Using traditional methods of productivity appears to be rising, but the comparison can be misleading, writes Chris tarry of the CTAIRA consultancy

With labour costs constantly at the top of the agenda for most carriers, we make no excuses in returning to issues of productivity and in particular of fleet and labour productivity.

From previous articles on this subject it is probably clear that we have little confidence in the standard measures to accurately measure real productivity, whether they are hours and minutes flown for aircraft or available tonne kilometres (ATKs) per employee for labour. After all, ATKs are a measure of capacity, and dividing this figure by numbers employed inevitably gives a figure for ATKs per employee. In reality, it is more of an input measure as capacity is in effect an input into the production process of the airline. Moreover, ATKs can be increased by flying larger aircraft longer distances. Similarly, hours and minutes flown are also an input into the airline production process and here too there is a risk of illusion.

There are also a number of limitations to hours and minutes as a measure of aircraft productivity. While some 34% of flights were reported to have arrived early in 2004, this is of little use as the timetable timings essentially include any contingency or buffer time to ensure that the integrity of the operation holds together. An early arrival is only a reflection that the contingency time had been over-estimated.

It is more meaningful to relate productivity to cost and revenue. In essence how much revenue does each unit of cost generate? That is the revenue productivity of each element of the production process.

In recent times, the element for most airlines that has shown the greatest change has been in revenue productivity of sales and distribution spending which has resulted from technological substitution. This is in addition to cost transfer from the airline to the customer, where customers now pay booking fees and agent commissions are minimised or eliminated.

The cumulative effect is to cast doubt over how meaningful standard productivity measures really are. Introduce revenue into the picture and things get more interesting.

A study into recent revenue productivity statistics for Air France, British Airways and Ryanair reveals some interesting results. From the perspective of fleet revenue productivity and comparing the latest quarter with the corresponding period a year ago, Air France is effectively unchanged, BA is reflecting a 6.5 % increase and Ryanair is showing a decline of just over 4%. For the first three quarters, year-to-date figures show Air France up by 4%; BA by just over 7% while Ryanair was down by 1%. Broadly the numbers for the majors improved while those for the low-cost player deteriorated.

Turning to labour, which at least in theory remains the single largest item of controllable cost, changes in the revenue productivity of labour have been disappointing at best.

The most recent set of figures from BA, for example, reported an increase of some 4.4% in ATKs per manpower equivalent in the quarter to the end of December and some 7.9% in the first nine months of the financial year. However, if we examine the respective revenue labour multipliers then the improvement was less than 1% in the quarter, with a decline of 1.2% in the ratio for the first nine months of the current financial year compared with last year.

At Ryanair, although there are no figures for ATKs per employee, the labour revenue multiplier declined by some 2.2% in the last quarter but was 4.3% up for the first nine months of the year. For Air France, the labour revenue multiplier improved in the quarter by 2.1% and by 4.2% in the first nine months of the year. While comparable data is not yet available for Lufthansa, but is for the full year, we have aggregated the data for the passenger and logistics business. This showed the improvement in 2004 was some 3.3% over 2003. These figures show that the relative cost of labour remains stubbornly high.

This, perhaps inevitably, brings into focus the issue of the reward relationship for labour. BA has announced that if its operating margin for the financial year just ended exceeds 6%, employees will receive a week's pay as a bonus, equal to an increase of some 2%. The 6% is calculated after deducting the bonus payment.

While a 6% margin by industry standards will be one of the better outcomes within the industry, it is still somewhat short of BA's 10% target and not much better than last year.

That brings the risk that BA's employees will expect a similar payment next year for an outcome not much different. Consequently the relationship between reward and real affordability is likely to come under further pressure. This is occurring when it appears, at least from an economic standpoint, that 2004 for the airline industry might have been as good as it gets for some time to come.

Source: Airline Business