Airlines must enhance worker productivity to cut costs
By Brad Foss
Associated Press
To fix bloated costs, the financially ailing airline industry prescribed itself a familiar treatment in recent years: Slash wages and benefits.
Now, with the limitations of that approach apparent as large carriers continue to lose money, experts say the cure lies in operational improvements that enhance workforce productivity.
Consider Southwest Airlines Co. Its pilots, flight attendants and mechanics are among the highest paid in the industry, yet the Dallas-based company delivers steady profits while many competitors that spend less on labor consistently lose money.
"Our low costs aren't achieved by paying lower wages," Southwest Treasurer Tammy Romo explained. "The key to our low costs, really, is high productivity."
Alaska Air Group Inc. is another carrier with well paid and productive workers. While currently negotiating with workers to make them more efficient, the Seattle-based carrier's cumulative quarterly profits have exceeded its cumulative quarterly losses since the start of 2003 — a statistic that sets it apart from most large U.S. carriers.
To drive home the point another way, Eclat Consulting vice president John Donnelly noted that both ATA Holdings Corp. and America West Holdings Corp., which have some of the cheapest labor in the industry, lost money in the third quarter of 2004, the most recent period for which carriers have reported earnings.
"It's not just the wage that matters," Donnelly said.
To boost the efficiency of workers and planes, carriers need to increase the number of hours their aircraft spend aloft; expand workers' responsibilities to ease the flow of passengers, baggage and planes; and outsource more maintenance work to third parties that can do it for less money.
One obstacle for airline executives has been getting employees to accept changes to union work rules and procedures.
"Taking down some of these walls is challenging, particularly in light of the fact that it is being accompanied in most cases with wage decreases," said Michael Allen, chief operating officer at Back Aviation Solutions of New Haven, Conn. "But if you increase productivity, you don't need to have wages come down as dramatically."
Analysts said airlines that seek to further shrink employee compensation without significantly improving operational efficiency also run the risk of worsening the morale of their workers.
The danger in this was highlighted over the Christmas holiday, when staffing problems at US Airways Group Inc. resulted in a 10,000-bag pileup in Philadelphia. It was a public relations disaster for the bankrupt carrier, which says it needs another round of concessions from baggage handlers, many of whom apparently called in sick on Christmas, and other workers in order to avoid liquidation.
Similarly, flight attendants at bankrupt UAL Corp.'s United Airlines recently threatened strikes if the company imposes additional salary and benefit cuts.
The focus on labor costs remained intense in the first week of the new year.
On Thursday, United Airlines' pilots ratified a new cost-cutting contract, but a federal bankruptcy judge one day later rejected the deal.
Continental Airlines, meanwhile, said it needed $500 million in wage and benefits cuts to avoid a liquidity crisis by the end of next month.
US Airways saved hundreds of millions of dollars by canceling a collective bargaining agreement with its machinists union, but even the judge who approved the move said it would not guarantee the carrier's survival.
While not abandoning efforts to reduce wages and benefits, U.S. airlines are increasingly attacking the cost problem from another direction — designing more efficient operations for the rank-and-file to run:
• Delta Air Lines Inc. is making major scheduling changes at its Atlanta hub to boost productivity; AMR Corp.'s American Airlines used that same strategy in Dallas a couple of years ago. The objective is to spread arrivals and departures more evenly throughout the day. This helps to limit costly congestion and enables crews to get arriving aircraft ready for the next departure more quickly, an area where Southwest excels.
• American and Delta also have reduced the number of different types of planes they use, cutting down on maintenance and training expenses. Southwest uses just one plane model.
• United aims to boost its financial performance in 2005 by exiting unprofitable domestic routes and increasing its international service, where fare competition is less intense. Continental Airlines Inc. and Northwest Airlines Corp. are also expected to try to squeeze more productivity out of their workers during the next round of labor negotiations.
Despite these efforts, airlines have largely been too slow in overhauling route networks, schedules and procedures, leaving their businesses only partially repaired, said Robert W. Mann, an airline consultant based in Port Washington, N.Y.
"This all comes down to scheduling airplanes efficiently," said Mann. "If you can't do that, you can't schedule anything else efficiently."
In fairness, the biggest airlines aren't ever likely to be as streamlined operationally as Southwest, because American, United and Delta, for example, have complex international systems with lots of connecting flights, whereas Southwest's passengers mainly fly nonstop and domestically.
But labor representatives said there still is plenty of room for improvement.
