Up in the Air: How Airlines Can Improve Performance by Engaging Their Employees

4. Industry Trends in Costs, Productivity, Quality, and Morale

The growth of low-cost competition initiated by new entrants and the other changes introduced by legacy airlines in the early years of the twenty-first century are transforming the airline industry in fundamental ways. In this chapter we summarize a large body of data to take stock of the results of this transformation. Our focus is on variations and changes in costs, productivity, quality, morale, and labor-relations outcomes in U.S. firms where the data are most readily available. Where possible we compare trends in the United States with those in Europe and Asia. What has happened to the cost differential between legacies and new entrants over time as low-cost competition has overtaken the industry, moving beyond the new entrants to include the legacy airlines as well? Has restructuring by the legacy airlines narrowed the gap? But before turning to the data on unit costs, it is important to acknowledge the role of differing “stage length”—the average length of flights flown—on unit costs. Longer stages reduce unit costs because the fixed costs of airport slots, ground crews, and so forth can be spread over longer flights. For these reasons, as shown in figures 4.1, 4.2, and 4.3, most airlines in both the United States and around the world have moved to increase their stage lengths, though legacy carriers tend to fly longer stages than new entrants. U.S. legacies have increased their stage lengths from 979 to 1,173 miles since 2000 (a 20 percent increase), while their new-entrant competiCHAPTER 4 IndustryTrendsinCosts,Productivity, Quality,andMorale 62 UpintheAir tors have increased their stage lengths even more, from 768 to 1,004 miles (a 31 percent increase), resulting in a convergence toward more similar stage lengths for the two sectors. In Europe, the legacy airlines have increased their stage lengths from 1,086 to 1,243 miles (a 15 percent increase ), while the new entrants have moved more aggressively into longer haul flying with stage lengths increasing from 559 to 679 miles (a 22 percent increase), resulting in a convergence toward more similar stage lengths for these two sectors, as also was observed in the United States. When we include Virgin Atlantic with the European new entrants, flying primarily transatlantic routes with an average stage length of 3,759 miles in 2006, the stage length of European new entrants far exceeds that of their legacy counterparts. In Asia, legacy airlines have moved toward longer haul flying with stage lengths increasing from 1,024 to 1,188 miles (a 16 percent increase ), and while we don’t have comparable data for the Asian low-cost sector, we expect that stage lengths have been increasing here as well. Given the cost and productivity advantages of longer haul flights, these trends toward longer average stage lengths should help airlines in both sectors to reduce their unit costs. Even so, unit costs have risen in both sectors, as we will see. 1,400 1,200 1,000 800 600 400 200 0 Miles per flight departure 2000 2001 2002 2003 Year 2004 2005 2006 U.S. legacy stage length U.S. new-entrant stage length Figure 4.1. Stage lengths for U.S. legacy versus new-entrant airlines. Legacy: Alaska, American, Continental, Delta, Northwest, United, US Airways. New entrant: AirTran, ATA Airlines, JetBlue Airways, Southwest, Spirit. Source: U.S. Department of Transportation, Form 41. 1,400 1,200 1,000 800 600 400 200 0 Miles per flight departure 2000 2001 2002 2003 Year 2004 2005 2006 European legacy stage length European new-entrant stage length Figure 4.2. Stage lengths for European legacy versus new-entrant airlines. Legacy: Air France, British Airways, Iberia, Lufthansa. New entrant: Air Europa, easyJet, Ryanair, Spanair. Source: International Civil Aviation Organization. 1,400 1,200 1,000 800 600 400 200 0 Miles per flight departure 2000 2001 2002 2003 Year 2004 2005 2006 Asian legacy stage length Asian new-entrant stage length Figure 4.3. Stage lengths for Asian legacy versus new-entrant airlines. Legacy: Air China, Asiana, Korean Air, Malaysia Airlines, Thai Airways. New entrant: Virgin Blue, Air Asia. Source: International Civil Aviation Organization and company documents. 64 UpintheAir Cost Trends Unit costs are a critical driver of success in an era of low-cost competition.1 Although total unit costs are ultimately what determine an airline’s ability to offer low fares while remaining profitable...