Regional airlines can’t fill their cockpits because their pilots earn miserably low pay. But the smaller firms are subject to the cost-cutting whims of major carriers.
FORTUNE — Apparently, a good pilot is hard to find.
On Friday, the U.S. Government Accountability Office released a report on the current and future availability of airline pilots. In its typically cagey language, the GAO said that it found “mixed evidence regarding the extent of a shortage of airline pilots.” The real takeaway: Regional airlines can’t fill their cockpits, and it’s because their pilots earn miserably low pay.
According to data for 14 regional airlines, the average new pilot’s hourly wage is about $24 per hour, the report says. But the Air Line Pilots Association estimates that the average starting salary is even lower than that — $22,500 per year, which for a 40-hour work week equals an hourly rate of $10.75. Unsurprisingly, 11 of the 12 regional airlines the GAO interviewed reported difficulties filling entry-level first-officer vacancies.
“You just can’t find people to work for those wages,” says Helane Becker, a managing director at Cowen and Company who covers airlines.
It’s not simply a matter of regional airlines being stingy. Rather, it’s a result of the uneven marriage between regional airlines and their bigger, brand-name counterparts.
Regional jet services — such as SkyWest or Republic Airlines — fly to cities that lack the demand to merit service from larger carriers like United UAL or Delta DAL . A regional airline typically doesn’t sell tickets directly to passengers but instead signs contracts to operate under the brand names of bigger carriers — an arrangement that subjects regionals’ revenue to the whims of their overseers. That position became especially precarious in the early- and mid-aughts, when larger airlines landed in bankruptcy and required regional airlines to rebid for contracts at lower rates. For instance, a few days before Delta filed for bankruptcy in 2005, it entered into an agreement with SkyWest that put a cap on the amount of money the regional carrier could make from the deal. If SkyWest SKYW earned “excess margins over certain percentages,” they had to be returned or shared with Delta, according to a SkyWest Securities and Exchange filing.
As a result, regional airlines cut costs — including employee wages — as they battled each other for contracts with major carriers. “The regional guys think, ‘If I raise costs, the industry will simply go to the lowest common denominator,’” says Robert Mann, an airline industry consultant.
Pilot wages received another blow in late 2007, when Congress passed legislation extending the mandatory retirement age from 60 to 65. The law put the United States on par with international standards, which let pilots fly an additional five years. The discrepancy between the ages had created an odd situation where American pilots retired at 60 only to be hired by international carriers. They were still subject to the 60-year retirement law when in American airspace though, so when flying in or out of the U.S., they had to surrender the controls to a younger copilot, says Mann.
Prolonging the retirement of pilots was a logical step for Congress, but it depressed pilot wages even further in an industry in which pilots ascend the ranks of regional airlines with the goal of eventually landing in the cockpit of a more prestigious — and better paying — mainline carrier. But in 2007, older pilots suddenly received another five years of eligibility and stayed put, so the supply chain of pilots stalled, and so did pilots’ pay raises.
“In that five-year window, if you were a first officer, you went through five more years of stagnation,” Mann says. “You would have moved up, but captains chose to fly for five more years. It was a one-time free pass to continue to operate the industry under economics as they were.”
Those measly wages are now set to collide with increased pilot demand, resulting in — ahem — major turbulence for the industry. With the pending mandatory retirement of a generation of pilots, and the introduction of new, bigger planes that require more pilots on board, the industry will need roughly 1,900 to 4,500 new pilots annually for the next 10 years, the GAO says. That demand is compounded by new rules limiting pilots’ flying time. The Federal Aviation Administration instituted the regulation earlier this year as a result of the February 2009 crash of a Colgan Air regional plane caused partly by pilot fatigue, and it means that airlines will need more pilots to perform the same number of flights.
The unequal partnership between major and regional carriers puts the problem of low pilot pay in the hands of regional airlines, which currently operate half of all domestic flights and carry 20% of all passengers, says Mann. Regional airline execs will need to demand more lucrative contracts from the big carriers so they can afford to pay pilots better wages, he says. “If there isn’t sufficient interest in becoming a regional airline pilot, then 50% of domestic departures on behalf of [major carriers] are at risk.”