View Full Version : Airlines cut deep to stay aloft

I. M. Esperto
17th Jun 2002, 11:57

Airlines cut deep to stay aloft
Edward Wong The New York Times Monday, June 17, 2002
Gordon Bethune usually struts with enough Texan swagger to stave off the clouds of gloom and doom. He drives a Porsche, rides a Harley and takes spins in the Boeing jets flown by Continental Airlines Inc., which he happens to run.
But lately, Bethune has been reduced to throwing up his hands. "We're a stupid industry led by stupid people," he said.
Bethune turned Continental from a near-bankrupt airline into the country's most successful full-service carrier. But that is an empty superlative in a profitless industry, and as some other top airline executives have done, he admits that he is running out of ideas on how to breathe life into the business.
Still staggered by the Sept. 11 attacks, the airlines are as close to recovery as a comatose patient on an intravenous drip. They had a loss of $2.4 billion in the first quarter of this year and a record $11 billion last year. The biggest carriers need to make deep cuts in labor costs while narrowing the gap between leisure and business fares, experts say. But few people can agree on exactly how to do that.

18th Jun 2002, 14:30
Notice that the UAL pilots have anounced "concessions" altho in UAL's case, that may certainly not be enough. UAL's "problems" started with bad decisions in the executive suite. It did not help that a few pilots are on the board of directors...serving up really big bennies. ESOP's look good on paper, but sometimes...don't work too well.:rolleyes:

19th Jun 2002, 01:34
These 'experts' always want to make deep cuts in labour costs but I wonder where they get their expertise? I don't make any more money than a person with my qualifications and experience could make in any other industry [and I have very portable qualifications] To put it bluntly, we are not overpaid. That said, the only way to cut labour costs is to reduce the number of people.

How? Single pilot operations? Eliminate preventive maintenance? Self check-in? We are a service industry and are by definition people intensive. Our crews are already as small as they can be. Customers are already fed up with long check-in times and rude service from hassled overworked front-line staff. Our maintenance is the minimum that we can get away with - try comparing the content of todays ADs with those of ten years ago and you'll soon get the picture.

Yes there has to be a way of making a profit out of aviation, but more concentration on increasing revenues and less on reducing costs, and by definition standards of service and safety, is the key to the future. What we need are innovations in service and quality that people will be prepared to pay for.

Through difficulties to the cinema

19th Jun 2002, 02:01

Im not a Manager, but let me make a quick calculation regarding increasing revenues versus cost-cutting. That may throw a little light on, why Managers prefer to cut costs rather than getting more business.

For example, If you have a profit-margin of say 5%, and you can manage to cut costs by 5% (by cutting investments and/or getting rid of employees, etc.) your profit margin will double and you will get 100% increase in profit.

Now, if you want to increase revenues to achieve the same effect, you would have to increase your revenues by 100%.

Imagine UAL having to sell 100% more in tickets and services in this economy ?? :eek:

The Aviation Industry is full of people who are passionate doing what they love to do and that is exactly the reason, why some people will work as Pilots for $1500/month or less. No other industry will tolerate this kind of compromise, which highly qualified people take upon themselves to do what they love to do.


19th Jun 2002, 03:22

The principle is right, but you are making one key over-simplification: there are two elements to the cost - fixed and variable (these terms are themselves not absolute).

So, for example, I guess there is a "fixed" cost (more or less) with running an operation to a destination, and then a variable cost per flight/seat/whatever.

In general, in a well managed an not "top heavy" organisation, the bigger the airline, the higher the ratio of variable to fixed costs should be, and the easier it is to move the "variable" costs around to meet changing circumstances (e.g. moving different size aircraft between different routes).

Of course, if you have something like BA Waterworld (or whatever it is called) to support then that changes the equation somewhat. :)

19th Jun 2002, 03:47
But I am a manager Avius, albeit a back-room boy at a fairly humble level, and I find your calculations amusing but horribly inaccurate. It is thinking like that that leads to trouble. Do the sums again but use dollars instead of percentages and you'll soon get the hang of it. There is a limit to the amount of cost cutting that can be done. Go any further and you are destroying the business. "Lean and Mean" is all very well but its a bit like dieting - go too far and you start to consume your own muscle tissue.

In our company the Beanies obliged us to lay off a sizeable proportion of the staff, particularly in Maintenance, and cut ALL overtime. The 'C' Check presently in our hangar has now been extended out to nine weeks! Yesterday there was a second machine in for a one day 'A' Check leaving just four mechanics working on the 'C' Check. Do you get the picture? Cut the labour level below minimum and you don't save on costs you actually increase them. How much do you think it costs to keep a 757 out of service for nine weeks? This is one effect of excessive labour cuts, and whether they occur in Engineering or in Sales and Marketing, ill considered staff reductions are as likely to increase as to reduce costs. The Beanies are not the experts in manning levels, line managers are paid to know exactly how many people they need to get the job done.

When 'de-regulation' came upon us, the idea was to increase competition, reduce fares and provide better service to the travelling public. Does anyone believe that has happened? In truth, the regulations were not really eased very much and we remain one of the most regulated of all industries [including nuclear power]. Perhaps a true "Open Skies" policy would transform the business? We certainly can't go on forever providing services at below cost as we do today, where the cheapest fares in coach are below the cost of providing the seat. Is it fair to rely on premium fare passengers subsidising them? Should we provide better services at higher fares or are we to be airborne supermarkets operating on high volumes at minimum margins?

Through difficulties to the cinema

19th Jun 2002, 05:09

I was speaking of profit-margin in percent. This means the bottom line in percent of the revenue. All fixed and variable costs are included in that calculation. To get that figure is in reality a very complex calculation, but big airlines calculate them DAILY. Once calculated it is a percentage, which is accurate enough to make business decisions.


I can understand your dilemma with not having enough resources and too much work. I also have been a Manager in a non-aviation related field, before changing a desk for a cockpit.

I agree quite with your point about the limit on how much cost cutting can be done without damaging the company. My explanation was also not representing my personal mindset, but rather the reality.

Those days, where Managers were interested in long term goals for the company are over (unfortunately). Today most Managers stay in positions for 2-3 years and then move on.

Consequently, their interest is to make as much as possible profit while they are in charge. In that context, it is easier to cut costs than increasing revenue. It bears less risk for them and has the desired effect. Events like 9/11 make it easy for them to take drastic cost cutting actions and not getting in trouble with unions.

The damage these Managers create most often does not show until long after they have left for better paid jobs.

Now, there is another way to cut costs without eliminating Jobs. Southwest, Jetblue and Continental Airlines have proved that it does work. But that requires REAL Managers on top who have a vision, not Beancounters.

Real Managers know, that a good corporate culture is the best cost-cutting instrument they can have, because it is very effective and works with almost no supervison.


Young Paul
19th Jun 2002, 08:42

You don't have to double your revenue to double your margin. Your margin is based on cost versus price, not on total sales. In your example, Avius, if you add 4.5% to your price, you will double your margin.

How do you think BA intends to increase its margin to 10% whilst cutting capacity?!

In other words, the solution is really the opposite of what you are saying. You need to increase your revenue by increasing unit costs. Taking 5% off your costs might double your margin - but do you really think that there is 5% of "slack" across the whole of any modern airline?

Of course, that assumes people would be prepared to pay. The bottom line is that competition is forcing airlines to set their fares at virtually a "break-even" level, and cross-subsidise marginal routes with premium fares to hold on to passengers.

The low-cost fare structure is something of a revolution, in this regard - the margins are much greater and the gullible public really thinks that the "low-cost" fare on a route will always be the lowest available - even if it the last seat on the aircraft, and the fare is actually double the normal economy fare.

19th Jun 2002, 09:12
If Mr Wong, or managers of his ilk, wish to understand how to make an airline profitable - even after 9/11 - I would suggest that they should perhaps take the CEO of Delta Airlines out for a very long lunch.

They are turning in good profits with a fast increasing revenue. Sensible prices, clever electronic ticketing, brilliant cabin service and the FD crew always stand at the door to say farewell to the passengers. He SELLS the airline and it's subsidiaries (lots of them).

The product they sell is very very good. No more to add really.

C Montgomery Burns
19th Jun 2002, 09:49
Forget Delta, who are using smoke and mirrors to improve their figures. Like with Enron, it will catch up with them. Rather let them take out MO'L - who, love him or loathe him has done more for European aviation than any other person, ever; or of course good ol' Herb Kelleher.

19th Jun 2002, 12:54
Young Paul,

That is not was I was saying. Please read my post carefully. In the Airline Industry the profit margin is probably significantly lower (i.e 1 %, etc.). Then cost-savings of 1% would boost profits by 100%. That of couse assumes that there are profits. One could also argue that cost savings of 1% would cut losses by 50%.

I certainly believe that it is very possible to cut costs in most of the Big Airlines by average 1% accross the board without losing those jobs which directly contribute to revenues. There is no doubt in my mind that this is possible and it has been proven by previously mentioned Airlines.

Besides nurturing a good corporate culture, improvement of information-flow, business logic automation and paperless strategies are other areas, where airlines can save a lot of money.

If you look at Southwest Airlines for example. They use on board computers to enter all the ops info (pax, fuel, maintenance info, etc. ) real-time into the computer, eliminating most of the paperwork. Paper by itself creates a buerocratic culture. The list of possible improvementd is long.


Young Paul
20th Jun 2002, 08:19
OK, but you are wrong to say that you need to double revenue to double profit. If your margin is 1%, and you get 1% more revenue but your costs remain the same, then you will double your profits. Just as effective.

21st Jun 2002, 04:53
To stay with the plot, what I suggested is that by cutting costs too deep in critical areas, total costs may actually increase and make the situation worse. The example I gave was loss of use of an expensive capital asset due to excessive retrenchment. The proper way to reduce cost in this instance would have been to shed the unused asset. I suggest that profits do not come from blindly cutting costs without proper selectivity, but from increasing revenues. This is much harder to do, but wealth creation is what business is really all about.

What we are facing today is excess demand in our existing markets. The standard bean-counting response is to cut jobs and reduce services, especially by chopping unprofitable routes. There is little effort to move with the times and create new market opportunities. The accounts may or may not move into the black but either way we are established as an industry in decline. Some entrepreneurs have succeeded by concentrating on market niches or else creating new service products; services that people are willing to pay for in sufficient numbers to create profits. South-West, RyanAir and Easy don't offer traditional services they created their own markets. That is the way forward. In the aftermath of Enron we can see how ineffective the Beanies truly are, why let them continue controlling things? It isn't the accountants that create the wealth, its time for them to return to the back seat and stick to counting the money. The company I work for is supposed to have made unaccounted losses for several years and our Finance department seem unable to account for where it all went. So why are they still in control of the budget?

Through difficulties to the cinema

23rd Jun 2002, 18:20
Alas, I am more of a passenger these days than a pilot but have worked for so many companies that just cut costs, and then go out of business, than I care to remember.

The bean counters haven't a clue and are destroying any and every chance of emerging out of recession in a healthy state.

By way of example, I recently travelled on Concorde as I had before it was grounded. Now, there are no gifts, no promotional wallets in the seat backs, 6 crew instead of 8 (which means on a full flight you are still being served food on the descent, cheap tacky seats (which I know is to save weight, but not by going to sub eco-seating). The full fare is over 8000, and now I am no longer delighted... On mentioning these facts I get the usual cra* about cutting costs, ha what a joke

You must continualy add value, delight your customers and sure watch the costs. Only if you do all of these will you survive

25th Jun 2002, 17:33
Some bean counters have to take for granted that the aviation industry is a very competitive and expensive business and hard to cut cost in the long term without hurting people lives.
The new CEO of my company called for a meeting with all the managers. On the day itself he found 220 people attending the meeting and asked his deputy, " Was it clear in the memo I only wanted the managers to attend?" May be this gives an idea about cost saving. Food for thought. What if all their secretaries would have been there too?

25th Jun 2002, 20:36
Young Paul,

you just mentioned it yourself. "If you get 1% more revenue, but your cost remain the same". If your cost remain the same..That IS de-facto a 1% cost savings.

To increase revenue you would need more of the production factors (5M's - Men, Machines, Money, Materials and finally Management). You need more Aircraft (Machines), Workforce (Men - sorry for not being polically correct here, of course Women too), Fuel, Spare Parts, etc. (Materials) Money (=self explanatory) and Supply Management, Workflow Management, Coordination, etc. (Management).

The largest cost-savings potential is in Management (more efficient ways of communication, better response management, automated workflows, etc.), but that requires initial investment in tools (such as Information Technology), thus money that the airlines don't have at the moment. So they simply have not much of a choice, but to cut cost -temporarily- as they fight for survival.

And I don't think, that in the competitive market like this, an Airline can just increase prices by 1% across the board to make your above statement true.

Therefore it is much easier to cut cost by 1% (whether you have more cash coming in at the same cost or have the same cash at a reduced cost does not matter).


Young Paul
26th Jun 2002, 10:41
Well, I was using revenue in the conventional sense, like you did in your original post when you said that you needed to increase revenue by 100% to double your profit.

I don't think we are actually saying terribly different things. I agree that the market might not bear a 1% price difference (although I suspect that 1 more on an air fare isn't here or there to most people - many don't even know how much the tax component is within that). I agree that overheads can be cut - although you can't cut your way to being a big and successful airline. Also, once you've got rid of the obvious dead wood, it becomes very hard to tell whether the cuts you are making are wise. For example, what price a good relationship with a reliable supplier? Is it really best to keep asking them to cut the cost of their contracts? How long before they don't bother any more?

I think you are being vague in your terminology. If you want to make a point, be precise. "Revenue" and "overheads" have precise accountancy meanings. You are using the terms in rather a Blairite fashion, to make a point that people can't then pin you down on later. Even "money" is not self explanatory, as you say in your reply - you presumably mean current assets, or something similar. You might have money in your account that is owed to somebody else (current liabilities). To hold onto this for longer so you have got "more money" firstly has no benefit for your balance sheet, and secondly annoys suppliers and banks - and may send suppliers under. Of course that's not what you mean - but that's how some people might understand it.