Flight Crew: Added value or added cost?

Pilot in cockpit simulator

Following the liberalisation and deregulation of air transport markets worldwide, airfares have been on constant decline in real terms, despite the industry’s secular growth trend. Low fare airlines and their impressive growth in the last decade have increased the demand for air travel exponentially, with air transport becoming cheaper and more accessible. This had an appreciable effect on how flight crew cost is perceived.

The cyclicality of the airline industry, however, is still playing a pivotal role. Airlines feel positive, plan and order additional capacity based on their forecasts, only to be faced by overcapacity way too often. This downward pressure on yield, especially in mature markets such as the European Union, makes airlines strive to reduce costs even further, sometimes even at the detriment of their service product.

Flight Crew related costs account on average for 10 to 15% of an airlines’ total costs. Flight crew’s jobs are volume related – depending on the number of aircraft an airline chooses to operate, and the conditions it chooses to offer, an airline will require a number of pilots. Hence quite often, when an airline chooses to downsize, pilots are very often in the crosshairs due to their high salaries. Keeping excess pilots is expensive. This has led to endless divisive confrontation between airline management and flight crews across the industry, in which there are no clear winners.

The principle problem is a missing link between flight crew’s input to the process, and the airline product.

The principle problem is a missing link between flight crew’s input to the process, and the airline product. Despite the ongoing pressure to cut costs, airfares are rarely priced on costs alone. This is due to a number of reasons, including production interrelatedness, cost allocation, aircraft type allocation, fare directionality and joint supply (demand is generated in origin-destination markets, but an airline’s output is in the form of flight legs). Airfares are generally based on a customer’s willingness to pay at a particular point in time, in exchange for a perceived benefit. Airlines cannot know what this perceived benefit is for each and every customer, and hence they offer a generalised service-price offer for what they deem to be the particular segments of their markets. The difference between price and a consumer’s perceived benefit is known as consumer surplus. How far an airline product can tap into this surplus is based largely on how much monopolistic power the airline has in the markets concerned.

Back to our question, flight crew have been a victim of their own and the industry’s success. The last published hull loss rate by IATA was 0.32 per 1 million flights, which is a tremendous safety record. Regulation and safety in well developed economies are now maintained at an excellent level, and flight crews’ competence, psychological wellbeing, and experience rarely play a deciding factor when someone purchases an airline ticket. These factors do not generally contribute to the perceived benefit above. However, they play a significant role in the cost portion of the seat.

This missing link is a big problem which is slowly creeping up on the industry, displaying itself in multiple facets. Pilot salaries, especially in the United States, have seen a massive drop after the Great Recession. In the EU, a significant number of furloughs created an oversupply of pilots and is only now returning back to previous employment levels. Young pilots across the globe are still facing excessively low salaries and limited job opportunities, often facing training bills upwards of €100,000. This financial pressure, and the psychological stress arising from such situations may even have disastrous consequences, as we have seen tragically in the Germanwings accident.

The perception of prospective flight crew has also changed. The glamour associated with the job in past decades is now in decline, with the younger generation seeking alternative careers in technology and finance, which ultimately pay better. It is very difficult to sell the idea of becoming a pilot to a 16 year old when he is faced with a huge training bill only to realise he can’t find a job and earn a decent salary after finishing.

With the airline industry set to carry over 7 billion passengers by 2035, there will be an ever growing need for flight crew in the coming decades. Despite aircraft technological advancements, we are still decades away from unmanned commercial passenger aircraft – the need for human intervention is still imperative when things go wrong. On their end, flight crew should strive to be more operationally efficient and move forward with the challenges facing the industry. However, flight crew are not an added cost, they are an imperceptible added value. In this other article I look into airline strategies for a more sustainable future.

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