Should I Give Up Retirement to Join the Airlines Now?

One of the things that made it frustrating trying to figure out whether to stay in the Air Force or get out was the lack of concrete information about the airline industry. I think we worry about making someone angry by asking directly and we don't necessarily even know whom to ask in the first place. The information I needed was all out there (AirlinePilotCentral.com is outstanding) but I didn't know how to put it all together.

This June 2016 article is courtesy of Jason Depew and his outstanding aviation blog at AviationBull.com.

One of the things that made it frustrating trying to figure out whether to stay in the Air Force or get out was the lack of concrete information about the airline industry. I think we worry about making someone angry by asking directly and we don't necessarily even know whom to ask in the first place. The information I needed was all out there (AirlinePilotCentral.com is outstanding) but I didn't know how to put it all together.

I work for a major airline now and things are somewhat clearer to me. I've continued hearing questions from others that I asked myself a lot too:

"How does pay at the airlines compare to pay in the Air Force? Does it make sense financially to give up a military retirement that includes free health care for life to start working at the airlines now instead of retiring and joining the airlines 9 years from now?"

This post is an attempt to answer those questions with some concrete information about actual airline pay. The short answer is: Yes, it's okay to forgo a military retirement and join the airlines now. Your family will not suffer financially if you choose that path (even taking health care into account).  Knowing this, I assert that finances should not be a major factor in the decision to stay or leave.

A more cynical (yet still fair) way of saying this might be: there is absolutely no financial incentive for you to stay in the military until retirement.

The long answer to this question will explain a bit about how airline pay works, illustrate/justify my position with actual numbers, and discuss some of the non-financial factors that I recommend using to help make your decision.

I liked being in the military because as soon as you met someone you knew his or her last name and exactly how much money he or she made. (He literally wore it on his sleeve...or somewhere on his shirt/jacket.) The airlines are essentially that way too. Their pay charts are all published online. They're not secret. I also like these two industries because men and women get paid the same. There are no games about negotiating your salary, paying women less, or trying to keep your previous salary secret. I don't see a need to play any of those games here, so I'm going to try to give you real numbers to the best of my ability.

I'm going to use the numbers for my airline because they're want I know. (Sure, Delta is the best, but that's beside the point.) Each airline has it's own pay charts and policies meaning the numbers could work out a little differently for a different company. If you run the numbers for a different company I think the results will still stand though. An airline career will be financially comparable to taking a military retirement. Therefore, you should base your decision on factors other than money.

Ready? Here we go:

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How the Airlines Pay

Airlines pay their pilots an hourly wage. The clock counting "Block Hours" essentially starts when you push back from the gate and ends when you stop at the next gate with motors shut down. You also get paid your hourly wage for deadheading - riding in the back of a plane to reposition for your next flight. Deadheading isn't counted in "Block Hours," but you get "Credit" for the hours you spend there. There's more to it than this, but that summary is good enough for our purposes today.

Most hourly wage earners live lives of uncertainty, never sure how many hours their company will let them work. The airlines don't do that to you. They promise to pay you a minimum number of hours per month...even if you're on reserve and don't fly a single day that month. That number of hours changes based on a lot of factors. For our purposes, we can say that number will be between 75 and 80 hours. Multiply that by 12 months and you find that you're guaranteed to get paid for somewhere in the range of 900-960 hours of "Credit" per year.

The airlines pay you for a few other things. You get paid to do quarterly CBTs (about 2 hours, only related to flying your aircraft,) you get a small per diem while on the road, you can fly more than the minimum number of hours, you can fly some trips for premium pay (more on that later.) You're guaranteed 900-960 hours of pay per year for flying, but given the other ways to make money I feel like a realistic low-end estimate would be to say that you can expect to get about 1000 hours of pay per year. So, if you look at the charts on AirlinePilotCentral.com and see that first year pay at Delta is $70/hr, I feel like it's a reasonable low-end estimate that you'll make $70,000 in direct monthly pay during your first full year. The same goes for the 777 Captain making $270/hr -> $270,000/yr.

However, that is not the end of the story! Delta also contributes 15%, on top of your normal pay, directly to a Fidelity 401(k) account of your choosing. That means during your first full year with the company, Delta will deposit about $10,500 into your 401(k), in addition to the $70,000 they pay you on your monthly paycheck.You can also choose to contribute some of your pay to that account, up to a combined total of something like $53,000/yr. Of that, $18,000 can go into a Roth 401(k) account that will never be taxed again. This is a very important part of your overall compensation. Some companies will "match" your 401(k) contributions up to a certain percentage. You should always maximize your contributions to meet that percentage. This is far better than the pension plans of ages past. Once the money is in your account, it's your property. The company can't touch it, they can't mismanage it, they can't steal or squander it, they can't negotiate it way in a merger or bankruptcy. (Not that I think Delta would ever do any of that.) If you still think pensions are better, go talk to someone who flew for Eastern Airlines or a city employee in Detroit.

In addition to your regular pay and your 401(k), Delta also does profit sharing. They pay it as a lump-sum every Valentine's Day. The amount is based on a formula and changes every year. Last year it was 21.4%. Yes, that means if a first year pilot made $70,000 in regular pay that year, he or she got a check for somewhere around $14,980 on Valentine's Day. 2015 was a great year for Delta and I think 2016 is going to be even better. That won't always be the case...profit sharing could be zero in a bad year. In my calculations I assumed a career average of 10%. Sadly, not all companies share their profits...American just started this year. You can download my Excel workbook and play with that number as you see fit.

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Setup for Comparison

As I've mentioned, the airlines give you more than just base flight pay, 401(k) contributions, and profit sharing. Being a Line Check Airman or simulator instructor pays extra. You're not limited to only flying 900-960 hours per year...the FAA will let you fly 1000 hours if you want. You can earn premium pay under some circumstances. However, these things aren't necessarily guaranteed or consistent from month to month, so they're hard to build into a spreadsheet. For our discussion here I only consider regular pay, 401(k) contributions, and profit sharing. I feel like this makes for a conservative estimate of what you can make in the airlines.

If you feel like working harder, it is possible to make a lot more than the figures I come up with. There are senior MD-88 First Officers (FOs) at Delta who fly a lot of premium pay trips and make upwards of $380,000 each year. That's potentially more than twice what their Captains are making! For our purposes, we're going to assume that you only get paid the minimum. I used 75 hours per month for 900 hours per year.

That makes my calculations potentially a very low-end estimate. However, the military has some opportunities to earn extra pay too. If you fly for AMC, you'll make a lot of money in TDY pay. If you have foreign language skills, you could earn an extra $12,000 per year. However, those aren't universal among military pilots. I didn't include any of those extra pays in my calculations either. I figure that it helps keep the playing field roughly even.

One of the major incentives for military retirement is that it (currently) includes free health care for life. Health care costs "a lot" and people are scared of that...my wife sure is. Thankfully, at indoctrination training (Indoc), Delta's health care provider gave us actual data on what each of their plans could cost us. The absolute maximum out-of-pocket costs for their most expensive plan that covers you and your family is $13,100 per year. The absolute maximum for their less expensive plan is $7,600. The plans are complicated and full of caveats; however, I feel like the figure of $13,100 is useful when comparing benefits between military and airlines. So, in my calculations for airline pay, I subtract out $13,100 per year from the value of total compensation. (I'm assuming that the level of care that $13,100 buys you would be roughly equivalent to what you get from Tricare.) Chances are it will cost you significantly less than this figure...I wish you and your family good health and minimal need to ever see a doctor. Feel free to play with the spreadsheets to put your own numbers in there.

For the charts that calculate earnings based on retiring from the military before starting to work for the airlines, I didn't subtract the $13,100/yr from you airline compensation because I assumed you'd have access to Tricare as a military retiree and won't need to pay for Delta's health care.

Other assumptions? For the military side, I used the 2016 Pay Charts available here. I assume you would be an O-4 at 12 years in. I give you flight pay, BAS, an "average" value for BAH based on that for Hurlburt Field, FL (aka the Promised Land), and the 9-year USAF pilot bonus. I assume that you get flight pay for all 9 of the years that you remain in the military (not likely) and that you retire as an O-5. I assume you'll live to 80 years old. In both cases I assume that you work for the airline until age 65 and then never work again. I assume that in both cases you go directly from the military to a major airline. Unfortunately, that isn't always the case. If you ended your military career flying a desk or a UAV, you might not have enough recency to get a job at the majors. You could potentially have to go fly for a regional airline for a couple years before the majors would pick you up. The regional market is shrinking and will probably be at least partially absorbed by the majors, so this could all change. Working at a regional could have a significant impact on your total earnings though. If you want an airline career, this needs to be a major consideration when deciding whether to stay in or get out, and what assignments you accept at the end of your military career.

If I forgot to mention or consider an assumption let me know and I'll add it in here.

I also need to note that Delta is currently in contract negotiations, so the pay charts will look a lot different a year from now than they do today. The Air Line Pilots Association (ALPA) started our negotiations asking for an across-the-board 40% pay raise for pilots. That's probably not likely; however, United pilots got a 23% raise in their recent contract negotiation. Each of the three major airlines feels obligated to beat the total compensation of the other two any time they renegotiate a contract. Delta will have to beat what United pilots are currently getting, so the pay raise should be significant. For our discussion, I assumed a 20% pay raise, and I feel that's conservative. I've run the numbers for the current contract ("Old" charts in the workbook,) and under a theoretical new contract ("New" charts.)

So, how does the military to airline comparison work?

The most important chart in my workbook of calculations is the "Summary" tab. It shows the total career earnings for getting out after 11 years in the military and flying for Delta until age 65, or retiring from the military at 20 years before going to work for Delta until age 65.

However, you can't make a direct comparison in total earnings. Your pay at Delta increases a lot faster and peaks a lot higher than your military salary does. Since you have more money to invest sooner, you can use the power of interest to make a lot of money for you. To compare apples to oranges we'll use a calculation called the "Net Present Value" (or NPV.)

NPV is the tool you use to answer the question of what to do if you just won the lottery. The lottery commission is offering to give you a one-time lump-sum payment today for 50% of the total price value, or to pay you the full prize value divided up over 30 years. NPV takes time and interest into account and tells you the equivalent value of that 30 year annuity in terms of a single lump-sum payment today. You run the NPV and if the value of the annuity today is more than the 50% lump-sum they're offering today, you should opt for the annuity. If not, you should take the lump-sum and run.

You'll find an NPV for each scenario on the "Summary" tab in the workbook. It assumes a Discount Rate of 8%. I'll leave it to you to read up on what that means and to play with that number as you like. The NPVs are the values to compare though. When you do, you'll find that military retirement has a slight edge under the current contract, but that the airlines win by a similar margin under a new contract...all given the assumptions I've made. Once again, the difference is so small that I feel it shouldn't be a major factor for you, but let's let the numbers do some talking.

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Actual Numbers

Here's a link to the Excel workbook I used to make my comparison. It's view-only here, but you're welcome to download and modify it as you see fit. The yellow boxes on the "Summary" tab are the variables that you can modify to test out different assumptions. If you want to change any of the actual pay/wage rates you'll have to do that the hard way.

I ran the numbers for three different airline career tracks:

The first one assumes that you only ever fly the B717 for your entire career and that it takes you 12 years to upgrade to captain. This isn't a very likely career path and is presented as a worst-case earnings scenario. However, for anyone who can't leave the military until 15-20 years from now, your career path will look more like this than anyone who leaves before that time.

	vs.
B717 (Old Contract)		B717 (New Contract)

 

The second scenario assumes that you only ever fly the MD-88 for your entire career. You stay in New York and upgrade to Captain after 2 years. Believe it or not, that upgrade time frame is realistic for the MD-88 in NYC. There are a few current Captains who fit that criteria. If you live anywhere near NYC, this would be a way to make a lot of money. This also isn't an especially common career path. I present it as a middle-of-the-road case.

(Yes, I realize that neither the MD-88 or the B717 will be around forever. For our purposes, I'm assuming that whatever replaces them will pay roughly the same.)

	vs.
MD-88 (Old Contract)		MD-88 (New Contract)

 

The third scenario assumes a progression through several different types of aircraft, culminating as a 777 Captain. I think it's a more typical career path and it's more lucrative than the other two. There are plenty of possible career paths that could generate higher lifetime earnings. However, I feel like this is a decent high-end case for the average pilot.

	vs.
Airline Progression (Old Contract)		Airline Progression (New Contract)

 

I looked at all three of these career tracks for both the pilot who separates from the military after 11 years, and the pilot who retires from the military after 20.

	vs.
Military Retirement (Old Contract)		Military Retirement (New Contract)