Airline Business and Chris Tarry of Commerzbank continue the investigation into airline productivity measures with a look at aircraft equipment

Over the past couple of months, this column has taken a closer look at the traditional measures used by the airline industry to track productivity. The conclusion has been fairly clear that these can often not only produce misleading headlines, but also lead to the wrong business decisions. Pure production measures, such as seat capacity per employee, we argued, were an inappropriate way to judge how well labour is performing. What is required is a series of measures that at least, in the first instance, looked at productivity in terms of revenue generation. What is true of labour is also true of aircraft assets.

Take the recent comments by Rod Eddington after British Airways announced its half-year results. "We are taking a ruthless approach towards poorly performing routes and assets. It is imperative that each of our aircraft generates shareholder value," he said. Will that perhaps prompt a move towards a more financial-minded approach in the direction of aircraft productivity? Certainly it seems clear that the traditional measure - hours flown - needs to be reworked.

Flight hours per day is essentially a measure of "input" into the market. The best and most appropriate measures of productivity in any industry should be based on the "output". On the surface it could be argued that hours flown do indeed represent the "output" of the aircraft. But that is not the point. Essentially flight hours represent capacity offered. As with labour, what is important is the return made from deploying that capacity.

In isolation, hours flown can anyway be meaningless. What is important is where those hours are flown and how much is generated from flying them. That, in effect, reflects the outcome of capacity, timetabling and pricing decisions. This underlines the need for a "joined up" approach between the various departments of an airline; "splendid isolation" in foreign policy or business is not a route to success.

The delay illusion

A look at the latest delay statistics for intra-European flying demonstrates how flight hours can rise while real productivity does not. In 1999, around 30% of intra-European flights were delayed by more than 15 minutes. Clearly that peaked due to the impact of the Kosovo war, but delays have continued to run at near-record highs this year again, rising close to an average 29%of all departures delayed in the third quarter. This is in addition to the expanded block times allowed for in airline timetables.

At the same time, latest statistics from the Association of European Airlines (AEA) show an apparent productivity gain from longer flying hours. Given the rising level of delays does this necessarily reflect a more efficient utilisation? The answer is undoubtedly no.

The lessons apply for all markets, but intra-European service highlights the problem due to the congestion levels and the fact that delays impact most heavily on short-haul operations since the hours flown per day are low and the proportion of non-flying time is high.

The mathematics speaks for itself. The AEA members report that flight hours for their short-haul aircraft increased by some 2.5 - 5.5% depending on type during 1999. On average this represents an improvement, equivalent to 15-25min. But the rise in the level of flight delays was just as great.

The percentage of departures delayed by more than 15min was stood at 30.3% in 1999, up from 23% the year before and less than 13% back at the start of the decade. Now, while some of this delay occurred at the gate, a significant proportion occurred while the aircraft was either moving on the ground or flying and so counted in the utilisation statistics. If we assume that around 60% of the delays were in the air, then the impact is 11 minutes a day of non-productive extra flying from this source or a significant part of the reported improvement.

Of course, airline managements are aware of this fact. Europe's airlines are currently crusading against the penalties imposed by such delays. However, to the outside world, aircraft utilisation measured in hours flown remains the most common indication of productivity.

So what then is the answer? Again, a more appropriate measure must bring revenue and cost into the equation. Almost by definition that reveals profit per flying hour.

Our proposed measure compares net operating revenue per flying hour, (a composite of route, mix, fares and hours flown) with net operating cost.

It does not take a rocket scientist to see that while delays would give the appearance of raising aircraft utilisation on a traditional measure of flying hours, the same level of delays would show a negative impact on our measure of revenues per flying hour.

But the implications go deeper than simply correcting a misleading headline. This type of analysis has significant implications in determining route and fleet development.

For example, if British Airways was to stop flying to Australia and turn its aircraft at Singapore, it would stand to lose flying hours per day but at the same time it would be possible to raise revenue per hour by a factor of 2.25. For example, the same aircraft could theoretically make three journeys across the North Atlantic in the time it would take for a return trip from Singapore to Australia.

Whether that makes sense is another matter. The underlying point is that the measures against which such a decision should be judged must rest on the fundamentals of revenue, profit, cash and shareholder value rather than simply on how many hours the aircraft stays airborne.

Source: Airline Business