As airlines set about raising their performance, Chris Tarry takes a second look at the underlying measures against which the industry is benchmarking itself.
Even putting the immediate crisis to one side, carriers in the world's maturer markets were already focusing attention on how to cope with a weak revenue environment. And it is doubtful that this environment is about to change soon. It now seems quite likely that the revenue outlook will remain exceptionally testing beyond the middle of 2003.
Near term there is, of course, economic uncertainty. In addition there is a new "threat effect" in the shape of a potential for conflict with Iraq. Even if an actual attack fails to materialise, the very threat that it might raises risks and uncertainties which will have a negative effect on bookings. Major carriers on both sides of the Atlantic have already announced plans to reduce flying on the anniversary of the terrorist attacks in response to potential customer fears. For example, British Airways is cutting nearly a third of transatlantic flights.
If this was not enough there is also increasing evidence of a "wealth effect" resulting from the steep decline in stock market values. That will eventually feed through into the wider economy in the form of reduced consumer spending, in particular on discretionary areas including travel.
And while the demand side shows little sign of stabilising, the supply side also remains out of balance.
The industry already found itself in a position of disequilibrium going into the present crisis and the return to a position of equilibrium - at least from the perspective of an economist - is still some considerable distance away.
However, the alignment of supply with demand may not, on its own, have been enough, especially if much of the demand has been stimulated by falling fares rather than by underlying economic prosperity. In any case, there are some real signs of demand exhaustion - reflected by an inability to use price to stimulate additional sales.
Rational response
There is, perhaps, only one rational response and that is to seek further cut backs. However, the question then arises as to where and how should they fall? While there are no universal answers, there is one overriding principle: that the changes must result in an underlying improvement in performance. It is not just about reducing capacity or grounding aircraft - all of the associated cost must be removed too.
Companies also need to pay attention to the benchmarks against which they set their performance targets. If the measures are not meaningful (and demonstrably so)then the chance is that the result will not be either. As argued before, many of the airline industry's traditional productivity benchmarks, for people or planes, are simply inadequate.
Admittedly, it is near impossible to assess the performance of any business with a single measure, even more so from the outside. Yet it should be possible to produce a broad scorecard.
From the viewpoint of a financial analyst, or indeed from the corporate boardroom, the key indicators are straightforward: cash and the returns on the capital employed. At the risk of massive over simplification, the bottom line is, after all, is the ultimate expression of how much it costs an airline to put capacity into the market and how much it gets back in return. That points towards a basic examination of the revenue per flying hour set against the cost.
Clearly, there is a hierarchy of related performance and productivity measures but within this we would argue strongly that any measure of benchmark ought to have a revenue or cost dimension. It is worth re-iterating that taken in isolation, the volumetric measures of tonne kilometres/miles per employee or flying hours per aircraft, may be widely used but are pretty meaningless.
Even the most basic economic textbooks, let alone more advanced reading, talk about the revenue productivity of labour rather than simply the volume. This is not to suggest that the blunt benchmark of revenue per capita should be the defining measure. A refinement is to look at the labour multiplier, where the measure is the amount of revenue generated per unit of labour cost.
Labour is not the only controllable cost item. What about the productivity of the sales and distribution system or the fleet?Are the best measures here passengers per sales and ticketing employee or hours and minutes flown? In both cases the answer is no. Again, revenue per unit of input cost is a far better measure. In essence this can be seen as a sub-set of the operating ratio of revenues to expenses.
Those represent hard business measures which can be monitored across the company and externally. However setting the performance targets is one thing and delivering the actual numbers is quite another. We shall continue to watch closely .
Source: Flight International
