What Happens to Airline Pilots in an Economic Downturn?

Up until a few weeks ago, leaving full-time military service for an airline job seemed like an easy decision. The money was amazing, and the Quality of Life was so far beyond anything the military will ever be able to offer that there was almost no comparison.

Then Coronavirus happened.

Some regional airlines like Mesa and Commutair have reportedly furloughed pilots, and both Compass and Trans States have announced that they’re going out of business. United cancelled a training class with almost no notice and has reduced their flights by 60%. Delta is reducing flights by 75%. American has announced domestic capacity cuts up to 70% and international cuts up to 90%. This video shows more than a dozen American 777s parked on a runway in Tulsa:

https://www.facebook.com/thehelicopterpage/videos/518972725724114/

Although the timing and circumstances of this are surprising, the fact that it happened shouldn’t be. The airline industry is cyclical, and has always been vulnerable to trouble from major world events. Older pilots right now are telling stories of SARS, Swine Flu, 9/11, and the 2008 recession, and more. It’s never been a question of “if” this would happen again…only a question of “when.”

(The fact that it’s happened and recovered many times before now should give you hope.)

Most families considering whether to leave the military know about these characteristics of the airline industry, and use them in their decision-making calculus. I know my wife and I did. However, until I was actually flying for an airline, I basically assumed that in a downturn it was either “You’re good” or “Um, yah. You’re furloughed. We need you to pack up your things and leave now.”

Thankfully, that’s not the case!

Although the bottom line is always money, I feel like most corporations try to do right by their employees. Most airlines have a lot of tools available to help their people, short of just kicking them to the curb. I want you and your family to understand what some of those options are, and how they play into the furlough equation, so that you can make an educated decision about whether to leave full-time military service for an airline job. We’re going to look at several pieces of this puzzle today.

Before we get going, let’s cover one disclaimer: The topics we’ll discuss today aren’t all sunshine and rainbows. I’m not explaining all this to scare or dishearten you. I’m explaining it because there are some relatively simple ways to protect yourself and your family from it. We’re going to start by exploring several scary scenarios. Keep reading to the end though because we’re going to put everything into perspective and show you ways to prepare your family to comfortably weather any storm.

Table of Contents

1. The Great Balancing Act
2. Bailouts
3. Military Leave of Absence
4. Reduced Pay for Not Working
5. Early Retirements
6. Voluntary Leave of Absence
7. Furlough
8. Bankruptcy
9. Closing
10. Displacements
11. Perspective

The Great Balancing Act

You would think that the airlines would be better off right now. At the end of last year, all of the major airlines reported record profits. Delta made so much money that they gave out $1.6 Billion to their employees in profit sharing. How is it that just a few weeks into the Coronavirus scare these companies are all on the ropes and considering layoffs?

Much of the problem lies in the way that most American companies are run. They use debt liberally. Airlines use their cash on new aircraft and infrastructure projects, rather than keeping it on hand for a rainy (or virusy) day.

Another practice that has hurt these companies is stock buybacks. I’ll refer you to this article at Epsilon Theory for a discussion on the details. Sufficeth to say: stock buybacks can be smart in a very limited set of circumstances. However, the way the airlines have used them recently was at best a way to artificially boost Earnings Per Share (EPS) numbers on quarterly earnings reports. These buybacks also helped executives and possibly some other shareholders get rich. Many of us knew that they were a terrible business decision for the long-term health of these companies. The current crisis vindicates our words.

The airlines are in trouble because they’ve failed to keep sufficient cash reserves to cover their enormous operational costs if their income falls.

Air travel has dropped, in part, because some people are concerned about the possibility of getting sick (or getting other people sick) if they fly. However, it’s dropped even more due to government-imposed quarantines. I flew two trips last week and had a flight with just four passengers on it. When I got home to Florida (from New York), three National Guard soldiers met us at the gate to make sure that everyone filled out paperwork documenting where they had come from and immediately went home to a mandatory 14-day quarantine.

With so few passengers, the airlines aren’t making any money. No business can afford to operate like that. So, the airlines are cutting routes, parking airplanes, and cutting costs. With fewer airplanes to fly, the companies don’t need as many pilots. If they want to take care of their employees, they have to get creative about it.

However, when things pick back up (and they will) it will take a lot of work for each airline to get back up to speed. Parked aircraft will need some maintenance housekeeping to be ready to go. Many pilots will be so non-current that they will have to return to the sim to reestablish landing currency, if not complete a short training course. The more drastic the cost-cutting measures an airline takes, the longer their subsequent spin-up takes. Once the market gets going, spin-up just costs them more money.

So, the airlines want and need to balance their reaction to a crisis like this to preserve cash now, but not slow down their recovery any more than absolutely necessary. They have a variety of tools for doing this.

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Bailouts

For better or for worse, Congress finally passed a bailout that provides $60 Billion to the airline industry to cover payroll and some other limited costs through September. This bailout comes with many strings attached. Any recipient of this money is prohibited from entering bankruptcy, furloughing anyone, cutting pay or benefits, buying back stocks, or paying a stock dividend during this time period. That’s good news for pilots.

In a way, the protection from all these attached strings will do as much to help pilots as the actual money. Although these billions sounds like a lot, they won’t even last an airline through the end of September at the rate things are going. Basically, this bill gives the airlines a little breathing room while the government hopes that it can either ease quarantine restrictions soon, or someone develops a vaccine before the money runs out. (I’m hoping for the latter because it’s a longer-term solution.)

In the meantime, the overall bill adds another $2 Trillion to the national debt that is already so large it’s unrealistic to think we could ever pay it off. Hopefully things can turn around quickly enough to make this worth the price.

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Military Leave of Absence

We covered Military Leave, in great detail, in our article about USERRA. Thankfully, this provides a bit of a pressure release valve that works opposite to the airline industry in many cases.

When 9/11 happened, the airlines needed to shed pilots like crazy. For better or for worse, the US was about to start two major wars and needed every pilot it could get. Each military pilot that volunteered to take full-time military orders to go fight meant another civilian pilot wouldn’t have to get furloughed.

We have a similar situation right now. The USAF has been suffering from a massive pilot shortage for many years. Part (though far from all) of the reason is that the economy has been booming and the airlines have been hiring like crazy. Now that the economy and airline industry is on the ropes, the military should have an easier time staffing its pilot slots while helping to balance out the furlough equation for military pilots. (At least until things get better.)

Many airline pilots will take mil leave during this crisis. It will help give their families some stability and assurance. It will also help fellow pilots at their airline keep their jobs. It’s good all around, and the airlines welcome it. In fact, most major airlines have already stated that any military leave taken during the COVID-19 outbreak won’t count against your 5-year USERRA limit.

Unfortunately, this means that spots at Guard and Reserve units are suddenly in even higher demand. Whether you’re an airline pilot looking for some security, or a young pilot just starting to pursue your dream, you need every advantage you can get if you want one of those spots. We hope you’ll use BogiDope’s expertise to maximize your chances!

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Reduced Pay for Not Working

Since the airlines are flying less, there isn’t enough to keep their pilots busy. Thanks to strong union contracts in our industry, pilots are protected in these circumstances. If there isn’t enough flying for a particular pilot to “hold a line” through the regular schedule bidding process, he or she is placed on reserve by default. Whether this pilot flies or not, he or she will get paid for a minimum number of hours, called the “reserve guarantee,” usually somewhere around 70-80, for the month. (For more detail on this, see our article on Airline Pilot Salaries.)

While this is good news for pilots, it’s also a problem. An airline needs a certain number of pilots on reserve to cover last minute sick calls, missed commutes, and other contingencies. In most cases, reserves account for 10-20% or airline staffing each month. However, with airlines cutting upwards of 70-80% of their flying, the vast majority of pilots will be placed on reserve and paid the full reserve guarantee to not fly. No company can sustain this forever.

One solution is to offer pilots reduced pay to not be on reserve…to just sit at home. At most airlines, this tends to be 50-55 hours, let’s say about ⅔ regular pay. (Some companies pay fewer hours in these situations.) These pilots are truly free from all commitments. The company can’t call and tell them to fly, and the pilots can’t pick up extra flying, even if they want to.

This can be a nice vacation for a family with a hard-working pilot. If you have a solid side-hustle, this can be a great opportunity to pour a lot of time and energy into it. Your side hustle might not pay as much as your airline job, but if you’re still getting ⅔ of your regular airline pay, how much does a side-hustle have to bring in to keep your family comfortable?

Most airlines have offered this to at least some extent for COVID-19. It’s definitely a good deal in this situation.

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Early Retirements

A few airlines so far have taken the principle of reduced pay for not working to another level; they’re offering early retirement.

In recent offers, pilots over the age of 62 (within 3 years of retiring anyway) have been offered 50% pay and full benefits including health care and employee travel perks through age 65. Reportedly, more than 600 pilots at American Airlines have taken this great deal.

This saves airlines a lot of money. Furloughs (see below) start with the most junior pilot at the company – the ones with the lowest pay rates. Early retirements, on the other hand, alleviate the burden of paying the most expensive pilots a company has. On average, a 2-year FO at American makes less than $150 per hour. A 12+ year 777 or 787 Captain at American makes $342 per hour. (Per APC.) Giving those senior Captains early retirement saves the company more money than furloughing a junior pilot. That’s a big deal.

These senior pilots have worked hard for many years. They’ve been through a lot and they deserve to relax and enjoy themselves for a change. With international flying suffering the most in this outbreak, the widebody aircraft they fly will be the last ones to come back. The airlines need the junior pilots flying narrowbody jets for the time being. If they furlough a junior pilot, it means they also have to re-train that more senior pilot to fly a smaller jet. Offering senior pilots early retirement instead of retraining represents additional cost savings for the company.

I hope more companies will see the wisdom in offering early retirement to their pilots.

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Voluntary Leave of Absence

Another tool that airlines have is offering employees a voluntary leave of absence. These leaves are unpaid, but frequently allow the employee to keep their travel benefits. For a family where the airline employee isn’t the primary breadwinner, or a family with a Bathtub full of Treasure, this might be a great option.

This is also an important option for employees who are at elevated risk of getting sick, or live with someone who is. In my experience, most airline leaders are great about understanding and going to bat for their people on an individual basis. If you have a family member with a serious health issue, COVID-19 related or otherwise, speaking to a chief pilot about getting a leave of absence is a no-brainer. In fact, most chief pilots will go out of their way to try and get you paid for as much of that leave as possible by moving up vacation or using any other tricks they can find. It’s good to see companies being even more liberal with this situation.

Although an unpaid leave of absence could make sense as a last resort, it should not be the go-to for most pilots. Thanks again to our union contracts, we can bid reserve and get paid a full 75-ish hours, whether we fly or not. In a case like this where there’s very little flying to be done, a reasonably senior pilot could probably just bid reserve and continue getting paid while still not having to go into work.

Thousands of my coworkers have taken unpaid leave right now, but most of them are from non-unionized groups of employees (not pilots). They don’t have the other options that we pilots do. As a military pilot, I’m still not exactly sure how I feel about unions. However, I know that they are keeping my family protected and very well paid right now, and I’m selfishly grateful for that fact.

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Furlough

In my mind, furlough is an f-word…just short of a worst-case scenario. When all of the measures we discussed above aren’t enough, the company starts at the bottom of the seniority list and tells pilots to stop coming in to work. (This is why moving to the airlines as soon as you can is so important! Seniority is everything!)

These pilots will get some benefits for a limited amount of time, but they’re only intended to keep you afloat while you find a new job. When this happens, applications to Guard and Reserve units spike again. Major airline pilots may find themselves flying for regionals. Regional airline pilots may have to move down into jobs they used to build time. Some pilots give up on flying altogether.

Thankfully, furlough isn’t forever. If or when the airline ever gets healthy enough to start hiring pilots again, it’s obligated to offer a job to every single pilot on furlough before it picks up a single person off the street. In most cases, the pilot on furlough has up to 10 years to accept that offer to return, once the company issues the recall. If you’d started a great second career and your family is happy, you can keep working away at it for a full decade before you have to decide whether you want to go back to flying or not. In most cases, you continue to accrue seniority during that period as well.

Many military pilots use this time to earn a full Active Duty retirement. Others use the time to continue setting up real estate or other business empires. The company is free to hire pilots off the street as soon as they’ve offered recall to every furloughed pilot. However, when you come back with your increased seniority, you get to bid to fly any category (aircraft type, seat, and base) that your seniority can hold.

This is one of the reasons that I advocate so strongly for airline pilots to have some type of side-hustle. Whether it’s furlough, losing your medical, or some other disaster, having a fall-back already running is a lot easier than having to start from scratch after a crisis arrives. If your side-hustle was already profitable, it may just be a matter of pouring in more time and energy to start making a full living from it.

Having a head start on a business venture can accelerate you toward the point where larger portions of your business can run on autopilot. I’m a big fan of the BiggerPockets Business Podcast. I’ve picked up on a resounding theme from listening to it: Setting up systems, processes, and teams can make your business more profitable and help you live a more balanced life. If I were furloughed my goal would be to get a business to this point as soon as possible. Then, it could continue to provide an extra income stream when I go back to flying.

In some industries, it’s easy for a business owner to lay off a bunch of employees in hard times to save money. Thankfully, the airline industry doesn’t quite work that way. We’re very expensive to recruit, hire, and train.

While a restaurant owner might choose to pay a couple weeks’ wages to a waiter she lets go, the airline generally has to pay a few months of full benefits to the furloughed pilot. When a crisis finally ends, the company usually needs to spin-up as fast as possible. Unfortunately, it takes a long time to contact every furloughed employee on the list. Then, the company has an enormous burden of putting all those pilots through training.

In most cases, a company will only resort to furlough if it expects things to last for a couple years. This means many (or most) recalled pilots will have to go through a full month of training, and Operational Experience (OE) before they’re useful again. These are very expensive pilots to put through that process. The company would rather have cheap new-hire pilots in the pipeline at that point.

Furlough is always a costly and undesirable option for an airline. You’ll see them try all of the other measures we’ve discussed so far, before resorting to furlough.

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Bankruptcy

Unfortunately, furlough isn’t the last or worst option that airlines have been known to use. In the wake of the 2008 housing bubble burst, pilot compensation was at an all-time high and airline costs were through the roof. At that time, most airlines offered a pension plan that paid 60% of a pilot’s Final Average Earnings (FAE) for life.

When the stock market dropped at the end of 2008, those pensions instantly became “underfunded” on paper. Between that and decreased revenues in the bad economy anyway, the airlines were all able to file for bankruptcy. During bankruptcy, a company can ask all sorts of things from its employees to save costs. If the employees don’t give up enough, a federal judge can mandate changes anyway. Most airline pilots took pay cuts in the 50% range. Pensions all but disappeared. And this all happened after companies had tried everything else we’ve discussed so far today.

Bankruptcy is a terrible thing for an airline. It means lots of furloughs, stagnated career progression, reduced pay, and many rough years. However, look at our industry right now. Every major airline that filed for bankruptcy got stronger in the aftermath. They went from moderately profitable to raking in all kinds of money.

As an airline pilot, I hope COVID-19 doesn’t cause any major airline bankruptcies! I’m not certain it won’t, but I feel like we have a long way to go before this becomes a serious threat.

For families looking at a future move to the airlines, something as severe as a bankruptcy is a scary prospect. My family addressed this as something that was not likely, but something for which we needed to prepare. We made sure that we had ample savings, ways to reduce costs, and a plan for what to do in case of a bankruptcy. If you prepare, this is not something to fear. There are more than enough good years to enjoy the good life, while simultaneously saving up for the next time the cycle bottoms-out.

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Closing

Like I said, bankruptcy doesn’t have to be the end of an airline. In fact, it’s designed to keep an airline alive. It provides financial relief and mandates restructuring that help a company return to profitability. Unfortunately, there is one worse option: the airline could just close up shop altogether.

This has already happened at some regional airlines that run on razor-thin margins and have a tough time attracting pilots. I suspect that we’ll see more announcements to this effect before we find a cure or vaccine for Coronavirus.

When a company closes, all of those pilots flood a job market. If it’s bad enough for one company to close, the others probably aren’t hiring. Thankfully, there’s such a pilot shortage at America’s regional airlines that if the economy picks up anytime soon, all the pilots from Trans States and Compass Airlines will be able to find jobs.

I firmly believe that there are plenty of other opportunities available to anyone smart enough to become a pilot. Someone close to me worked for an airline that closed, and ended up just fine. (Keep reading for his story.)

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Displacements

Enough with the doom and gloom! Let’s go back several steps and talk about a tangentially related subject before we put this all into perspective.

Every so often, new aircraft deliveries, or retirements at the top of a seniority open up seats that need to be filled. Airlines hold a bid, sometimes called an Advanced Entitlement (or AE) to fill these vacancies. When an airline retires older aircraft, or has to downsize in rough times, the opposite process applies. The company identifies some positions as surplus and holds a displacement bid. The pilots in those surplus positions get to bid to fly anything they want. As long as there’s at least one pilot in that category junior to the displaced pilot, the more senior pilot gets the position he or she wanted, and the most junior pilot in that category is now displaced…repeating the process.

This can save the company a lot of money. Whether they’re paying each pilot full reserve guarantee, they’re offering reduced pay to say home, or they’re paying out a few months of furlough benefits, it’s a lot cheaper to pay a pilot at 737 rates than 777 rates. Those 777s aren’t going to be flying to China right now anyway, so there’s no good reason to pay those senior pilots at that rate. Displacements aren’t always ideal for pilots, but they’re a lot better than furloughs!

American Airlines has delayed the need for this by offering early retirements. Hopefully, other airlines will do this too. However, we will start seeing displacement bids at many airlines in the relatively near future.

Displacements aren’t the end of the world. Most contracts include a provision that the company has to reinstate a displaced pilot to his or her previous category before training any other pilot for that position. If you happen to be on an aircraft you don’t like, a displacement is like a get-out-of-jail-free card. Personally, I kind of want to fly every aircraft that my company offers. A displacement would be a way for me to check an extra type rating off my list without having to wait for the company to offer it on an AE.

A displacement isn’t something to fear, in and of itself. It’s just a temporary change of category. I included it in today’s discussion because you’re likely to hear about it in the next few months.

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Perspective

We’ve just considered several ways an airline can play the balancing act between burning money unnecessarily, and trying to take care of its people. Most of these situations are less than desirable, but the goal is always to get through the tough times and get you back to working your regular, wonderful job.

I know this can all work. My father-in-law worked for Eastern Airlines when they went under. He was unemployed for a while, but things got better and he retired from a great job flying the B777 for American. He looks back on his career fondly and lives a great retirement with more money than he’ll ever spend.

Any given airline has to take a lot of money-saving steps before it closes altogether. That is an extremely rare occurrence for major airlines, and even if that happens it’s not the end of the world. No matter how tough things get, you can find a way forward.

For pilots already at the airlines, things will be tough for now, but they will get better. There are many ways for you to max perform what you have available right now. Pilots not at the airlines yet are almost better off in some ways. You don’t have to deal with the uncertainty plaguing every airline pilot right now. This crisis is also a stark reminder that all pilots need to prepare for and protect against things like this. You now have time to get that all set up, so you can truly max perform your airline career when you get there.

The first thing you need to do is make sure your family is financially solvent. Consumer debt from credit cards or other optional spending are dead weight that will drag you down to misery. Things like student debt and car loans aren’t great either. You need to attack your debt like it’s a snake about to eat your favorite child.

As you’re trying to kill your debt, you also need to save up at least a small emergency fund. Personally, I suggest you save up enough cash to cover a month or two of expenses. Then, keep saving, but invest the money in something that pays better than a savings account. This is a buffer against incurring stupid debt in case of a minor unexpected emergency. It’s also a way to keep your family afloat in case of something like reduced pay or furlough.

If you don’t know how to get started with killing debt and building an emergency fund, you need to read The Total Money Makeover by Dave Ramsey and do everything he says…to the letter.

You can accomplish most of what Mr. Ramsey says whether you’re a military or regional airline pilot. There are no toys, clothes, electronics, Instagramable experiences, or anything else that makes it right to spend your money on frivolous stuff before you’ve secured your family’s future. I’m going to feel sorry for a lot of pilots who go through rough times as a result of COVID-19’s financial impact. However, there are plenty of pilots who will get zero sympathy from me because they’ve prioritized short-term pleasures over long-term security. They made their decisions long ago, and they deserve the outcomes of those decisions.

You can bet better than that though. If you follow Dave Ramsey’s Baby Steps, you’ll be okay. Even as good as his advice is, he also leaves you hanging. Don’t dogmatically follow Mr. Ramsey just because he’s written a few books and has a radio show. Once you’ve reached his final step, explore some other ideas out there and run the math for yourself to decide how your family should save and invest.

If you really want to be in a great position you need to:

• Spend less money than you earn, no matter what your job is.
• Eliminate all consumer debt. I’m okay with you carrying a reasonable home mortgage.
• Invest everything else until you’ve maximized your tax-advantaged retirement accounts.
• Invest the rest in something that pays better than a savings account.

If you do these things, you cannot help reaching a point where the passive income from your investments can fund all of your family’s basic needs…forever. From that point, you can live a life completely free from fear.

This is what my wife and I have done. We were both military officers. We lived on one income and invested the rest. By the time we left the military we had more than enough to cover our basic needs. If I get furloughed, our savings will still cover our needs whether I get another job or not. This means I won’t have any pressure to work at a bad place. We won’t have to feel deprived. We won’t have to worry that we’ll lose our home or that our kids will go hungry.

I don’t say any of this to brag. I say it in hopes of inspiring you to save like we did. If your spouse doesn’t work, it’ll take longer to reach complete financial freedom, but you can still get there a lot sooner than you’d think. Once you reach that point, every day you go to work just increases the depth of the savings from which you have to draw if times get bad. Or, if times are good, you can then feel free to spend your money on luxuries without impacting your family’s overall financial well-being.

From this position, you can confidently leave full-time military service to take a job at the airlines. If something bad happens, your family will be fine…just like mine. I wrote an entire book on this topic because I believe it’s that important for pilots to understand. If you haven’t read it yet, please do. If you’re a young pilot who can’t afford a copy because you just lost your job, let me know and I’ll send you a copy for free. (I even have some volunteers willing to help provide those books for you.)

Although Coronavirus means we’re going to go through some tough times, I’m confident they won’t last forever. If you use this time to prepare and save, you’ll be in the best possible situation to take advantage of it when things get better.

The stock market has dropped, hard, over the last few weeks. Unless you need to sell shares of stock to feed your family right now, that drop is not a problem for you. In fact, since prices are so low, this is the perfect time to buy. The more money you can save and invest right now, the better off you’ll be when the market picks back up.

Airline flying will eventually get back to the level it was at. In fact, the worldwide demand for flying was so insatiable that most airlines were planning to grow over the next few years. That demand is down slightly because of fear, but it’s mostly dropped because of government-mandated quarantines. As soon as the government orders go away, demand will pick right back up.

Now that you know how airline pilots get paid in good times and bad times, you can prepare your family for both.

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Image Credits:

This post’s feature image, a Southwest 737 flying past a storm is by peter mantice on Unsplash.

The chart showing FCF vs Share Repurchases is from an excellent analysis on The Motley Fool, my favorite place to read about the stock market and big businesses.

The dawn C-17 shot came from: https://www.dvidshub.net/image/6113199/816th-eas-flies-iraq.

The shot of getting paid to sit in a hammock is by cmophoto and available here: https://unsplash.com/photos/QE7wxhuQDd8.

The No Bankruptcy sign came from: https://pixabay.com/illustrations/town-sign-bankruptcy-insolvency-96612/.

The Compass Airlines website screenshot is from: http://www.compassairline.com/Pages/default.aspx.

The Eastern Airlines B737 came from: https://es.wikipedia.org/wiki/Archivo:Eastern_Airlines_B738_@_MSN_(20957501853).jpg.