Airline Mergers: A Solution To The Pilot Shortage?

With the recently announced mergers of Spirit and Frontier Airlines, one might ask the question: who is going to benefit the most from this merger, is it the customers, the employees, or the airlines themselves? As with any public company merger, the law prohibits any disclosure of the merger proceedings prior to it being finalized. Therefore employees and the public alike learned about this merger only recently after everything was completed. Observers and industry experts have been considering if this is an effort for these two airlines to deal with the current pilot shortage, are wondering if it is, and trying to figure out what effects of the pilot shortage this merger is aiming to reduce or eliminate.

In this article, we will take a look at the reasons why airlines may want to merge, particularly given the set of circumstances in the economic and socio-political environment we find ourselves in today. We’ll take a look at the notion that this might be a way to solve the pilot shortage, at least for the Airlines involved in the merger. We’ll also take a look at some additional factors relating to the airlines, pilots – and by extension flight crew – as well as the traveling public, – the customers of these airlines.

Key Takeaways

• • • There are a few reasons why airlines would want to merge. Primarily mergers are executed around an economic need for survival by one or all parties involved.
    • Mergers today in the current economic environment may be primarily as a result of airlines trying to survive economically and to deal with, all beat in a temporary way, the pilot shortage at an individual airline level.
    • One might believe that the merger of these two airlines could help with the overall pilot shortage, this might not be so.
    • Flight schools in power training institutions might be concerned about the merger of airlines, but should they be concerned?

Airline Mergers

Airline mergers are nothing new. Since the airline industry was deregulated In 1978 as an effect of the Airline Deregulation Act, airlines have found it expedient to merge together for many different reasons. In the past airlines merged to increase the economics of scale, reduce competition, take advantage of newly opened routes, and sometimes downright hostile takeovers for control of a particular airline. Therefore, airlines have had a long history of mergers and divestitures – splitting of smaller units of an airline and selling it off to another company.

Now, why would airlines want to merge today? What is the set of economical and socio-political conditions that would make it prudent for an airline to want to merge with another one? The answers to these questions are numerous, however, there are some key underlying reasons that would be somewhat homogeneous across the board for why airlines in today’s economic and socio-political condition want to merge.

It is worth noting here that, unlike the late 20th century, since the beginning of the 21st-century airlines have primarily done mergers to cope with significant economic challenges. These economic challenges could be brought on by many different factors. In 2001 it was the 9/11 attacks. From 2008 through 2013 it was a great recession. Today mergers could be triggered by the economic and social-political fallout from the effects of the global pandemic. Something to keep in mind, however, airlines even in good times have generally faced difficult financial times. So much so, that since the deregulation of the airline industry in 1978 there’s only one airline on record to have made a profit – no matter how small –  every single year since then. That airline is Southwest Airline.

Why Merge Now

It is worth noting that the airlines that are being merged today are low-cost budget carriers. But the carriers generally operate on much thinner margins than the major airlines. Therefore, they are adversely affected to a greater degree by any checks in the industry than that of the major airlines. Nonetheless, one should not be surprised if a major airline decides to merge as well. In fact, most of the high-profile airline mergers have been with major airlines, American Airlines and US Airways in 2013, United Airlines and Continental Airlines in 2010, and Delta Airlines and Northwest Airlines in 2010, for example. Here are some of the reasons for mergers in the past that are brought on by negative economic conditions.

• Economics of scale – Most of the reasons for an airline’s merger could be linked back in some form to scale economies. What this means is The airline has the ability to cope with many factors that could be affecting its smooth and profitable operations. When an airline merges with another the combined entity can sometimes be twice as large, this means that significant economies of scale can be derived from the overall cost of operations which the airline can then use to either pull its way out of a negative economic situation or pass the savings on to the paying customer. Note, however, that generally, it is the former that is done.
• Job preservation – For political reasons it may not be prudent to have a failing airline go under and lose thousands of jobs. Therefore, whether or not it’s supported by the federal or local government, Airlines might find it to be a better political move to merge with another airline and be able to keep the jobs from the more troubled, or in some cases both if they’re in equal economic conditions, from being lost.
• Shareholder equity preservation – If a company is failing, rather than liquidating its assets through a bankruptcy filing and paying off the creditors and shareholders, one thing that a company can do is merge with another company and essentially sell its assets to the company through the merger. This will not seem as if they’re selling the company but rather it would be a merger. Nonetheless, current shareholders and creditors would be compensated for the failing company, generally with new notes or stocks in the new company that came out of the merger. In essence, they are still selling the assets of the company but shareholders and creditors are paid notes (bonds) or stocks in either the new company that’s formed or the dominant company in the merger.
• Asset acquisition– If an airline is failing, then another airline might find it prudent to acquire the assets of that failing airline. In the main, it may not be presented as such. It may just be presented as a merger between two airlines. However, what would be happening in this scenario is that one airline is failing and the other one is taking the advantage of acquiring its assets into its business, with the idea of using the additional routes, employees, and physical assets to expand and grow the acquirer’s business.

Mergers and the Pilot Shortage

One might think that one airline merging with another is a way of dealing with the pilot shortage, even if it’s just for the merged airlines. In talking about the pilot shortage, one needs to first clarify who will benefit from mitigating the effects of a pilot shortage in this manner. It is very clear that the airlines would benefit from economies of scale, and a fusion of resources and personnel to include pilots, and that would help the airlines themselves especially if they’ve decided to reduce some routes in the process which further allow them to utilize all resources more effectively. Even if the airlines do not decide to reduce their overall operations, a scale economy would help them to use resources and personnel more efficiently. Does this, however, help with the pilot shortage from the pilot’s perspective? We think not. While economies of scale may work for the airlines in their operations and its use of pilots, even with all things being equal and all pilots are retained, there is still on net balance of no increase in the pilot pool.

From the pilot shortage perspective, it would be as if one has 2 identical baskets of 10 apples, but is short 5 apples. They then got a bigger basket and placed all the apples in one basket. In effect, They still have a total of 20 apples but are still short 5 apples. Say, however, that in the process of transferring apples, two get lost, Then on net balance, they are now short 7 apples. In the previous allegory, even if a merger goes perfectly well with no job loss it does not mean there will be any reduction in the shortage of pilots. In fact, if the merger does not go well and pilots decide that they would rather leave the industry than reduce their seniority, then on net balance they’ll be an increase in the shortage of pilots.

Below will take a look at some of the general factors of a merger as it relates to employees in-flight crew, with specific reference to pilots.

• Seniority – As an airline pilot most things revolve around seniority. Along with other things, seniority is based on the date and age one entered a specific airline. The challenge with seniority in a merger is that once a new company is formed from the merger practically all seniority is wiped out since you’re now dealing with a completely different entity or for at least a portion of the pilots themselves being transferred from one entity into another. This may cause some problems where a captain may become a first officer, and the first officer could become a captain. Needless to say, there is a lot of working out that needs to be done to ensure that this process goes through smoothly. Nonetheless, there will be some dissatisfaction about ranking. This might be slightly less pronounced for regional airlines since many of the pilots there are transitioning to the majors.
• The fusion of cultures – The airline operates under specific operating procedures and its common operating certificate as stipulated by the FAA and specific to each Airline. These two things in themselves play a major role in a specific airline’s culture. That means since no two airlines have the same common operating certificate, coupled with their respective unique procedures, All airlines have distinctive cultures. Putting these distinctive cultures together can be a tremendous challenge. Notwithstanding all of the other factors that must go into a merger that also affects culture.
• No job gain or loss on net balance – In most mergers of airlines especially with union effective involvement, all jobs will be preserved. That means that there may not be any job losses or gains on net balance.
• General business as usual – With the exception of cultural challenges and merging management structures and employee practices, if a merger between two airlines is well done, then it should be business as usual. The roots that were being flown before will still be flown and passenger travel should not be affected. In the somewhat rare incident where there is a dispute that cannot be resolved between the parties, then there could be disruptions. However, this is slightly rare these days as there are too many interest groups involved ensuring that all parties and processes are strictly followed to ensure that it remains business as usual as much as possible, even though all parties may have to compromise in some way.

It is worth noting here that not all mergers go smoothly where cultures are fused and jobs are preserved in their entirety. In the event that some pilots are unable to acclimate to the new company, they may leave for another company. The problem with this is that pilots are fearful of leaving one company for another because they would lose their seniority, and therefore opt to stay. In the event that the merger does not go well and jobs are lost then in the aggregate, the industry would absorb these jobs because the demand is there, while at the same time not affecting the overall pilot shortage. That is because the job that was lost at this particular airline did not necessarily add any new jobs to the market itself.

What Does This Mean For Flight Schools?

One might ask, should flight schools be worried about the merger of Airlines? We would answer no, to this question. Whenever there have been mergers in the past it has not affected the overall pilot training segment in any noticeable way. As stated before, on net balance in the overall industry a merger does not affect the demand for pilots, Which is the largest driving force for flight schools and their business. Once more, while the merger of two airlines means some positive outcome for the individual airlines – notwithstanding the pilots themselves – this will not have a noticeable effect on the entire industry itself.

While the aforementioned holds true, There are a few key areas that flight schools would want to pay attention to during the merger of airlines in the industry. While these are not significant enough to create a pilot training segment-wide disruption they are worth noting for the individual flight school.

• Specific partnership with merged airlines – Many flight schools are “partnered” with regional airlines, and in some cases with budget carriers such as Spirit and Frontier. What these partnerships mean is that A respective school can keep a direct relationship with the recruiting arm of the specific airline And provide somewhat of a pipeline of pilots. It is worth noting that this is not a true partnership since the airlines tend to partner with any school that can promise pilots into the pipeline. In fact, the airlines actually invest nothing in the partnership but to receive those who are interested and provide regular recruitment services that they would have to provide without a partnership.
• A reduction in the merged airlines’ demand for pilots – Due to scaled economies, airlines that emerged are more likely to find themselves with a slight surplus in pilots. Well, this surplus as mentioned before is not across the entire industry, nonetheless, it still exists within the New entity, albeit temporary. What this means for a flight school is that if they’re working with an airline that had demand for pilots and a need for influx into the pipeline, after a merger the school could find That the respective airline is not as eager to receive new pilots into their pipeline at the moment. As stated in the article “Discrepancies: Pilot Training vs Professional Pilot Careers”, each year only a fraction of the approximately 50,000 new student pilots make it through the pipeline of approximately three years of training into professional pilot careers. The forward-looking airline will know that this is only temporary for them and that they will still need to keep the pipeline filled. So, This is also something that flight schools should not be majorly concerned about.
• Ubiquitous partnership – As stated in the article “Airlines And Pilot Training Academies”, partnerships between flight schools and regional airlines are so ubiquitous that every flight school that starts can claim that they have a partnership with some regional airline. The airline partner for a respective school has entered into a merger, and the school believes that the supply to the pipeline may not be needed at the moment, the school can easily find another airline to partner with. In fact, the ease at which a school can find airlines to “partner” with, making the problem of losing a partner through a merger, not a big deal

In sum, flight schools should not be worried about airline mergers, as the net effect of the mergers of airlines on flight schools operations and their ability to place their ballot candidates into jobs after training is practically nonexistent. Therefore, when there are talks about mergers or acquisitions between airlines, given the current economic, and socio-political environment in the Aviation industry, these activities will not affect the demand for pilots in the aggregate. It is the aggregate demand for pilots that flight schools need to be worried about.

A merger of two airlines is serious business, for the specific airlines involved and their local ecosystem to include suppliers, customers, employees, and other stakeholders. On the whole, it is not a major issue for the overall aviation industry as the factors outside of that merger are generally strong enough to keep the entire industry on the path and condition it was, prior to the respective merger. No doubt individuals directly associated with the airlines may be affected adversely by a merger, as well as some may be affected positively. This article tried to lay out the argument that a merger between two airlines will not affect the overall industry structure, nor prevailing industry conditions vis-à-vis the pilot shortage. The industry-wide activities that are being undertaken to curb the pilot shortage or to take advantage of the same will continue because the pilot shortage will continue.

Thank you for reading this week’s On Aviation™ full article. Do you think airline mergers are overall good for the industry? Please share your thoughts in the comments below.

Orlando – On Aviation™