Asia’s skill shortage

Rapid airline growth in the Asia-Pacific region, particularly in China and India, is causing a shortage in skilled staff and putting pressure on costs. But is this a short-term phenomenon, or do carriers face a longer-term problem?

Among the Asia-Pacific airline community, labour strife is a relatively rare affair. While South Korea’s Asiana Airlines, which has seen mass strikes recently, might disagree that labour woes are few and far between, a potential problem is brewing, and in part it has to do with the region’s carriers being victims of their own success. As the industry continues to perform well and so many new players seek a piece of the growing passenger and cargo transport pie, many of the region’s airlines are facing the prospect of a shortage of labour in the coming years. This shortage will be particularly acute on the flightdeck, say some, and there are concerns it could force airlines to slow growth plans.

“There are some significant issues here,” says Timothy Ross, a former Asia-Pacific airline analyst with UBS who now runs his own industry consultancy based in Auckland, New Zealand. He is also a board member of fast-growing Malaysian low-cost carrier AirAsia. “When you look at the number of aircraft that have been ordered over the past year, particularly on the narrowbody side, it raises huge questions about how you’re going to fill the cockpits,” he adds. “The indications are that it is only going to get more difficult. The corollary is that some of the ambitious growth plans are going to have to be scaled back.”

Problems are already being seen in China and India, where the markets are growing particularly rapidly and there are serious shortages of qualified aircrew. In India, for example, every airline has suffered pilot shortages forcing them to slow growth plans – some have had to delay the introduction of new aircraft, while others have had to suspend services on some routes.

The problem has also affected some of the majors elsewhere, such as Malaysia Airlines (MAS), which has lost many of its pilots to fast-growing carriers such as those in the Middle East offering bigger salaries. Many airlines within Asia have quietly agreed “no-poaching” deals, but the start-up carriers do not adhere to these.

More shortages are likely in other countries in the years ahead. In Japan an unusually large number of pilots will be retiring between 2007 and 2012 and airlines have acknowledged that this will bring them some difficulty. Training is being stepped up there, as it is in China and India, where the problem is most severe, but some analysts warn that unless much more aggressive action is taken soon there will be a bigger problem to come.

Regulatory changes have been taking place in some areas to help cope with the problem. In India the pilot retirement age has been raised to 61 from 60 and the number of flying hours needed for the issue of a commercial pilot’s licence has been reduced to 200h from 250h. But efforts by the government to get the country’s airlines to agree a “code of conduct” that would prevent pilot poaching failed, as all the carriers refused to sign up to it. Recently Air India’s newly established low-cost arm, Air India Express, was forced to drop some services after a group of pilots resigned en masse without giving notice, presumably to join other airlines.

Recruiting overseas

China is, meanwhile, standardising regulations to make it easier to attract foreign pilots, but the pay gulf is enormous between airlines there and those in the West. The Chinese government, like others elsewhere in the region, is at the same time forcing its airlines to adopt stricter English-language requirements for pilots, which may make things even more challenging.

Some analysts say that what happens in the still-problematic US airline market may resolve the Asian pilot shortage – such as a major failure that could create a fresh supply pool of aircrew. There are also some who are not worried about a dire shortage of pilots affecting major Asian airlines. Director general of the 17-member Association of Asia Pacific Airlines (AAPA) Andrew Herdman is one who does not see a problem worth keeping his member airlines up at nights.

“I am not so alarmed as some about the supply crunch in terms of skilled labour. There are the means to train the pilots, for example, so I don’t see any fundamental shortage. This thing goes in cycles,” says Herdman. However, he adds: “Those airlines that are expanding rapidly are putting upward pressure on salaries… and if you are in a country with lower per capita GDP where salaries are by nature lower you are going to face some problems.”

On the other hand, Herdman believes the “bidding up” of salaries by start-up carriers is having the effect of eroding their traditional advantage of a low cost base compared with incumbents. The more intense competition for qualified staff comes at a time when airlines more than ever need to control costs.

Staff costs are already inching up in many markets – in some such as India they are rocketing – but Hong Kong-based JP Morgan airline analyst Peter Negline does not see it being an issue that the quality first-tier carriers cannot handle. “It is within a cost level they can cope with,” he says. “I haven’t heard of any [major incumbent] airline slowing growth because they can’t get the personnel.”

Negline sees labour shortages as not so much an immediate worry, but a “medium- to long-term problem – three to five years down the road”. He says: “In the short term it may be an expense issue because of the costs related to retention of staff but in the longer term it may become an issue of absolute numbers, meaning there could be a real shortage of qualified personnel.”

Like Herdman from the AAPA, Negline sees it affecting the weaker players more, such as those in countries like Malaysia or the Philippines where costs are traditionally much lower. By contrast, airlines in high-cost regions such as Japan or Hong Kong are far less likely to lose staff to carriers elsewhere offering better perks.

“It could be more of a problem for second-tier airlines or new entrants,” says Negline, and specifically those that “might not have their eye on the ball”.

At South Korea’s Asiana Airlines, for example, unionised pilots began an indefinite strike in mid-July which cost the airlines millions in lost revenue per day. While that strike was the result of circumstances unique to the airline, other carriers – and particularly home-based rival Korean Air where pilots are already making noise about new contract terms – were watching closely. The Korean government stepped in and ordered an end to the strike in mid-August, giving the two sides 30 days to reach agreement or face binding arbitration. One of the key issues was a union demand for a say in management decisions, which the airline said was unacceptable.

While nobody is predicting a doom and gloom scenario, most agree Asia-Pacific airlines must watch changing labour trends closely so as not to be taken off guard. Going forward, the region’s airlines are also expected to face a more delicate balancing act between giving staff pay rises to retain them, and making sure the pay rises or improvements in benefits are not too significant.

Wake-up call

The AAPA’s Herdman, who sees the issue of personnel shortages and rising labour costs as being only a short-term problem, if even that, says that it should, however, be viewed as a wake-up call to some. “This is a reminder that you’ve got to manage staff costs carefully whether you are a new entrant or an established player,” he says.

Some observers believe the power of labour over airlines in terms of what staff can demand will probably become clearer later in the year – once it becomes more apparent where the carriers are in the earnings cycle. There are already some signs of demand weakening in the Asia-Pacific market and if this continues it could aid in keeping staff salaries in check.

But in an environment where demand is continuously growing, says consultant Ross, the “pilot lobby has far more clout” and in some places, “if they get a sense there are more sweets in the tin they will want to put their hand in it”.

Labour costs rise for Asian carriers
Airline	Change 2003/04	Change 2002/03
Cathay Pacific	10.0%	1.5%
China Airlines	8.2%	9.2%
China Southern	47.5%	-1.5%
Eva Airways	14.9%	10.8%
Japan Airlines	2.2%	2.4%
Korean Air	20.3%	1.1%
Singapore Airlines	22.8%	-12.3%