Fri 5 Sep 2003
According to a recent McKinsey Quarterly article there are great opportunities for cost savings in the airline industry. But my granny (or anyone else who has ever been on a budget airline) could have told you that. Why are McKinsey presenting solid business reportage as strategic insight? Reading the summary, it looks like they’ve missed the main point of how budget airlines are changing the industry.
The reason budget airlines are truly significant is not just that they are cheaper and more operationally effective. If this were the case, we’d see lots of budget airlines flying motley fleets of aging smaller planes whose capacity was tailored to the routes being served.
But this isn’t what we’re seeing. We’re seeing the budget operators acquiring standardised fleets of 737’s and A320’s. They attempt to build a large enough volume of passengers between outlying airports in order to justify having a full-size jet on the route. Big airlines are continuing to use small aircraft to serve small numbers of high-paying business travelers from similar airports.
Another way to put it is that traditional airlines build their business from the front of the plane (where the business travelers sit), and the budget airlines build their business from the back of the plane (where the large volumes of customers come from).
It is this switch in emphasis from going after business passengers to getting as many passengers as possible that is really changing all parts of the aviation industry.
November 14th, 2003 at 11:02 pm
First of all, I 100% agree with your assessment of the fundamental difference between low cost carriers and mainline carriers. Add to your assessment the fact that mainline carriers increasingly “depend” upon price-stimulated leisure traffic to keep the seats full and back-fill the excess capacity created by business-focused frequency plays, and it’s not hard to understand why the mainline carriers are so vulnerable to LCC competition.
That said, I don’t think you read the article, and your attack of it weakens your otherwise strong case. The article does not lay out a “case” for why mainline carriers need to address their cost structures (with this much, I, and, presumably, your Granny, agree). Instead, it offers some new insights into “how”. The authors of the article contend that airline management (in its signular focus on factor costs) has failed to recognize that much of the cost structure is driven by “how” airlines execute basic daily operational tasks. This is a process-intensive, labor-intensive, capital-intensive industry. The authors believe that “process excellence” has the potential to both reduce cost and increase quality. Other companies in similar situations (Disney, McDonalds, Toyota) focus much of their efforts on refining processes to ensure maximum output from each labor or capital input. The authors, I think, put some compelling examples on the table of how airlines might further reduce costs (and increase quality) without simply slashing wages.
Certainly the case for business-model reform remains. But add the right business model reforms to a capability-driven 10% cost advantage, and you’d have an airline that might just survive the low cost onslaught
Read the article again.
AD