Cost-cutting is back at the top of the boardroom agenda as airlines battle to deal with the sustained high price of oil combined with the continuing sluggishness of economies across the globe.
Emirates Airline, Air France-KLM and Scandinavian Airlines have all declared a new war on costs. The Dubai-based airline says it is having "another hard look" at its cost structure, while Air France-KLM has engaged with its unions to seek further savings in the wake of poor results.
"The stubbornness of the oil price is giving us concerns about the bottom line," Emirates Airline president Tim Clark tells Airline Business. "As the rate of growth of our profit has fallen as a result of the oil price, we must [look at our costs]."
Clark believes the high oil price is the single biggest cause of the problems being suffered by the global economy, and caused a "tempering" in underlying demand for air travel: "We're all a little bit concerned about what is going on in the global economy and the volatility. And when there is volatility, it has an effect on demand."
The Emirates cost drive will not affect the airline's growth, says Clark, but he admits that there is more caution about "the pace at which we increase production and stretch the network".
Clark says he is setting "some fairly stiff parameters" for the Emirates management team with regard to reducing the costs of "inward facing, back-of-house" functions.
"We have been totally focused on growth - perhaps behind the scenes, some of those costs have grown at a greater pace," he says. "We've got to dig deep and go into structural costs to see where we can start pulling out 5-8%."
He points out that with the airline's costs in the $20 billion region, single-digit percentage reductions "will make life easier on the bottom line".
Part of the effort will involve the management of the airline's income streams, which Clark says is not necessarily about raising fares: "We have to assess the segments in which we operate and try to improve the quality of business within those segments."
Growth trajectory
However, Clark emphasises that the efficiency programme will not have any impact on the Emirates growth trajectory: "We're continuing to grow our business this year and next year according to the plan."
This will see the all-widebody passenger fleet grow from the current 147 aircraft to 185 by March 2013, as the airline takes more Airbus A380s and Boeing 777-300ERs and phases out older A330/A340 and 777 Classic aircraft. "By September 2013, we'll have 44 A380s and have taken most of our 101 777-300ERs," says Clark.
Meanwhile Air France-KLM chief executive Pierre-Henri Gourgeon has made tackling the group's level of debt an absolute priority and aims to increase cash flow by reducing costs. After meeting with unions, Gourgeon said measures comprise maintaining the hiring freeze and requiring each division to "define structural savings plans to reduce fixed costs, conserve cash and improve adaptability".
He says that the measures were necessitated by poor financial results which were lower than the airline's major European competitors, "indicating a structural competitiveness gap at Air France's expense".
The Franco-Dutch airline increased the aim of its "Challenge 12" cost-saving programme from €470 million ($663 million) to €500 million for the current financial year after registering a net loss of €197 million during its first quarter.
SAS aims to cut unit costs by up to 5% with its 4Excellence strategy. Chief executive Rickard Gustafson said that by 2015 SAS will make improvements to its commercial, sales, operational and people divisions by building on the platform developed by the previous Core SAS strategy, which has cut unit costs by 23% since 2008.
Savings will be achieved through a combination of continued cost reductions and an increased focus on improving productivity. The latter will be aided by rolling out the Lean quality and efficiency programme throughout the group.
For more on the challanges facing airlines, see our recent industry outlook
Source: Airline Business
