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Have Airlines Cut Too Deep?


Selling paint at Home Depot (HD) can be more lucrative than flying a commercial airplane. That startling fact emerged last week after three days of hearings by the National Transportation Safety Board into the crash of Continental Express (CAL) Flight 3407 on Feb. 12 near Buffalo, which killed 50 people.

Among the headlines: The flight's 24-year-old first officer, Rebecca Shaw, earned less than $17,000 in 2008, her first year on the job with Colgan Airlines, the Manassas (Va.)-based carrier that flies regionally for Continental, US Airways (LCC), and United (UAUA). (The company later said the pay figure was reported incorrectly during the hearings, and that Shaw actually made $23,900.) Her pay wasn't the only part of the crash narrative that raised warning flags for some. Testimony also described the captain's prior failings on inspection flights and Shaw's overnight "red-eye" commute to work.

Yet it was Shaw's situation that seemed the most gripping, raising these questions: With so many costs squeezed out of airlines in recent years, just how low can a cockpit salary go? And is the airline industry reaching the limits of an economic model that seems to have more in common with Wal-Mart (WMT) than with a highly trained profession where safety must come before all else?

There is a rightful reluctance in the airline industry to draw connections between safety and salaries. Indeed, the period between 2001 and 2008 was among the safest in U.S. airline history, despite the fiscal nightmares many airlines were enduring. For two years before the Colgan crash, the U.S. industry was fatality-free.

Hubs and Spokes

Yet, anyone horrified by Shaw's salary must also confront their own primary motivation when booking an airline ticket: finding the lowest possible fare. The two are connected, say airline executives and pilots. "People will spend three hours on the Internet to save $8," says Arne Haak, vice-president for finance at AirTran Airways (AAI). "You know this! You do it yourself."

Airline economics changed dramatically with the deregulation of U.S. airlines in the late 1970s. The industry responded by evolving into hubs and spokes. Gradually, and far more in recent years, regional airlines have come to dominate most of the places where mainline flying is no longer economical. Smaller "regional" jets have become popular to handle busy routes that were once the exclusive domain of mainline pilots—even some Chicago-to-New York flights, for example. Air travel has become a commodity product, affordable for the masses, with the only difference on most flights being what you pay for the ticket. This fact drives nearly every revenue and cost decision. "Congress made a decision in 1978," says Roger Cohen, president of the Regional Airline Assn., which represents the smaller airlines. "It is what it is."

Colgan, which is owned by Memphis-based Pinnacle Airlines (PNCL), says it pays industry-competitive salaries. The average pay for captains is $67,000 annually; first officers average $24,000. "We pay wages that are competitive within the industry," Pinnacle spokesman Joe Williams said May 16 in an e-mail. "We periodically review wages to ensure that we remain competitive." Colgan's 450 pilots voted last December to join the Air Line Pilots Assn., the nation's largest pilots union. Colgan captains make $78 per hour after 15 years, while a mainline jumbo-jet captain can top $200. The industry's highest rates are $238 hourly at FedEx (FDX) and $239 at cargo carrier ABX Air (ATSG), according to AirlinePilotCentral.com, which compiles pilot wage data. At a large airline, pilot salaries over $100,000 annually are not uncommon.

Regional vs. Mainline Carriers

Regional flying is governed by contracts hashed out between the regional players and mainline carriers. It is the mainline airlines that dictate large portions of regional carrier operations, from scheduling flights to selling tickets, often buying fuel for regional planes, and deciding when a particular flight must be delayed or canceled. Contract negotiations between mainline and regional can turn contentious—the usually cash-strapped mainline airline wants to keep a tight lid on what it pays for flights, while the regional must cover its own costs and try to wring a profit.

Cohen, of the regional airlines trade organization, says airlines' "focus every second of every day of every flight must be on safety and we can't be distracted by whatever else." As to questions about low salaries in pilots' first few years, Cohen notes that doctors, before they advance in their careers to higher salaries, begin as interns making little. Others contend that, regardless of what regional fliers earn or how far they choose to commute to work, the airlines, unions, and Federal Aviation Administration have devised a framework of training standards, "check rides" where experienced pilots observe in flight to see how others perform, and recurrent training requirements. That framework keeps commercial aviation remarkably safe. Says Patrick Smith, a Boeing (BA) 767 first officer who flies for a major U.S. airline he declines to reveal: "The system is legal and to the most extent, it works."

Into this mix come enthusiastic pilots who begin on small planes at pay scales of, say, $21, $23, and $26 per hour. Most expect to move to larger aircraft and higher pay within a few years, but migrating to a mainline carrier has become more difficult amid the weak economy, as airlines cut flights and furlough larger numbers of pilots. Those on furlough will be the first the big airlines summon back to fly if new jobs materialize, which makes for few job openings.

Cultural Changes Needed

"Like actors and other artists, pilots are a little too anxious to suffer for their art," says Smith, a former regional pilot who writes a weekly aviation column for Salon.com. He says Shaw's income fell on "the low end of the low end" for the field, but wasn't terribly unusual for pilots at regional airlines—a part of the airline business long known for meager pay and oppressive work schedules. "At the root of the problem, there needs to be changes on a cultural level at the regional airlines," Smith says.

As the industry's finances have declined—U.S. passenger airlines in total have had only two years of profitable operations since 2000, according to the industry's trade group—airline jobs have lost nearly all the glamour and mystique they once held. Cohen took reservations for TWA in the 1970s, a time he says employees "would have paid to have their jobs" because aviation was such a highly regarded field. By contrast, Shaw worked part time at a coffee shop in Norfolk, Va., on her days off from flying, before she and her husband moved back to the Seattle area to be closer to her parents. Renslow, the captain of Flight 3407, stocked shelves at a Tampa supermarket for 16 months before joining Colgan in September 2005, according to the NTSB case docket.

Today many pilots commute to their stations to save money, and Shaw had spent the night before the flight on a red-eye from Seattle to Memphis and then on to Newark, arriving around 6 a.m. It's not clear if either pilot had places to rest in Newark beyond their crew quarters at the airport, although Colgan says its policies require pilots to have accommodations near their base for rest. Senator Byron Dorgan (D-N.D.), who chairs a subcommittee on aviation, said last week he was "stunned" by revelations about the crew's inexperience and potential fatigue, according to media reports, and plans hearings in June to explore the issue.

Competing with Retailers

Aside from top management, airline pilots still receive the highest paychecks at airlines compared with other workers. Today, wrangling luggage in all sorts of extreme weather for $7 or $8 an hour may not seem all that appealing next to a job selling yogurt or books in the airport concourse. It's much the same story, compensation-wise, for flight attendants, gate agents, and those who clean airplane cabins.

"Our [hiring] competition is really not other air carriers," says Julie Weber, senior director of employment for Southwest Airlines (LUV). "We compete with retail. We compete with anyplace that wants to hire quality entry-level workers. In Vegas we compete heavily with the casinos for talent."

Bachman is deputy news director for BusinessWeek.com.

Bachman is an associate editor for Businessweek.com.

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