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‘What's Our Vector, Victor?'—A Series of Regulatory Amendments May Force Change in Business Model for Regional Airline Industry

Tuesday, March 25, 2014

 Cameron Cloar

  By Cameron Cloar
 

Cameron Cloar is an attorney with Nixon Peabody LLP. Mr. Cloar is based in the firm's San Francisco office and is a member of the Products: Class Action, Trade & Industry Representation practice group and the Aviation team.  

In February 2014, pilots of American Airlines subsidiary American Eagle Airlines rejected a concessionary contract proposal, an action that could spell the eventual demise of that regional carrier with its 12,000 employees.1   

In exchange for a salary freeze and termination of profit-sharing for American Eagle pilots, the parent company promised to place larger aircraft and more pilot jobs at the subsidiary. Without the requested concessions, American made no secret about the fact that economic pressures would force it to place the new larger aircraft at other carriers that could handle the flights at a more competitive price.2 A refusal to accept such an agreement by a regional carrier's workforce was an almost unimaginable bold position prior to last month. The collapse in negotiations could mean that many of the 2,800 pilots at American Eagle find themselves out of work, or essentially demoted to junior pilot status with a different regional airline making significantly less money.

While this story has not received widespread press coverage, it offers a rare and unique glimpse into an emerging dilemma for the nation's regional airlines that may lead to significant transformation of their business model and the industry as a whole.3 The most noticeable cause is a recent series of changes to federal law and regulations that changed several requirements for airline pilots, including:

• a mandate for additional rest requirements for pilots at work;

• an increase in the certification and experience required for new pilots; and

• an increase in the retirement age for older pilots.

 

Industry analysts and stakeholders disagree on whether the changes will net an increase in aviation safety, or intensify a looming airline pilot shortage, end passenger service to many communities and lead to higher passenger ticket prices for others.

In any event, the situation illustrates the heavy impact that the regulatory environment can have on an airline's bottom-line, its employees and the entire air transportation business model. It represents an important reminder for executives inside and outside of the airline industry to play an active role in the ever-evolving shape of local, state and federal law; to thoroughly and proactively prepare for changes to those rules; and, to think creatively in devising strategies to keep the business one step ahead.

New, Increased Rest Requirements

After accident investigators concluded that pilot fatigue and inexperience contributed to the 2009 crash of a regional airline flight near Buffalo, New York, Congress directed the Federal Aviation Administration (“FAA”) to promulgate several new and significant requirements for pilots at the nation's air carriers.4 In response, the FAA first drafted a number of new and updated rules concerning duty and rest requirements to ensure that pilots in passenger operations do not suffer from dangerous amounts of fatigue. The FAA finalized the revisions in December 2011 and they took effect on Jan. 4, 2014. Industry analysts consider the changes to be the most significant to hit pilot work regulations in the last 50 years, and many believe they will strengthen aviation safety and help to prevent future accidents caused by pilot fatigue.

There are several notable highlights:

 

• The maximum amount of time a pilot may be on duty now ranges from 9 to 14 hours.5 The exact time depends on a number of factors, including what time the pilot's day at work begins, the number of time zone changes made during the day's flights and the total number of flights completed during the day.6 Under the prior rules, pilots could be on duty at work up to a maximum of 16 hours in a 24 hour period.

• A new hard limit of 9 hours flight time for pilots is in place, with an 8-hour limit for pilots working flights late at night or during the dark hours of the morning.7 Old regulations had a soft 8-hour cap of scheduled flying that could be and often was extended due to poor weather, ground delays and diversions.

• At the conclusion of a shift, airlines must now schedule pilots for at least 10 hours of consecutive rest with a full 8 hours that can be devoted towards sleep.8 The previous rules called for a minimum of 8 hours rest before reporting back to work. That requirement did not allot for time spent traveling to and from the airport, eating and showering for work.

• Over the course of one week, pilots must receive at least 30 consecutive hours off-duty from work.9

 

Airlines big and small felt the effects of the changes. Due to the increase in required rest and off-duty times, several airlines hired more pilots, expanded their slate of reserve pilots who act as backup when schedules do not go according to plan, and updated computer programs that build pilot schedules and track crews throughout their networks.10 Regional carriers sustained the most immediate repercussions from the modifications. Many of the carriers have been forced to raise staffing levels by five percent or more.11 Ordinarily, these carriers serve smaller communities near hub airports. That often translates into more flights per day for the average regional pilot when compared to those at the major airlines, and heightened risk of delays during periods of inclement weather.

Heightened Pilot Certification, Qualification Requirements

In July 2013, the FAA also fulfilled its obligation to enhance the pilot certification and qualification requirements for airline pilots.12 Modifications to those rules now require that all flight crewmembers at air carrier operators have both an airline transport pilot (“ATP”) certificate and 50 hours of flight experience piloting a multi-engine airplane.13 The ATP is the highest level of pilot certification and it authorizes individuals to act as pilot in command in air carriers' operations. To obtain an ATP certificate, the applicant must be 23 years old and have at least 1,500 hours total flight time, though the FAA permits some exceptions for younger pilots with less flight experience and who have obtained a college degree in aviation or are military-trained.14

While expected, the changes have had the most sizeable impact on the regional airline industry and the careers of many pilots. Historically, regional carriers hired pilots with less total flight experience than those hired by the major airlines. Regional airline pilots often receive less in wages and their collective bargaining agreements consist of less favorable work rules and benefits. Until very recently, their pilots were more willing to accept these conditions because they viewed regional flying as an intermediate stopover to build experience before eventually landing a job at a major airline. Airline consolidation, high fuel costs and the economic downturn stalled the upwards trajectory for many.


 

The increase in flight experience requirements will deplete the pool of qualified pilots from which the regional airlines historically hired to fill their ranks.  

 


The increase in flight experience requirements has again altered that landscape. The most significant changes were made to regulations covering pilots employed as first officers, otherwise known as second in command. Previously, they were expected only to hold a commercial pilot certificate and an instrument rating, which can be obtained in as little as 190 flight hours. Regional airlines were much more likely to employ first officers with only the commercial pilot certificate and far less experience. The new ATP certificate mandate for all airline pilots, and its accompanying 1,500 hour flight experience requirement, therefore represents a larger and costly hurdle for new pilots seeking employment. It also depletes the pool of qualified pilots from which the regional airlines historically hired to fill their ranks.

Once hired, many regional airline pilots seek a promotion to captain, or what the FAA refers to as the pilot in command. This is because most major airlines require their pilot applicants to have some pilot in command experience at an airline or in a larger aircraft. Previous rules also required pilots acting as pilot in command to hold an ATP certificate. However, a new regulation requires pilots to possess 1,000 hours of airline flight experience before becoming a captain.15 This requirement is separate and in addition to the 1,500-hour requirement necessary for the ATP certificate, and it means that many regional airline first officers may experience a delay in advancement to captain as they spend additional time gathering this airline flight experience.

Previous Regulation Changes to Mandatory Pilot Retirement Age Now Impacting Older Pilots

A third important alteration to the regulations has amplified these complications for the airline industry. For decades, federal law set mandatory retirement for all commercial pilots at age 60. The law was justified in part on the concern that pilots over 60 were more susceptible to heart attacks and strokes, and because it was believed that physical and mental processes important for pilots deteriorate more rapidly over that age.16 After several unsuccessful legal challenges, along with sustained lobbying efforts to change the law, the retirement age was increased to age 65 in 2007.17

That change brought the U.S. into alignment with several countries that had already implemented an age 65 retirement requirement and it resulted in a five-year delay of retirement for several thousand airline pilots. Those pilots are now beginning to reach age 65 and the first of several large-scale retirements for many major airlines began in late 2013. Retirements are expected to accelerate over the next several years, with predictions that nearly 2,000 airline pilots will reach mandatory retirement each year and over 45,000 will retire in the next 20 years.18 Estimates vary from a few hundred to thousands of pilots that will need to be hired each year to replace those who retire.19 Most of the pilots retiring will do so from the major airlines. As a result, those carriers will in turn need to increase their hiring from the regional airlines, which will again bear the brunt of this turnover.

Pilot Shortage or Salary Shortage?

Combined, these revisions to the regulations have been a point of contention for many airlines, labor unions, and industry analysts. Many believe that the new and updated rules will lead to a large shortage of qualified airline pilots to fill flight decks across the country. One aircraft manufacturer projects a need for more than 85,000 commercial pilots in North America during the next two decades.20 Since 2000, however, the nation's supply of pilots has remained flat.21 Colleges have also reported a sharp decline among current and prospective students that want to pursue professional pilot education.22

Regional airlines, in particular, expect to feel the pinch due to the considerable retirements at the major airlines that will escalate their recruitment of new pilots. The industry trade organization representing the nation's regional air carriers, known as the Regional Airline Association, believes that the new flight experience and qualification requirements may jeopardize passenger service to some 500 U.S. communities that rely exclusively on the regional air carriers, as those companies quickly exhaust the pilot supply.23 In February 2014, one regional carrier, Republic Airways Holdings, announced its intent to ground 27 of its 50-seat regional jets due to its inability to find qualified pilot applicants.24 That same month, another regional carrier was unable to retain enough pilots and ended service to six small Midwestern communities.25

At least one labor union disputes the existence of any current shortage of trained and qualified pilots.26 It insists that the current predicament is the product of poor pay, benefits and working conditions at the regional airlines.27 Costs to train and obtain all of the necessary pilot certifications and licenses, and to build the necessary hours of flight experience, can easily exceed $100,000 for the average person.28 With starting pilot salaries of little more than $20,000 per year, stakeholders argue that the next generation has little incentive to straddle such large debt for so little in return.29 As a result many regional pilots often accept employment by carriers in foreign countries that offer much higher salaries, extraordinary benefits and job stability. The promise of better pay and benefits by domestic regional airlines could result in many of those pilots returning home to the U.S. for employment. A recent report by the U.S. Government Accountability Office also found mixed results on whether a shortage of airline pilots exists today.30 However, the report also recognized that the supply pipeline of qualified pilots is changing and that adjustments to airline operations, training and career opportunities for pilots, or both, may be needed.31

Will the Regional Airline Industry Change?

No matter which way you look at the current state of this issue facing the industry as a whole, the regional carriers are without a doubt enduring the brunt of the new federal regulations. That may be in part due to the typical regional airline business model, commonly referred to as the fee-per-departure structure.32 Under it, major airlines often send out requests for regional airlines to bid on a certain amount of flight operations to be conducted with smaller aircraft, most often regional jets. The carrier selected to complete the contracted work is typically compensated on a per flight basis.33 The rate paid by the major airline remains constant irrespective of flight lengths or the number of passengers. The major carrier thus incurs all of the revenue (or loss) of the flight. The regional carrier, on the other hand, enjoys predictable revenue and earns a defined return. However, the nature of these agreements often provides small margins for the regional carrier to complete the necessary work and earn a profit, forcing strict control of operation costs to do so. Pilot and other labor costs are one considerable area that those carriers historically have sought to manage to keep their contractual fees low and win new business.

In recent years, airline bankruptcies, industry consolidation and fleet reductions decreased the overall need for regional lift and those carriers face significant pressure to offer even more competitive fees to retain the business. The major airlines now also look to their regional airline partners to shoulder more risk than was typically demanded under the traditional fee-per-departure model. A dwindling supply of qualified pilot applicants may force regional carriers to increase benefits to attract new talent, thus escalating labor costs beyond that allocated to deliver regional flying to their airline partners at predetermined fixed rates. The FAA itself voiced that possibility in its recent regulation changes.34 That raises some doubt that regional carriers can continue to realize a modest return in profit without a further change to the business model.35


The new reality appears to have energized the negotiating positions of both airline management and their current pilots, each, in effect, calling the other's bluff.  

The situation is complex and rapidly evolving. The consequences of the new regulations, and the perceived dwindling supply of qualified pilots for the regional airlines, appear to have energized the negotiating positions of both airline management and their current pilots, each, in effect, calling the other's bluff.

After pilots at American Eagle rebuffed the concessionary proposal for more aircraft and pilot positions, parent company American reiterated its intent to place the promised aircraft at another carrier. It also stated that another 47 aircraft currently operated by American Eagle would move to another carrier, and all flying performed by its subsidiary would wind-down.36 Days later, American retreated from its plan to liquidate American Eagle but maintains that many of its larger aircraft will move to another regional carrier.

Republic Airways was thought to be a logical destination for those aircraft, given that it is already under contract to handle a portion of American's regional business.37 However, Republic denied that it has spoken to American about additional regional business, noting that it is focused on its own challenges to recruit and retain pilots to operate its current fleet of aircraft.38

It is not yet clear what will happen at American Eagle, or what company will eventually take delivery of its promised new aircraft.39 For the industry, considerable disagreement persists on whether a pilot shortage will come to pass. In the meantime, however, the regulation changes have presented the regional airline industry with real and immediate challenges. It will need to find innovative ways to attract qualified pilots, potentially assist future pilots ease the burden of training costs that dissuade many individuals from entering the industry, and design new training methods for pilots to obtain experience important for the airline environment.

1 Mary Schlangenstein, American Eagle Pilots Reject Givebacks With Vow to Seek New Jobs, Bloomberg BusinessWeek, February 12, 2014, available athttp://www.businessweek.com/news/2014-02-12/american-eagle-pilots-reject-givebacks-with-vow-to-seek-new-jobs.

2Id.; Ted Reed, American Eagle Pilot Leaders Reject Deal and Look to Shutdown, The Street, February 12, 2014, available athttp://www.thestreet.com/story/12347163/1/american-eagle-pilot-leaders-reject-deal-and-look-to-shutdown.html.

3 In the U.S., airlines that conduct scheduled commercial service must operate in accordance with 14 C.F.R. Part 121 and are typically categorized as mainline, or major, and regional. The major carriers include passenger and cargo airlines that use larger airplanes. Regional airlines include passenger service carriers that generally operate airplanes with less than 90 seats, and cargo airlines that operate domestically or with limited international service on a contractual basis.

4 Airline Safety and Federal Aviation Administration (“FAA”) Extension Act of 2010, Pub. L. No. 111-216, §212, 124 Stat. 2348.

5 14 C.F.R. §117.13.

6Id., Table B.

7 14 C.F.R. §117.11

8 14 C.F.R. §117.25(e)-(f).

9 14 C.F.R. §117.25(b)-(c).

10 Susan Carey and Jack Nicas, Airline-Pilot Shortage Arrives Ahead of Schedule, Wall Street Journal, February 3, 2014, available athttp://online.wsj.com/news/articles/SB10001424052702304851104579361320202756500.

11 Nancy Trejos, New Pilot Fatigue Rules Go Into Effect This Weekend, USA Today, January 3, 2014, available athttp://www.usatoday.com/story/todayinthesky/2014/01/03/pilot-fatigue-mandatory-rest-new-faa-rules/4304417/.

12 78 Fed. Reg. 42,324 (July 15, 2013).

13 14 C.F.R. §§61.153, 61.159, 121.436(b).

14 14 C.F.R. §§61.153, 61.160.

15 14 C.F.R. §121.436(a).

16SeeAir Line Pilots Ass'n, Int'l v. Quesada, 276 F.2d 892, 898 (2d Cir. 1960), cert. denied, 366 U.S. 962 (1961).

17 Fair Treatment for Experienced Pilots Act of 2007, Pub. L. 110-135, codified at 49 U.S.C.A. §44729.

18 James Higgins, et al., An Investigation of the United States Airline Pilot Labor Supply, University of North Dakota (2013), at 5, available at http://tinyurl.com/lod5gyc .

19 Chase Jones, Pilot Shortage Looms for Airlines, USA Today, January 6, 2013, available athttp://www.usatoday.com/story/travel/flights/2013/01/06/pilots-shortage-could-start-this-year-analysts-warn/1566088/.

20 The Boeing Company, Long-Term Market Outlook 2013-2032, Pilot & Technician Outlook, available athttp://www.boeing.com/boeing/commercial/cmo/pilot_technician_outlook.page. The FAA projects that an additional 70,000 new pilots with an ATP certificate through 2032 will be needed to account for industry growth and retiring pilots. FAA, Final Regulatory Evaluation Pilot Certification and Qualification Requirements for Air Carrier Operations Office of Aviation Policy and Plans, Economic Analysis Division (APO-300), June 2013.

21 U.S. Government Accountability Office, Aviation Workforce: Current and Future Availability of Airline Pilots, Report to Congressional Requesters, February 2014, at 20-21, available athttp://www.gao.gov/assets/670/661243.pdf.

22Id. at 23-25. The number of graduates from undergraduate professional pilot-degree programs has also decreased 23 percent from 2000-2001 to 2011-2012. Id. at 23.

23 Roger Cohen, Message from Roger Cohen RAA President, Regional Horizons RAA Magazine, September 2013, at 3, 14, available athttp://viewer.epageview.com/Viewer.aspx?docid=fff7696a-6473-430c-89e6-a23e00d5cfb8; RAA, RAA Member Airlines are Ready for New Pilot Licensing Law, Press Release, July 10, 2013; Bart Jansen, FAA Requires More Pilot Training After Colgan Crash, USA Today, July 10, 2013, available athttp://www.usatoday.com/story/travel/flights/2013/07/10/faa-pilot-training-colgan-crash/2505499/.

24 Terry Maxon, Republic Airways Expects to Park Some Airplanes Because of Pilot Shortage, Dallas News, February 11, 2014, available athttp://aviationblog.dallasnews.com/2014/02/republic-airways-expects-to-park-some-airplanes-because-of-pilot-shortage.html/?nclick_check=1.

25 Justin Bachman, Yes, There's A Pilot Shortage: Salaries Start at $21,000, February 11, 2014, available athttp://www.businessweek.com/articles/2014-02-11/yes-theres-a-pilot-shortage-salaries-start-at-21-000; Great Lakes Airlines, Great Lakes Airlines to Suspend Air Service at Devils Lake and Jamestown, North Dakota; Fort Dodge and Mason City, Iowa; Ironwood, Michigan; and Thief River Falls, Minnesota, Press Release, January 27, 2014.

26 Air Line Pilots Association, International (“ALPA”), ALPA Refutes Myth of U.S. Pilot Shortage, Urges Congress to Enact Pro-Aviation Policies, Press Release No. 14.10, February 4, 2014, available athttp://www.alpa.org/Portals/Alpa/PressRoom/PressReleases/2014/2-4-14_14.10.htm. However, the US Airline Pilots Association, which represents pilots at US Airways, claims that there is a pilot shortage. Linda Loyd, U.S. Airlines Facing Pilot Shortage, Philadelphia Inquirer, February 3, 2014, available athttp://articles.philly.com/2014-02-03/business/46927543_1_us-airline-pilots-association-commercial-pilots-two-pilots.

27Id.; ALPA, GAO Report on Pilot Availability Confirms that It's All About the Money, Press Release, February 28, 2014, available athttp://www.alpa.org/portals/alpa/pressroom/pressreleases/2014/ALPA-statement-GAO-report-pilot-shortage.pdf.

28Aviation Workforce: Current and Future Availability of Airline Pilots, supranote 21 at 4-5.

29 In a study conducted by the University of North Dakota, for example, it was determined through analysis that individuals considering a pilot career base their decision on a risk-reward paradigm. Higgins, supranote 18, at 19.

30Aviation Workforce: Current and Future Availability of Airline Pilots, supra note 21, at 11-15; GAO Report Uncertain on Possible Shortage of Pilots; Regional Carriers Face Greater Risk (41 DER A-9, 3/3/14 )

31Id. at 44-46.

32 For example, Air Canada's regional subsidiary, operates under such an agreement. Under the agreement, Air Canada is responsible for pricing and network planning for the aircraft and their routes. Jazz receives payment based on the flights that it completes, and can focus on completion rates, on-time performance and controlling its costs. Gregory Polek, Air Canada Jazz Adopts Fee-per-departure Model, AIN Online, May 6, 2008, available athttp://www.ainonline.com/aviation-news/aviation-international-news/2008-05-06/air-canada-jazz-adopts-fee-departure-model.

33 Some agreements include additional monetary incentives for the regional airline partner, such as for on-time performance. See Id.

34 FAA, Pilot Certification and Qualification Requirements for Air Carrier Operations Final Rule, Federal Register, Vol. 78, No. 135, 42358 (July 15, 2013), available athttps://www.federalregister.gov/articles/2013/07/15/2013-16849/pilot-certification-and-qualification-requirements-for-air-carrier-operations.

35 In addition, maintenance and upkeep expenditures on aging smaller regional jets that seat up to fifty passengers now often exceed the total cost that many regional carriers can incur in fulfilling contractual obligations to their major airline partner and still net a profit. Some regional carriers have approached those partners to rework the negotiated rates paid per departure called for under their agreements, with varying success. Requests to further increase those rates to account for a change in pilot or labor costs may further complicate the situation. For more, see Viable Business Models Continue to Evade US Regional Airlines, Centre for Aviation, March 13, 2012, available athttp://centreforaviation.com/analysis/viable-business-models-continue-to-evade-us-regional-airlines-69746.

36 Andrea Ahles, American Warns Pilots it Will Move Larger Regional Jets Away From Eagle, Star Telegram, February 20, 2014, available athttp://www.star-telegram.com/2014/02/20/5587736/american-warns-pilots-it-will.html.

37 Terry Maxon, Analyst: Republic Airways May Pick Up Jets from American Eagle, Dallas News, February 21, 2014, available athttp://www.dallasnews.com/business/airline-industry/20140221-analyst-republic-airways-may-pick-up-jets-from-american-eagle.ece.

38 Terry Maxon, Republic CEO: We Haven't Talked to American Airlines About Getting More Jets, Dallas News, February 27, 2014, available athttp://aviationblog.dallasnews.com/2014/02/republic-ceo-we-havent-talked-to-american-airlines-about-getting-more-jets.html/.

39 On March 7, 2014, union leadership of the pilots at American Eagle decided to allow the carrier's pilots to weigh in on the proposed contract through a vote. Terry Maxon, American Eagle Pilots to Get a Chance to Vote on Contract After All, Dallas News, March 7, 2014, available athttp://aviationblog.dallasnews.com/2014/03/american-eagle-pilots-to-get-chance-to-vote-on-contract-after-all.html/.

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