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A MAGAZINE FOR AIRLINE EXECUTIVES

Ta k i n g

y o u r

a i r l i n e

APRIL 2003

t o

n e w

h e i g h t s

MAKING EVERY DOLLAR COUNT

A Conversation with . . . Brett Godfrey, CEO, Virgin Blue INSIDE New Approach to Cost Reduction Provides Benefits

Aeroflot Reshapes Itself

American Airlines De-Peaks Its Hub and Spoke Structure

Š 2009 Sabre Inc. All rights reserved.

wearelistening@sabre.com


industry

industry

The Tactical Approach A New Way of Looking at Cost Reduction Can Pay Huge Dividends Shane Batt | Ascend Contributor With a global reduction in demand

costs can be negotiated downward, but

the characteristics of a particular

costs are related to per-flight expenditure,

not without significant and often very

phenomena from a tactical point of view.

and the remaining 20 percent of variable

difficult negotiations. Customer services

During the second step of the process,

costs are related to per-passenger costs.

can be reduced, but this often has a

the data is analyzed to identify trends

Per-flight costs include the largest

negative revenue impact as demand

and impacts. This step is followed by

percentage of fuel costs, crew overtime,

declines and customer dissatisfaction

the development of remedial actions

maintenance, navigation and landing fees,

increases. Nearly all of the large cost

specifically designed to deal with the

among other costs. The per-passenger

drivers of the airline business resist the

tactical characteristics of the issue. Finally,

costs include catering, fuel costs, some

holistic approach to reduction.

in the last step, compliance with the

passenger handling costs and a few other

On the surface, staff reductions

remedial actions is checked. This process

related costs. This expenditure tree

this particular issue. This normally

supply issues can result in higher costs

seem the only resort to produce sizeable

is a cycle, because data collection begins

demonstrates a fundamental principal

for air travel and the continued over-

results in a task force being created to

for fuel virtually overnight.

cost reductions. This is the reason that

again resulting in different analyses

about the airline industry — most of the

capacity of the marketplace, airlines seek

address cost reductions in a strategic

so many airlines have recently resorted

followed by different remedial actions

costs of an airline have nothing to do

to reduce costs. Indeed, cost reduction has

manner. This holistic method generally

“hedged” using strategies that essen-

to layoffs in order to control costs. The

and new compliance. This is a purely

with passengers being carried. As shown

always been an important goal, but recent

only produces limited positive results.

tially pay a negotiated fixed fee to a

standard process is that the airline re-

tactical approach to cost control, and it

in the expenditure tree, only 7 percent

economic conditions have increased its

For example, fuel is one of an

supplier for a period of time, regardless

engineers its processes in order to

may not produce huge results in the

of a typical airline’s total operating costs

Similarly, fuel purchasing can be

importance. In order to perform cost

airline’s highest costs — if not the highest.

of the price of fuel. This often reduces

remove inefficiencies and introduces

first implementation. But consistent

are related to passengers. This is a

reduction, most carriers look toward the

Fuel costs, however, are difficult to

the variability of fuel costs, but does not

productivity improvements that lead

application of this cycle produces short-,

strength and a weakness of the industry.

major cost drivers of their business:

contain because they vary with world-

necessarily reduce them. Some carriers,

to the ability to reduce staff. A great

medium- and long-term successful cost

Fuel,

wide supply and demand for petroleum.

such as Southwest Airlines, produced

many airlines are performing this exact

reduction. Before examining a specific

that incremental revenues, driven by

Staff,

One way of reducing fuel costs is to

tremendous results based upon fuel

exercise today. This process is not

example, first consider the way costs

successfully competing, essentially come

Maintenance and engineering,

reduce flying, of course. This option,

hedging contracts in the wake of rising

simple, however, when considering the

are split for most airlines.

at no additional costs and therefore con-

Aircraft ownership or leases,

however, also has a profound impact on

fuel prices following Sept. 11, 2001.

human impact. Airlines typically perform

Customer service.

revenues. Fuel costs can be contained in

Other carriers, however, have actually

staff reduction as a last resort — and

Together, these primary costs are

tribute substantially to the profitability of

Expenditure Tree

increased costs with fuel hedging

rightly so. Staff reductions hurt morale,

to consumption and cost reductions

activities. If fuel prices are predicted

have a tendency to reduce productivity

tree shows costs

all operating costs of an airline. They also

due to purchasing. Flight operations

to increase due to global political

and often spawn labor actions.

split for a traditional

highlight the difficulty of reducing costs

departments attempt to cut fuel

conditions — such as war in the Middle

for most carriers, because none of these

consumption. Adjusting flap settings,

East or local strikes in Venezuela

costs are easily reduced by themselves.

reducing power settings, performing

during December and January —

FUEL

130 250

STAFF

90 AIRCRAFT M&E

150 210

SERVICE OTHER

Typical cost breakdown of a US$1 billion airline (values in $ millions)

older and existed

the price of hedging increases and

are virtually impossible at airlines, but

during a regulated

and avoiding the use of

produces a real risk if the airline enters

this is far from the case. To reduce and

period of the industry.

Indirect Costs 30%

Total Operating Costs 100%

Fixed Costs

Direct Costs 70%

50%, (35%) Flight Costs

Variable Costs

80%, (28%)

50%, (35%)

Passenger Costs

full reverse thrust upon

into these types of agreements. So,

control costs, airlines must take a tactical

When considering total operating

landing can all reduce

fuel costs savings are hard to produce

approach to understanding what is

costs, these airlines have a high

fuel consumption —

and are even difficult to contain. If

controllable and then take effective

percentage of indirect costs — 30 per-

but not by much. If an

an airline executive attempts to use

action. The tactical cost reduction

cent. Traditionally, these costs are con-

demand for passenger travel declines,

airline has never imple-

the holistic approach to fuel cost

process is a cycle:

sidered overhead because they are not

this reduction in revenue is not matched

mented cost-control

reduction, the results will most likely Data Collection

be disappointing.

airline might gain some

Each of the other major costs

real savings in this area

presents its own unique difficulty when

with a concerted holis-

it comes to cost control. Airlines can

tic effort. Most carriers,

reduce maintenance and engineering

however, exhausted

costs, for example, by introducing

None of the primary costs are easily

most of the “low-hanging fruit” from

new purchasing control practices.

reduced because ordinarily managers try

fuel reductions long ago, and there is

This approach, however, can lead to

to contain the costs “holistically.” That

little more to gain from holistic cost

problems with on-time performance

is, airline managers examine a major cost

exercises. In addition, the rise of fuel

during periods of unusual or irregular

driver and dedicate resources to solve

prices due to global political or local

operations. Aircraft ownership or lease

2 ascend

these airlines are

single-engine taxiing

activities for fuel, the

170

airline. Typically, It may appear that cost reductions

the airline. But it is a weakness because as

The expenditure

two primary ways: cost reductions due

responsible for more than 85 percent of

Tactical Cost Reduction

This is a strength because it means

Analysis

Compliance

Remedial Actions

allocated to the direct costs of the

by a corresponding reduction in costs

airline. But these costs are not

from flying fewer passengers. This is

purely overhead. Of the 70 percent

the reason that so many carriers are

of the total operating costs that are

struggling today with profitability. This

associated with direct costs, about

is why a tactical expenditure control is

half of the direct costs are fixed

more effective than a holistic method.

and the other half are variable. The fixed costs include aircraft

Tactical Cost-reduction Cycle

payments, crew salaries, other operating staff salaries and other

The process begins with data collection, where the carrier investigates

20%, (7%)

An Example of Tactical Cost Control On-time performance has a big

costs that are fixed for the operation.

influence on an airline’s profitability

Finally, about 80 percent of all variable

(continued on next page)

april 2003

3


industry

industry

The Tactical Approach A New Way of Looking at Cost Reduction Can Pay Huge Dividends Shane Batt | Ascend Contributor With a global reduction in demand

costs can be negotiated downward, but

the characteristics of a particular

costs are related to per-flight expenditure,

not without significant and often very

phenomena from a tactical point of view.

and the remaining 20 percent of variable

difficult negotiations. Customer services

During the second step of the process,

costs are related to per-passenger costs.

can be reduced, but this often has a

the data is analyzed to identify trends

Per-flight costs include the largest

negative revenue impact as demand

and impacts. This step is followed by

percentage of fuel costs, crew overtime,

declines and customer dissatisfaction

the development of remedial actions

maintenance, navigation and landing fees,

increases. Nearly all of the large cost

specifically designed to deal with the

among other costs. The per-passenger

drivers of the airline business resist the

tactical characteristics of the issue. Finally,

costs include catering, fuel costs, some

holistic approach to reduction.

in the last step, compliance with the

passenger handling costs and a few other

On the surface, staff reductions

remedial actions is checked. This process

related costs. This expenditure tree

this particular issue. This normally

supply issues can result in higher costs

seem the only resort to produce sizeable

is a cycle, because data collection begins

demonstrates a fundamental principal

for air travel and the continued over-

results in a task force being created to

for fuel virtually overnight.

cost reductions. This is the reason that

again resulting in different analyses

about the airline industry — most of the

capacity of the marketplace, airlines seek

address cost reductions in a strategic

so many airlines have recently resorted

followed by different remedial actions

costs of an airline have nothing to do

to reduce costs. Indeed, cost reduction has

manner. This holistic method generally

“hedged” using strategies that essen-

to layoffs in order to control costs. The

and new compliance. This is a purely

with passengers being carried. As shown

always been an important goal, but recent

only produces limited positive results.

tially pay a negotiated fixed fee to a

standard process is that the airline re-

tactical approach to cost control, and it

in the expenditure tree, only 7 percent

economic conditions have increased its

For example, fuel is one of an

supplier for a period of time, regardless

engineers its processes in order to

may not produce huge results in the

of a typical airline’s total operating costs

Similarly, fuel purchasing can be

importance. In order to perform cost

airline’s highest costs — if not the highest.

of the price of fuel. This often reduces

remove inefficiencies and introduces

first implementation. But consistent

are related to passengers. This is a

reduction, most carriers look toward the

Fuel costs, however, are difficult to

the variability of fuel costs, but does not

productivity improvements that lead

application of this cycle produces short-,

strength and a weakness of the industry.

major cost drivers of their business:

contain because they vary with world-

necessarily reduce them. Some carriers,

to the ability to reduce staff. A great

medium- and long-term successful cost

Fuel,

wide supply and demand for petroleum.

such as Southwest Airlines, produced

many airlines are performing this exact

reduction. Before examining a specific

that incremental revenues, driven by

Staff,

One way of reducing fuel costs is to

tremendous results based upon fuel

exercise today. This process is not

example, first consider the way costs

successfully competing, essentially come

Maintenance and engineering,

reduce flying, of course. This option,

hedging contracts in the wake of rising

simple, however, when considering the

are split for most airlines.

at no additional costs and therefore con-

Aircraft ownership or leases,

however, also has a profound impact on

fuel prices following Sept. 11, 2001.

human impact. Airlines typically perform

Customer service.

revenues. Fuel costs can be contained in

Other carriers, however, have actually

staff reduction as a last resort — and

Together, these primary costs are

tribute substantially to the profitability of

Expenditure Tree

increased costs with fuel hedging

rightly so. Staff reductions hurt morale,

to consumption and cost reductions

activities. If fuel prices are predicted

have a tendency to reduce productivity

tree shows costs

all operating costs of an airline. They also

due to purchasing. Flight operations

to increase due to global political

and often spawn labor actions.

split for a traditional

highlight the difficulty of reducing costs

departments attempt to cut fuel

conditions — such as war in the Middle

for most carriers, because none of these

consumption. Adjusting flap settings,

East or local strikes in Venezuela

costs are easily reduced by themselves.

reducing power settings, performing

during December and January —

FUEL

130 250

STAFF

90 AIRCRAFT M&E

150 210

SERVICE OTHER

Typical cost breakdown of a US$1 billion airline (values in $ millions)

older and existed

the price of hedging increases and

are virtually impossible at airlines, but

during a regulated

and avoiding the use of

produces a real risk if the airline enters

this is far from the case. To reduce and

period of the industry.

Indirect Costs 30%

Total Operating Costs 100%

Fixed Costs

Direct Costs 70%

50%, (35%) Flight Costs

Variable Costs

80%, (28%)

50%, (35%)

Passenger Costs

full reverse thrust upon

into these types of agreements. So,

control costs, airlines must take a tactical

When considering total operating

landing can all reduce

fuel costs savings are hard to produce

approach to understanding what is

costs, these airlines have a high

fuel consumption —

and are even difficult to contain. If

controllable and then take effective

percentage of indirect costs — 30 per-

but not by much. If an

an airline executive attempts to use

action. The tactical cost reduction

cent. Traditionally, these costs are con-

demand for passenger travel declines,

airline has never imple-

the holistic approach to fuel cost

process is a cycle:

sidered overhead because they are not

this reduction in revenue is not matched

mented cost-control

reduction, the results will most likely Data Collection

be disappointing.

airline might gain some

Each of the other major costs

real savings in this area

presents its own unique difficulty when

with a concerted holis-

it comes to cost control. Airlines can

tic effort. Most carriers,

reduce maintenance and engineering

however, exhausted

costs, for example, by introducing

None of the primary costs are easily

most of the “low-hanging fruit” from

new purchasing control practices.

reduced because ordinarily managers try

fuel reductions long ago, and there is

This approach, however, can lead to

to contain the costs “holistically.” That

little more to gain from holistic cost

problems with on-time performance

is, airline managers examine a major cost

exercises. In addition, the rise of fuel

during periods of unusual or irregular

driver and dedicate resources to solve

prices due to global political or local

operations. Aircraft ownership or lease

2 ascend

these airlines are

single-engine taxiing

activities for fuel, the

170

airline. Typically, It may appear that cost reductions

the airline. But it is a weakness because as

The expenditure

two primary ways: cost reductions due

responsible for more than 85 percent of

Tactical Cost Reduction

This is a strength because it means

Analysis

Compliance

Remedial Actions

allocated to the direct costs of the

by a corresponding reduction in costs

airline. But these costs are not

from flying fewer passengers. This is

purely overhead. Of the 70 percent

the reason that so many carriers are

of the total operating costs that are

struggling today with profitability. This

associated with direct costs, about

is why a tactical expenditure control is

half of the direct costs are fixed

more effective than a holistic method.

and the other half are variable. The fixed costs include aircraft

Tactical Cost-reduction Cycle

payments, crew salaries, other operating staff salaries and other

The process begins with data collection, where the carrier investigates

20%, (7%)

An Example of Tactical Cost Control On-time performance has a big

costs that are fixed for the operation.

influence on an airline’s profitability

Finally, about 80 percent of all variable

(continued on next page)

april 2003

3


industry

industry

and can be controlled tactically. Most

Since most crew contracts stipulate that

per year. This is a fairly modest expense

marked for improvement through

Standards and procedures creation —

Staff planning and deployment —

carriers understand the basic flight- and

crewmembers are paid the maximum of

and certainly within the parameters

the next type of analysis.

specific standards and procedures

addressing the impact of improving

passenger-related costs of OTP problems.

the rostered duty period or the worked

for what is accepted as industry aver-

Prescriptive analysis — an approach

were identified from the prescriptive

rostering and planning to reduce

Delays or cancellations increase passen-

duty period, the airline’s fixed costs of

age, but it seemed as though the OTP

is developed for each normatively

analysis and documented.

total costs,

ger costs because passengers must be

crew salary increase because the crew-

performance of the carrier was lower

negative item in order to improve to

Training — the impacted staff were

Crew planning and control —

provided meals, hotel accommodations,

member is not performing up to the

than what the relatively modest

the level of performance required.

trained in all procedures and practices.

addressing pairing creation, roster

incidental expenses and also must be

rostered level. If OTP is a long-term

expense (1.8 percent) would indicate.

Implementation — once the staff was

creation, crew control and day-of-

re-accommodated on other flights.

problem for an airline, then the crew

Sabre Consulting worked with the

were two fold. First, it was determined

fully trained, the procedures were

operations management to reduce

Most of these costs are relatively easy

contingent for the airline is often larger

carrier, employing the tactical cost

that the total impact of OTP problems

implemented.

total costs,

to account for and are charged within

than what would be necessary to oper-

reduction process to examine the

on the carrier was approximately

the passenger costs on the expenditure

ate if the carrier were performing accord-

issue in more detail.

US$88 million instead of the originally

the remedial action phase of implemen-

addressing the cost drivers for

tree. Similarly, when airlines are charged

ing to the schedule. In the same way that

estimated US$18 million. This extra

tation. Once this work is completed,

handling passengers in order to

penalties for late arrival at airports —

OTP issues increase crew salary fixed

client’s own staff and Sabre Consulting’s

impact was identified in the fixed and

however, a process of compliance check-

reduce costs while maintaining

such as missing slots, crew working

costs, OTP problems have a similar

specialists began a process of data

indirect portions of the expenditure tree.

ing will be put in place to ensure that

or improving service levels.

overtime due to delays and consuming

impact on fixed maintenance costs,

collection. The inter-disciplinary team

Obviously, simply recognizing this larger

the remedial actions are fully assimilated.

extra fuel for auxiliary power unit/ground

aircraft costs and even indirect costs.

included resources from flight operations,

level of cost impact does not recover

First, a team constructed from the

The results of the analysis phase

This particular carrier is currently in

Service cost containment —

All of these areas seem to be

The tactical cost reduction model

secondary or related areas to the

When delays occur and passengers

operations control, airport operations,

the costs, but it certainly points to the

was successful for this particular carrier,

overall issue of cost reduction,

costs are neatly accounted for in the

become more demanding, carriers often

finance, maintenance and engineering,

fact that work in the OTP area should

as well as for many other airlines.

but this is exactly the reason why

flight costs on the expenditure tree. To

endorse tickets over to other airlines to

marketing, and outstation management.

be exerted. Second, the prescriptive

This approach ensures that the tactical

tactical cost reduction works so

control OTP costs, most airlines concen-

carry delayed passengers. This provides

The team looked at the characteristics

analysis identified more than 80 specific

drivers of the costs are addressed, and

well for many carriers. The basic

trate on the easily identified passenger-

good customer service, but has a sub-

of the carrier that might be impacted

tactical actions that could be taken to

this tends to reduce or eliminate the

inter-related nature of the airline

and flight-cost characteristics of the OTP

stantial impact on

improve on-time performance.

strategic drivers of the costs.

operation means that these tactical

problem. These costs are 15 percent to

indirect costs.

20 percent of the total OTP impacted

When the passen-

costs for the typical airline. The largest

ger is endorsed

portion of the costs associated with OTP

to another carrier,

are hidden from view and can only be

the lost revenue

uncovered with a tactical approach.

is accounted for

power unit burns due to delays — these

by low on-time per-

“are virtually impossible at airlines,

It may appear that cost reductions

but this is far from the case.

formance. All stones

After the analysis phase, the remedial

The tactical cost reduction approach

issues have a large impact on total

were turned over in

action phase was started. The combined

works well for other tactical implemen-

order to investigate

team used a multiple-step process in

tation issues besides OTP. This method

the characteristics

order to take corrective actions:

has been used successfully to address

experienced limited success with

airline cost areas including:

holistic cost reduction on the major

operating costs. Because so many carriers have

of the OTP issues at

Empowerment — the inter-disciplinary

the carrier. This data

team was organized to implement

Maintenance and engineering

cost drivers, maybe it is time to try tactical cost reduction methods.

as increased indirect costs. The other

collection was performed in only four

the recommendations from the

dispatch reliability — addressing

OTP problems impact fixed costs and

carrier lifts the coupon of the delayed

weeks, but time was spent to collect

prescriptive analysis and tasked

the impact of improving dispatch

Shane Batt is a partner

some impact indirect costs. For example,

passenger and charges the ticketing

historical performance information

with reporting progress frequently.

reliability on total cost reduction,

in Sabre Airline Solutions Consulting

when delays occur, crewmembers may

airline through the International Air

(operational and financial) and also to

not be able to complete their duty day

Transport Association clearinghouse.

perform interviews in the different areas.

without being illegal due to the total

These clearinghouse charges are gener-

duty time spent for that day. This can

ally applied to indirect costs if they are

combined team performed a standard

happen when a crewmember has four

not netted from revenues. The result

process of analysis including three

News Briefs from Around the Globe

hours left in his or her duty day with

is that indirect costs increase due

specific steps:

News from Asia

a three-hour upcoming flight that is

to OTP issues.

Some of the costs associated with

T H E

Following data collection, the

Comparison analysis — the particular

Air China will add the Sabre ® AirFlite ™ SlotManager ™

vıew

H I G H

L E V E L

“We are now a large player in the industry, and we

require superior solutions that enable the recent merger

delayed two hours. Since completion of

The OTP problems cause increases

data collected in the first phase is

system to its flight scheduling department, further

to move forward as smoothly as possible,” said Li.

the delayed flight would result in the duty

in variable costs (flight- and passenger-

compared to several benchmarks

advancing the airline’s scheduling capabilities.

“Sabre Airline Solutions has been able to offer these

day extending by at least five hours (two

related costs), fixed costs (crew salaries,

including historical performance, com-

hours of delay plus three hours of flight),

maintenance and aircraft unit costs) and

petitor performance, industry best

and CNAC Zhejiang, Air China, which also utilizes the

the crewmember is relieved and another

indirect costs. The largest bulk of the

practices, budgets and expectations.

Sabre

crewmember is called from stand-by or

costs are hidden in the fixed and indi-

Normative analysis — the comparisons

aircraft operating on more than 300 routes.

reserve to handle the remaining flight,

rect costs. A recent Sabre Airline

and characteristics are mapped on a

resulting in a disruption of the crew

Solutions client had this exact problem.

graph where the horizontal axis meas-

planning and scheduling for Air China, the advanced

the market, including Sabre ® AirOps ™ Movement

roster. This disruption might impact

This particular carrier has approxi-

ures financial impact and the vertical

flight scheduling systems will enable the airline to

Control, Sabre ® AirOps™ Flight Planning, the Sabre ®

the roster for several days if it occurs

mately US$1 billion in total costs with

axis measures operational impact.

generate the company wide fleet schedule quickly and

AirCrews ™ crew management system and Sabre ®

in the first day of a multiple-day pairing.

OTP costs estimated at US$18 million

The areas that are negative are

more efficiently.

AirOps ™ Load Planning.

4 ascend

Following its merger with China Southwest Airlines ®

AirFlite ™

Schedule Manager, has a total of 118

According to Li Zeng De, deputy director of

solutions to us while also providing support functions that help schedule evaluation and optimization.” This contract follows the implementation of a range of software from Sabre Airline Solutions that China Southern Airlines uses to meet its objectives in

april 2003

5


industry

industry

and can be controlled tactically. Most

Since most crew contracts stipulate that

per year. This is a fairly modest expense

marked for improvement through

Standards and procedures creation —

Staff planning and deployment —

carriers understand the basic flight- and

crewmembers are paid the maximum of

and certainly within the parameters

the next type of analysis.

specific standards and procedures

addressing the impact of improving

passenger-related costs of OTP problems.

the rostered duty period or the worked

for what is accepted as industry aver-

Prescriptive analysis — an approach

were identified from the prescriptive

rostering and planning to reduce

Delays or cancellations increase passen-

duty period, the airline’s fixed costs of

age, but it seemed as though the OTP

is developed for each normatively

analysis and documented.

total costs,

ger costs because passengers must be

crew salary increase because the crew-

performance of the carrier was lower

negative item in order to improve to

Training — the impacted staff were

Crew planning and control —

provided meals, hotel accommodations,

member is not performing up to the

than what the relatively modest

the level of performance required.

trained in all procedures and practices.

addressing pairing creation, roster

incidental expenses and also must be

rostered level. If OTP is a long-term

expense (1.8 percent) would indicate.

Implementation — once the staff was

creation, crew control and day-of-

re-accommodated on other flights.

problem for an airline, then the crew

Sabre Consulting worked with the

were two fold. First, it was determined

fully trained, the procedures were

operations management to reduce

Most of these costs are relatively easy

contingent for the airline is often larger

carrier, employing the tactical cost

that the total impact of OTP problems

implemented.

total costs,

to account for and are charged within

than what would be necessary to oper-

reduction process to examine the

on the carrier was approximately

the passenger costs on the expenditure

ate if the carrier were performing accord-

issue in more detail.

US$88 million instead of the originally

the remedial action phase of implemen-

addressing the cost drivers for

tree. Similarly, when airlines are charged

ing to the schedule. In the same way that

estimated US$18 million. This extra

tation. Once this work is completed,

handling passengers in order to

penalties for late arrival at airports —

OTP issues increase crew salary fixed

client’s own staff and Sabre Consulting’s

impact was identified in the fixed and

however, a process of compliance check-

reduce costs while maintaining

such as missing slots, crew working

costs, OTP problems have a similar

specialists began a process of data

indirect portions of the expenditure tree.

ing will be put in place to ensure that

or improving service levels.

overtime due to delays and consuming

impact on fixed maintenance costs,

collection. The inter-disciplinary team

Obviously, simply recognizing this larger

the remedial actions are fully assimilated.

extra fuel for auxiliary power unit/ground

aircraft costs and even indirect costs.

included resources from flight operations,

level of cost impact does not recover

First, a team constructed from the

The results of the analysis phase

This particular carrier is currently in

Service cost containment —

All of these areas seem to be

The tactical cost reduction model

secondary or related areas to the

When delays occur and passengers

operations control, airport operations,

the costs, but it certainly points to the

was successful for this particular carrier,

overall issue of cost reduction,

costs are neatly accounted for in the

become more demanding, carriers often

finance, maintenance and engineering,

fact that work in the OTP area should

as well as for many other airlines.

but this is exactly the reason why

flight costs on the expenditure tree. To

endorse tickets over to other airlines to

marketing, and outstation management.

be exerted. Second, the prescriptive

This approach ensures that the tactical

tactical cost reduction works so

control OTP costs, most airlines concen-

carry delayed passengers. This provides

The team looked at the characteristics

analysis identified more than 80 specific

drivers of the costs are addressed, and

well for many carriers. The basic

trate on the easily identified passenger-

good customer service, but has a sub-

of the carrier that might be impacted

tactical actions that could be taken to

this tends to reduce or eliminate the

inter-related nature of the airline

and flight-cost characteristics of the OTP

stantial impact on

improve on-time performance.

strategic drivers of the costs.

operation means that these tactical

problem. These costs are 15 percent to

indirect costs.

20 percent of the total OTP impacted

When the passen-

costs for the typical airline. The largest

ger is endorsed

portion of the costs associated with OTP

to another carrier,

are hidden from view and can only be

the lost revenue

uncovered with a tactical approach.

is accounted for

power unit burns due to delays — these

by low on-time per-

“are virtually impossible at airlines,

It may appear that cost reductions

but this is far from the case.

formance. All stones

After the analysis phase, the remedial

The tactical cost reduction approach

issues have a large impact on total

were turned over in

action phase was started. The combined

works well for other tactical implemen-

order to investigate

team used a multiple-step process in

tation issues besides OTP. This method

the characteristics

order to take corrective actions:

has been used successfully to address

experienced limited success with

airline cost areas including:

holistic cost reduction on the major

operating costs. Because so many carriers have

of the OTP issues at

Empowerment — the inter-disciplinary

the carrier. This data

team was organized to implement

Maintenance and engineering

cost drivers, maybe it is time to try tactical cost reduction methods.

as increased indirect costs. The other

collection was performed in only four

the recommendations from the

dispatch reliability — addressing

OTP problems impact fixed costs and

carrier lifts the coupon of the delayed

weeks, but time was spent to collect

prescriptive analysis and tasked

the impact of improving dispatch

Shane Batt is a partner

some impact indirect costs. For example,

passenger and charges the ticketing

historical performance information

with reporting progress frequently.

reliability on total cost reduction,

in Sabre Airline Solutions Consulting

when delays occur, crewmembers may

airline through the International Air

(operational and financial) and also to

not be able to complete their duty day

Transport Association clearinghouse.

perform interviews in the different areas.

without being illegal due to the total

These clearinghouse charges are gener-

duty time spent for that day. This can

ally applied to indirect costs if they are

combined team performed a standard

happen when a crewmember has four

not netted from revenues. The result

process of analysis including three

News Briefs from Around the Globe

hours left in his or her duty day with

is that indirect costs increase due

specific steps:

News from Asia

a three-hour upcoming flight that is

to OTP issues.

Some of the costs associated with

T H E

Following data collection, the

Comparison analysis — the particular

Air China will add the Sabre ® AirFlite ™ SlotManager ™

vıew

H I G H

L E V E L

“We are now a large player in the industry, and we

require superior solutions that enable the recent merger

delayed two hours. Since completion of

The OTP problems cause increases

data collected in the first phase is

system to its flight scheduling department, further

to move forward as smoothly as possible,” said Li.

the delayed flight would result in the duty

in variable costs (flight- and passenger-

compared to several benchmarks

advancing the airline’s scheduling capabilities.

“Sabre Airline Solutions has been able to offer these

day extending by at least five hours (two

related costs), fixed costs (crew salaries,

including historical performance, com-

hours of delay plus three hours of flight),

maintenance and aircraft unit costs) and

petitor performance, industry best

and CNAC Zhejiang, Air China, which also utilizes the

the crewmember is relieved and another

indirect costs. The largest bulk of the

practices, budgets and expectations.

Sabre

crewmember is called from stand-by or

costs are hidden in the fixed and indi-

Normative analysis — the comparisons

aircraft operating on more than 300 routes.

reserve to handle the remaining flight,

rect costs. A recent Sabre Airline

and characteristics are mapped on a

resulting in a disruption of the crew

Solutions client had this exact problem.

graph where the horizontal axis meas-

planning and scheduling for Air China, the advanced

the market, including Sabre ® AirOps ™ Movement

roster. This disruption might impact

This particular carrier has approxi-

ures financial impact and the vertical

flight scheduling systems will enable the airline to

Control, Sabre ® AirOps™ Flight Planning, the Sabre ®

the roster for several days if it occurs

mately US$1 billion in total costs with

axis measures operational impact.

generate the company wide fleet schedule quickly and

AirCrews ™ crew management system and Sabre ®

in the first day of a multiple-day pairing.

OTP costs estimated at US$18 million

The areas that are negative are

more efficiently.

AirOps ™ Load Planning.

4 ascend

Following its merger with China Southwest Airlines ®

AirFlite ™

Schedule Manager, has a total of 118

According to Li Zeng De, deputy director of

solutions to us while also providing support functions that help schedule evaluation and optimization.” This contract follows the implementation of a range of software from Sabre Airline Solutions that China Southern Airlines uses to meet its objectives in

april 2003

5


TheTacticalApproach_APR_2003