When Cranfield University last probed the productivity and efficiency of the industry five years ago, the emphasis was on lean and mean. Since then, the airline industry has gone through an accelerated period of structural and organisational change, prompted by further deregulation, privatisation and globalisation of the world economy. To survive and prosper, carriers have paid closer attention to the advantages of new technologies and business and management practices. From simple cost-cutting, airlines have developed more sophisticated strategies to pursue sustained profitability.
To evaluate exactly how much the key contributors to the bottom line - productivity, costs and yields - have evolved over the past decade, Cranfield has carried out a follow-up survey of 24 of the world's international airlines, to be published in February. Measures of strategic success: the evidence over ten years, includes airlines which accounted for 76% of the total carrier revenues in the European region in 1998, 70% of revenues in North America and 69% in Asia-Pacific. Performance indicators between 1988 and 1998 have been compared, revealing trends over two five-year periods in the airline industries in the three regions of Europe, North America and Asia-Pacific, as well as the performances of individual airlines.
In an industry where margins are typically low, rather than focusing purely on getting flying activities profitable, diversification into other areas has become an attractive option. As long as they serve the airline industry, however, there is a risk of exaggerating exposure to the airline business cycle. Some European airlines appear to be particularly taken by this strategy, with airline revenues in the region accounting for 85% of group revenues in 1998, followed by 86% for the Asian carriers and 96% for the North American airlines. The SAirGroup and, to a lesser extent, Lufthansa, are the leading exponents of this strategy. Excluding these and Alitalia, European airlines' core businesses actually account for well over 90% of group turnover. SAirGroup and Lufthansa's expansion into catering, ground handling, maintenance and logistics means flying activities account for less than half of group turnover.
What is clear is that the concept of focusing on core activities is perhaps not happening as fast as anticipated. SAS is the only European airline to have sold its non-airline assets over the past 10 years - it streamlined its corporate structure in 1993 by disposing of its service partners (including terminal and contract catering) and its Leisure Group and Diners Club subsidiaries. In Asia, Japan Airlines (JAL), with the airline accounting for 74% of total revenues, followed closely by All Nippon Airways, is the most diversified group, while in North America, only American Airlines - which has already sold three smaller non-core companies, including ground handling and airport services - has any appreciable involvement in non-core businesses. These are dominated by its IT offshoot, Sabre, which is now in the process of being floated as a separate business.
Measures of efficiency
Measures of efficiency such as unit costs, yields and employee productivity all depend on the nature of the airline's strategic objectives and the supply characteristics required to achieve them. Diversification, therefore, can cloud the comparisons of one airline to another, as can the focus of the airline's core activities - whether on scheduled passengers, charter passengers, cargo, long-haul or short-haul - and network characteristics - whether stage length or aircraft size. Costs, for example, will be lower for airlines heavily involved in the cargo and charter markets. Long-haul carriers will have lower unit costs than short-haul carriers, but their yields will also be lower. While none of the airlines in the survey has any significant involvement in the charter markets, emphasis on cargo varies considerably, with some airlines, such as Lufthansa and Swissair, hiving off this business into separate companies.
Asia, for example, has gone furthest at developing cargo, by capitalising on its position as the major global centre of air trade, with air cargo accounting for 18% of airline turnover in 1998, compared with 11% in Europe and 4% in North America. In traffic terms, Asian carriers have increased their cargo share by three percentage points, while European airlines have seen this figure fall by four points since 1988. Singapore Airlines and Cathay Pacific have gradually shifted their emphasis to cargo, while All Nippon's growing cargo share is mirrored by JAL's decline. In 1998, cargo accounted for 41% of total traffic for Asian carriers, 37% for European and 16% for North American.
Asian carriers also still operate over the longest average sector distances, followed by the North Americans and then the Europeans. Average passenger haul for the European carriers is almost 70% higher than their sector length, compared to 25-27% for the other regions, due to a greater number of multisector routings. If there have been some substantial changes at the fringes - particularly at the smaller end of the market - aircraft size across the globe has barely changed since 1988. Asian carriers still have an average payload of 46t, employing larger aircraft than European carriers with 31t, and US carriers with 23t. Asian carriers still tend to use larger aircraft on intra-regional routes, while the North American carriers use Boeing 767-type aircraft over the North Atlantic rather than Boeing 747s.
These large variations make it difficult to assess underlining productivity and costs. For example, Asian carrier productivity, expressed in terms of available tonne kilometres per employee, is still substantially above that of both the other regional groups. However, this is largely because of a longer average stage length, a higher proportion of cargo (which is less labour-intensive), and the use of larger aircraft.
Some tentative conclusions can be drawn, however. First, productivity of labour has improved worldwide in terms of traffic volumes, costs and longer working hours. Second, European carriers have dramatically improved cockpit crew productivity, measured in hours per crew member, catching and overtaking North America. European cabin crew productivity, however, still lags behind that of the Asian and North American carriers, despite significant improvements worldwide over the 10-year period. While the difference between regions is partly to do with a stage length disadvantage compared with the Asian carriers, it is likely that European airlines still employ a larger number of cabin crew per aircraft than North American carriers.
It is also clear that average aircraft utilisation has improved worldwide, converging to around 9-10h a day in 1998. European airlines, however, have performed better than their North American and Asian peers, since they operate at lower average stage lengths. Europe's 9% average increase in utilisation since 1993 is particularly impressive given the growth in congestion over the period.
European airlines have continued to achieve large gains in productivity over the past five years, helped by healthy growth in traffic and output, as well as the greater use of outsourcing for in-flight catering, maintenance and ground transport.
While Alitalia had the fastest growth in labour productivity in 1988-1993, in terms of available tonne kilometres per employee, Swissair became Europe's leader, helped by a 14% reduction in staff numbers between 1993 and 1998. Air France experienced the slowest labour productivity growth since 1988, with staff numbers rising by 16%.
European airlines have substantially improved aircraft use - an important contributor to total factor productivity - in the past five years, after a small deterioration in 1988-1993. Iberia achieved the highest growth over the period, but this is compared with a poor performance over the first period, caused principally by an increasingly ageing fleet.
Most of Europe's airlines saw a decline in yields and reduced unit costs as a result of the competitive effects of the single market and the battle for market share of the higher yielding business passengers. Alitalia has been the most successful in holding up yields over the 10-year period, with yields growing 7% between 1993 and 1998 alone. British Airways suffered from its early successes in reducing costs in the first few years after privatisation and fell behind its competitors in the second half of the 1990s as they introduced similar cost-reduction programmes. Its costs rose, along with Alitalia, in 1993-1998, but like Alitalia and Iberia, it was able to raise yields. Iberia's yields, and to a lesser extent, costs, have risen since 1993 with the consolidation of domestic carrier Aviaco. SAS, which has seen a fall in both measures, has deliberately focussed on the lower yield and lower cost air cargo sector.
Carriers in North America achieved substantial labour productivity gains in the 10 years after deregulation, so the scope for increases between 1988 and 1998 was more limited. For example, Northwest's productivity declined between 1993 and 1998, as it added over 5,000 staff.
Exchange rate movements play a smaller part in accounting for almost all of the North American airline cost and yield changes than for carriers in Europe and Asia Pacific. The exception is Air Canada, which saw its national currency depreciate against the US dollar by 18% between 1993 and 1998. This helps explain why Air Canada experienced the largest drop in yield in the region. With a relatively high share of international operations, Continental was better protected from reduced yields through higher US dollar equivalents of revenues generated abroad. The carrier, however, was also less able to reduce unit costs, at least those relating to operating costs incurred on foreign currencies.
Comparing the shifts in unit cost and yields for North American carriers for the period 1993-8, the most striking change is for Continental, which, following its 1995 restructuring, has repositioned itself as a higher yield (and higher cost) airline. United Airlines, American Airlines and Delta Air Lines narrowed the gap most rapidly between yields and costs, largely as a result of an aggressive attack on costs - a move which by 1998 made them the lowest cost US carriers in the survey.
Asian and Pacific airlines have achieved the greatest advances in labour productivity of the three regional airline groups. While this is linked to higher growth rates in traffic and capacity, the region's airlines have become more capital intensive through continuous investment in new technology.
Between 1988 and 1993, Korean Air's lead in Asia Pacific in terms of labour productivity growth should be seen in the context of an 82% expansion of output, while Thai's lower productivity growth was largely the result of recruiting a large number of extra staff. Singapore Airlines, with the lowest dependence on intra-regional and locally originating traffic, made the most impressive advances in productivity by reducing staff numbers while simultaneously increasing output. Qantas performed badly largely as a result of a 6,000-strong boost to staff numbers.
Asia-Pacific airlines's improvement in aircraft utilisation accelerated in 1993-8 compared with the preceeding five years. This may be due to the 1997 downturn as much as the increasing pressures, building up prior to the financial crisis, to produce efficiency improvements in all areas of operations. Korean and Thai, respectively, had the highest and lowest increases in 1993-98- a reversal of the previous five-year period. Thai clearly needed to improve the efficiency of its fleet as well as to defer delivery or to sell new aircraft, while Korean, with a similar need for efficiencies, must have boosted its fleet rather rapidly.
All Nippon's large yield reduction between 1993 and 1998 was accompanied by an increasing emphasis on lower-yielding cargo, as well as an increase in average haul length from new international services as it has moved from being primarily a domestic Japanese airline with many high-density routes, to more of an international carrier. This strategy helps explain why ANA also had the largest unit cost reduction of the selected Asian carriers.
Qantas' yield boost, bucking the regional trend, was a result of an improved US dollar exchange rate relative to other airlines in its group (a smaller depreciation compared to the large falls for many Asian countries), rather than from any change in product or network. This also produced the lowest unit cost reduction. Competitive pressures have forced JAL, meanwhile, to adapt its costs to its significantly reduced yields.
Intense competition has already lead to uniformity in yields and unit costs in North America. As the process accelerates across national boundaries, airline performance will become more homogeneous both within Europe and Asia Pacific and across the globe.
Source: Airline Business