- Fuel Cost - fuel is an airline's second largest expense. Fuel makes up a significant portion of an airline's total costs, although efficiency among different carriers can vary widely. Short haul airlines typically get lower fuel efficiency because take-offs and landings consume high amounts of jet fuel.
- Labor - According to the ATA, labor is the an airline's No.1 cost; airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service and others.
- business travelers are important to airlines because they are more likely to travel several times throughout the year and they tend to purchase the upgraded services that have higher margins for the airline. On the other hand, leisure travelers are less likely to purchase these premium services and are typically very price sensitive. In times of economic uncertainty or sharp decline in consumer confidence, you can expect the number of leisure travelers to decline.
- fuel
- Labor
- Maintenance
- Faster than average gate turnarounds to yield higher utilization rates.
- Putting a premium on customer service : There's no first class, nor is there assigned seating. One class of seating. No meals or movies on flight.
- Having one type of aircraft :Southwest's fleet is comprised of one type of aircraft: the Boeing 737.“We only need to train our mechanics on one type of airplane. We only need extra parts inventory for that one type of airplane. If we have to swap a plane out at the last minute for maintenance, the fleet is totally interchangeable,"
- Using a point-to-point routing system: Another cost-cutting tactic? Forgoing the popular hub-and-spoke model, which can lead to delays in the event of inclement weather or scheduling conflicts. Instead, Southwest uses a point-to-point routing system; with this strategy, passengers deplane the flight and, chances are, the aircraft will turn around and fly back to its starting airport. Applying its Point-to-Point transit system, its admirable how Southwest Airlines has avoided the congested airports, thus not needing the dozens of gates or thousands of employees to handle the banks of the flights that come in and then disperse, leading to reducing a major fraction of the operational costs. Point-to-point service allows for direct nonstop routing by minimizing connections, delays and total trip time. As a result, approximately 71% of Southwest Airlines’ customers flew nonstop in FY2011. This service also enables the company to provide its markets with frequent, conveniently timed flights and low fares.
- High employee productivity : Its hiring process which lays stress on applicants possessing teamwork skills and optimistic outlook has helped it shape a dynamic and motivated workforce which not only helps in smooth functioning of an informal horizontal organization but also promotes accountability among the employees not just as individual but as a team.
- A very successful fuel hedging program (long-term contract with oil companies to buy fuel equivalent to $51 per barrel through 2009 that has reduced a major fraction of its operating expense).
- Serves relatively less-congested airports to achieve high asset utilization and reliable on-time performance (however later it had spread its operations to major airports as well).
- Airlines Employee profit sharing plan
- high customer satisfaction:
- Cost leadership : Single plane
- Differential leadership: Employee satisfaction : hiring procedure and hierarchy in jobs cannot change
- Fuel hedging plans
- It made its “Bags Fly Free” policy a centerpiece of its advertising and marketing campaign.
- With AirTran, Southwest will inherit a fleet of 86 Boeing 717s that it will have to integrate into its operations. Mr. Kelly says those planes will provide more flexibility, allowing Southwest to serve lower-traffic cities that would be uneconomical to serve with the larger 737.
- Southwest will also have to absorb AirTran’s 8,000 employees into its highly unionized work force of 35,000. That aspect has prompted considerable worries among Southwest employees, who fear that the merger will somehow dilute the company’s specific culture. Pilots often help clean up a cabin to speed up operations. Flight attendants have been known to lend a hand on their day off.
- Its homegrown reservation system needs major help to handle code-sharing of flights with AirTran plus AirTran’s international flights. So while Southwest is busing replacing AirTran, it also is replacing much of Southwest, in terms of reservation and passenger handling systems.
- The plane order is also part of Indigo's drive to keep its fleet young — it retires its aircraft after six years — to minimise maintenance and fuel costs.
- Analysts say IndiGo has taken a leaf from budget US carrier Southwest Airlines in containing costs by keeping operations simple.
- It flies to fewer destinations than rivals but offers more flights on those busy routes to maximise plane-capacity and uses just one make — Airbus.
- landing-and-takeoff turnarounds and maintaining a lean staff-aircraft ratio.
- IndiGo lone profit-maker among India's big airlines: with lesser borrowed money
- Turnaround time - An airline is charged for the duration its aircraft stays at the airport. Indigo has a faster turnaround time (time taken between landing and the next take-off) of 30 minutes. Point 5 is one of the reasons for this. Having a single make of aircraft again helps in this regard as the time taken by the crew gets optimized.
- Employee Aircraft ratio - Lower employee aircraft ratio of 102 compared to Jet Airways's 130 and Air India's 262.
- Stage Length - Average Stage length (flying time per flight) of 1.5 hours, which means not having to stock and serve hot meals in most flights. This again contributes to the low turnaround time.
- Most Indian airlines take delivery of aircraft by sending their own pilots and engineers (to Toulouse in the case of Airbus). Indigo prefers to get them delivered to Delhi, this is costlier but it also leads to better utilization of the available pilots and the engineering crew
- Route planning: They make their routes profitable. Wrong. They fly only on profitable routes and slots.
- Little advertising spend.
- High reliance on word of mouth marketing in its early days by establishing a reputation of being a no frills airline which is always clean and on time.
- Strategic marketing - Indigo advertised heavily when it started international operations and also when Kingfisher was going bust, with catchphrases like 'Let the bad times roll… Fly IndiGo in good times and in bad times.' taking a dig at Kingfisher's tagline 'Fly the good times.' This move was criticized but it worked for Indigo.
Industry in general
Few inventions have
changed how people live and experience the world as much as the invention of
the airplane.
Airlines provide a
vital service, but factors including the bloated cost structure, vulnerability
to exogenous events and a reputation for poor service combine to present a
huge impediment to profitability.
Analyze Fuel Hedging
Some airlines try
to pass higher fuel costs on to their customers in the form of a fuel
surcharge.
For example,
Southwest Airlines hedged as much as 85% of its annual fuel usage over the
past six years. The move effectively locked in consumption at $26 per barrel
of oil,
Competition between
Airbus and Boeing
Top airline
expences:
Southwest
major U.S. airline
has declared bankruptcy in the past 10 years, Southwest Airlines has
remained solvent and has consecutively generated a profit for the past 41
years.
Southwest Airlines,
being a Low Cost Carrier (LCC), is famous for its uniquely
competitive low fares, which are often some 30% lower than most
of its major rivals. They have achieved this low cost leadership position
in their industry by emphasizing on:
And
while pilots in most other airlines pilots are unionized, there are no such
union affiliations in the Southwest Airlines which therefore does not restrict
the pilot’s flying hours for a particular period
No
formal hierarchy is enforced. It’s not uncommon to see the pilots
assisting the flight stewards in helping them check the passengers in
the plane or cleaning the plane. This helps in achieving the swiftest
turn around of the aircraft.
With
the innovative profit-sharing plan, they have wittily made each and every
employee his/her own performance appraiser, ensuring that no employee
falters behind the line.
-
It is the only carrier that does not charges any nominal amount for
changing the date of the ticket.
They
have respected the basic requirement of any passenger i.e. – to reach on time,
by maintaining a decent record of on schedule flights.
Its method of offering differentiated
products like Rapid Rewards frequent flyer program have made it stand
apart in the LCC sector.
This
is one of the reasons why, even in the aftermath of the 9/11 terror
attacks, when the entire aviation industry was reeling under the
disastrous consequences of running empty flights, Southwest Airlines not only
was successful in maintaining fully seated flights but also earned
an ROIC of 5.8%.
Why model not
replicated :
Next
read:"https://www.linkedin.com/pulse/20140603192246-220737949-organizational-research-southwest-airlines
Michael
O'Leary from Ryanair has copied the model pretty well.
Gary C. Kelly is
the chief executive officer and chairman of Southwest Airlines
Since Southwest typically flies shorter routes and
schedules more daily flights, pilots can fly one hour longer each day than at
other airlines, he says. This efficiency becomes a crucial component to the
airline’s edge.
“They disproved the notion that customers preferred
service to low prices.
Culture : There’s
also the whole Southwest road show that is a feature of nearly every trip:
Some flight attendants joke with passengers, others play games and sing, or,
in the case of one flight attendant made famous in a YouTube clip, break into rap songs.
Merger :
Advantages :
Disadvantage :
Those
computer systems are the most difficult part of any airline merger, executives
say. For now, Southwest is running two computer systems on different screens
for airport agents
Ryanair CEO Michael O'Leary
Gone to extremes like : One toilet
per aircraft; Charging £1 for toilets, Standing room only; Charging for
overweight passengers; Charging extra
£40 to print boarding passes
Customer care –
Ryanair has one-tenth the number of customer care attendants per passenger
mile compared to BA.
INDIA
India's biggest carrier IndiGo, which
announced on Wednesday a deal to buy 250 Airbus aircraft, has consistently
racked up profits as rivals have drowned in red ink from cut-throat fare wars.
No-frills IndiGo has posted six straight years of
profits — even with high fuel taxes, ramshackle airport infrastructure and
vicious fare fights — thanks to its zealous cost controls, analysts say.
Billionaire airline
co-founder Rahul Bhatia
Indeed sale-and-leaseback transactions that helped
IndiGo record higher profits.
A sale and
leaseback constitutes an arrangement where the seller of an asset leases back
the same asset from the purchaser.
"the airline will
receive a cash inflow which will then be used to pay down the debt associated
with the aircraft. If the sale value is greater than the amount of debt
against the aircraft, the airline will receive a positive cash flow."
A leasing company agrees to
such an arrangement, they wrote, because it is provided with an asset and an
established customer without having to buy a brand new aircraft, but still
generates lease income from the airline.
IndiGo has been the most
active user of sale-and-leaseback financing among no frills carriers, : IndiGo
completed 37 such transactions in the past two years
But the key difference in
IndiGo's strategy was to incorporate the purchase of 100 aircraft into its
business plan even before launch. Other operators even now are talking of only
a fraction of that order size, according to Kaul.
Humongous Order: "the
airline will receive a cash inflow which will then be used to pay down the
debt associated with the aircraft. If the sale value is greater than the
amount of debt against the aircraft, the airline will receive a positive cash
flow."
A leasing company agrees to
such an arrangement, they wrote, because it is provided with an asset and an
established customer without having to buy a brand new aircraft, but still
generates lease income from the airline.
"results
in all manner of cost-saving efficiencies: we only need to train our
mechanics. We only need extra parts inventory. If we have to swap a plane out
at the last minute for maintenance, the fleet is totally interchangeable — all
our on-board crews and ground crews are already familiar with it..."
Other cost-cutting measures:
Marketing:
Influence:
Finally, we come to
the elephant in the room. IndiGo is privately held by two very low key people.
- Rahul Bhatia,
who owns 50% of the airline, is in charge of operations. He has almost
two decades of experience in the travel business and, some say, contacts in
the government. Does that mean acquiring the more profitable routes and slots?
Maybe.
- Rakesh Gangwal who
owns the remaining 50% has a long history in the US airline industry. He
brings global networking and expertise to IndiGo. Does that help in better
bargaining with manufacturers and other suppliers? Again, maybe.
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