CEO Panel Discussion: Session I, Regional Airline Business and Trends, 2022 RAA Leaders Conference

I'm excited for our first panel as much for the moderator as for the great CEOs that we have. Our moderator today is Alison Sider, she's a top aviation reporter with the Wall Street Journal. Ali has covered subjects including the Boeing 737 Max grounding, all the pandemic's effects on airlines, and the overall travel experience. She's covered the small community air service crisis very thoughtfully as well. She joined the Wall Street Journal in 2012. Thank you for joining us, Ali. Joining Ali are Tim Komberec, CEO of Empire Airlines, a regional cargo airline. Tim's been in aviation since 1971 and has logged over 13,000 hours as an airline pilot, check airman, and instructor. Empire Airlines has become the largest regional operator for FedEx, and Tim's been a steady force on RAA's executive committee. Russell 'Chip' Childs has been CEO of SkyWest since 2016. Chip's led SkyWest through tremendous evolution and growth under his leadership, and SkyWest was named one of Fortune's most admired companies. Rick Leach is CEO of GoJet, which he founded in 2005. Rick is a 40-year aviation veteran who built an airline from flying 1219C turbo props to a fleet with 171 RJs. His resume is deep, and we welcome his experience. John Sullivan is the founder and executive chairman of CommutAir. John has spent 45 years in the regional airline business with such historic carriers as Allegheny Commuter, US Air Express, Piedmont Commuter, and CEO of Brockway Air, and president of Burlington, Vermont's Air North. We're glad to welcome all of our panelists, and Ali, it's your panel.

Great, thanks so much, Faye. I guess to get started, I'll let you all maybe go around if each of you maybe want to take a minute and tell us kind of what the most pressing issues are on your agenda. I imagine there might be some overlap, but if maybe everyone wants to take a moment.

Pilots and mechanics. How much time you want to say it? Take to say the same thing. I think it's pilots and mechanics and meeting demand that's just off the charts.

I would obviously agree with that, and actually if Captain Obvious has a resume, we'll take it, we'll interview you. I'll take any chance to get a captain in the seat. But yeah, it's pilots, and it's actually for us it's captains. Trying to motivate the FOs to have a desire to upgrade, which is a perplexing situation that we never saw before. Historically, the pilot wants to progress up, get that PIC time, and move on to the major at some point in most cases. But there's a large group that just wants to stay in that FO seat, and now they're able to be hired at the medium and large carriers with those credentials.

Yeah, it's obviously labor workforce and mechanics in particular, but we're seeing shortages in dispatchers and all kinds of other support functions that you really need to operate your airline.

We're kind of unique. We're an all-freight carrier for FedEx, but we also own an MRO, Empire Aerospace, and we do aircraft conversions and heavy maintenance. It's nothing we have seen where contract houses have raided our mechanics to go do things for Boeing and so on and so forth to get the Maxes back in the air and stuff that has really added an additional burden on the maintenance side.

Well, you've sort of this is a good segue. So my first question, Rick, what are we, where are you seeing the bottleneck? Is it getting people in the front door, having trouble accumulating those hours? Is it attrition and holding on to folks? Is it captains? If any of you could talk a little bit about where you think the biggest issue is.

Well, first of all, it's switched a bit. In the beginning, the problem manifested itself in being able to get people off the street and into the profession. Now there's an additional logjam getting people from the left seat, I mean from the right seat to the left seat. So in some cases, we're just short of upgradable first officers, for example. And across the board, it's a difficult situation. Is there going to be some relief? Probably, but who knows when. There's a parade of retirements going through the majors that is one of the major causes of this shortage, and there's been various predictions about where the apex of that is. I've heard different answers. Back in 2017, I was told by a highly placed major airline executive that it was going to be over by 2020. Now they're saying there's going to be another four or five years. But anyway.

I think it's all of the things that you said in your question. All of those are part of it. They all create this large issue that we're dealing with. And what Chip just said about demand, it's those of us have been around, and all of us here have been around for decades in the business. I mean, we're geared towards trying to meet the challenges and the objectives of our major partners to fill that void where they want new opportunities, where they want more capacity, and we're unable to even come close to meeting what not only they deserve but the traveling public in the market is asking for. But I think the problem has migrated. Early on, it was getting people in the door because the cost of entry to become a first officer has skyrocketed in cost, where they thought, okay, I'm going to go invest a hundred, hundred fifty thousand dollars in becoming a pilot. I'm going to get to go to a great school, let's say like Embry-Riddle, and come out with 400 hours with a great structured training program, and I'm going to go get my job and sort of learn another even more highly structured training program at a regional and hone my skills and my profession. That all changed. Now you need to go invest another hundred thousand dollars, and then I think they had to think, what do I want to do? Re-evaluate my options in life and my career path. With the changes recently, the wages have gone up over the course of time, but here of late they've gone up quite significantly. I think even more than maybe Mark slides might have presented, but it truly is a profession where the return on investment is significant. So it is something that I think will entice people to come in, but that's a long path, it's a long runway to get them there. And during the pandemic, before the pandemic hit, we were all gearing up for summer traffic, so we were all at our classes were full, we were getting a lot of bringing a lot of people in, trying to get pilots on board. And then the pandemic hit, and we had all these pilots, and now they finished their training, but then they had to get their hours, but there were no hours to give them. So we've got these pilots that are sitting there saying, I want to remain a first officer, that are blocking the ability for the people that have been on the payroll for a year, year and a half, and they're not getting the hours they need because there's not enough captains to staff the aircraft. We're unable to staff an airline with two first officers on an aircraft, so we need those captains, and we need people to upgrade, we need there to be an enticement for them to upgrade. And right now, we're unable to get enough aircraft in the air to basically build the hours at the rate that we need, so we have more even upgradable first officers at the same time.

I mean, kind of right around the time the chance to upgrade, they're just being kind of picked off by another carrier. Where's that disconnect? Why aren't people upgrading?

I think we're losing first officers in most cases to other regionals, maybe where they're going to be able to get more hours because they're not maybe getting the hours at some of the carriers that they're with today. In some cases, or there's a new enticement for bonuses or wages or something like that, and they've got a way to go to build their time. I think on the captain side primarily, we're seeing a lot of people leaving and going to the majors. The majors are coming to lots of regionals and enticing them to come on board with them more quickly. So we're seeing a much higher turnover in the captain ranks than we historically had seen. And the first officer ranks, some will go to the majors or the mid-tier carriers, the LCCs, ULCCs, but most of those in some cases are even going to other regionals or private jets and things like that.

I'd like to comment on something that Tim commented on, which is really the lack of the ability to fund this expensive occupation and the need to be able to have affordable loans and access to federal funds for pilots to pay for flying. Flying airplanes, it's great to have a degree in an education, I believe in that, but flying an airplane is a trade. And we have plenty of young people out there, a lot of people that see this as an opportunity, probably for the first time in their family's history, to break kind of the poverty level and by becoming a pilot with really big upside to it, and they're unable to fund it. So I think that, because I agree with everything else that was said here, but I think that's a major issue that just has to be dealt with in this country.

Enjoyable impacts that we're seeing already. We've already talked today about small communities starting to lose service. Tim, we talked a little bit last week about some of the routes that you've got uncovered. Could you tell us a little bit about what that looks like?

Yes. We're at the point where we basically provide last mile service for FedEx. Small communities have overnight express service because we can fly a mirror in a Cessna Caravan and a Cessna 408 or an ATR. And if we can't fly those, then those packages get trucked or sent by some other means, and you can't get it there in the designated cutoff for an overnight. So if you're shipping vital supplies and blood and human tissues and all of the other things that these communities need to support their populace, if our service breaks down, they're not getting what they need. And of recent, we have been in a situation where we are selectively canceling routes ahead of time because of the lack of flight crews. And we have people coming into the pipeline, but not at the rate we need, not at the rate that they're leaving out the top. My pilots are just like anybody else's pilots. They look at other opportunities out there. Ours tends to be kind of a lifestyle because we tend to get the pilots home every night, and a lot of people like that. But with a shortage of flight crews, they end up working more, then they go, well, if I'm going to do this, I might as well go make twice the money that I'm making to go do it. So we are working diligently to break that cycle, but we're seeing the level of pilot candidates increased somewhat, but not nearly to the rate we need to see it for a long term.

I know in some cases this is a statistical out of a city isn't necessarily yours, but to the extent that you're having conversations with some of these small communities, what are you hearing from them?

Would you expect to see sort of new models develop, more public-private partnerships, or cities taking on more helping to recruit or maintain service? Or is that even viable given the...?

This has been evolutionary as well. In the beginning, there were more choices at each of the small and medium-sized communities. Now it's all directed at a major airline hub. So you may have had, for example, seven different routes that you could take out of Burlington, Vermont back 10, 15 years ago, and those slowly started to go away. Now the choices are you can go to a major hub and that's it. The evolution also has gone from lopping off small cities that were perhaps not as profitable to a situation where routes are being lopped off the system. There are very important routes that are between much larger cities that we would never consider eliminating in the past. Clearly, it's going to be a highest and best use in an environment like this, right? And that means that there's going to be winners and there's going to be losers. And it's unfortunate because a lot of us grew up in this business serving these communities, and not with a couple flights a day. In the turbo prop days, we'd have 17, 18, 20 flights a day to certain markets. So these are markets that are important to all of us in our evolution as well, in our careers and in our companies. So we hate to see what's happening, but it is out of necessity because of the shortages that exist. The other thing you asked about, what are some other byproducts of what's happened with the pilot shortage? One is to the community point that Chip was talking about. I think we need to make sure and we hope we motivate the communities and the Chambers of Commerce and other people that are within those communities that support the business entities to get more actively involved, to have more of a voice. So it's not just industry having this voice, but they are part of the fabric of our industry and the economic impact of our industry in the country. And we need them to actively be having their voice heard as well as to what's going on with the pilot shortage, what's going on with various things. But the other thing I've seen happen, and we've obviously as all of us 121 carriers and so forth have put together very good training programs to make sure that only the most qualified people get into our cockpits, okay? So we want to make sure that's the case. But what we did see was people would come out of these amazing training programs that they invested great deals of money in, them and Mom and Dad, and took out lots of loans to become pilots. And then they found out they had to go get another 700 to a thousand hours of training. Training is what even the lawmakers believe is happening, but it's just really poking holes in the sky. They're out there flying in uncontrolled airspace, they're out there learning or unlearning, I guess I should say, everything they were taught in this very good structured detailed program. And then they usually would come to a program like we all have that is going to test them even more and challenge them even more to make sure they're the most qualified they can be before they get awarded the seat in one of our aircraft. And some of those folks that came to us with 400 and 500 hours are leaders today in our industry. They're head management at a lot of the majors. They evolved that way. But today, we'd get those and they'd fly through our program, we'd test them hard, but they would overcome and they would produce and succeed. Failure rates went up because people unlearned all of the detailed training that they were given in that investment of those four or five years they were in college. And then when they came to us after going and just logging time, burning fuel, like I say poking holes in the sky, just a long time, every hour isn't created equal. And we need to realize that. We can take all the good that they came out of an Embry-Riddle, let's say, I keep using them as an example just because they're a really great program, but there are many others out there too. And then they'd come to us 700, a thousand hours later, and it was difficult for them to make it. Some didn't make it to the program. And these were people that, because they created bad habits, and that's a byproduct, an unintended consequence that's happened because our lawmakers believe that these people, and they've said this to me because we go meet with lawmakers a lot, all of us, but they're getting another thousand hours of training, that's good. But they're not getting a thousand hours of training. That is a falsehood. That is something that's a misunderstanding. This is not another thousand hours of training. Flying around in a low-priced aircraft poking holes in the sky is not the same as sitting in a simulator or being in a structured program that somebody has, that all of us have in our programs, and challenging these people. Those hours are worth multiples of that, many multiples. It's an unintended consequence, but it's having a real effect. We don't let them get into the cockpit just, you know, they don't make it through, they wash out. But that's painful too. We know they had a dream, and unfortunately that dream has been sidestepped.

We're bringing up a time. I know we don't have anyone from Republic on this panel, but obviously I'm curious what you made yesterday. I've seen the FAA reject Republic's petition for restricted ATP pathway at its Lift Academy. I don't know, does that tell you anything about how regulators are viewing this issue or how open they are to solutions? How are you thinking about that?

You guys have an application in for a charter certificate. Just curious if you see Part 135 as a solution or a potential pathway for folks to gain more hours or to produce more captains.

I wonder if we could talk about pilot pay. It was obviously throughout the summer, it's just been big news, big pay increases we're seeing at some of the regionals. How do you see your business model evolving to adapt to those rates? Can carriers remain economic and profitable paying some of these rates? And I guess, Tim, I'd be curious, you all had a deal with your pilots, and since then we've seen even higher raises at some other competitors. Do you see those rates sticking? How do you see that evolving?

Well, right now we're all in a bidding war for a finite pool of talent, and it's unfortunate. It's not a good business model for any of us. And the problem has to be solved. There's pressure that will come to bear on this problem. Pay is one element of that pressure, and as someone said a few minutes ago, over time that will attract more people into the industry. We have certain characteristics of the pilot workforce right now that need to be changed. One of them is there aren't enough women in the pilot workforce. That can be worked on, that can be changed. There aren't enough minorities in the pilot workforce. That can be worked on and can be changed. Pressure will come from cities being abandoned, routes being lopped off. Pressure will start to come from the hinterland, and it will be political pressure, and it will start to bear on Congress. And perhaps as a result of that, we'll have some more rational, fact-based discussions over this 1500 hour issue. So between trying to attract different groups into the profession and coupling that with the extra pay that's coming in, the majors will eventually decide that they're not getting enough connectivity anymore because of the inability of the regional airlines to staff those smaller aircraft. So there'll be political pressure, there'll be commercial pressure from the majors, and hopefully there will be some response to the vastly increased wage structure to attract more people from different categories into the profession.

How the economics of the business might change with these pay rates if they survive?

Well, we've been borrowing money a little bit this last year just to be prepared for this because of the evolution of getting to these rates. As well as making sure that it's a sustainable way to manage through these with our partners. From our perspective, I think that for us, these rates are deeply concerning. They're rates that we have not even been close to being used to relative to what we thought the markers were going to be even a couple of months ago. Nonetheless, it does give us a lot of opportunities if we can sustain it. So economically, that's an entirely different format for this, but I think from our perspective, we are a bit nervous about the race but are also confident that we've got some economic and strategic models in the long run to make sure that this works itself out.

I think if the rates do have a meaningful impact on turnover and stability within the carriers, that will have an impact. I think if we can start seeing our hours start to turn and go the other way, so we're building hours and adding hours to our schedules instead of reducing hours every month, that will start to have an impact to help offset because we're becoming more productive. But we do have to find a way to manage in this new reality. I mean, ASM costs are going to go through the roof. These are regional sized aircraft somewhere between 50 and 76 seats, and in some cases payroll costs in some seats have doubled. And yet in some cases, an FO can make two and a half, three times the salary of an upgraded captain, and they're still not doing it. Why not? We got to figure that one out too. But the impact is significant. Obviously, we are all long-term players in this business, so we need to do... I never thought we would see rates at this level for regional aircraft. The sustainability, that story is yet to be written. But we need to see a recovery of the market and a recovery of our individual carriers and our production and the health in those kind of areas. And then I think we'll have to see. But it is significantly more than obviously any of us ever anticipated it would happen, and it's happened very, very quickly.

Unfortunately, this should not be a negotiating tactic, which has become. I mean, there is a pilot shortage. We need people to acknowledge that. And key players that are part of our industry, important parts, are believing there's not. It's the possible shortage or the supposed shortage. It's a real shortage, and it's having a real economic impact, and it's driving these rates because we need to maintain and sustain and to recruit. But I think the story has yet to be fully written. So for the smaller carriers, and especially in my instance, my worry is where does this end? I mean, I understand why this is going on. None of us like to see this solution, temporary solution by throwing, for lack of better word, throwing money at a problem. But is this round three, round four, round five? Your words are going to end, and it affects everybody else in the business because our pilots are no different than any others. They believe that they're flying equal sized airplanes and they are entitled to equal pay. They may be flying under totally different circumstances, they may have why totally less hours, but if you're a pilot, that's not really what you're looking at. You're looking at what can I do if I go over to SkyWest or what happens if I can go to Republic. And so my worry is there's more rounds in the future. I don't know the answer to that.

I wanted to see before we move on if there's any audience questions. There might be someone with a microphone or there might be a mic stand, but if anyone has any questions, this would be, we'd love to open it up. Okay, I've got more. So, Tim, on the passenger side, we've been talking about just huge demand, continued demand. Is that the same on the cargo side? We had FedEx come out last week and warn of some decline volumes. Where do you see the air cargo demands heading?

Well, there's a difference in the express business between volumes and flights. The issue is that if, especially on the regional side of the business, if even if the volume goes down and if FedEx still wants to have a product, they can still get the small communities from wherever, we still got to fly that flight. So I don't see that affecting too many of what would be regional flights. FedEx has given notice that they may be trimming, and I think most of that will probably be international type stuff, you know, China is still locked down, they still got a lot of issues in Europe and stuff. But on the other hand, I don't know what's in their head. I mean, we have to see. But during other downturns, we normally don't see a downturn in the flying, but it certainly puts economic pressure on the carriers, especially in a time when we have rising costs. And our carrier that we work for is struggling with less demand, so it can certainly affect us economically. I don't think it'll see mass groundings of airplanes for us.

If we're looking at the future, we're in a post-50-seat aircraft world. What does this industry look like? Is there something coming up behind? How do you think that will change things?

Well, if you look at this from the perspective of many, many decades, it's a cycle. And we've been through not the exact same type of cycle before, but we've been through cycles before. If you take this to the extreme, the shortage of pilots could lead to a complete lack of regional air service in the United States. Well, that's going to upset a lot of people, and hopefully, as I said before, it will lead to some rational discussions about what the solution should be. Remember, there used to be a couple of hundred of us 30 years ago running around flying mom and pop type of operations. Now there's a dozen or so. Before the pandemic hit, those dozen or so were flying 10 times as many passengers as the couple of hundred mom and pop operations were 30 years ago. So it was good business, and it can be good business again. But we have to go through this cycle, and enough people have to get upset about the loss of air service in small and medium-sized communities and lack of choices from all the communities and lack of frequency from all the communities to solve the problem. And I do think, and I'll end on an optimistic note, that there are opportunities coming because of the way this problem is manifesting itself. So take these communities that have already lost service and take the communities that are going to lose service over the next few years. And what do the airlines do in response to a shortage of pilots? They fly fewer flights in bigger aircraft. And so looking back over my shoulder, I see an opportunity coming down the pike that might allow us to go back and repeat what we did many, many years ago. And that would require new aircraft coming on line from the aircraft manufacturers. And they have a history of playing catch-up. Back in the 80s, we didn't have, or 70s, we didn't have proper aircraft to fly in the United States that were certified for use in the United States. And all of a sudden, a whole bunch of manufacturers popped up with a 30-seat aircraft. And so maybe that's going to happen again. Maybe those aircraft will be greener than what's available now. There'll be new technologies coming online. So I think that we're going to have an opportunity to revisit small community air service with smaller aircraft once again and do it in a way that's better environmentally, and it will restore the nation's air transportation system to what it was.

I'm the ultimate optimist, so I also ultimately have optimism about what the future holds. But we've got a big mountain to climb right now. And I think it was Tim that might have said in one of his comments about everybody sort of needs to get on the same page and sort of agree that there's a problem or try to cooperate and collaborate to solve these. And there's too much division still that's preventing us from making the progress we need. I think some of the solutions are there, science-based solutions. We have more data than we've ever had with some of the challenges we face today and how to overcome those, and they're not being listened to or they're not having the weight and attention placed on them that they should because of division among the perceptions that people have as to the challenges that the industry faces. So we need to get on the same page. But I believe there are opportunities. I believe there's always an evolution. I also believe the industry might look a bit different. We're going to have to evolve accordingly to address some of the fundamental and foundational changes that are taking place. We've done that before. We are an innovative industry. I think we will rise to the occasion. But I am optimistic, but we have a lot to get through. We've got to get everybody on board together to pull in the same direction, which hasn't happened yet.

I'd like to speak a little bit to the technology. Probably the first, and not counting small package individual drone deliveries, probably the first air freight in this country will be a feeder carrier operating an unmanned aircraft. And it will probably be an existing technology airplane that's been modified to fly unmanned. And there's a lot of people working on this technology. There's a lot of people working on electric technology, there's people working on hydrogen, all of these other things that are happening. But I do think that we recognize that the public is not going to step up and embrace flying an airplane without a pilot in it. But air freight, if we can work out all of the safety precautions and how to fly in an NAS and technology to make it reliable and safe and all of that, that we're going to see that probably sometime not too far in a distant future. And then who knows where it'll go for passenger? I don't know. I think there's technology that's leading toward reducing the number of required crew members in a cockpit. That is very doable. And whether it is acceptable and how the pilots react to it, how the unions react to it and all that stuff, that story is not written yet. But that's all coming.

I think we have just about one more minute. So I just want to quickly ask each of you, if things continue on as they are, we don't see big regulatory regime change, when do you see the industry working through this shortage of pilots that you're seeing? Is there kind of an end date, or is this how things will be indefinitely? Tell me it's tomorrow.

Thank you. I don't know whose crystal ball is clear. Well, the biggest factor is this bubble of retirement that's making its way through the majors. And it's anybody's guess when that's going to be over with. But the collective wisdom at the moment seems to be that it'll be less than five years. I'd take the over on that bet. I think it's going to last longer than five years without regulatory change for sure.

Well, I'll be retired I hope by then if it's 10 years. No, I believe obviously we all are working to do everything we can to try to make it better as soon as possible. Again, I think all of the stakeholders need to get on the same page and agree that there's an issue and there's a problem. And we need to use all of the knowledge we have and all the scientific data we have, safety-founded data that we have, to help address some of these challenges. And I think we can make progress in a more meaningful way. But there's so many key opponents that are on opposite sides of the table taking diametrically opposing positions that just doesn't make sense. So we've got to get beyond that. But I would say five years would be an objective, but I think it can go a little bit over that as well because the lead time to prime this pump is significant.

I think I'd be clear about your finish line too. If you want us to get back to a 2018 space, that's going to take more than 10 years. If you want us to not come out of any more small communities, that may be five. If you want us to stabilize, that might be too. So just be clear on the finish line. It's probably different finish lines depending upon. But if you want us back where we were back in 17, 16, and 18, that's going to take a long time.

Yeah, I agree. The fundamentals that created a pretty abundant pilot population is all gone. Military is not producing pilots traditionally. We're not getting where we used to. So all of those pipelines are off. So we're replacing them with new, and we've got a lot of obstacles to overcome. I think it's going to be with us for a long time.

On that note, yippee. Well, thank you so much to all our panelists. I think we've got a break coming up, so we'll let, or I'll let Faye tell us what to do next.

Thank you, thank you. Well, clearly lots of problems, but we're all together in our resolve to safely solve them. So thank you very much.