InnocuousFox
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The Quandary Of "cost Cutting" For Airlines

Tue May 11, 2004 5:17 am

For a number of years we have heard about how airlines have needed to "cut costs" in order to stay out of bankruptcy - or even to emerge from it. We have all fallen into the mindset that "LCC" is the same thing as saying "profitable" or "successful". Yet, when the time comes for an airline to do so, many people are quick to cry foul when labor is targeted as a method of reducing expenses. But really, what are the options? Looking at the big expenses...

Fuel: Can you really just choose to pay less for fuel as part of your "cost cutting?" Not really. You can hedge fuel - but that is something that is necessarily done ahead of time and only when an opportunity presents itself.

Maintenance: Can you really just choose to cut down on maintenance? Even people here have made insidious remarks about how one airline or another is only succeeding because they are practicing unsafe maintenance procedures in order to cut costs. Certainly that's not something that can or should be done in order to lower expenses and be profitable.

Aircraft purchase/lease: Unlike many industries where you can just start buying less expensive machinery and see an immediate turnaround, airlines cannot just start buying cheaper planes and see an overnight benefit. These aren't office supplies we are talking about. If you need to cut your costs over 6 months, we are only talking a few aircraft (if you happen to be receiving new ones at all during that time) and the additional costs of changing to a less expensive type would likely offset the purchase savings.

Marketing: While airlines in many markets don't have to worry about "brand awareness" (like in hub markets) and in other situations let the internet booking sites or travel agents do the talking for them, there is still a lot of money that needs to go into putting your product in the forefront. There may be more leeway here in an emergency than in other places, but is this something that you really want to cut back on?

Gate Space/Landing Fees: Some things are just necessary for operation and can't be cut or are not in the direct control of the airline anyway (landing fees). However, there can be some adjusting here and there. De-peaking a hub (rolling hubs) means that an airline can get better utilization out of gates and ground assets - therefore needing less of them to serve the same number of flights per day... but that's simply a matter of degrees.

That just leaves us with the biggest expense of all for an airline. Labor. We can all agree that an airline either can't reduce or shouldn't reduce expenses in other areas... at least not to a level that is going to make a difference. But LABOR can be negotiated, trimmed, deferred, massaged, etc. It is certainly true that the airline can't run if the people don't work - something that unions make very clear to management once in a while through tactics ranging from subtle suggestion up to strikes (or worse). However, the reverse is never that apparent until the 11th hour - that the people can't work if there is no airline.

When that realization occurs, it is often disguised or recast by the cries of "it's not fair that all these people should lose their jobs!" Well, that may seem true, but really it has nothing to do with whether or not it is fair - it just is. One would think that the airline would rather stay in business and pay its employees than fold. Of course, it is even blamed on management by claiming "its not the employees' fault that the airline is in trouble." Well, that is true as well to an extent. There are usually too many factors to pin down what or who was at fault which makes that a rather pointless effort anyway. However, some of the blame can be placed on those people that are narrow-sighted enough to insist ONLY on the alleged well-being of the employees rather than in the success (or even survival) of the company as a whole. Those people, of course, are union leaders who, by nature of their position, are ONLY interested in furthering the position of their charges (the employees). The result is that labor is now being put into the same "untouchable" category of other expenses such as maintenance, fuel, etc.

Therein lies the quandary.

If a struggling airline:

  • Can't cut maintenance for fear of government penalties, public backlash or, at worst, planes falling from the sky

  • Can't cut fuel costs (for obvious reasons)

  • Can't cut aircraft expenses either enough or in time to matter

  • Can't cut marketing for fear of obscurity

  • Can't cut other expenses such as fees and gate leases for operational reasons

  • ... and can't cut labor costs or staffing levels for fear of retribution by zealous unions...


  • ... then what is there for them to do?

    Every time debt is forgiven through bankruptcy or renegotiation of terms, it hurts the economy as a whole. In short, it is money or product that has been given away for free (or very reduced rates). That is someone else's labor that has gone uncompensated. That is someone else's paycheck in a different industry entirely that is going up in smoke. That may mean someone else's job working for some parts manufacturer in the supply chain is now in jeopardy - or even gone entirely. That is someone's potential new job opportunity that has now evaporated because the airline didn't pay its bills - and a judge somewhere said that it was "OK" for them not to do so. Do we weep for these people? Is there a huge outcry of "there are thousands of people out of work or taking pay cuts because the airlines are bankrupt!"? I haven't heard it.

    We complain about the idea of laying off 1000 flight attendants. We never notice the damage that would be done by continuing to pay them.

    We despair about the "latest round of concessions" by the mechanics. We never think about the tool company that closed it's doors because the airline was allowed to not pay their bill rather than pay a dollar an hour less to the mechanics that used the tools.

    We are shocked at the stories of pilots who aren't making what other pilots are... and yet we never cry over the mom and pop business that can't get a small loan from the major bank because the bank didn't get their loan payments from the airline.

    I'm not judging... I'm pondering. I ask you to do the same.


    1. What expenses, exactly, are we expecting the airlines to cut if not labor?

    2. At what point do we balance the damage being done to the economy by the airline industry's "serial bankruptcies" with the damage we allege is being done to a relative handful of employees?

    3. At what point do we realize that, while the airlines continued healthy existence is necessary for the country's economic stability, their continued unhealthy state is undermining the exact same economic stability it is meant to serve?


    Let's think about this... not slam each other about it.


    Dave Mark - Intrinsic Algorithm - Reducing the world to mathematical equations!
     
    Flying-Tiger
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    RE: The Quandary Of "cost Cutting" For Airlines

    Tue May 11, 2004 12:51 pm

    I throw in a few considerations:

    Work on the INCOME side, not only the cost side. If you have a healthy income you are able to accept higher costs. An example how you could increase your income would for example be a state-of-the-art yieldmanagement system.

    Try to fly on routes which justify a higher fare.

    Try to match capacity and demand.

    -----------
    Cost cuts:

    I have to disagree somewhat on the fuel bill, you can cut this one a bit if you are always using state-of-the-art technology which is usually more fuel-efficent. That might give you an edge over a competitor - this basically means, that DL, UA, AA - the all have employed their B727, 732 fleets way too long, and now don't have the appropriate replacements in place due to funding issues.

    De-Hubing is not a heal-everything-idea - all majors rely on a hub-and-spoke strategy for their long-haul networks, someting the 7E7 won't change. You need the feed from smaller destinations.

    Regards
    Flying-Tiger
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    InnocuousFox
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    RE: The Quandary Of "cost Cutting" For Airlines

    Tue May 11, 2004 1:17 pm

    "Work on the INCOME side, not only the cost side"

    However, the consumer has the final say on that. As long as there is someone charging less, your hands are somewhat tied.

    "Try to fly on routes which justify a higher fare. "

    This only works if you are a mid-sized national line where you can pick and choose. If you are a major where you are expected to have service to all places, you don't have this flexability so much.

    "Try to match capacity and demand."

    That is pretty much a given - but is often difficult due to relatively inflexible asset lists. You have what you have and you will just have to make it work.

    "I have to disagree somewhat on the fuel bill, you can cut this one a bit if you are always using state-of-the-art technology which is usually more fuel-efficent."

    As I mentioned above, this is a long-term strategy that may require short-term expense. As you pointed out, it may not save someone who has gone too long that way.

    "De-Hubing is not a heal-everything-idea - all majors rely on a hub-and-spoke strategy for their long-haul networks, someting the 7E7 won't change. You need the feed from smaller destinations."

    Notice I didn't say "de-hubbing" above. I said "de-peaking a hub". Believe me, I have written some pretty massive explanations of the benefits and pitfalls of the hub system. However, it is a mathematical fact that a banked hub has a horrible asset utilization rate. By shifting to a rolling hub rather than a banked hub, you can either operate more flights per day or use less gates/ground assets to serve the same number of flights. The only casualty of that is slightly longer connect times for the passengers.

    Thanks for jumping in, though!
    Dave Mark - Intrinsic Algorithm - Reducing the world to mathematical equations!
     
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    ClassicLover
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    RE: The Quandary Of "cost Cutting" For Airlines

    Tue May 11, 2004 1:42 pm

    Personally, I think labor costs should be cut - but not in the usual ways that people think.

    Long serving airlines tend to have long serving staff that are on vastly superior salaries to LCCs. The LCCs have proven the theory that people will do the same jobs for a lot less money in order to have a career in the airline industry.

    As such, the base salaries for newly hired all crew in the so called legacy carriers should be reduced to LCC levels.

    This is taking the very long term view. As people retire and new staff come online to replace them, the overall salary expenditure is going to decrease. It's a win-win situation for the airline in that the existing staff don't get pay cuts, and the airline gets to save money.

    However, I can see three problems. Firstly, unions would never let it happen. Secondly, staff morale would suffer as some people were getting a lot more money for doing the "same" job. Finally, some airlines would go bust before all the people turned over (up to 40 years in some cases).

    It makes sense to me, but human nature would never let it happen.

    However, I also believe that in 40 years time the survivors of today's LCCs will be in precisely the same position as the legacy carriers are today - spiralling labor costs killing the airline. It's due to the yearly pay rises given on performance and the like.

    Perhaps the airlines should fix any wage increases to inflation in the home country only, and pay the employees cash bonuses in profitable years, based on performance. In that way, labour costs are not increasing in real terms.

    The only other way an airline can cut costs is to not fly any unprofitable routes. All unprofitable routes should be withdrawn immediately, or appropriate steps done to make them profitable. An example here is Qantas creating the low cost international airline Australian Airlines. It flies routes profitably that Qantas can't due to its cost base, yet as a wholly owned subsidiary, all the profits go back to the parent company.

    I think airline managers need to think outside the square a little more in some cases - remembering here that I don't profess to have all the answers either.

    Good topic!!

    Trent.


    [Edited 2004-05-11 06:47:27]
    I do quite enjoy a spot of flying - more so when it's not in Economy!
     
    UA744Flagship
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    RE: The Quandary Of "cost Cutting" For Airlines

    Tue May 11, 2004 1:46 pm

    Great post with a lot of thought. Good job!

    Look back at some of my posts last year and I echo a lot of the same sentiments.

    Especially about the "cumbersome equipment obligations"...

    I'll write some more pt/counterpt response later when im not so tired..
    no wire hangers!
     
    Sydscott
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    RE: The Quandary Of "cost Cutting" For Airlines

    Tue May 11, 2004 2:24 pm


    "What expenses, exactly, are we expecting the airlines to cut if not labor?"

    How about Labor related costs?? Don't cut the salaries but make people pay for their own Health Insurance, Life Insurance etc.

    How about Pensions costs?? Why should any business be lumbered with a Defined Benefit Pension Plan. If the employees Pension provider loses money why should the airline foot the bill for that loss plus pay more contributions for that employee?? It shouldn't. Defined Contribution plans are way fairer to the employer as they have set commitments to their employees and are far more efficient to run. Just look at US Airways Pension deficit problems. The employee should take responsibility for their own retirement. (Its general practice in Australia. There are very few defined benefit plans left except in government service)

    How about property related costs?? Terminals, Offices etc. These are all non core assets of any airline and could be sold to a private property group to maintain and upgrade. This then ensures their efficient use and provides the airline with capital to invest in their flying operations. It will also force the airline to be more efficient in their gate and space usage as the private operator will seek the maximum movements through their terminal in terms of planes and passengers. This would result in a more streamlined and efficient airport operation which would definitely cut costs.

    "At what point do we balance the damage being done to the economy by the airline industry's "serial bankruptcies" with the damage we allege is being done to a relative handful of employees?"

    I think the damage done to the economy as a whole by an airline bankruptcy is negated to an extent by the way that airlines capacity is replaced. Clearly if US or DL went under there would be a rush to fill the void at places like Atlanta, Philadelphia and Washington National. The employees would find new jobs, probably at lower pay, and the economic damage would be minimal as the new airlines expanded to fill the void. Even if they didn't add all the flights back they would use larger planes which means the employees at Boeing or Airbus would build more planes, requiring more parts etc. So the economy would recover and continue. The damage in smaller communities would be harder to offset and that is where the loss would be most felt but if their services are profitable other airlines will add frequencies and replace the bankrupt carrier.

    I'm sure my points will be expanded upon as this topic continues. Lets not get personal either. (As InnocuousFox said)
     
    4jaded
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    RE: The Quandary Of "cost Cutting" For Airlines

    Tue May 11, 2004 3:00 pm

    Excellent discussion here. To put in my penny thought on the subject pay does not make any employee happy to do his/her job correctly everyday. It is human nature to always want more. If you make $7.95 as an agent or $27.95 for example you will live a lifestyle at the edge of your pay scale. The LLC's have proven this time and again. There are people that just love to work in aviation and there are people that would be better served doing something else. No matter what you pay them they will just not "get" the job they are supposed to do to make the company a winner. I have never seen any of the legacy carrier employees run around really happy that they make more than the person at the next counter making a fraction of the pay doing the same job. It just does not happen. They complain about this that the other thing going on at there company, worry about there bills, there Christmas gifts etc.
    There are employees that have been working years at legacy carriers that make really big money and refuse to take overtime or Holiday shifts even when the company Begs them too yet if you asked any LLC agent if he/she would like to work for $35.00 an hour /overtime pay for example/ they would cut there arm off to be able to do that.

    The problem with cost cutting the employees however is that once you are used to working for $17.00 an hour working for $10.00 an hour makes them feel cheated, violated, etc and puts a great deal of stress on them personally as they now live an $18.00 an hour lifestyle /yes $18.00/ and now you want them to cut it back to a $11.00 an hour one. The resentment alone is palpable when these things happen and it shows in the product. So the ailing carrier is now cut cost but has also cut revenue as customers flee in terror away from the angry nasty employees. It is a cycle that repeats itself over and over. Plus the rumor mill winds up into high gear and employee groups look for a target to focus their anger on. This could be a CEO, a local manager or whatever, and the Ivory Tower mentality kicks in also. They start to complain about everything that "looks expensive" to them in the hope that by cutting that they will somehow get some money back. This focus is obviously not on the customers still showing up for the flights and I have even seen agents and others get resentful of them as well. Lets take it out on this GOLD level FF because he got a free upgrade! Well the guy earned it he flew 50 revenue flights this year already.
    To close, cutting anything is very difficult for a variety of reasons
    but unless the employees truly get on board any move and see past themselves into the whole or imagine what life will be like without a job at all
    these failures will continue. It is hard working for a big company and sometimes employees feel just like an employee number but everything they do with every customer counts. The truth is here in our posts we all have tales of being mistreated.
     
    dairbus
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    RE: The Quandary Of "cost Cutting" For Airlines

    Tue May 11, 2004 4:46 pm

    This is a great topic and illustrates that there are no quick fixes to the problems facing the legacy carriers. I do have to agree 100% with what ClassicLover said in his post regarding the fact the tenure and overhead is a factor which most LCC's don't have to deal with. At least not to the degree of the legacy carriers. I can see however that the issue of "long serving staff" as he put it is starting to put pressure on labor relations at the oldest and biggest of the LCC's which is Southwest.

    I can use the example of their BWI hub to illustrate my point since I worked there for over six years. Southwest is roughly 30 years old but most employees have worked for them, on average, 10 years or less. This is about the timeframe that Southwest started building their BWI hub which now is their third largest operation. Say that someone in their late teens or early twenties started with Southwest when they first came to Baltimore. They start out at around $7-8.00/hour but it seems like it is a good deal since they like working at the airport and their income is sufficient for their lifestyle at that point in their lives.

    Let us now fast forward to the present. The same ramp agent has now maybe moved up to Lead or Supervisor but is still working on the ramp because that is what he or she likes to do. They have had incremental pay raises and are now earning maybe $15.00 to $20.00/hour. That is not bad money and better than what they started out with but their lifestyle and responsibilities have changed dramatically as they move into their late twenties and early thirties. They might now be married with a family to support and mortgage payments to make and although they have a good job, they find that money is a little tight at times. Meanwhile, the legacy carriers are paying their employees higher wages while continuing to lose money (although granted there have been mass layoffs and huge wage concessions) but their wages lag behind even though the company has been profitable for practically their entire existence. They go to the company to ask for more money but they say that they can't raise wages to match the other carriers because they would lose their cost advantage. The 10 year veteran is then left pondering about the future earnings potential in relation to other fields and what career path to take from where he or she is now.

    I know that a lot of my remarks are speculation and opinion on my part but the facts is that this industry is no longer going to be as well paid as it used to be no matter what part of it you belong to. Pretty soon, the only people working for airlines are going to those that love aviation no matter what instead of just looking at the dollar signs. As a final remark, about two years ago when the current economic crisis was still fairly young, I was asked once why the legacy carrier I used to work for could not make money while Southwest and Jetblue seemed to be raking it in. I told that in order to make money, they would have to fire everybody, hire them back at half their original wages, and sell off their fleet to just one type. Then you would have just another LLC.

    The whole industry is clearly in upheaval and there are no quick or easy fixes. Only time will tell what results from all this.
    "I love mankind. It's people I can't stand." - Charles Shultz
     
    InnocuousFox
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 12:58 am

    @SydScott

    "How about Labor related costs?? ... Health Insurance, Life Insurance etc."

    Many people include those sorts of things in the idea of "labor costs" - I didn't diferentiate for that reason. Sure, you could cut them, but that is almost as bad as cutting salary since you are adding an expense for the employee. In fact, it is cheaper to have a group health plan through the company than to increase the employee's wages enough so that he can pay it himself (which WILL happen over time).

    "How about Pensions costs??"

    This I agree with. Maybe I'm just from a different generation, but pensions seem kind of outdated. I suppose it is now things like IRAs with company matching, etc. That goes in a similar pile as the benefits above, however.

    "How about property related costs?? Terminals, Offices etc. "

    I'm not sure if there is going to be that much of a savings here to make it worthwhile. I don't know enough about it, however.

    "I think the damage done to the economy as a whole by an airline bankruptcy is negated to an extent by the way that airlines capacity is replaced."

    I don't think you understood what I was saying. As I explained in my original post, there is a financial void that is created when a company declares bankruptcy and doesn't have to pay their full debt. That money comes out of the economy as a whole. As an example, if I buy ProductA on credit, CompanyA has to spend money to make it. If I don't pay for ProductA, CompanyA has incurred expense that they can't recover from me. Same thing for money that is lent to me. If I don't pay it back, LenderA has less money and takes a financial hit. Bankruptcies ripple throughout the economy in that way because anyone who doesn't get paid is now hurting that much more.

    @4jaded

    "once you are used to working for $17.00 an hour working for $10.00 an hour makes them feel cheated, violated, etc "

    That definately complicates matters! It's the same thing in professional sports, for example. Once one person gets the big huge contract, all the other players say "uh... aren't I worth as much as that guy?" and ALL the salaries increase. Is the pay necessarily proportional to the work being done, however? Each airline's unions can point to the other airline's pay scale and say "what about us?" There is a "salary creep" that happens that is very hard to reverse - or get to revert back to before it began.

    I'm not saying that airline employees are overpaid - I don't have enough information to judge. But don't you think that EVERY industry has people that thinks they aren't paid enough? The #1 sign that you may be paid too much, however, is when your industry is crumbling around you.

    @DAirbus

    "I told that in order to make money, they would have to fire everybody, hire them back at half their original wages, and sell off their fleet to just one type. Then you would have just another LLC."

    Bingo. That just about sums it up.

    Thanks for all your responses... good stuff so far! (It beats the hell outta "what is your favorite bulkhead", doesn't it?)
    Dave Mark - Intrinsic Algorithm - Reducing the world to mathematical equations!
     
    InnocuousFox
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 6:54 am

    One note: I just was looking at my May copy of Airline Business. There was a quote from David Seigel (USAirways) where he said:

    "Last year our average fare was $125. Unfortunately, it cost us $140 to carry that passenger, so every time a passenger got on one of our airplanes last year, we were paying them $15."

    Serious ouch.
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    UA744Flagship
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 7:10 am

    OK, here's me on the soapbox.

    The solution to getting labor to be more amenable to wage/salary fluctuations lies at the root of the company culture.

    If you have the right company culture, then adjustments of labor cost when they are needed by market fluctuations are much easier to accomplish.

    What kind of culture do you need? Definitely a "Performance Based Culture"... e.g. one where risk and reward are shared. Currently being implemented under United as "success sharing" and under AA as "Pull Together Win Together", and already done successfully for over the last decade by Continental...

    But it doesn't just mean rewarding employees for good operational performance. It means making sure that everyone has the same mission, vision, priorities, etc. It means making your workforce concious about what's going on with the company, and truly care about the company.

    Yeah, this all sounds like touchy feely mumbo jumbo, but this is one of jetBlue's and Southwest's biggest strenghts -- the kind of culture where F/A's really care and take pride in having a clean a/c, for instance.

    Financially, wages can be made more stable with better paying systems. Unfortunately, the network carriers face union opposition with regarsd to changing the way people are paid, but carriers like jetBlue have it right with such innovations as individual pilot contracts, etc...

    no wire hangers!
     
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    PA110
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 7:32 am

    This thread represents the best aspects of A.net (as opposed to "what is your favorite....). It's why I joined up in the first place. Great and thoughtful contributions by all.

    I honestly believe if some of the big legacy carriers are to survive, they will have to abandon the traditional airline pension plans in favor of the 401K's or SepIRA's that most other industries offer. They must also introduce a new lower payscale for new hires, but at the same time introduce pay for performance rewards. As was seen with Eastern, unions only benefit employees if they can deliver. In Eastern's case, although the airline was already pretty far gone, union intransigence pushed it right over the edge, and everyone lost. Unions need to be amenable to pay for performance type contracts, and so-called "B-scales". In fact, if you are really trying to look long term, stage the lowering of wages over several periods to avoid some of the inherent inequities. Go B-scale for 5 years, then introduce C-scale.
    Maximize aircraft hours by careful planning and rotation. Dedicate some aircraft to regional service so that weather delays in one area of the country don't have a ripple effect across the airline's entire fleet.

    These are just a few of the "what if" thoughts off the top of my head. I'm enjoying reading everyone elses contributions. Please keep this discussion going.
    It's been swell, but the swelling has gone down.
     
    InnocuousFox
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 10:22 am

    "This thread represents the best aspects of A.net ... Great and thoughtful contributions by all. ... Please keep this discussion going."

    Absolutely! I would have thought this would be more trafficked than it is, however. I suppose it is easier to bitch, defend and finger-point (and then move on so you don't have to follow up on anyone's responses) than it is to actually come up with thoughtful solutions. However, while I know that this thread won't "solve" anything, perhaps it will generate some understanding as to how the industry we all seem to love works.
    Dave Mark - Intrinsic Algorithm - Reducing the world to mathematical equations!
     
    ncflyer
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 11:25 am

    Are WN workers (as an example) really paid that much less, or are they just more productive? Example: who cleans the planes on WN-- not a third party cleaning crew, but the flight attendants and sometimes even pilots-- that's gotta save some bucks. The flight crew including pilots must have to work harder to earn the same wage, as they turn the birds around in 20 minutes. I don't know the facts, but I just can't imagine WN (as an example) gets such good workers if they pay so much less than the industry.
     
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    mats
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 11:34 am

    I'm impressed by the thoughtful, eloquent commentary here.

    I was thinking that training costs and employee benefits warrant some discussion.

    I think that the LCC's are at an advantage because their operations are inherently simpler to understand. For example, legacy CRS systems are exceptionally difficult to comprehend; newer carriers have simpler, more intuitive systems that are easy to learn. New employees can learn the systems more readily and training costs are vastly reduced.

    Simpler operations also facilitate turnover. Without the financial merits of a long-term career, employees can come and go more rapidly without the training costs of complex operations.

    Health insurance is a contentious issue for many organizations, airlines included. Although this is an enormous cost for the employer and a focal point of union concerns, I still believe that the airlines should provide adequate health insurance for their empoyees. I speak as a healthcare provider, not a businessman, but I feel that the airlines have the responsibility to be good employers. Furthermore, I consider employee health insurance as a safety issue; the safety of passengers depends on the health of employees.
     
    n844aa
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 11:44 am

    I think this thread is a pretty good summation of why the airline industry's cumulative return to investors has been something like -2% since the dawn of commercial aviation. (Source: an Economist from a couple weeks ago. Can't remember the exact figure or issue.)

    It's an expensive, cutthroat industry, with enormous fixed costs, unpredictable fuel prices (and, lately, upwardly trending), a highly skilled labor pool, exacting standards of maintenance and safety, and competitors at every turn.

    The airlines are squeezed by these pressures from every which direction, and they are either effectively or actually powerless to change most of them.

    But let's take a look at labor costs, which I agree are probably the most adjustable of the costs in the airline's equation. For the reasons well-stated above, variable though they may be, employee resistance and morale issues are likely to impede any attempt to downwardly adjust payscales. While lower rates of pay can be successfully introduced (see b-scales at American in the early 80s) eventually those b-scalers will be your senior pilots, F/As, maintenance techs, and union chief, with similarly senior rates of pay. And the airline is left with little choice but to begin the cycle again.

    Frankly, I'm not sure the airline industry is one I'd care to invest my money in. I'm not saying I could resist working in it -- it'd be an adventure, if nothing else -- but for long-term return, the industry thus far has not proven to be a winner.

    I read once that over the 80 years of passenger aviation, the total profit generated by the industry was exactly $0. And that was written a year or two ago, so it may actually be in negative territory at this point. It's a rather remarkable record if you think about it.
    New airplanes, new employees, low fares, all touchy-feely ... all of them are losers. -Gordon Bethune
     
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 12:41 pm

    Ncflyer had a good point.

    Both productivity and assigning "non-traditional" jobs to staff to increase efficiency is something that makes a lot of sense. The example given of aircraft crew cleaning their own planes on turnarounds is an excellent one. Not only is it increasing the efficiency of pilots and flight attendants, but it's directly saving costs by not having a 3rd party cleaning crew.

    This is not as simple as it sounds, however!

    It seems to be a general human trait to not wish to do "more work" or to work outside a current job description without compensation in the form of more money, or other benefits (time in lieu, and so on). It's something I've never understood personally, because the person who takes on more work and doesn't complain is usually the one promoted when the time comes.

    To have a productivity increase happen, you need to have -

    * Honest management - and this usually comes about when management is up front about what they're doing and why.

    * Respected management - management presenting what they are doing in a logical and easy to understand why. Also, management leading by example, and management not "ordering" but "asking".

    By management, I don't just mean CEOs - you need line managers who will lead by example, and who will back up senior management. It flows all the way down, and if everyone is empowered, productivity gains will happen.

    Back in the old days, it was not uncommon for a Flight Attendant to be responsible for ordering the catering, choosing what to serve, prepare the food, keep the cabins clean, and to check in and board passengers as well. From what I've read, I couldn't see a Pan Am Purser with 30 years experience in 1986 doing something like that! It would have been "below" their station in life.

    From what people write on here and in other groups, it seems that the culture in many of the majors is a case of, "Well I'm not doing that, because I already do this and this, and they can't ask us to do more!" - it's defeatist and very unfortunate. Everyone pitching in and helping regardless of "rank" creates a very close culture, even in a big company, and if it can be achieved, there are big advantages.

    The other issue is "It can't happen to me"-itis - "XXX Airline will never fail! Even if we don't give these concessions, we'll be fine!" ... where history has proven that airlines do fail, all the time. Typical head in the sand mentality, that I think is partly a management issue and partly a union issue.

    Unions have things to answer for too. While they do serve a purpose, sometimes I think they serve their own ends a little too much, and behind the scenes power struggles and the like can really destroy other companies.

    I have noticed that some companies outsource maintenance and other services (IT, etc) and this apparently saves money as well. Unfortunately I don't know enough to comment on outsourcing savings... maybe someone else has a better idea.

    Cheers,

    Trent.


    [Edited 2004-05-12 05:44:29]
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    RE: The Quandary Of "cost Cutting" For Airlines

    Wed May 12, 2004 1:55 pm

    Clearly the labor cost/productivity balance is the hot button issue. LLC's started with lower costs and higher productivity, and still have better productivity due to their culture. That's hard to change at a legacy airline. As to pay tiers, well AA tried that a few years ago, and it wasn't successful and later abandoned. Legacy airlines seem to be running into the same fate as passanger railroads in the USA did in the 1960's/early 1970's due to technological changes, competition (cars for pax RR's, LLC's for legacy co's) and high, union structured labor costs. Benefits as part of labor costs are a major problem, especially fixed pension costs for long retired employees, (versus most working people having 401k's and the employer adding money to them based on their profits) and health care costs for current and retired workers. Cut or change them, and productivity may fall as in effect your getting a pay cut.
    Income is one variable that maybe has to change, in a upward direction to reasonable levels, but competition and having many seats available on may flights negate that situation. Maybe fares should have a base $ amount, plus taxes, TSA fees, and then a variable fuel adjustment fee for when national average fuel costs go up above certain points. Of course, the compeition will find a way, take a slight loss for a while to attract customers, so a variable fuel surcharge would be a problem too as well as an administrative nightmare.
    As to more efficient a/c used, with 9/11 we saw a lot of older, less efficient a/c sent to the dessert, and then replaced with more efficient new or newer a/c (777's for DC-10's, 747's and bigger 737's for 757's, and so on) as well as large growth in RJ's to better balance need for seats without over capacity and with lower costs.
    Maybe we need to allow a bending of the Anti-trust laws in the USA to allow for some carefully limited working together as to schedules, airports serving, and so on to reduce overlaps of flights, costs, gates needed,
    .
     
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    RE: The Quandary Of "cost Cutting" For Airlines

    Thu May 13, 2004 12:29 am

    @ltbwer

    "Maybe fares should have a base $ amount, plus taxes, TSA fees, and then a variable fuel adjustment fee for when national average fuel costs go up above certain points."

    "Maybe we need to allow a bending of the Anti-trust laws in the USA to allow for some carefully limited working together as to schedules, airports serving, and so on to reduce overlaps of flights, costs, gates needed,"

    While your two points above SEEM like more freedom for the airlines, it also looks a little like "enforced freedom" - especially the 2nd point. I hate to get the government involved in anything at all lest we get back to a regulated industry. That may be healthy for the airlines, but it won't be healthy for the conusmer. I'm talking a VERY big generality here, I know. Just be careful what you wish for.  Big grin

    By the way, I have a feeling my respected user list is going to grow substantially by the end of this thread! (It already started!)
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    RE: The Quandary Of "cost Cutting" For Airlines

    Thu May 13, 2004 1:33 am

    I tend to believe that the more companies cut back, the more consumers cut back. Hence we have seen a spiralling downwards of quality and economic activity over the past 25 years.

    It's time to start spending again like FDR did back in the 40's before we all become pigs eating swill.

    and with that..cabin crew, seats for landing please.
     
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    RE: The Quandary Of "cost Cutting" For Airlines

    Thu May 13, 2004 1:51 am

    "It's time to start spending again like FDR did back in the 40's"

    Who should start spending? Consumers? The Government?
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    InnocuousFox
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    RE: The Quandary Of "cost Cutting" For Airlines

    Thu May 13, 2004 10:07 am

    Someone in another thread brought up the idea of workers doing things that may be outside their job description - FAs cleaning the cabin, pilots slinging bags, etc. Of course, a lot of this comes from Southwest's company culture.

    There are a number of factors that could contribute to resistance to this:

    One is arrogance - e.g. "I'm too good for that".
    One is ignorance - e.g. "I don't know how to do that."
    The other - and most subversive - may be union reps jumping in and saying "you shouldn't HAVE to do that!"

    If it is a proven fact that fluidity in job assignments helps to "get the job done" quicker and/or with less expense, why WOULDN'T a company embrace this? Is presure against it SO horrible that there isn't a way to infuse it into the company culture?
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    RE: The Quandary Of "cost Cutting" For Airlines

    Thu May 13, 2004 3:44 pm

    I also wrote something that touched on this in this thread.

    I think Southwest gets away with it because it's always been that way - everyone pitches in and helps. This was probably partially easy due to the fact that in the beginning (I'm talking deregulation beginning) there would have been a sense of ownership. WE started this company, WE are building this company and so on.

    Do you think the employees in some (or the majority?) of the legacy carriers have a feeling of ownership of the place they work for? Or the ability to make a change? Judging from some comments, morale seems to be a big issue.

    Changing a company culture is a difficult thing to do. It takes people with vision to be able to do that. Personally, I'd like to know what the CEO of Continental did in more detail - he seems to be held up as the pillar of all that's good and what can be done with an ailing legacy carrier...

    Trent.


    [Edited 2004-05-13 08:45:56]
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    RE: The Quandary Of "cost Cutting" For Airlines

    Thu May 13, 2004 6:19 pm

    Interesting read so far...

    Since labor is the biggest cost of an airline, it makes sense it alone has the power to change the company's overall costs. There are other ways, however, and although they may seem small, when added together can actually be quite large. For example, when AA set out to reduce costs, it looked at everything from aircraft purchases to purchasing paper clips, literally. When AA began this monumental task, they had determined they needed to reduce overall expenditures by four billion dollars. Two billion was achieved by labor cuts and the other two billion were all the "little things."

    Here are some of the little things: AA reduced it's company headquarters from 11 buildings to three, saving several million in annual leases. AA also looked at all the space it had at airports around the world and consolidated where it could, sold off or returned leased space to airports and renegotiated leases on airport space to save money. Construction on the JFK remodel was temporarily sped up to lower the overall cost of the project. The project was eventually halted to reduce capital expenditures. Renegotiate contracts with all suppliers. This is easy to do when facing economic hardship as the suppliers have a vested interest in your company's well-being. If you go under, they lose a hell of lot more than charging you two cents less per bag of pretzels. And when I say suppliers, I mean suppliers for everything from the inflight beverage service to spare engines. AA saw very good results from this monumental task as it literally restructured every agreement with EVERY supplier and contractor over the last two years. Although aircraft costs are high and generally fixed, the opportunity to renegotiate leases also exists with the above philosophy. In addition, as you are well aware, AA deferred its remaining 777 and 738 orders, thereby reducing capital expenditures.

    Another "little thing" AA accomplished was to make payroll entirely paperless. First, there was a big push to get everyone to go on direct deposit. Once that was accomplished, the company ended paper statements and made them available via a website. Up to three years of past pay stubs are available for viewing. In the process, AA has saved millions on paper, postage and printing costs associated with mailing out pay checks and pay stubs.

    There are some ways to reduce employee costs without reducing wages, although, I agree, wage reductions are inevitable in a down turn such as this. Adding more automated customer service features reduces the amount of people needed to operate the airline. Of course, this isn't popular with the unions or the employees, but it is possible. Productivity, as discussed above, can also save costs while maintaining wage. For example, I am a flight attendant. I now am scheduled to work somewhere between 70 and 85 hours a month. Increase that range to between 75 and 90. Yes, flight attendants will balk, but most will enjoy the increase in their paycheck as a result of increased flying. Here, you've preserved wages by increasing productivity and reducing the overall number of flight attendants necessary to operate. Again, not very popular with unions and employees, but, sadly, more popular for those that keep their jobs. Their still making the wage their used to.

    Another way to decrease employee costs, especially for the legacy carriers, is to offer an early out package. Although the company may give the employee a one time early out bonus of $10,000, the company will make that up and then some by the junior, lesser paid employee who replaces them. The most senior flight attendants at American make nearly three times as much as a newbie. Again, you are maintaining wage by reducing the number of people flying at the top of the pay scale, as well as potentially increasing morale by allowing workers an early out option.

    There are literally thousands of things that can be done to save money, and when added up, save a great deal. It is true, however, that employees remain the biggest expense and therefore the most easily targeted for cost reductions.

    ~~~~~~~~~~~~~~~~~~~~

    Some unrelated food for thought: Every penny increase in fuel price costs AA an additional $30 million annually. (Source: Gerard Arpey, CEO.)

    [Edited 2004-05-13 11:26:55]
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    RE: The Quandary Of "cost Cutting" For Airlines

    Thu May 13, 2004 10:54 pm

    A couple of additional thoughts as I have read on since my post.
    While AA did have a good Idea many years ago to start the "B" scale this idea was a miserable failure and was "corrected" due to employee pressure. As I remember it the A scale employees had the following reactions. First they felt threatened by the B scale employees ability to perform the exact same job at a lower cost. There was an effort on many of the A scale employees to point out the flaws in performance of the new hires. This was not only difficult on morale but mostly unjustified as new employees go through a learning curve at just about any job. The A scale employees also made constant accusations that the company had lowered its standards by taking on employees at a lower scale and to prove the point would set up difficult or impossible situations for the B scalers and then walk away and watch the disaster /usually customer service/ unfold. In addition going on at the same time AA was growing AMR Services /a very low cost ground handling operation/ and farming out a lot of traditional AA employee work to AMR Services. This only helped fuel the fire .
    The B scale employees on the other hand had the following reactions.
    At first they were very excited to be airline employees and had the zest for the job that any new hire has. However this was very short lived as the A scale employees rolled out the UNWelcome mat for them. Besides the constant looking down the nose routine they found themselves being pitied for their plight. As they did not know anybetter they would have been happy at the job they signed up for yet the constant reinforcement of " being taken advantage of" got to most of them rather quickly. The backlash of course was to with hold output and dump the bulk of the work back onto the A scale employee they were working next to. The justification was " well they think they are all high and mighty and they make blank blank dollars an hour more than I do let them do the work then. It became a cycle of abuse that only the passengers and some managers suffered. It was amazing to see the change when the scale was "righted" as everyone was suddenly Welcome and respected and "wrongs" were corrected.
    The last topic I wanted to speak about was that of productivity.
    Legacy carrier employees do have a sense that they are too good for many of the little jobs needed to get the flight going. This has been fostered by the carriers themselves in the good years. While small city employees at big carriers are much more adept at performing Multiple functions HUB employees
    for the most part /unless they came from a smaller city/ are trained in a specific function and pretty much can be " born, raised, live, and die" doing that one function if they so choose. My experience is that " for example" most gate and/or ticket counter agents would leave a passenger stranded for hours as opposed to getting a wheelchair and helping out a customer get from point A to B unless specifically instructed to do so by a supervisor. That was always someone else's job. They would spend an hour bitching on the phone to that "contractor" to " hurry up" as this was " Unacceptable" but would not spend the 5 mins to do it themselves. In many cases that was the training that they have and are actually afraid to think outside their box. While they were all trained in wheelchair procedures if you never really have to do it then when the time comes you are unsure if you can. Worse is the Flight Attendants revulsion at cleaning anything up. Not only have I seen them be unwilling to correct an oversight by the Cabin Service people and become indignant about "their failures" but I have also witnessed them make a mess of a perfectly clean cabin ie drop something on the floor etc by accident" then call for cleaning and sit down and refuse to board until that " someone comes and cleans it up". This type of mentality is dripping from the legacy carrier employees while the LLC employees have more of the "small city mentality of lets just get this done right now."

    Just some more of my experiences with this topic
     
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 12:58 am

    Fantastic information!  Wow!

    From what I have read about Southwest (in the book "Nuts!", for example) the culture is a big deal to them. Most of what you wrote above is completely anti-thetical to what they stand for and how they run things on a day-to-day basis.
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 1:52 am

    4jaded... I totally know what you mean. When I was a flight attendant at Reno Air, we did clean cabins and would do that and many other things to get the plane out on time. As you've correctly pointed out, that's not the ideal at the legacy carriers. When we first merged with American, I was working a Chicago turn from Reno. In Chicago, I was walking through the cabin picking up blankets and folding them when one of the rampers literally yelled at me and said, "You're taking away a union job."

    This attitude is like a cancer and runs rampant at the legacy carriers. I've even seen passenger service managers step on board and quickly clean, while muttering things like, "I hope the ground crew doesn't walk on and see me doing this." I have, from that day in Chicago forward, refrained from cleaning where I am not required to (At AA, flight attendants do clean airplanes on thru flights of less than 1100 miles in length).

    Having said all that, AA has increased its employee's productivity. Their used to be cleaning crews at most stations, but now, the baggage handlers do double duty and clean the plane. Their union accepted this added responsibility as it promised to save some of their "union jobs."
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 2:43 am

    "In Chicago, I was walking through the cabin picking up blankets and folding them when one of the rampers literally yelled at me and said, "You're taking away a union job."

    Bingo! Again with the freakin' unions! And now, because the unions are insisting that the airline pay 2 people for doing the job of one, the airline is now some big, evil entity that is "taking away union jobs" by having to let people go.

    Christ, people... do the math once in a while! (This is not meant for you but for the industry in general.)

    "Their union accepted this added responsibility as it promised to save some of their "union jobs."

    Gee, ya think?
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 3:35 am

    In all fairness to the unions, however, not all have that mentality, really. My union at least encourages thinking outside the box to get the job done, where others are separists and would rather do the entire job on their own just to boost membership. There is strength in numbers, but the bigger you get, the less skilled and more ignorant your members become. I'd rather go the extra mile and be respected by my coworkers.

    Before anyone goes nuts on me, I respect the rampers at AA very much. This incident I had at ORD only happened once, and although I've heard about similar incidents there and elsewhere, my interactions with most rampers are positive. They are motivated to achieve success just as much as I am. It's the sour apples we really have to watch out for, as they can bring down and entire work group.
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 3:48 am

    "There is strength in numbers, but the bigger you get, the less skilled and more ignorant your members become. I'd rather go the extra mile and be respected by my coworkers."

    That's the main argument against unions. If you believe in yourself and you believe that you will be respected and appreciated for what you have to offer, why align yourself with others? Stand on your own merits and work to the best of your ability. An honest company will recognize that, respect you for it, and compensate you accordingly.

    However, if you fear being judged on your own ability and would rather be in a position of power through ganging up with your peers in order to "force the hand" of your employer, that says quite a bit about you as well. Not all union members are like this, however. In an industry that has mandatory union membership, though, what does that say about the unions and their belief in you and the company?
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 4:09 am

    "Work on the INCOME side, not only the cost side"

    Excellent idea, except management of most US "legacy" carriers finds this idea repulsive. Here's a snippet from another thread which concerns WN's loads in PHL:

    USAirways has been carrying an average of 130 psgrs per day between these two points (PHL-PVD)

    On 9 trips Sunday WN carried 550.


    Price it right and you have a tendency to increase demand. Here's another example for you. I had to fly from MCI to Dallas with one days notice. No weekend stay either. It's a round trip mileage of about 880 miles. I called Delta and American - $870, or almost a dollar per mile for the flight. Their "costs" are considerably less. So I checked Southwest - I had to stop in Tulsa on the way down and OKC on the way home, but the price was $400... fifty cents per mile. Still WELL ABOVE AA or DL's costs per seat mile. And on the return flight, I made some observations - there were about 30 people who got off the DAL-OKC flight and walked over and checked in for the OKC-MCI flight. Had DL or AA priced a last minute MCI-DFW round trip for $400, there was the potential for them to have made an additional $12,000 on one flight - but people gave that business to Southwest. Some might have paid a small premium for the "convenience" of a nonstop flight, but certainly not double what the competition was charging. FWIW - about 20 of those 30 passengers were wearing suits...somebody's corporate travel department must have noticed. I would have observed my outbound flight for "two steppers", but since I was paying full fare, and since we got to TUL 7 minutes early, I was able to jog over to the next gate and get on the TUL-DAL flight...total ground time for me in Tulsa - 10 minutes. Might as well have been a nonstop flight!
     
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 5:17 am

    (And if it wasn't for the "Wright Ammendment" - specifically designed to clip WN's wings at DAL - you likely could have done a non-stop anyway.)
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 5:46 am

    Since multiple unions at Northwest have rejected any plans for contract restructuring, NW has chosen a different route - cut labor costs through technology. Check-in counters at the hubs of DTW, MEM, and MSP are being ripped out and replaced with E-ticket machines, to service the customers that don't already check in online. Elite line agents are no longer able to manually process upgrades. "Customer Rebook Hotline" carts have been rolled out in almost all mainline stations over the last few years. The airline has chosen an interesting way to cut costs - reducing the work force by making certain jobs obsolete.

    Of course, lost in all this cost-cutting is the inverse relationship between reducing costs and customer service, and trying to find a happy medium between the two. Many passengers are now upset at the fact that it's almost impossible to talk to an actual human being at a check-in counter except in cases of irregular ops. And when those cases come through, talking to an actual person is usually much more helpful than an RSA or CSA at a cubicle in Chisholm.

    This comes down to a roll of the dice by Northwest (and surely other airlines in the future that attempt to implement these and similar features), a bet that says "We believe that customers will sacrifice face-to-face interaction and customer service in exchange for check-in flexibility (explained two paragraphs later) and lower fares." Will the bet pay off? In regular operations, probably, but if you need to get a ticket rebooked due to weather and there's a line of 50 people waiting to talk to the two agents on staff, the bet may be a losing proposition.

    It may not be fair to the agents, some of which probably came over from proud airlines like North Central and Southern, but the fact is that the prevailing trend in American industry is that of outsourcing. Can somebody or some other firm complete the task at a lower cost? Good - hire them! Some airlines at some stations outsource their aircraft cleaning to Firm XYZ, and now they're outsourcing their check-in to Microsoft.

    The thing is, I can't say I'm surprised. I don't mean to offend anyone with the following questions, but do we really need unionized professionals to put new copies of SkyMall and WorldTraveler in the seatbacks of our jets, or to straighten out the head-doilies on the first class seats? Do we need 20 of them to check in John Q. Public to Billings at the ticket counter when Mr. Public can, thanks to technology, check in 1) at work, 2) at home, 3) in the skyway, 4) in the WorldClub, 5) in the Ground Transportation, 6) in the parking garage, etc. In today's aviation climate, the overwhelming answer is no. And that answer is not just from struggling legacy airlines like Northwest and Delta, it's industry-wide. Southwest and Airtran have already begun to offer customers the opportunity to check in online.

    InnocuousFox is right - labor is where costs must be cut, and outsourcing is the way to do it, at least in the visible arenas of check-in, aircraft cleaning, and maintenance, where outsourcing is so prevalent that it deserves its own topic.


    Regards,

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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 5:51 am

    To reply to the above I also have nothing but respect for most airline employees. There is always some bad apples but that goes without saying everywhere. But exaclty what the Reno Flight attendant has pointed out is very true. The same thing happened to National Flight attendants when PanAM took them over. They were used to getting up right away and getting the service going since they had worked shorter legs than PANAM but when they tried this on their first Transoceanic Service with Pan Am crews they were told to sit down and relax " we don't get up for at least 45 mins." These kind of stories were told to me by both former National and PanAm inflight employees. When AA took over AirCal I once took a 767-200 flight from SFO to JFK. It was completely staffed with former Aircal flight attendants /just after the merger/ and the energy level and service were spectacular. Even though it was a red eye flight these FA/s were Johnny on the spot the whole way there. Months later you could see that the AirCal way was slowly but surely being beat out of them. I am sure Reno Air employees had a similar expereince .

    On the revenue side reply 30 has a good point. The airlines may be able to sell alot more tickets at 400.00 as opposed to 800.00 and still make money since the lowest fare in the market may be 125.00 or so for an advance purchase. If I was going to have to buy a walk up ticket and had the choice of flying Continental or Airtran for example I would pick Continental in a minute if the price were the same. However many legacy carriers still think there is a market out there for the 1300.00 coach transcon flight when in fact most people would happily choose say America West and fly for less than that in First Class. The airlines that can keep flying selling tickets for 29.00-499.00 are going to continue to attract the bulk of the business. This may turn around to some extent when the economies of the world pick up and "flying in style" becomes cool again but the bulk of worldwide passengers have come to realise that "flying in style" does not buy as much attention as it used too. While there is room out there on a global scale for 4 or 5 Singapore Airlines size carriers to offer a premium product and charge premium prices there just isnt the interest of the masses to keep airlines like AA,UA,BA,US,NW,AC,DL,AF etc etc with the massive fleets they have rolling in enough premium fares to keep them viable with the massive cost structures that they have. It seems to me that the AA size carriers /talking fleet size and passenger moved/ are going to eventually look alot like what Southwest is today except on a grander scale, there is a small Niche Market for Combo Carriers /like the Continentals of the world, and an even smaller number of Premium Carriers like the Singapore Airlines type of service. One way or the other the legacy carriers will have to change to meet the reality of the market or go the way of PanAms and Easterns of yesteryear.
     
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 5:52 am

    "Since multiple unions at Northwest have rejected any plans for contract restructuring, NW has chosen a different route - cut labor costs through technology."

    Fantastic point! That is a whole other animal, however. As in other industries, there will be a point when "labor" starts griping about jobs being "lost to technology" and tries to stop it somehow. *shrug*
    Dave Mark - Intrinsic Algorithm - Reducing the world to mathematical equations!
     
    qqflyboy
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 6:47 am

    It's a vicious cycle, isn't it?
    The views expressed are mine alone and do not necessarily reflect my employer’s views.
     
    ckfred
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 10:06 am

    I think one of the biggest problems for legacy carriers is the crazy fare structure. Although most businesses do respond to the pricing of competitors (Case in point, a local competitor of Wal-Mart and Target sold formula for $3 less per can. Wal-Mart and Target eventually matched the price), it's only in the financial markets that prices change daily.

    The airlines need to devise fare scheme that a) has only a few fares, say 21-day Advance, 7-day Advance, 3-day Advance, Walk-up Coach, and First Class, b) limit the cheapest fare to the Saturday-night stayover, and c) charge a fair price for fares most often used by business flyers, even if it means raising discount fares.

    The airlines have worked on the notion that the 10% who pay unrestricted fares are generating over 70% of the revenue. That is crazy!

    I would even suggest putting a business-class cabin on all mainline flights. Reserve it for Walk-up and 3-day Advance passengers. This would have extra legroom and full meal service.
     
    goingboeing
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 10:17 am

    The airlines need to devise fare scheme that a) has only a few fares, say 21-day Advance, 7-day Advance, 3-day Advance, Walk-up Coach, and First Class, b) limit the cheapest fare to the Saturday-night stayover, and c) charge a fair price for fares most often used by business flyers, even if it means raising discount fares.

    This was tried in the early 90's by Bob Crandall at AA. Drastically lowered last minute fares...slightly raised advance fares...and offered 21,14, and 7 day advance purchase fares. Shortly after it was "adopted" by the industry, Northwest started a super duper highly restricted dirt cheap advance fare sale. Rather than stick to his guns, Crandall decided to "teach them a lesson" and ditched his idea. "Value pricing" became a thing of the past.
     
    InnocuousFox
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 11:23 am

    "The airlines need to devise fare scheme that a) has only a few fares, say 21-day Advance, 7-day Advance, 3-day Advance, Walk-up Coach, and First Class, b) limit the cheapest fare to the Saturday-night stayover, and c) charge a fair price for fares most often used by business flyers, even if it means raising discount fares."

    Heck, even THAT may be too complex.
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    4jaded
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 11:51 am

    Heck I remember the old days when your choices were excursion, coach, and first class. That was it take your pick. Made planning a trip and doing business much more easy. Then they came up with " circle fares" etc and the world got alot more complex.
     
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    ClassicLover
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    RE: The Quandary Of "cost Cutting" For Airlines

    Fri May 14, 2004 12:52 pm

    Regarding culture being lost when airlines are bought and merged into the buyer...

    I've always been against this. Often an airline is bought because its owners have received an offer too good to refuse, or it's been taken over due to its happily bubbling balance sheet.

    It strikes me as counterproductive to merge a successful airline into a much larger airline that may or may not be as successful. Wouldn't it be more prudent for big airline A to buy smaller new airline B and let it continue as a wholly owned but separately operated subsidiary?

    The buyer airline would then have a profitable subsidiary that is bringing in money, as opposed to the gradual merge, where fares and service levels deteriorate to the levels of the buying carrier.

    Another reason that so many of the new startups have been taken over or merged into bigger carriers is due to today's way of doing business. You no longer have a Juan Trippe (or others like him) who will do what they can for their airline, fight fiercely for their airline - or anything like that.

    CEOs are expected to give about 5 years to a company and then move on. Company founders are in it for the buck - start a company with the intention of selling it for the highest price when and if it's successful.

    It's capitalism at its best at those levels, but who suffers in the long run?

    The airline itself. Years later it finds itself having to reinvent the wheel in order to cut costs and stay afloat. Sometimes more foresight needs to be used in business methinks.

    Trent.
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    InnocuousFox
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    RE: The Quandary Of "cost Cutting" For Airlines

    Sat May 15, 2004 2:00 am

    " Wouldn't it be more prudent for big airline A to buy smaller new airline B and let it continue as a wholly owned but separately operated subsidiary?

    The buyer airline would then have a profitable subsidiary that is bringing in money, as opposed to the gradual merge, where fares and service levels deteriorate to the levels of the buying carrier."

    There is a slight loss of profit due to the added overhead of interfacing the two companies, but other than that, I agree with you.

    "Sometimes more foresight needs to be used in business methinks"

    Actually, the reciprical concept is more accurate - stay the hell away from "that's the way we've always done it!"
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    Econojetter
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    RE: The Quandary Of "cost Cutting" For Airlines

    Sat May 15, 2004 4:59 am

    At this point, it is too late for any big airline A to buy a profitable small airline B. Airline B will not let itself be taken for any price. An extension of this idea is to launch one's own low-cost brand, which some airlines have done, e.g. Song. The results appear rather mixed, but it may be too early to tell. Even a successful low-cost model needs time to break even. At the same time, the venture is likely to make labor relations at the mainline operations even more tense.

    Maybe time to discuss a little about the traditional network airlines who launch their little low-cost operations or turn part of their operations low-cost. Examples of the former: Delta's Song, Air Canada's Jazz etc., United's Ted, BMI's bmibaby... and the latter: so far Aer Lingus aerlingus.com effort, which appears to have paid off.

    Maybe someone familiar with those developments can comment?
     
    InnocuousFox
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    RE: The Quandary Of "cost Cutting" For Airlines

    Sat May 15, 2004 6:16 am

    While I originally thought concepts like Song and Ted were rediculous, (if you realize it works, integrate the idea system-wide!) I began to realize that a lot of the LCC concepts they are trying to emulate simply CAN'T scale to the size of the parent airline. However, I think there should be at least SOME attention paid to trying to integrate more of what makes an LCC work into the larger systems.

    One of the main sticking points seems to be beliefs about the customer:

    "Flyers want assigned seating!"
    "Passengers want club lounges in the terminal!"
    "Customers want face-to-face service at all times!"

    Well, despite the fact that some passengers DO want these things, the numbers are surely showing that passengers just want to get there for the least amount of money they can.

    It's almost like it should be the reverse of what he have now - that we should have many LCCs and a handful of "luxury carriers". Of course, at the rate we are going, that may not be far off.
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    docpepz
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    RE: The Quandary Of "cost Cutting" For Airlines

    Sun May 16, 2004 3:13 am

    Outsourcing ground operations may have its benefits - but if the airline can run its home base with its own ground handling company, shouldn't they continue to do so?

    From a customer point of view, I think it is necessary for, say, SIA to have its own staff in its home base in SIN, and BA to have its own ground handling in LHR. ( I know it doesn't anymore)

    This will enable to company to have strict control over costs that are incurred in their home base, as well as ensure that operations are smooth at their hubs.

    There was once the luggage at LHR from my BA flight took over an hour to get to the carousel. As a result, I missed the last tube to central london, and BA kindly agreed to pay for my taxi fare.

    When I asked them what exactly was going on with our luggage after about 30 mins of waiting, their staff told me "I'm sorry but this is the responsibility of our handling agent and not us. We have absolutely no control over this situation."

    As a customer, I would be more forgiving to an airline if their ground operations weren't so smooth out of their main hub. However, I would be less forgiving if say, SIA's ground handling agent in SIN, SATS (Singapore Airport Terminal Services) messed up with my luggage.

    Any thoughts on this? The main thing is we must reconcile the needs of controlling operations in your home base while keeping costs low.
     
    InnocuousFox
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    RE: The Quandary Of "cost Cutting" For Airlines

    Sun May 16, 2004 3:56 am

    I would have to agree that a lot of the ground service at a major center should be kept in-house. However, when you get to smaller stations such as feeder airports, you lose the benefits of scale. Why pay full-time people to work 2 flights a day? At that point, having shared services gives you some advantage.
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    4jaded
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    RE: The Quandary Of "cost Cutting" For Airlines

    Sun May 16, 2004 9:57 am

    On the topic of Ground handling inhouse. Bob Crandall tried a brilliant idea of starting a low cost ground handling company AMR Services. He then ordered AA to turn over alot of the existing contracts to Services and also went out and got contracts with other carriers. The concept worked well and Services expanded and expanded. However once it got too big and began to threaten the unions they did all they could to beat it down again. The company was sold off to Worldwide. Another great idea that was rejected by the establishment.
     
    aa757first
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    RE: The Quandary Of "cost Cutting" For Airlines

    Sun May 16, 2004 10:36 am

    USAirways has been carrying an average of 130 psgrs per day between these two points (PHL-PVD)

    On 9 trips Sunday WN carried 550.


    WN's PAX count is grossly inflated. I would guess that 420 of those WN passengers were going to BOS, not PVD. US Airways served both, meaning the people going to BOS flew PHL - BOS and the people going to PVD flew PHL - PVD. I bet US Airways carries about 1,000 PAX daily to BOS.

    I will be so flamed for this, but I think airline employees, in general, are very overpaid. Looking at AirTran's pay rates, I think $18.56 an hour for a flight attendant is just too much. First of all, I think we can safely say few flight attendants are in it for the money. They are in it for the free travel, the odd work hours or just for the love of avation. I think $13.00 an hour for a flight attendant is a resonable pay rate. Before AA stoped hiring, its my understanding that new flight attedants were paid $21.61 per hour. An airline flying a 757 from ORD - LAX would save about $108 per trip by paying flight attendants $13 per hour compared to $21.61.

    Can't cut other expenses such as fees and gate leases for operational reasons

    The only thing I can think of is cutting city ticket offices.

    AAndrew
     
    txagkuwait
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    RE: The Quandary Of "cost Cutting" For Airlines

    Sun May 16, 2004 10:48 am

    >>WN's PAX count is grossly inflated. I would guess that 420 of those WN passengers were going to BOS, not PVD. US Airways served both, meaning the people going to BOS flew PHL - BOS and the people going to PVD flew PHL - PVD. I bet US Airways carries about 1,000 PAX daily to BOS.<<

    BOS-PHL as a market averaged 1115 passengers per day between the two points. Of those 1115 passengers, USAirways carried 76%, or roughly 847 of them.

    But as far as how many of WN's 550 passengers were going to PVD or BOS or wherever.....the bottom line is the seats were occupied.


     
    jetbluefan1
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    RE: The Quandary Of "cost Cutting" For Airlines

    Sun May 16, 2004 11:37 am

    Labor actually can go quite a ways when it comes to cost cutting. All airline employees know that the "good ole' days" when you got paid $25/hour to check-in passengers are gone. And why? Because times have changed. Therefore, everyone must adjust. Why should a legacy carrier worker be paid triple the amount of an LCC worker, when an LCC worker often gives better service?

    JetBlue pays its phone reservationists $8.25/hour, and they say LOTS of money by having them work out of their own homes. US Airways phone reservationists get paid $21 an hour, and they work out of an office. This is a perfect example of where costs can be trimmed. These workers are doing the exact same thing, so why should the US Airways employee be paid $12.75 (if my math is correct) more? That's the type of thing that's killing an airline - overpaying someone who really doesn't deserve that type of salary (IMO). If you're paying someone $21/hour, that person might as well give the best customer service around, but with my experiences, that has not been the case.

    Here's another thing: exporting jobs. This is an issue definitely as many jobs are needed in the US, but it costs the airline quite less to export jobs to poor(er) countries such as India, etc. I heard that they are paid as little as $2/hour there! That is definitely a huge bargain for the airline, but as I already mentioned, many people wouldn't be happy that jobs are being brought to other countries.

    Another option not related to labor is the rolling hub, as mentioned. JetBlue at JFK is a rolling hub. AirTran at Atlanta is a rolling hub. Why do the majors feel that there's a huge need for banks? If their hub was to become a rolling one, the cutsomer may have to wait a few more minutes for their connecting flight, but boy, would it save that airline quite some dinero!

    Another thing to look at is employee efficiency. A perfect example is Delta vs. JetBlue. At LGA, Delta had ALL positions filled (roughly 25), and the line (only snaked 3 times) took over an hour to get through! JetBlue at JFK had about 20 positions filled and a similar line, but I still got through the line is less than 20 minutes. And why is this? 1.) JetBlue has a simpler and quicker check-in process, and 2.) JetBlue employees move quicker than the Delta employees. This could be because they are more organized, more relaxed, etc. So Delta, which has less flights out of LGA than JetBlue has out of JFK, has the same line and MORE employees being paid MORE than the fewer JetBlue employees taking care of a line three times quicker.

    I think I made a point that employee efficiency is highly important, and there are certain things an airline can do to make sure it happens. This includes going ticketless, and simply asking the customer for his or her last name/destination when they get to the airport. Why should they have to have paper tickets? If employees are more efficient, airlines can save a load of money.

    Yet another thing to look at is a "cultural" thing. Airlines that have bad customer service aren't the most attractice to a customer, and if that customer does not return to the airline due to bad customer service, then that's lost revenue. Ways to make a culture are to do cheap yet nice things for employees (that supervisors can organize), such as: bring in snacks and juice, organize a "casual Friday" type of thing, set a date to go out to the dinner, schedule meetings to vent about work, and all together just organize a laid back atmosphere. Chances are that someone working in a laid back atmosphere will be more polite to the customer than someone working in an uptight atmosphere.

    Just my thoughts,

    JetBluefan1

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