Geoff MurrayTaylor CornwallMatthew PoitrasDaniel RyeJeff Green

THE PILOT DILEMMAEngage, reward, recruit

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A COVID-19 PREAMBLECOVID-19 has hit the airline industry hard. Only a month ago (as of this writing), our Flight Operations Brief was on final approach, stabilized and fully configured for landing — but then things changed. While some of the insights in this Brief may now seem out of place in the short term, over the long haul they will be relevant, as Flight Operations leaders consider ways to rebuild and rescale their operations. There has never been a time in airline history when close to 70 percent of global passenger aircraft are grounded, with pilots and crews of all nationalities, experience levels, and backgrounds wondering, “When will I fly my next trip?” or even, “Will I have a next trip?”

Engagement is a major theme in our Brief, and today’s “grounded” pilots are asking for exactly that. They want to know how their airlines are responding to the crisis and what may lie ahead. Frequent and candid communication is critical. Similarly, flight students are questioning whether they have a future. They have invested time and money to build a career and do not want to see the carefully curated path ahead fractured in any way. While 30,000 pilots may not be flying for a year or so, flight students can find hope in that 20-year projected demand for commercial pilots is still estimated to be over 20 times that figure. Although the exact growth trajectory is uncertain, we believe that the airline industry has a rich future in which to build a career as a pilot. These students must be actively engaged by the airlines that will ultimately employ them.

For Flight Operations leaders, now is a good time to think about how pilots are rewarded and managed. Many of the existing pay and working standards were developed in different economic and growth environments and have been challenged through the COVID-19 response. Leaders have an opportunity to work together with pilots to thoroughly understand the tradeoffs between quality of life, flexibility, and pay, to create a comprehensive reward model that fairly captures these elements. Coming out of this crisis and with a new generation of pilots transitioning into the cockpit, there’s simply never been a better time for these discussions.

While our survey and interviews were conducted prior to the emergence of COVID-19, and it is too early to fully understand all of COVID-19’s impacts, we believe that the insights and perspectives in this Brief can be leveraged to help reshape tomorrow’s Flight Operations departments. We hope you find our survey of value from that “angle of attack.”

The Authors

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INTRODUCTION

The airline industry is at a crossroads. Through 2019, aviation saw tremendous growth, with 10 consecutive years of industry profitability. During that decade, strong travel demand, cheap oil, more fuel-efficient aircraft, and ongoing consolidation favored continued profitability. But a public health crisis, aircraft groundings, rising cost pressures, a slowing world economy, greater focus on air travel’s environmental impacts, and increased regulatory oversight raise questions about how the next decade will unfold for airlines around the world.

Flight Operations leaders are being challenged to cope with both the momentum from a period of high growth and great uncertainty moving forward. Flight Operations costs as a share of total operating costs have been growing. In the US for example, these costs have nearly doubled relative to total operating costs since 2010. Airline growth has increased both economies of scale and operational complexity, as well as a demand for pilots that some airlines have struggled to meet in the midst of pilot supply challenges. Finally, engagement with a large, dispersed workforce and increasing workforce diversity remain consistent challenges.

In Oliver Wyman’s second Flight Operations Brief, we explore how industry leaders are responding to these trends. Our perspectives are based on our work with Flight Operations departments worldwide, interviews with influential executives, and a survey of senior management at global airlines, cargo operators, original equipment manufacturers, and training companies. While the interviews and survey were concluded before the COVID-19 pandemic, much of what we heard remains relevant in today’s environment. This analysis is part of our comprehensive and ongoing aviation and aerospace research, including our annual Airline Economic Analysis, Global Fleet and MRO Forecast, and MRO Survey publications, as well as our continuously updated PlaneStats website.

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TOP DISRUPTORS

Flight Operations leaders face an array of disruptive forces as they seek to effectively run their organizations. As in our inaugural report, how to engage, reward, and recruit the pilot workforce continue to be leaders’ top long-term concerns (Exhibit 1).

Increasing cost pressure is the overwhelming top concern for Flight Operations management. Cost increases have been driven by pilot supply and demand issues, recent labor agreements, and challenges in maintaining productivity. Airlines can however engage a variety of levers to improve long-term cost sustainability — including contract strategy, operational productivity gains, managing headcount, and improving pilot engagement.

Exhibit 1. “Which disruptors will warrant the greatest attention by your company over the next five years?”

Changes to flight safety standards

Increased cost pressure

Pilot behavior & engagement

Increased coordination

Non-cockpit technology advances

Regulatory constraints/changes

Modernization programs

Professionalization of training

New training approaches

Cockpit technology advances

Shortage of qualified pilots

Percent of respondents, selecting up to five Percent of respondents who ranked as most effective

33

6641

6222

7511

11

11

41

4 30

4 21

4

30

26

16

Source: Oliver Wyman 2020 Flight Operations Brief

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Another major long-term concern is recruiting, which has contributed to the cost pressures some airlines have experienced. Flight Operations leaders have experimented with an array of mitigation efforts, including working to attract more women to expand the potential pilot pipeline.

The most frequently cited challenge is pilot engagement — how well pilots connect with their colleagues and how interested they are in sharing in their airline’s mission. Leaders described to us the inherent difficulties of connecting with a distributed workforce, as well as the impact of a history of distrust between that workforce and management. Some airlines appear to be making a little headway, but on the whole, engagement is an issue with no easy solution — and made more difficult during a time of crisis. (For an in-depth discussion of pilot engagement, see our inaugural Flight Operations Brief.)

EMERGING TREND: TRAINING CHALLENGES

Compared to our inaugural survey, twice as many leaders highlighted new training approaches as an emerging disruptor. Recent events, including those with the Boeing 737 MAX, have exposed opportunities where airlines, original equipment manufacturers, and training providers may be able to improve. Many leaders mentioned that training is too expensive compared to its efficacy and has not evolved sufficiently to test pilots on all the necessary competencies or situations they might experience in the cockpit. In addition, they believe curricula are not tailored enough to each individual pilot’s performance.

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FLIGHT PATH FOR SUSTAINABLE COSTSRising crew costs have been a focal point in our discussions with Flight Operations leaders over the past year. Some are struggling to keep down costs after recently negotiated contracts. Others have prepared for negotiations while responding to large new requests from their workforce.

Still others have tried to maintain productivity while avoiding industrial action. Globally, most Flight Operations leaders think unit costs will rise in the coming years and so are looking for ways to manage costs sustainably. It remains to be seen how extensively the COVID-19 pandemic and the resulting economic and capacity implications will impact the urgency of these savings.

UP, UP, AND AWAY

Aviation labor costs have seen substantial growth in recent years. In the US, for example, pilot unit costs have grown by 5.8 percent on average every year since 2008, compared to 2.5 percent annual growth in overall airline unit costs (excluding fuel). Over the same time period, airline unit revenue has grown by only 1.9 percent per year (Exhibit 2).

Exhibit 2. Pilot costs rising faster than revenue and total costs, 1991-2019Indexed, US carriers, stage-length adjusted

1991 1995 1999 2003 2007 2011 2015 2019100

120

140

160

180

200

220

240

CASM excluding fuel +52

Pilot CASM +136

RASM +94

1991 = 100

Six major US airlinebankruptcies, 2002–2005

Note: 2019 data through Q3. RASM excludes revenue from codeshare and regional operations. CASM excludes transport costs and fuel/oilSource: DOT Form 41 P5.2, P6; PlaneStats.com

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In some high-growth regions, costs were until recently accelerating even faster. For example, in China, where the number of commercial pilots over the past 10 years has doubled, the starting salary for foreign pilots had grown from $10,000 per month to more than $25,000 per month. (This trend has subsided with the MAX groundings and the COVID-19 outbreak). Over the next 3-5 years, 71 percent of survey respondents expect pilot costs to continue increasing moderately to significantly. Half cite pay rate and contract term changes as key drivers, together with quality of life measures and pilot pipeline challenges.

It is still unclear, however, whether increasing pilot costs are simply part of doing business or will eventually become unsustainable. Some Flight Operations leaders we asked expressed concern about a repeat of the early 2000’s — when consistent pay increases paired with economic challenges eventually led to bankruptcies. Nearly two-thirds of survey respondents believe costs will continue to grow but will be manageable (Exhibit 3). Virtually all agree that given the size and upward trajectory of crew costs, any opportunity to increase efficiency should be pursued.

Exhibit 3. “Which statement about Flight Operations costs do you believe is most accurate?”Percent of survey respondents

Crew costs are growing but will be manageable 62

Pilot crew costs will eventually become unsustainable and severely impact airline profitability

36

Not concerned about pilot crew costs 2

Source: Oiver Wyman 2020 Flight Operations Brief

LEVELING OFFFlight Operations leaders can seek to limit cost increases by employing a range of cost-control measures (Exhibit 4). Many of these cost reduction strategies revolve around four major themes: 1) actively managing headcount, 2) driving productivity in operations, 3) smarter contracting, and 4) building employee engagement.

1. Managing headcountMany of the productivity investments described above only drive value if they can translate into greater efficiency for the pilot workforce. Evolving airline strategies, the COVID-19 crisis, and upcoming retirements offer the opportunity to improve pilot productivity and reduce the salary pool over time. This requires active management of the workforce and the tools to accurately

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predict and manage pilot demand. And it could include slowing down on future hiring in some instances, if there is confidence in the productivity measures that have been put in place. If done correctly, active headcount management can not only reduce costs but help lessen the impact of long-term pilot shortages.

Exhibit 4. “What methods are you using to manage Flight Operations costs?”Percent of survey respondents, selecting all that apply

Pairing design efficiency

71%

Contract strategy

47%

Manpower planning or reduced hiring

42%

Disruption planning & recovery

60%

Reserve planning

47%

Basing or structural change

40%

Training efficiency

53%

Leaner back office support

42%

Targeting behaviors (e.g., sick time)

36%

Source: Oliver Wyman 2020 Flight Operations Brief

2. Driving productivityAirlines also must focus on getting the most out of what they already control and the assets they already have. This often involves a detailed look at the holistic drivers of crew productivity, including network and pairing design, training, IROPS management, and better management of non-flying time. Example opportunities include a crew-friendly network design, more efficient training footprints, resilient pairing design, and improved processes and tools to identify crew issues and support recovery decisions.

Sustained productivity may require a more open dialogue and collaboration with pilots to find symbiotic options, such as quality-of-life enhancements. This can be risky if not well managed, but as a leader at one European carrier told us, “We found creative solutions after forming a joint working group with our pilots and ‘opening our books’ to them.”

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3. Smart contractingCreating sustainable labor agreements remains one of the largest cost challenges. While annual wage rate escalation clauses have become the norm, these often are not offset by productivity gains. One executive at a major US carrier commented: “I would be surprised if we receive offsets that sum up to one percent of costs.” In fact, 70 percent of airline respondents globally, and a staggering 88 percent in North America, believe their next pilot contract will result in a higher cost per available seat-mile than today.

Long-term wage escalation may be unavoidable, but Flight Operations leaders can be prepared when they go into these discussions by prioritizing non-wage negotiation topics (such as work rules and productivity measures), with a focus on “win-win” areas for both the airline and the workforce. A strong labor strategy and analytics group can help identify mutually beneficial changes or at least quantify trade-offs to find an optimal balance.

Communication with the front line is critical as well, to explain how certain work rules can help reduce disruption and improve quality of life. Finally, it is important for management to align internally on which items are negotiable — and which aren’t — before heading to the table. According to an executive at a major European carrier, “You have to strike that balance between not having industrial action and building long-term cost into the business.”

4. Building engagementAs highlighted in our inaugural Flight Operations Brief, generational change in the pilot workforce creates a once-in-a-lifetime opportunity for airlines to redefine their company culture and engage with pilots in a differentiated way. Better engagement can lead to stronger operational resilience, increased pilot retention, and an improved cost structure.

Monetary incentives have done little to sustainably improve engagement. While 20 percent of survey respondents report that their airline has offered monetary incentives, only six percent consider those measures to have been effective in improving engagement. “Pilot pay raises create a happiness that lasts only so long,” noted one vice president of Flight Operations from a North American low-cost carrier.

Closely aligning pay incentives with company goals could help somewhat, but a more effective approach could be focusing on strong leadership, mentorship, and communication – especially during times of crisis. This could include sharing the company’s mission with pilots, eliciting pilot input on company decisions, and face-time with company leaders at pilot events (Exhibit 5). This is not easy to do with a distributed workforce, but pilot work groups typically have sophisticated communication channels and will “fill in the blanks” with their own narrative if the company leaves something unsaid.

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Leaders might have to stretch outside their comfort zones in these interactions, to be “vulnerable” and “acknowledge the company’s faults,” as one senior executive commented. Yet by being the go-to source of information about the company and actively listening to pilots’ concerns, Flight Operations management can better position itself to foster pilot engagement — and ultimately lower costs.

Exhibit 5. “Which measures has your airline adopted or is considering adopting to sustain/improve its overall level of engagement with pilots?”

Percent of respondents, selecting all that apply Percent of respondents who ranked as most effective

Updated value proposition

Increased responsibilities

Gathering pilot input

Targeted pilot events

Targeted surveys

Communication tools

Sharing company mission with pilots

Additional incentives

206

466

4814

5014

5211

688

8233

206

Source: Oliver Wyman 2020 Flight Operations Brief

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PILOT SHORTAGE: WOMEN ON DECKMore than 60 percent of survey respondents cite the shortage of qualified pilots as a concern, and with good reason: Boeing estimates that 645,000 new commercial aviation pilots will be needed by 2038 (although impacts related to COVID-19 potentially could alter the pace of demand). Finding a solution will be critical for many airlines (see sidebar, “Airline Haves and Have Nots”). Hiring more women — a large and mostly untapped potential talent pool — could help ease the pilot shortage and enable airlines to meet an increasing societal mandate as well.

Currently, women account for only 5.1 percent of global commercial pilots, according to the International Society of Women Airline Pilots (ISWAP). Despite the industry’s gender-blind pay and seniority-based advancement, 84 percent of survey respondents report finding it moderately to extremely challenging to recruit and retain female pilots. There are many reasons why: Some are common to male-dominated industries, such as a “boys’ club” reputation and a lack of female mentors (Exhibit 6). Other challenges are specific to Flight Operations, such as developing a more women-centered recruiting pipeline and overcoming perceived shortcomings of the pilot lifestyle. As an example of the latter, India’s airlines, which have a 12.4 percent share of female pilots overall, provide secure location travel, daycare, and non-flying maternity work options.

From our survey and one-on-one interviews with female Flight Operations leaders, two themes emerged on where airlines specifically could be doing more to address the current lack of women in the pilot pipeline: engaging women much earlier and increasing mentorship.

Exhibit 6. “Why is your company experiencing challenges in recruiting/retaining women as pilots?”Percent of survey respondents, selecting all that apply

Limited recruiting pipeline 53

Perceived pilot lifestyle 51

Reputation as a male-dominated industry 44

Lack of women role models 37

Culture 26

Other 16

Note: Answers solicited only from survey respondents who had indicated on a prior question that it was moderately, very, or extremely challenging to recruit and retain women as pilots.Source: Oliver Wyman 2020 Flight Operations Brief

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MAKING MORE PILOTSTo have female pilots to recruit, airlines must actively engage in developing women’s interest and awareness of piloting as a career choice and in supporting women who embark on this path. Airlines need both a perspective and a program: What does it take to become a pilot? What benefits can piloting offer to women, compared to other careers? What support is available to counter the time and expense of flight school?

Similar to other gender-dominated industries, such as technology, this engagement must begin early, before stereotypes are fully formed. Many airlines report focusing on engaging potential pilots early, showcasing their own female pilots, and conducting campaigns to improve career perceptions (Exhibit 7). JetBlue, United Airlines, and easyJet, for example, conduct school visits and events aimed at getting girls interested in aviation. The Philippines’ largest flight school, Alpha Aviation Group, uses on-campus university recruiting programs and talks by female aviators to encourage more women to apply.

Exhibit 7. “What mechanisms are you using to increase the potential supply of female pilots?Percent of respondents, selecting all that apply

65

Participation of existing women pilots in recruiting 58

Diversity-focused recruitment 56

Women-centered mentoring programs 48

Targeting high school students in STEM 46

Sponsored programs 42

Targeting certain college students and groups 40

Pairing women in recruiting process 23

Other 6

None

Specific recruiting events

4

Source: Oliver Wyman 2020 Flight Operations Brief

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CRITICAL MENTORSNext, airlines must address the most pressing concerns of female pilots once they enter the workforce. With few women in senior leadership positions, there aren’t many role models for newer female pilots. Yet both research studies and leading airline experience have shown how vital mentorship can be. One female leader commented that “being a mentor should be a more formal part of our job description and performance review.”

In some cases, this could be an organizational blind spot, as nearly all the women we interviewed cited a lack of female role models as a key recruitment and retention challenge, compared to 48 percent of survey respondents (who were 94 percent male).

The challenge of recruiting more women won’t be solved overnight. Ten or more years may pass between an airline’s first contact with a potential female aviator and the day she is hired. Commitment however can bring results: 10 of India’s 12 airlines, as well as selected airlines in Canada, Australia, Iceland, and South Africa, now have double-digit shares of female pilots, according to ISWAP.

Other airlines have set clear goals: This year, easyJet expects 20 percent of new entrant pilots to be women, while Qantas wants women to make up 40 percent of pilots by 2028. What will be important in meeting such goals and growing the supply of female aviators is that airlines commit to ongoing, targeted support and a multifaceted approach along the entire pilot career path.

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AIRLINE HAVES AND HAVE NOTSNot all airlines have felt the heat from the pilot shortage equally. In many regions and under normal operating circumstances, network carriers have more candidates than open positions; they expect that they would be the last affected by any shortage. Many network carriers do face an upcoming loss of experienced pilots who are hitting mandatory retirement age, but these airlines are confident they can fill the gaps while gaining some cost relief due to new hires’ lower salaries.

For smaller airlines, especially independent regional carriers that fly on behalf of mainline carriers, the shrinking pilot pool could make operations unsustainable in the long-term. With less secure recruiting pipelines, they have been forced to open their checkbooks: Some have seen (non-salary) pilot recruiting costs increase by two to four times in the past five years. Constraints in their contracts with mainline partners however may make it hard for them to compensate for such cost increases.

Retaining pilots has been another challenge these airlines face, as they typically have less attractive employment packages and flight schedules than their mainline peers. And pilots typically use such smaller carriers as stepping stones to a career at the majors, leaving after a few years.

Wholly owned regional airlines are in a better position, as many benefit from partner academies and financing programs, as well as direct flow-through programs that provide pilots a virtually risk-free path to a mainline partner. While these programs don’t address attrition issues, they do bring more qualified pilots in the door.

Regardless of their size, all airlines will need to ensure a strong pilot supply to enable long-term growth and replace retirements. This just may be more difficult for some airlines than others, requiring more flexible and creative solutions.

Exhibit 8. “How challenging will it be to ensure a continuous supply of qualified pilots over the next 10 years?”Percent of respondents by company type

Independent regional 50 33 17

Value/LCC/ULCC 78 22

Network 6 77 17

Extremely challenging Moderately to very challenging Not very or not at all challenging

Source: Oliver Wyman 2020 Flight Operations Brief

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THE NEXT WAYPOINTDisruptors to Fight Operations — notably a public health crisis, rising costs, pilot engagement, and the future pilot pipeline — are affecting airlines around the globe, although some have experienced more turbulence than others. For Flight Operations leaders and industry participants, we expect that the following questions will become ever more resonant:

• How can airline leadership prioritize and address top disruptors to Flight Operations?

• How can Flight Operations leaders best manage through the current crisis and resulting future challenges?

• How can airlines tap into technology, culture, and generational changes to better communicate with pilots?

• How can airlines collaborate with pilot groups to achieve mutually beneficial changes?

• How can Flight Operations leaders identify and implement levers that effectively offset rising wage rates?

• How can airlines and other industry participants tap into historically underrepresented groups to expand the pilot pipeline?

The answers to some of these questions won’t be clear immediately, but as Flight Operations costs continue to rise and the airline industry moves into a period of greater uncertainty, a robust strategy to address these shifting dynamics will be essential to ensure a sustainable future for airlines and the pilot workforce alike.

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