I have spent the afternoon reading and researching airline economics and found some interesting stuff that I would like to share with you.
First, a few quotes to set the tone:
"I'm flying high and couldn't be more confident about the future."
- Freddy Laker, Laker Airways, 3 days before the collapse of Laker Airways, 3 Feb 1982.
"These days no one can make money on the goddam airline business. The economics represent sheer hell."
- C.R. Smith, President of American Airlines.
The following text is not my work, but I have bolded certain bits that are relevant to the current Qantas situation:
It may be hard to believe but the airline industry is actually the world's least profitable industry. In 2000, the airlines had a good year with a turnover of $328 billion but a net profit of just $3.7 billion or just 1.1%. The industry's best year was in 1966, when it made 6.1% net profit, but in the past 30 years, most airline balance sheets have revealed losses of about 1.5% or profits of about the same order.
In fact, from 1947 to 2001 (54 years), the world scheduled airline industry has made a cumulative (and combined) net profit of $27 million. In comparison, Microsoft made a profit of $7.4 billion in 2001 alone.
Being a service industry, airlines are labor intensive. This is true, although to a lesser extent, even for low-cost carriers. Each airline employs armies of pilots, flight attendants, mechanics, baggage handlers, reservation agents, check-in staff, security personnel, catering staff, cleaners, administration staff, accountants, lawyers and the list goes on.
The cost of staffing an airline is related to the region in which it operates and the general level of wages in that region, whether it is a short-haul or long-haul airline operation and whether it is a full-service or a "no frills" operation.
Qantas' staff costs in the 2002-03 year were 28% of its total expenses - the highest in the South-East Asian region.
By contrast, airlines such as Singapore Airlines and Hong Kong-based Cathay Pacific are purely international, although they do have some short-haul international routes. In both cases, their labor costs are approximately 21% of total costs - much lower than that for Qantas.
A factor in the significantly lower staff costs for these airlines is the nature of long-haul operations which tend to be less labor-intensive. In addition, both Asian-based airlines overall enjoy better productivity from their staff and employ leaner work practices.
American Airlines, the world's biggest airline and considered by many as the most successful of the past century, has been tragically affected by the events of September 11 and has also felt the impact of the upsurge in low-cost airlines. Table 14.7 lists its costs for the year 2002.
These figures reflect the generally much higher staff costs for many US full-service airlines which in some cases reach 49% of total costs. High staff costs put such airlines at a serious disadvantage on the international front where they have to compete overseas with operators like Singapore Airlines, and on the domestic front, with Southwest Airlines and JetBlue, all of which operate with a much lower cost base.
The high labor costs are a legacy of heavily unionized workforces combined with short-haul operations. Airlines such as Eastern and US Air were badly affected by high labor costs which was a significant factor in their eventual demise.
The cost of running American Airlines and its regional subsidiary American Eagle in 2002 was $20.63 billion. Combined, the airlines flew 178.7 billion Available Seat Miles (ASM) for a cost of $0.115/ASM or $0.071/ASK.
Southwest Airlines, however, with its one aircraft type and a more simplified operation, produced impressive figures for 2002 amounting to just $0.074/ASM or $0.043/ASK.
Despite Southwest Airlines being a short-haul airline with an average sector length of just 720 miles (1,199km), its staff costs are only 35% of operating costs - 7% below that of American Airlines. US Airways, prior to entering Chapter 11 (bankruptcy protection) in 2002, was similar to Southwest. It was essentially a short-haul airline with a few longer sectors but had much higher labor costs which was a major factor initiating its filing for bankruptcy protection. US Airways costs were $0.124 cents/ASM - 68% higher than Southwest's.
In taking a closer look at the cost of labor to airlines, the Association of European Airlines provides a pertinent look at the break-down of staffing costs for European airlines in 2000. Graph 14.8 illustrates the split of staff by workgroup as well as the salary percentages for each workgroup.
This provides an interesting perspective into the relationship between the volume of staff within each workgroup and the cost burden associated with the salaries of each workgroup. Note that the pilot workgroup represents 8% of the staff but commands 21% of the staff salary costs.
The fact remains that costs per employee are among the highest of any industry, according to the US Air Transport Association. The ATA provides some intriguing labor cost figures for US airlines at August 2002.
Remembering that US national average earnings are $17.13 an hour for a 39.6 hour week, it is interesting to note that pilots ranked the highest paid workforce in the US with hourly earnings of $107.22 and an average working week of just 21.9 hours. The survey included regional and commuter pilots who are typically paid much lower wages than their mainline colleagues.
Flight attendants who ranked 45th, had hourly earnings of $32.73 but they only worked 20.7 hours a week. As a comparison, waiters and waitresses in the hospitality field earned $3.95 an hour during a 36.7-hour week. However, they receive tips to supplement their wage.
Another of the airline sector employees are airline engine mechanics who earn $22.04 an hour and work 40 hours.
Discontent between the various airline employee groups has evolved due to the starkly different pay increases granted over the five years to the end of 2002. During this time, pilots' wages have soared by 57% while flight attendants' salaries have increased by 44%. Check-in agents' incomes have risen by 17% but engine mechanics' salaries have barely moved.
One of the starkest examples of the efficiencies of low-cost airlines is the comparison between the defunct Ansett Australia and low-cost operator Virgin Blue's passenger uplift/staff ratio. According to Virgin Blue figures the airline will carry more passengers than Ansett on major Australian domestic truck routes for the year ending 31 March 2004, with only a third of the staff. The two airlines' RPM/RPK figures are almost identical, however Virgin Blue only has 3,300 staff compared with the 10,000 staff that Ansett employed for its domestic trunk route division.