Did we reach the next phase of the pilot shortage?

[goingnowherefast]

Flying is expensive because of aviation fuel tax and airplane liabity insurance. Government thinks flying is for the rich, so tax the shit out of the fuel. Carbon tax too!
Engine overhaul cost is $15/hr.
Oil costs double or triple the automotive equivilant. 15w50 conventional auto oil is cheap. Airplane stuff is not. Plus you change airplane oil every 50 hours, not 150+ in a car.
How much do those simple parts cost to make, for example, a plexi sheet for a side window. What does it cost now that it's an airplane part?

It will never change and pilot labour will always be the easiest controllable variable.

[Diadem]

Because for $125 the school can employ five instructors at $25/hr, and earn 5*$75=$375/hour.
Alternatively for the same outlay, they can employ one instructor at $125/hr, and earn... how much do think the flight school owner would expect? $200/hr? What a great business decision.

Your movie example is irrelevant. The movie studio amortizes the star’s fixed salary over the cost of many tickets. They’re not selling him or her at an hourly rate. A better example would be that star’s agent. When the studio doubles the star’s fee, the agent takes the same percentage, double the amount. Not the same fee because the agent only had to do the same amount of work.

Business works on profit as a percentage of turnover. If you know better, go right ahead and show the world how wrong it is. But ask yourself, how many flight schools are currently following your advice?

Have you not followed the premise of this whole thread? No one wants to instruct for $25/hr, so we're running out of instructors. Of course a school is going to pay as little as possible, and they'll pay that if they can find people who will accept that rate. But the point is that no one is sticking around at that rate, so wages must go up. Also, since the instructor fee is paid directly by the student, it doesn't matter how many instructors the school employs; they're paid depending on whether they fly, so it's pure profit for the school. The margins on instructor wages don't matter, because it doesn't cost them anything to employ the instructors beyond having a CFI, which is a fixed cost. If schools start charging $445/hr for instructors, then either the market can bear the rate, in which case the school should have been charging that much in the first place, or people will refuse to pay and the school will lose all its customers. Tripling your rate instead of adding the raise onto the existing rate just to try to increase your profit margin is a terrible business decision no matter how you try to frame it. We're talking about schools barely staying in operation because they don't have enough staff, so trying to profit on that shortage is idiotic.
Let's go back to the minimum wage increase. If you owned a business, let's say a fast food franchise, and your wages automatically increased from $10/hr to $15, would you add 1/3 to the price of all the items on your menu? You have to pay the higher wage to stay in business, and if you refuse you'll have to shut down, so this isn't a matter of profitability, it's a matter of survival; if you add 1/3 to the price of every item, and your neighbour adds just a few cents, just enough to cover the wage increase while maintaining the same amount of profit, then why would anyone eat in your restaurant? All other costs are equal, and you can maintain the same absolute amount of profit by adding a small amount to the cost, or you can get greedy and try to add 1/3 to your profit margin, but you'll drive all the customers away.
It really seems like you're failing to grasp that this is a matter of keeping the doors open, and not rapacious owners rubbing their hands together thinking "Yes, now I can make 3 times as much money!"

[photofly]

Gosh what a lot of words. First, your analysis of my arithmetic is wrong. I’m not raising the price by the factor that wages are increasing (x5, in our example: $25/hr to $125/hr) - I’m raising prices just enough so my margin doesn’t slide due to increased supply costs.

And, there’s absolutely nothing rapacious about it. (Although it’s interesting you think of that, in order to refute it.) It’s not about making 3x the money. It’s about not making less money for the same outlay and effort.

When I go to the bank to borrow money for my business, or sell shares, or frankly engage in any comparison of my business with others, like as you say running a burger joint, I and my investors want to know what their return on investment is.

If my profit is 8% of turnover, then I can borrow money, or sell shares, or whatever. If my profit is 6% of turnover I can’t. My investors will go and put their money in a burger bar where the margin is 7.9%. Unlike you, money isn’t wedded to the flight training business, it goes where the margins are best.

And yes, if I sell burgers and my staffing costs go up 20%, then yes you bet my burger prices go up to maintain my margins. Otherwise my bank gets on my case, and my investors walk.

https://www.investopedia.com/terms/o/op ... margin.asp

A company’s operating margin often determines how well the company can satisfy creditors and create value for shareholders by generating operating cash flow. A healthy operating margin is also required for a company to be able to pay for its fixed costs, such as interest on debt, so a high margin means that a company has less financial risk than a company with a low margin

Apple made $39B profit on revenue of $183B. Exxon made $33B on $369B. AAPL market cap $903B, XOM $308B, despite their similar profitability. Apple is worth three times more than Exxon not because it made more money but because it’s margins are so high.

I take the point that this environment may result in margins getting squeezed. That’s an undesirable outcome, and makes the whole flight training industry less stable, less able to attract investment, and one step close to shutting shop entirely. That’s not a good thing.

Oh - and your argument about your competitors increasing their prices less and stealing your business is bogus too. If they were happier to operate on lower margins than they (and you) do today, they would already have lowered their prices relative to yours, and they’d already be getting the benefits. There’s no need to wait for you to raise your prices just so they can raise theirs by less.

[fly2017]

If a flight school increases instructor pay to retain/hire, so as not to turn away students at the door(for students who can absorb the higher rates), the increase in revenue at a lower margin can still mean greater profit at the end of the day. (once a certain threshold of revenue is reached)

$500,000@ 8% = $40,000
$750,000 @ 6% = $45,000

[jg24]

Flying is expensive because of aviation fuel tax and airplane liabity insurance. Government thinks flying is for the rich, so tax the shit out of the fuel. Carbon tax too!
Engine overhaul cost is $15/hr.
Oil costs double or triple the automotive equivilant. 15w50 conventional auto oil is cheap. Airplane stuff is not. Plus you change airplane oil every 50 hours, not 150+ in a car.
How much do those simple parts cost to make, for example, a plexi sheet for a side window. What does it cost now that it's an airplane part?

It will never change and pilot labour will always be the easiest controllable variable.

Exactly. All other factors in operating a flight school, or small charter/703 operation are expensive. Renting a building, TC and other DOT fees, commercial fees for operating a business, taxes, maintenance, parts, fuel, landing fees, utility bills, supplies..... bladi-bladi-bla.... The one resource they don't need to worry about upkeeping is the pilots/instructors. They pay them whatever and the job is done. And that is where the profit is made. From the percentage they take from the pilot costs. Otherwise there is zero to very little profit in all the other factors.

[photofly]

If a flight school increases instructor pay to retain/hire, so as not to turn away students at the door(for students who can absorb the higher rates), the increase in revenue at a lower margin can still mean greater profit at the end of the day. (once a certain threshold of revenue is reached)

$500,000@ 8% = $40,000
$750,000 @ 6% = $45,000

They could do that today.

But look at the gearing that your figures need:

To get just an extra $5,000, the school has to increase its revenue by a whopping 50% - which would have to be generated with a 2% increase in price. Do you think that’s feasible?


The real answer is that an instructor shortage is just like a shortage of widgeterium. That is, the price of widgets has to rise to slow demand. In this case, airline ticket prices have to go up so fewer people want to fly and we have fewer airplanes that need pilots.

[mbav8r]

[quote=fly2017 post_id=<a href="tel:1033875">1033875</a> time=<a href="tel:1521258867">1521258867</a> user_id=57012]
If a flight school increases instructor pay to retain/hire, so as not to turn away students at the door(for students who can absorb the higher rates), the increase in revenue at a lower margin can still mean greater profit at the end of the day. (once a certain threshold of revenue is reached)

$500,000@ 8% = $40,000
$750,000 @ 6% = $45,000

They could do that today.

But look at the gearing that your figures need:

To get just an extra $5,000, the school has to increase its revenue by a whopping 50% - which would have to be generated with a 2% increase in price. Do you think that’s feasible?


The real answer is that an instructor shortage is just like a shortage of widgeterium. That is, the price of widgets has to rise to slow demand. In this case, airline ticket prices have to go up so fewer people want to fly and we have fewer airplanes that need pilots.
[/quote]
Or they upgauge and reduce frequency so that two pilots fly twice as many passengers, there are always other solutions. If FTUs want to keep their margins and the market can’t bear it, that’s fine by me, less new pilots means a greater shortage which will drive up wages for the existing.
Maybe the plan is to create a crisis so the government steps in with funding and allows the schools to keep their margins, could work but I don’t think I’d bet my business on the current government stepping in.

[photofly]

Personally I think we’ll see single pilot transport operations sooner rather than later.

less new pilots

Fewer, not less.

[JohnnyHotRocks]

Personally I think we’ll see single pilot transport operations sooner rather than later.

I agree. And then the pilot shortage will be over!

[mixturerich]

Personally I think we’ll see single pilot transport operations sooner rather than later.

I respectfully disagree...the first thing we would see is more and more 250hr pilots in the right seat. It’d still be better to have an experienced captain plus a cadet than a single pilot altogether.

Looking at the growing lack of instructors and the massive global need for pilots forecasted the next 10+ years, I suppose we’re gonna see the industry reach some kind of balance between low experience and cancellation/reduction of flights. Just my 2 cents though.

[Zaibatsu]

Personally I think we’ll see single pilot transport operations sooner rather than later.

less new pilots

Fewer, not less.

We'll have liquid pilots in the future.

[CanadianPilotQc]

well the hiring in the regionals slowed down a little at least compared to last year. we'll see.

[Diadem]

If my profit is 8% of turnover, then I can borrow money, or sell shares, or whatever. If my profit is 6% of turnover I can’t. My investors will go and put their money in a burger bar where the margin is 7.9%. Unlike you, money isn’t wedded to the flight training business, it goes where the margins are best.

How many flight schools are publically traded, or have investors of any kind? The mom-and-pop schools aren't run by people who are concerned how the margins are going to affect the IPO; they just want to take home enough profit to pay their mortgages and buy groceries.
Let's throw some actual numbers at this, completely off the top of my head. Let's say rent is $2000/month, insurance is $1000/month, the local MRO gives a flat rate of $2000/month, and utilities, coffee, and miscellaneous expenses are $1000/month, for a total cost of $6000. Instructors are only paid if they fly, which means the school also makes money when they're working, so there's no overhead for employees who aren't productive. The instructor fee is $50/hr, half of which goes to the school, and rentals are $150/hr. If the fleet flies 100 hours/month solo and 50 hours/month dual, this gives a revenue of $25000. Take out the instructor pay and the fixed costs, and profits are $17750, giving a margin of 71%.
Now, demand for pilots has gone up, and no one is willing to instruct for $25/hr anymore when they can go to Jazz. If the school doesn't raise wages, they will lose the majority of their revenue. The only rentals will be done by licenced pilots, who tend to perform a very small amount of the flying at any school, and it's unlikely it would even be enough to cover their costs. So the school has no choice but to raise wages if they want to keep the doors open. If they increase the instructor fee to $125 and continue taking their $25 cut, they can retain enough instructors to stay in operation, and for argument's sake let's say they're flying the same number of hours per month. The revenue increases to $28750, the costs increase to $11000, and, critically, the actual amount of money taken home by the owner remains the same at $17750. Now, the CFOs of those schools listed on the NYSE might be concerned that the margin drops to 62%, but most owners don't care about maintaining an arbitrary margin to please investors, because they don't have investors.
What if the owner does what you're saying, and raises the fee sufficiently to keep that 71% margin? The instructor fee has to go up to $300, and if all else is equal then revenue will increase to $37500, costs won't change, and the absolute amount of profit goes up to $26500. Of course, the big thing that you're missing is that it won't all be equal; even a single penny increase in rates will cause a decrease in the number of customers. The greater the increase in rates, the greater the loss of customers, so if the owner increased the fee to $125 there probably wouldn't still be 150 hours/month of flying; it might drop to somewhere around 125 or so, but at least the school would still be in operation. If the owner increased the rate from $50 to $300, the number of students would plummet, and let's say the amount of flying each month would drop to 25 hours each of dual and solo. That gives revenues of $15000, costs of $8500 including wages, and profits of $6500 with a margin of 43%. In your zeal to maintain your margin, you've actually reduced both the amount of money that you'll take home, and your profit margin, because you failed to factor in that any increase beyond that needed to cover the increased wages will cause ever-diminishing revenues. There's no possible way that you'll keep the same amount of business by increasing your fee six-fold, so you can't possibly maintain that margin.
If you increased your fee to $300, and the school next door only increased theirs to $125, where do you think your students will go? You may actually end up causing their business to increase by driving your customers to them. If you don't increase your fee because you don't want to hurt your precious margins, then either you won't have any instructors and you won't be in business, or you'll end up paying out of your profits to retain them, which defeats the purpose.

In this case, airline ticket prices have to go up so fewer people want to fly and we have fewer airplanes that need pilots.

That's going to take a while, and in the meantime schools are faced with the immediate need to retain instructors. If they wait until demand for airline tickets decreases, they're going to be out of business.

[photofly]

profits are $17750, giving a margin of 71%.

I don’t think one needs to read any further.

[Diadem]

I don’t think one needs to read any further.

The actual numbers don't matter. Make your own model if you don't like it, because I'd love to see how you intend to increase a fee multiple times and not drive off so much business that you end up losing money. Hell, why don't you present your proposal to a few flight schools and see how well it's received.

[photofly]

I don’t need to. I already know how well the whole $125/hr primary instructor thing will go down. Like a brick. Which is my point.

[Diadem]

I don’t need to. I already know how well the whole $125/hr primary instructor thing will go down. Like a brick. Which is my point.

Okay, then what do you propose be done to retain instructors who aren't willing to work for $25/hr?

[photofly]

I don’t need to. I already know how well the whole $125/hr primary instructor thing will go down. Like a brick. Which is my point.

Okay, then what do you propose be done to retain instructors who aren't willing to work for $25/hr?

The problem isn’t that instructors won’t hang around; the problem is that we can’t train enough pilots.

I’d scrap most or all of the government regulation surrounding flight training and FTU’s, and let market forces do the rest.

[Diadem]

The problem isn’t that instructors won’t hang around; the problem is that we can’t train enough pilots.

I’d scrap most or all of the government regulation surrounding flight training and FTU’s, and let market forces do the rest.

Oh my god... Are you being intentionally obtuse? Why can't we train enough pilots? Because the schools don't have enough instructors! Why don't they gave enough instructors? Because they'd rather go to Jazz than make $25/hr. The market solution is to pay them more. Eventually we'll run out of class 1s, and someday there won't be anyone to train the next generation of pilots.

[Big Pistons Forever]

I personally don’t think it matters how much you pay. Most instructors want to go to the airlines. Double the pay and they are still going to leave as soon as they get an interview because the sooner they get on the better seniority number they will have. I think Industry has to take some responsibility for the supply of their pilots. A big step would be to hire instructors, give them a seniority number but set a guaranteed course date a year out so that they can stay instructing, ideally with a bonus at the end of that year.

Sponsored instructor ratings would also be a way for airlines to step up to the plate. If hiring keeps going at this rate the airlines are going to end up parking airplanes due to lack of crew, which is going to cost a lot more than investing in the increased supply of pilots.