Today, it is more expensive than ever to train for a career as an airline pilot. At the same time, major airlines are about to be hit with a flood of pilot retirements as pilots reach the federally mandated retirement age of 65. To make matters worse, starting pay at regional airlines -- where most new pilots break into the industry -- remains quite low.
Over the past few years, this has resulted in a growing pilot shortage. The pilot shortage has already claimed several victims, most notably Republic Airways -- the second-largest regional airline in the U.S. -- which was forced into bankruptcy earlier this year.
Last week, American Airlines (NASDAQ:AAL) returned to a tried-and-true strategy to scrounge up more pilots for its regional carriers: big signing bonuses. Delta Air Lines (NYSE:DAL) and United Continental (NYSE:UAL) are taking a different approach, though. They are trying to reduce regional flying as much as possible.
Bigger bonuses than ever
In the past few years, as regional airlines have had more trouble recruiting new pilots, most have turned to signing bonuses to meet their hiring quotas. For example, in early 2015, nearly every regional airline was offering a signing bonus of at least $7,500, with many offering $10,000-$12,000.
American Airlines is now upping the ante at its three wholly owned regional airlines: Envoy, Piedmont Airlines, and PSA Airlines. Last Monday, all three announced enhanced pilot signing bonuses. They will now pay $15,000 to new hires. PSA and Piedmont are also offering $5,000 referral bonuses to current pilots who recruit new pilots for the company.
Envoy, PSA, and Piedmont also emphasize that they offer a direct pathway to becoming a pilot at American Airlines -- where pay rates are much higher. They have also rolled out retention bonuses of up to $20,000 to give current first officers an added incentive to stick around.
American's regional affiliates are spending freely on bonuses because they have to recruit pilots to support planned growth in addition to replacing those who leave (or move up to the mainline carrier). American Airlines currently plans to increase its regional fleet by 26 airplanes this year, including third-party regional airlines it contracts with. It grew its regional fleet at a similar rate last year, with its wholly owned regional carriers supplying the growth.
Delta and United go in a different direction
Delta Air Lines and United Continental have adopted a radically different strategy to address the growing pilot shortage. They are simply reducing the size of their regional fleets on a permanent basis.
Delta was quick to recognize the looming pilot crisis a few years ago. It started adding smaller 110-seat aircraft to its mainline fleet in 2013 while retiring most of the 50-seat jets in its regional fleet.
Delta is continuing down this path, having ordered 75 CS100 jets in late April. These jets, which will also hold about 110 seats, will allow Delta to continue retiring 50-seat jets over the next few years.
Meanwhile, United Continental has also been snapping up small mainline jets this year. It's part of a new plan for the company to shrink its 50-seat regional jet fleet to fewer than 100 planes by the end of 2019, down from more than 250 at the beginning of this year.
Of course, Delta Air Lines and United Continental will have to increase their mainline hiring to staff these new jets in addition to replacing retiring pilots. However, since they offer much better pay than regional airlines (and also compared to most low-cost carriers), they will have no trouble filling their open pilot positions for the foreseeable future.
Furthermore, a small mainline jet requires two pilots, just like a 50-seat regional jet. The move toward fewer departures on larger planes reduces the industry's pilot hiring needs, making the pilot shortage a little less severe.
Delta and United are reducing their risk
The approach taken by Delta and United seems more prudent than the route American Airlines is taking. By proactively reducing their regional fleets, they will be better able to handle any worsening of the pilot shortage.
There are certainly advantages to American Airlines' approach. With a big regional fleet, it can offer frequent flights to its hubs, even in relatively small cities. However, if the regional airline pilot pipeline dries up in the next few years, American could be forced to change its fleet plan in a big hurry.
Adam Levine-Weinberg owns shares of United Continental Holdings and is long January 2017 $40 calls on Delta Air Lines and long January 2017 $30 calls on American Airlines Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.