Singapore Airlines' chairman J Y Pillay calls it 'The genius of the organisation at work.' Productivity has become a mantra in an airline industry which is desperate to find ways of improving its long term financial performance. All airline managers are putting in a great deal of effort to improve their company's efficiency, whether it is profitable or not. And many are achieving significant results.
Improving efficiency involves a number of skills. It draws in experts in finance, accounting, information technology, operations, marketing, logistics and, perhaps most importantly, labour relations. As well as professional expertise in all the technical and managerial areas, there is another essential ingredient - a touch of creative genius.
At the same time, productivity gains are painful. They often involve some people losing their jobs, and they always involve more work for those remaining. And each round of productivity improvements is harder than the last, as companies relentlessly chase ever more challenging levels of efficiency.
This survey, carried out with the aid of a straw poll among 25 airlines, represents an overall examination of how airlines view efficiency and how they are improving it. There is then a more detailed assessment of how six particular airlines have tackled the issue and are taking it forward. Finally, the use of information technology to boost efficiency is illustrated by the experience at UK charter carrier Britannia Airways.
The seven carriers discussed in detail - KLM, Air Canada, EVA Air, Northwest, Singapore Airlines, Malev and Britannia - represent a cross-section. KLM, Air Canada and Northwest have translated efficiency gains into turnarounds in profitability, though Air Canada is having to struggle to maintain this in a growth situation. EVA Air has used growth to improve productivity radically. SIA is an example of a highly efficient airline which is constantly seeking further improvements. Malev's substantial efficiency improvements have yet to filter through to the bottom line. And IT has revolutionised the way Britannia carries out its business.
This survey considers four key aspects of airline efficiency - labour productivity, overall unit costs, marketing efficiency and asset utilisation. There are clearly areas of overlap among these four aspects, but taken together they provide the best view of how airlines are tackling the issue.
Twenty-five airlines responded to our request for information. They were asked how they measured productivity in each area and what improvement they had registered during 1994. Extracts from their replies are listed in the box above.
Overall, most carriers reported significant progress in terms of labour productivity, with 12 out of the 25 carriers reporting improvements of 10 per cent or more, and a further eight claiming a 5-10 per cent gain.
Most airlines measure employee productivity by the yardstick of available tonne km or available seat km per employee. However, many use other measures as well, including output per unit of personnel cost and discrete measures such as flying hours per pilot and revenue passengers or available seat km per cabin attendant.
However there are exceptions. EVA Air looks at just one measure: revenue per employee. Southwest Airlines and TWA consider employees per aircraft. Singapore Airlines takes an average percentage change in four indicators: ATKs, load tonne km, revenue and value added per employee.
The progress on the labour front has not always translated into significant changes in overall unit costs. This may indicate a lack of success in cost cutting efforts in other areas, but also reflects cost increases in areas which are difficult to control, such as agency commissions and airport and air traffic control charges. Only three carriers in our sample - Alaska Air, Austrian Airlines and EVA Air - reported a unit cost improvement of more than 10 per cent.
Marketing efficiency is usually measured in terms of load factor and yield. Here again, the 25 airlines' performance is unexciting, with eight carriers claiming a fair improvement (5-10 per cent) and 16 little or no improvement (0-5 per cent). However in general, load factors improved markedly as carriers held back on capacity growth. The problem was that yields suffered at the same time, partly as a result of competition.
Many carriers would say that improvements in asset utilisation are the most difficult to achieve. Only four airlines - Alaska Air, Canadian Airlines, Malev and VASP - claimed a significant increase in hours flown per aircraft, with another six claiming a fair improvement.
Of course, there are only so many hours in a day, and scheduling complexities make widespread increases in this measure unlikely. Only airlines with low aircraft utilisation to start with can hope to bring about significant change.
Whilst every airline has a different story to tell, two things stand out. First, efficiency improvements are much easier to achieve while an airline is expanding - by hiring very few new employees and adding capacity, or freezing existing capacity to boost load factors, most airlines can improve productivity substantially.
Second, every achievement in this area makes the next round of productivity targets harder to reach. To a degree, there is a law of diminishing returns once the 'easy' things have been done and labour productivity, load factors and asset utilisation have reached levels close to market leadership.
From then on, it becomes a matter of attention to detail and learning from others - in short, making the pursuit of high productivity as much a part of the corporate ethos as the airline's logo or its flight attendants' uniforms.
Aerolineas Argentinas
Fixed costs were reduced and expanded services improved aircraft utilisation.
Air Canada
Employee numbers up only 1% while ASKs rose 12.2%. Pilots' flying hours rose from 43 hours a month in 1993 to 51 hours in 1994. Unit costs down 7.1% (see p32).
Alaska Air
Unit costs have been slashed from 10.2 cents per available seat-mile in 1993 to 7.7 cents this year. Newer aircraft are flying higher frequencies (Airline Business, September).
Alitalia
During 1995, ASKs per employee projected to be up 16% as workforce fell by 1,600 during 1994. MD-80 utilisation improved through faster turnarounds and fewer backup aircraft. Alitalia is using wet-leased B767s on thinner routes to cut costs.
All Nippon Airways
ATKs per employee up 9%, RPKs per cabin attendant up 6%.
Austrian Airlines
ATKs per employee up 21% and unit costs down 12.5% in the first half of 1995 due to a significant production increase with fewer staff.
British Airways
BA improved ATKs per employee by 3.2% and aircraft utilisation by 2%. Scheduled passenger load factors rose by 1.6 points to a record 71.6%. Yields rose 0.6% but unit costs rose 0.4% on a group basis.
Canadian Airlines
Better asset utilisation through increasing the number of seats per aircraft, standardising seating configurations, better scheduling and quicker turnarounds.
China Airlines
Labour productivity up 16.2% and unit costs down 8.9%.
Czech Airlines
Labour productivity up 6.6%. Daily flying up 6.6% to 5.04 hours per aircraft this year.
EVA Air
Fast growth pushed revenue per employee up 62% in 1994. Unit costs fell 21% and load factors rose 4 points to 70% (see p34).
Finnair
ATKs per employee rose 11%.
Garuda
Modest improvements in efficiency across the board.
KLM
Productivity improved by changing the schedule, outsourcing and reorganisation. Growth helped: in financial 1994/5 capacity rose 10.5% and staff levels increased only 0.5% (see p31).
Lufthansa
ATKs per employee were up 15.6% in 1994 as operating expenses per ATK fell 4.4%.
Malaysia Airlines
Aircraft utilisation improved through better fleet planning and leasing out surplus aircraft.
Malev
ASKs rose 16.5% as employee numbers fell slightly. Load factors improved by 4 points to 60.3%. Aircraft utilisation up (see p42).
Northwest
Has concentrated on innovative fare sales to generate incremental revenue, plus further refinements of routes to strengthen hub flying. Capacity has stayed static, allowing load factors to rise (see p36).
Singapore Airlines
Labour productivity rose 8% using a basket of measures; while unit costs fell 7.6% (p40).
Southwest Airlines
Increased daily aircraft utilisation 2% to 11h10 and cut unit costs 2.3% in 1994.
Swissair
ATKs rose 7.5% per labour cost unit and 7.7% per employee, helping to cut unit costs 5.7%. But yields fell 11.3%, mainly due to currency factors.
TAP Air Portugal
ATKs per employee are up 8.7% with a per cabin attendant increase of 10.2%.
TWA
Staff reductions of 3,000 produced annual savings of $130 million. A productivity task force has helped produce an additional $100 million in annual savings. Second-quarter unit costs fell 6.2% to 8.64 cents per ASM this year. By eliminating the Atlanta mini-hub and expanding St Louis, TWA upped aircraft utilisation from 9h53 a day to 10h23.
United
Labour productivity improved as a result of the buyout. Second quarter unit costs fell 0.9% this year to 8.82 cents per ASM, while unit revenues rose 2.2% to 9.27 cents per ASM.
VASP
Rapid growth enabled VASP's output per unit of personnel cost to rise 59.7% for passenger operations and 50% for cargo operations. Load factors rose 4.7 points and yields 14.4%, and aircraft utilisation increased from 7h30 to 8h20 (Airline Business, October).
Source: Airline Business
