Why we should end the Aviator Continuation Pay Bonus Program.
A NOTE IN THE Air Force publication Roll Call pointed out that extending the length of military assignments from three to four years would produce cost savings that the service could use to recapitalize its equipment, airplanes, and facilities. (1) As Air Force decision makers review the monetary efficiency and effectiveness of the service's other policies, one incentive policy--the Aviator Continuation Pay (ACP) program--appears worthy of scrutiny. Reviewing the historical purpose of ACP and examining evidence from military and Social Security sources suggest that the Air Force should end this program.
The Historical Purpose of Aviator Continuation Pay: Reducing the Airline-Opportunity "Gap"
Enacted in 1989, ACP was designed to slow the exodus of military pilots to civilian airlines--an industry that offered "an alternative lifestyle, better retirement and benefits, and shorter work weeks." (2) Congress's establishment of ACP sought to increase the retention rates of full-time Air Force pilots by making their compensation competitive with that of civilian-airline pilots. Currently, the Air Force offers its pilots an ACP contract of five annual payments of $25,000 for agreeing to serve an additional five years.
At one time, such a program made sense. After all, the Bureau of Labor Statistics (BLS) identified the annual income and career earnings of civilian pilots as among the highest in the United States. (3) A "major" airline-one that earns $1 billion in revenues annually--offered the most attractive opportunities. According to the BLS's Occupational Outlook report, the median annual earnings of airline pilots, copilots, and flight engineers amounted to $129,250 in 2004. (4) Military pilots have competed very well for these jobs due to their thousands of hours of flying experience, as well as their high-quality training in some of the world's most technologically advanced flying equipment. (5)
The attractiveness of airline jobs to Air Force pilots remains a notable issue in the service's pilot-retention reports--as has the presumed effect of its ACP program. For example, in 2004 a report noted that "the pilot ACP program will continue to provide a buffer against future airline hiring." (6) However, using the ACP program to "buffer" against airline opportunities no longer appears necessary, as the following analyses suggest.
Airline Salary Reports: Disappearance of the Gap after II September 2001
During the creation of ACP, the domestic airlines offered recruits the possibility that one day they might become senior pilots earning $300,000 a year while flying only 14 days each month. Using such earnings estimates as the standard for current airline opportunities, however, is no longer valid--just as the baseline assumption of guaranteed airline employment is no longer a certainty.
Ever since the deregulation of major airlines in 1978, competition has become increasingly intense within the industry, whose members use cost-saving strategies to remain profitable. One such strategy involves acquiring a competing carrier. After a merger, the resulting airline can reduce the previous route overlap of the two former carriers, increase the number of passengers per aircraft on each trip, and enhance profitability. America West's buyout of US Airways in 2005 reflected this strategy.
An airline may also seek better profits by lowering labor costs--a measure made even more necessary by the events of 11 September 2001 (9/11). As a BLS report of 2005 noted, "After September 11, 2001, air travel was severely depressed. A number of the major airlines were forced to reduce schedules, lay off pilots, and even declare bankruptcy." (7) Said US Airways spokesman Rick Weintraub when announcing the layoff of 1,100 pilots at the end of September 2001, "This is part of the sequence of events forced on us by the attacks in New York, and the response of the traveling public to those events." (8) Altogether, US Airways laid off approximately 1,800 of the 6,000 pilots it employed before the 9/11 terrorist attacks. "They are cutting pilots to the point where it reaches people who have been here 15 years," said Roy Freundlich, a spokesman for the Airline Pilots Association. (9)
Northwest and Delta airlines, both of which filed for Chapter 11 bankruptcy status on 14 September 2005, provide recent examples of the major airlines' troubles. These two, along with United and US Airways, represented 50 percent of US airline capacity. (10) During this time, all of Northwest's pilots who had been with the airline for less than a year were eventually laid off, and Delta's pilots, who had recently accepted a five-year deal that included a 32.5 percent pay cut, accepted an additional 14 percent cut in 2005. (11) In aggregate, decreased employment opportunities such as these should have lowered the "average salary" benchmarks to which ACP had once been linked, yet the historical values of the ACP contracts reflect no such updating--those values did not decline.
General Airline-Employment Statistics: Disappearance of the Gap
Due to the strict seniority system within the airline-pilot career field, the industry's hiring rates and furlough levels serve as two broad indicators of career opportunity. All of the 14 major airlines' 63,000 pilots are unionized, and the unions strongly enforce a seniority system. (12) Regardless of previous experience, if a pilot joins a new airline, then he or she starts at the bottom of the seniority list and pay scales. Seniority also affects how a pilot advances through an airline's piloting ranks, insofar as the first consideration for any promotion is the pilot's initial date of hire. Similarly, seniority influences employee layoffs. According to a report published in 2001,
[FIGURE 1 OMITTED]
When a furlough occurs, pilots are laid off in reverse seniority order, beginning at the bottom of the pilot seniority list When recalls begin, pilots usually return to work in seniority order. Furloughed pilots at unionized carriers have recall rights--the company must recall any pilots off furlough before hiring new pilots. Most pilot contracts stipulate "recall rights'--the maximum number of years a pilot can be on furlough before the company can remove him from the seniority list Retention ranges from five years to an unlimited number of years, depending upon the airline. (13)
Using data from AIR Inc., I constructed two airline-opportunity charts. Figure 1 displays the employment drop that occurred after 9/11. Prior to that date, major carriers such as American Airlines and United Parcel Service, whose pilot salaries used to reach $100,000 per year by the fifth year of service, hired hundreds of new pilots each month. (14) In 2002 and 2003, however, the average number of new hires per month for major airlines fell under 45.
The next tier of piloting opportunities occurs at the national-airline level. These carriers, such as jet Blue and Midwest Express, generate between $100 million and $1 billion in annual revenues. Although it may take a few more years before a pilot reaches an annual salary of $100,000 at this level, the national-level carriers had offered employment opportunities to hundreds of pilots every month. After 9/11, though, their hiring rates dropped by an average of 200 new pilots per month.
Figure 2 complements the airline hiring rates by illustrating the number of pilots on furlough status before and after 9/11. Within months after that date, the airlines furloughed thousands of pilots. The largest part of the furlough population--over 8,000 pilots--consisted of major-airline pilots who had recall rights. Thus, military pilots looking to begin an airline career in 2005 would have found it much more difficult to find employment, and, if hired, they would have faced slower-than-traditional career progression and earnings growth. Compared to the hiring environment during ACP's enactment in 1989, the airline industry has become a far less attractive option.
[FIGURE 2 OMITTED]
Airline Pension Changes: Disappearance of the Gap
When an airline such as Delta or Northwest enters bankruptcy, the Pension Benefit Guaranty Corporation, a federal agency, takes over the company's pension plan, guaranteeing only a minimum pension amount and penalizing individuals who retire before age 65. The corporation capped pensions at $45,613 per year for pension plans cancelled in 2005. (15) Since pilots must retire by age 60, their cancelled plan in 2005 would be capped at $29,649. For a major-airline pilot, such as a Northwest pilot, this cap could lead to a loss of half or more of a yearly pension previously expected to exceed $60,000. (16)
Still, these retired pilots at least would have a "defined benefit" of retirement funds that they could expect to receive during their lifetime. Most of the airlines, however, have since transitioned their retirement programs to "defined contribution" plans whereby, in most cases, they contribute some amount of funds to each pilot's retirement plan but offer no guarantee of its retirement value--the nest egg may grow or decline in value. This pension change, which contrasts sharply with the military's guaranteed pension, represents another major difference in airline compensation since ACP began in 1989. As an Air Force report of 2004 noted, "Younger pilots have watched the news and are talking to people who have separated and returned back to active duty. As a result, the prospect of a 20-year Air Force career followed by a government-guaranteed pension has become much more palatable. The certainty of the military compensation is a notable benefit that has become more apparent since 9/ 11." (17)
The general trends in airline opportunity since 9/11 have taken the form of a decrease in employment and a decrease in earnings and pension values for employed pilots. Yet ACP values do not reflect this fact.
Decline in Specific Airline Opportunity for Military Pilots
Although the airlines generally tended towards reduced earnings potential, perhaps individuals possessing a military pilot's skills remained above the general employment fray. In order to better determine the opportunities for such individuals, I examined data to ascertain the airline-employment trend of the Air Force's Reserve Component (RC) pilots--part-time fliers belonging to either the Air National Guard (ANG) or the Air Force Reserve (AFR).
I would have preferred to have tracked active duty pilots as they exited the Air Force and joined the airlines since ACP applies to them and since the Air Force Instruction (AFI) 36-3004, Aviator Continuation Pay (ACP) Program specifically states that ACP does not apply to ANG and AFR officers. (18) However, such a data set did not exist. Nevertheless, I was able to generate a reasonable proxy of airline impact on military-skilled pilots by examining a database composed of RC service records as well as earnings data from the Social Security Administration (SSA). The RC pilot data came from the Defense Manpower Data Center's work-experience file. (19)
Within this database, the RC pilots of interest served in the AFR and ANG some time during the years 1999-2004 in the ranks of captain, major, and lieutenant colonel, with eight or more years of service. This population loosely reflected the RC pilots who could leave the RC at their choosing, versus not having the opportunity to leave as a result of an active duty service commitment. The RC pilots I studied served at least 50 percent of their recorded time (from the data) in airlift, fighter, or refueling airframes--these three mission areas representing approximately 70 percent of all RC flying activity. The database excluded smaller mission areas, such as special operations or initial flight instruction, due to their small sample size and corresponding constraints that the SSA uses to protect the privacy of an individual's earnings data. Another population restriction--the fact that RC pilots could not be full-time reservists (e.g., Active Guard Reserve)--created a sample population of approximately 4,200 RC pilots for each year. Lastly, the SSA's process of gathering and quality-checking earnings data resulted in nearly a two-year lag in data availability, so 2004's information was the latest available.
Having identified the population of part-time pilots, I requested that the SSA uncover whether or not an RC member had worked for a major or national-level airline during that year--specifically, by utilizing the SSA's employer identification number (EIN) variable, which facilitates identification of an individual's employer(s). Therefore, to find out if an RC pilot worked for an airline during one of the calendar years 2000-4, I submitted EINs of the 21 major and 44 national-level carriers of that period to the SSA for employment matching.
Figure 3 shows that 70 percent of RC pilots received paychecks from such airlines in 2000. This statistic closely resembles the airline-employment estimates calculated from a second source--the Status of Forces: Reserve Component (SOFRC) survey for the year 2000. I analyzed the subset of respondents made up of Air Force RC pilots (by means of a unique pilot identifier) and found that 75 percent of them stated that they were pilots or navigators in their civilian jobs. Given the possibility that the RC pilots worked for charter-plane services or other non-top-tier airlines, the 5 percent difference between the SOFRC and EIN-matching results appears trivial. The similarity between the two sets of results supports my assertion that the EIN-matching technique accurately reflects employment trends among airline pilots.
The EIN matching in figure 3 shows that the percentage of RC pilots employed by civilian airlines gradually dropped to about 50 by 2004, coinciding with the general trend of layoffs and decreased opportunities within the top two airline tiers. This suggests that individuals with a military pilot's skills were subject to the same downward trend in airline opportunities as the general population of pilots. It is worth noting that the part-time RC pilots depicted in the figure would most likely have built up some seniority within their airline (e.g., eight or more years). Thus, the illustration understates the reduced level of opportunity for someone wishing to become an airline pilot for the first time. The fact that over 8,000 major-airline pilots with recall rights were on furlough during this period made the quick employment and advancement of a new airline hire unlikely.
[FIGURE 3 OMITTED]
Decrease in Specific Wages for Military Pilots
A Defense Manpower Data Center report summarizing the results of the November 2004 SOFRC showed that the top two (of 17) most widely selected factors affecting the continuation decisions of all RC members were "pay and allowances" and "the military retirement system." (20) Unfortunately, this listing did not include a "strength of preference" indication that would have showed the extent to which pilots preferred these two factors over the other 15.
Still, it did suggest that individuals value pay and benefits as top priorities when they consider working for an employer. It seems reasonable to assume that people will attempt to optimize their employment opportunities, with pay a major influence. With this in mind, I explored the earnings information of part-time RC pilots also identified as airline employees. Not all-encompassing, this data did not account for benefits received by an "RC employee," such as base-exchange privileges and accumulation of RC retirement points--or for the higher "at home" expenses incurred from overnight airline flights or temporary military duties, such as higher child-support costs. Still, as I will show, the earnings investigation told a consistent story.
To better understand how earnings changed for pilot-skilled individuals, I constructed figure 4 using grouped administration data from the Defense Manpower Data Center and the SSA. As a crude attempt to control for some of the earnings issues associated with age and seniority, the figure displays the before-tax earnings averages (including combat-zone tax exclusions) of part-time RC pilots, based upon three different "years of service" groups: (1) junior, those with eight to 14 years of military service (approximately 30-36 years old); (2) middle, those with 14-19 years of military service (approximately 37-42 years old); and (3) senior, those with 20 or more years of military service (approximately 43 years old or older).
[FIGURE 4 OMITTED]
Figure 4 also shows the BLS-reported earnings averages for airline pilots identified by Occupational Employment Statistics code 53-2011, "Airline Pilots, Copilots, and Flight Engineers." The BLS average shows a continuous, albeit gradual, rise in pay--most likely due to a "survivor bias." (As the airlines laid off their junior workers, the average salary calculated would be based upon the remaining pilots, who were more senior and earned higher salaries.)
Given the magnitude of the airline furloughs and the resulting survivor bias, one would expect a similar trend of gradually rising earnings within the airline-pilot subpopulation of RC members. Yet their earnings lines differ from the BLS average, leveling off and dipping over time, which suggests that earnings, even when biased upward by a survivor effect, were cut significantly enough to appear as decreases. Each of the RC airline categories showed a trend of downward earnings by the year 2004, despite an opportunity to work for two employers.
In summary, using EIN matching to uncover airline opportunities revealed that pilot earnings did not always increase and that airline employment was not always assured, even for individuals with military-pilot skills. A large fraction of RC pilots who also worked as airline pilots at the beginning of 2000 experienced a decrease in airline employment and pay opportunities following 9/11. Those who lacked seniority, such as recently separated active duty Air Force pilots, enjoyed even fewer opportunities. Yet during this same period, the value of newly offered ACP contracts did not drop.
Additional, Nonpecuniary Considerations Affecting Air Force Pilot Retention
It seems reasonable to ask what would happen if the ACP policy were eliminated. Would individuals stop flying or applying to fly? It appears unlikely. Strategic-compensation research shows that nonpecuniary rewards such as career advancement, interesting work and work location, a valued peer group, and training opportunities may also make a job attractive. (21) The mission of an Air Force pilot--which has global implications and for which no civilian equivalent exists--offers these rewards.
Furthermore, military pilots already receive two additional compensations by virtue of being in the pilot career field. First, they learn a transferable civilian job skill, as opposed to other officers with less marketable technical skills, such as ballistic-missile-launch officers. Second, military pilots already receive the additional aviation career incentive pay although it does decline during the latter part of a career. In 2004 a major with 12 years of service would have been making well over $90,000 in before-tax earnings, and that individual would receive a secure pension, beginning in just eight years. This is competitive with the pay of junior members in figure 4, who needed to work for two employers to earn their money, had years of seniority built up with their airline, and did not enjoy as many tax-advantaged earnings (e.g., the Air Force's basic allowance for housing).
Why, then, might a pilot leave the Air Force? In the past, a subpopulation of military pilots left due to the rigors of high operational tempo. They separated from the Air Force even when the ACP option was in place, suggesting that its financial incentives did not affect their decision. One way to mitigate this outflow of pilots would involve increasing the total number of pilots in order to lower deployment rates. The Air Force, however, should consider this very expensive option only within the portfolio of many pilot-stabilization alternatives.
Although the actual size of the "too many deployments" population remains unknown, we do know that over 60 percent of the eligible ACP pilots did not accept the ACP contracts of five or more years in fiscal years 2000 and 2001. However, by fiscal year 2004, that trend had reversed itself, and ACP acceptance rates approached 70 percent, certainly in part due to the patriotic response of pilots after 9/11. (22) At the same time, the decrease in airline opportunities now appears a valid additional, if not dominant, reason for the decreased separation rates of military pilots from the Air Force.
The Air Force has enacted additional policies in an attempt to ensure that it maintains enough pilots to achieve its vision of global vigilance, reach, and power. For example, when it faced a potential pilot shortage in the late 1990s, it steadily increased the number of pilots it trained from 650 per year in 1997 to 1,100 per year in 2000. The year 2000 also saw the Air Force increase the length of active duty service commitments from eight to 10 years, incurred upon completion of pilot-school training. Both policies, in conjunction with decreased civilian opportunities, have more compelling claims that they--not the ACP policy--have created a more stable pilot force.
Limitations, Implications, and Future Directions of Research on Air Force Compensation
Like the preponderance of other research, mine did not attain a full perspective of the situation. For example, I would have preferred to have examined more recent earnings data, but the SSA's process of gathering and quality checking produced a nearly two-year lag in information availability. Additionally, the effect of the expanding force of unmanned aerial vehicles has not yet been integrated into pilot-compensation research.
Still, my exploration of civilian pay revealed that the specific earnings opportunity of a civilian airline pilot, with regard to both annual compensation and future pension benefits, has been decreasing. Yet the fact that ACP contracts have not decreased suggests that that program is an anachronism--the product of a time when many airlines could entice pilots with a $300,000 salary for 14 days of flying each month, along with the promise of a lucrative pension.
Because the career-specific incentive pay of ACP emerged during a time when military compensation lagged behind that of civilian airlines, the Air Force should reexamine the ACP program, and perhaps the Aviation Career Incentive Pay program as well, to determine whether it is still necessary. One method would entail expanding EIN-matching techniques to include viewing the employment and earnings opportunities of pilots who have recently separated from the active duty force. This would enable policy makers to uncover the percentage of separating pilots who either join the airlines or take nonairline jobs, as well as the amount of money they earn (within the constraints of the SSA). Although the airlines no longer appear to be a significant benchmark for ACP values, perhaps some other profession is. We should apply EIN matching to other, recently separated, Air Force Specialty Code categories of officers as well.
Proponents of ACP will most likely point to the airlines' recent hiring of a few hundred new pilots in 2007 as a sign that furloughs have ended and that airline "recovery" has begun. The very concept of what that recovery might look like must be redefined in light of the evidence uncovered during this research. The increase in the number of low-cost airlines, the bankruptcy and merger activities of major airlines, and the industry's efforts to reduce the cost of labor all suggest that airline-compensation packages from any future recovery will be far less appealing than they were when ACP was enacted in 1989. As a recent New York Times article pointed out, pursuing some grand airline opportunity is like "chasing a dream toward a disappointing reality." (23) Just how much has the airline opportunity decreased? In that same article, Paul Rice, a vice president of the Airline Pilots Association, noted that in previous decades when a temporary layoff ended, nearly 100 percent of the furloughed pilots returned to the airlines. In contrast, since 9/11, 30 to 35 percent of the furloughed pilots have not accepted the offer of their old airline jobs, which reflects how much less attractive an airline-pilot career has become. Yet military ACP contracts have not taken into account this decreased opportunity within the civilian-airline sector.
Last, some ACP advocates have stated that the program pays for itself if it persuades only a few dozen pilots to remain in the Air Force, since that retention saves the service millions of dollars by not having to train replacement pilots. Given the findings of my research, the onus is now on ACP proponents to provide evidence that, without an ACP program, some individuals would not become Air Force pilots or would leave the service for the airlines (versus an alternative explanation such as the tempo of operational deployment).
The preponderance of the evidence suggests that ACP pay is unnecessary and that the Air Force could use the funds more effectively elsewhere. Specifically, it could apply money saved from stopping ACP expenditures to specific war-fighting policies such as increasing imminent-danger pay or recapitalizing equipment and facilities.
(1.) "PCS Changes," Roll Call, 2-8 February 2007, 1, http://www.af.mil/shared/media/document/AFD-070202-029.pdf
(2.) Lt Col Craig A. Bernhard, "How We Got the FY 89 Aviator Continuation Pay (ACP)," student report (Washington, DC: National Defense University, National War College, 1989), 3.
(3.) "Aircraft Pilots and Flight Engineers," in Occupational Outlook Handbook, 2006-07 Edition (Washington, DC: Bureau of Labor Statistics, US Department of Labor, 2005), 6, http://www.bls.gov/oco/ocosl07.htm (accessed 29 December 2005).
(5.) Kit Darby and Becky Dean, Pilot Career Guide (Atlanta, GA: AIR, 2001), 14-15, http://wwwjetjobs.com/guestframe.html (see "Products & Publications").
(6.) Air Force Personnel Center (AFDC), "U.S. Air Force Rated Officer Retention Analysis: Pilot, Navigator and Air Battle Manager CCR [Cumulative Continuation Rates] and TARS [Total Active Rated Service]," 2004, 3.
(7.) "Aircraft Pilots and Flight Engineers," 5.
(8.) Associated Press, "Airline-Unions Announce Pilot Layoffs," 21 September 2001, BC Cycle, 1.
(9.) Associated Press, "US Airways Plans to Lay Off 471 More Pilots to Return Bankrupt Airline to Profitability," 26 October 2002, BC Cycle, 1.
(10.) Mary Schlangenstien, "Low-Cost Carriers Poised to Reap Benefits from Delta Bankruptcy," Seseret Morning News, 19 September 2005, 1. America West purchased US Airways in 2005. United Airlines reemerged from bankruptcy in 2006--Delta in 2007.
(11.) Joshua Freed, "Delta and Northwest Pilots May Have Had Enough of Cuts," Associated Press, 18 November 2005; and "Delta Pilots Accept Pay Cut Deal," CNN.com, 29 December 2005, http://edition.cnn.com/2005/BUSINESS/12/29/ delta.pilots.ap/index.html.
(12.) Darby and Dean, Pilot Career Guide 24-25.
(14.) Author's compilation of AIR's "Monthly Hiring Summary" data, http://www.jet-jobs.com/guestframe.html (see "Monthly Hiring Summary").
(15.) Associated Press, "Airline Workers Fear Pension Plans Will End," Boston Globe, 27 September 2005, 1, http://www.boston.com/business/personalfinance/articles/2005/09/27/ airline_workers_fear_pension_plans_will_end.
(16.) Steve Karnowski, "Bankrupt Carriers Must Fund Pensions," Associated Press Financial Wire, 15 September 2005, 1.
(17.) AFDC, "U.S. Air Force Rated Officer Retention Analysis," 3.
(18.) AFI 36-3004, Aviator Continuation Pay (ACP) Program, 12 April 2007, 1, http://www.e-publishing.af.mil/shared/media/epubs/ AFI36-3004.pdf.
(19.) For a detailed description of how the RC service data was linked with the SSA records of military and civilian earnings, see Brian E. A. Maue, "Balancing Two Lives: The Relationship of Activation, Pay, and Retention among U.S. Air Force Reserve Pilots" (PhD diss., Pardee RAND Graduate School, 2007), 14-21, http://rand.org/pubs/rgs_dissertations/ 2007/RAND_RGSD213.pdf.
(20.) Defense Manpower Data Center Human Resources Strategic Assessment Program, "Survey Note: Factors Influencing Continuation Decisions of National Guard/Reserve Members," note no. 2005-008 (Washington, DC: Defense Manpower Data Center, 25July2005),1, https://www.hrm.osd.mil/ appj/hrsap.
(21.) Joseph J. Martocchio, Strategic Compensation: A Human Resource Management Approach (Upper Saddle River, NJ: Prentice Hall, 1998), 3-12.
(22.) AFDC, "U.S. Air Force Rated Officer Retention Analysis," 4.
(23.) Jeff Bailey, "For Pilots, Dreams Run into Reality," New York Times, 10 April 2008, http://www.nytimes.com/2008/04/10/business/ 10pilots.html?em&ex=1208145600&en=371474b8fdO753b6&ei=5087%0A.
MAJ BRIAN E. A. MAUE, USAF
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|Author:||Maue, Brian E.A.|
|Publication:||Air & Space Power Journal|
|Article Type:||Viewpoint essay|
|Date:||Dec 22, 2008|
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