Understanding the "Cost Gap"
April 9, 2009
Jeff Brundage on the competitive challenges facing network carriers
A sobering study out from Oliver Wyman, an airline consulting group, demonstrates that legacy airlines continue to have a competitive battle ahead, even after years of cost-cutting.
The study, reported by The Wall Street Journal on April 7, notes that the so-called “low-cost carriers” have reduced their costs even while the network carriers have made painful efforts to whittle down expenses, with the other guys maintaining their advantage in productivity and labor costs.
On average, American, Delta, Continental, United and US Airways generated 12.46 cents per seat mile in revenue in the 3rd quarter of last year, while costs came in at 14.68 cents per seat mile.
By comparison, the average revenues per seat mile for Frontier, Air Tran, JetBlue and Southwest were 10.92 cents, with costs at 10.87 cents.
One reason is the relatively senior workforce at the older, larger carriers where many employees are at the top of their airline’s pay scale.
Another is that the big hub operations with international routes simply have higher costs as compared to airlines that fly fewer aircraft types on mostly domestic routes.
The other major factor is that fare wars continue to ratchet down ticket costs, and the recession has hurt demand for premium business and international travel. As the Journal put it, the economy “has drained high-dollar business travel, leaving higher-cost airlines to compete more directly with discounters for cheap fare passengers.”
According to the Journal, low-cost carriers claimed 31 percent of U.S. domestic air travel in 2007, up from 26 percent in 2003.
For American, this means that as we move forward in our contract negotiations, costs still matter. Our competition is not just the Deltas and Uniteds of the world, but every carrier that is flying the routes we fly (and we now have low-cost competition on about 80 percent of our domestic flights).
The other lesson is that the industry continues to change, and we have to look ahead to where and what our real competition will be, rather than back to an era that no longer exists.
