have to be paid for in full,” says Skaiste Knyzaite the CEO of AviationCV.com. “Considering the aforementioned, significant benefits could stem from turning to various workforce leasing solutions, which enable ensuring more flexible HR-related cash flow management. By carefully forecasting and planning for the demand changes, the carriers can implement appropriate HR-strategies, which basically help to reduce surplus labour expenses to a minimum. As a result, airlines might not only gain a necessary competitive edge, but also afford to pay their pilots higher salaries, thus remaining more attractive to the potential employees.”