The profit divide: Bridging the gap in unit costs for legacy carriers

With low-cost carriers encroaching on ever more markets, the profitability of traditional airlines will continue to remain under threat. Recent years have seen the worst of this shift, with flag carriers in Europe struggling to keep afloat and Chapter 11 bankruptcy protection befalling a number of their American counterparts. Indeed, ensuring the long-term survival of these legacy carriers will require bridging the gap in unit costs that separates them from their lower priced competition. This is not a precise science, however, as recent efforts by the traditional airlines to cut costs have measured results ranging from mild success to dismal failure. So what options are in line for these long-established carriers to regain some of their competitiveness?

Although trends in annual yield vary amongst the legacy carriers, the issue that lies at the heart of this problem is the prolonged tendency for changes in unit costs to outpace unit revenues. The downward pressure on airline yield is being fuelled by a number of factors, but namely the increased competition from low-cost carriers and changes in demand attributed to the cyclical nature of the industry. The traditional airlines have sampled a number of measures to bring their unit costs in line with those of the low-cost model, including the start-up of their own ‘no frills’ subsidiary airlines, introducing wage scaling, reducing staff levels and increasing aircraft turnaround sequences, all in the aim of boosting productivity.

‘In most cases, the strategy of legacy carriers to fight fire with fire by establishing their own low-cost subsidiaries has not proven very successful. Airline start-ups including Germanwings, Iberia Express and Go Fly – to name but a few, are all testament to this. Whether it was persistent losses, takeovers or a conflict of interest with core company services, for a number of these carriers it also managed to incite a strain on industrial relations. Existing pilots voiced their displeasure with the threat posed by revised contracts aimed at scaling back salaries and associated benefits. In essence, we can see traditional airlines initiating efforts to lower costs or by starting additional carriers in order to compete in the low cost segment,’ comments the CEO of AviationCV.com, Skaiste Knyzaite.

On the flipside, certain endeavours by major carriers to boost their productivity have generated encouraging results. For the overwhelming majority of legacy carriers, load factors have shown a positive rate of growth over the last twenty years owing to better asset utilisation and operational planning. Similarly, there have been impressive advances to aircraft turnaround times (alongside improved airport infrastructure), effective ancillary revenue strategies, increased product scope and lower maintenance costs through fleet type consolidation. While these have measured respectable changes to the income statement, the fact remains that a large number of legacy carriers are expected to report further losses for 2012.

‘Airlines should evaluate the individual merits and shortcomings of their business segments in order to harness further cost savings and efficiency improvements. In many cases, real increases to the bottom line can be achieved through outsourcing certain functions of an airline’s setup. While there was a considerable amount of bad publicity associated with the outsourced maintenance activities of American Airlines, this needn’t imply similar prospects for other carriers. Indeed, airlines including Delta, British Airways, Qantas and LOT Polish Airlines have all begun to reap the benefits of outsourcing one or a number of functions, be it sales, IT or HR and maintenance. Critically, however, many traditional carriers continue to be burdened with the established pay levels and overhanging pensions that make up their largest expense – labour. While a number of low-cost carriers maintain competitive labour expenses through the use of personnel leasing agencies, it would appear that the classic recruitment structure of legacy carriers fails to bridge this gap,’ comments Skaiste Knyzaite, CEO of AviationCV.com