Empty Cockpits: How to Play the Pilot Shortage

My Stocks to Watch topic today reminds me of a scene in the movie spoof Airplane! (1980). Speaking over the intercom, a flight attendant reassures passengers about a patch of turbulence and then she calmly asks: “By the way, is there anyone on board who knows how to fly a plane?”

Panic ensues, of course. In the real world, something akin to panic is gripping aviation operators of all types, as the need for trained pilots grows acute.

Below, I pinpoint the best investment play on the global pilot shortage (and you’ve probably never heard of the company). But first, let’s examine the magnitude of the shortage and how it emerged.

Watch This Video: A High-Level Look at Aerospace/Defense

Aerospace manufacturing giant Boeing (NYSE: BA) projects that the aviation industry must generate more than 2.1 million new pilots and other skilled workers during the next 20 years to keep pace with the sector’s growth. That spells trouble for airlines and government agencies that already don’t have enough pilots.

The Federal Aviation Administration’s (FAA) Airline Transport Pilot (ATP) certificate represents the highest credential a pilot can receive. For pilots, an ATP is akin to a Ph.D for scientists.

For full calendar year 2021, the FAA only issued 4,928 ATPs, less than half the number of pilots that the U.S. commercial aviation industry projects that it needs to hire in 2022 (see chart).

Source: Federal Aviation Administration

Global demand is projected to exceed 260,000 new pilots over the next 10 years. Passenger airlines are particularly vulnerable. Annual pilot retirements average 4,100 per year. This chronic shortage of pilots is giving commercial airlines great difficulty in keeping aircraft in service. The pilot shortage could drive some regional airlines out of business.

Just as they were overcoming the severe pandemic-caused slump, many air carriers have been compelled to announce reductions to summer schedules this year to keep their pilots on staff from being overworked and stressed.

The airline sector is finally bouncing back from its COVID trauma. Paradoxically, the boom in aviation has a downside, by creating passenger demand that the existing inventory of pilots can’t fulfill.

According to FAA mandates, commercial pilots must retire at age 65. It’s a demanding job that doesn’t appeal to a lot of ambitious younger people, who tend to choose higher-paying jobs in places such as Silicon Valley. Many pilots once came from the military (especially during the Vietnam War era), but the armed forces are training a lot fewer pilots than in previous years.

Even if they have a passion to fly, many students drop out of flight school because they find it too difficult. As increasing numbers of pilots retire, the shortage worsens.

What’s more, fast-moving change continues to unfold in the field of cockpit electronics, putting intense pressure on aircraft operators to modernize their equipment and keep pilot skills up-to-date.

Take me to the pilot…

But as the old saying goes, in crisis there’s opportunity. A pure play on the pilot shortage is CAE (NYSE: CAE). Never heard of the company? For investors, that’s a good thing.

This company is little covered by the financial press, but without its services, aircraft in the civilian and military sectors would be stuck on the ground. As such, CAE’s fortunes are tied to those of aircraft manufacturers and operators.

With a market cap of $7.3 billion, CAE is a leader in aviation training. Canada-based CAE designs, manufactures, and markets training simulation equipment around the world. The company operates through three divisions: Civil Aviation Training Solutions, Defense and Security, and Health Care.

Civil Aviation provides training solutions for flight, cabin, maintenance, and ground personnel in commercial, business, and helicopter aviation; flight simulation training devices; and crew sourcing services. Defense and Security operates as a training systems integrator for air, land and naval defense forces, including government agencies responsible for public safety. The Health Care segment provides training devices for medical students and health care providers.

The average analyst expectation is for CAE’s year-over-year earnings growth to reach 20% next quarter and 53.3% next year. The stock’s forward 12-month price-to-earnings ratio hovers at 25.7, a premium compared to the S&P 500’s 19.4, but below the aerospace/defense sector’s 27.3. The current analyst consensus for the stock’s 12-month price appreciation is 33.7%.

Amid the market’s current volatility and a litany of macroeconomic uncertainties, CAE is your best play on a chronic long-term shortage of a must-have commodity…in this case, that commodity is human pilots.

What’s more, as a mid-cap stock, CAE enjoys outsized room for future growth. The stock is better able to “move the needle” than large caps, but conveys more stability than small caps. CAE also is further proof that beneficial technology doesn’t just emanate from Silicon Valley.

Editor’s Note: In this tumultuous broader market, where else can you still find appealing growth opportunities? I can sum it up with a single word: takeovers. Even the hint of a major corporate merger can generate outsized investment returns.

My colleague Nathan Slaughter, chief investment strategist of Takeover Trader, just pinpointed a “mega-merger” in the offing. When it comes to anticipating takeovers, Nathan is the savviest analyst I know. Click here for details.

John Persinos is the editorial director of Investing Daily.

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