Approaches used to Minimise Cost in Airline Industry
Airlines play a significant role in transportation of people and goods. However, airline industry is a service industry that requires strategic management approaches because it is labour, capital, and technology intensive. It is also often challenged by external environmental variations as well as internal operations. Much expense in airline industry is incurred in staffing, buying aircraft, maintenance, airport fee and aviation fuel. These expenses are vital factors that determine transportation fee. However, airlines use different approaches to minimise cost and at the same time ensure quality customer service. Rather than raising airfare, there are different approaches that can be used to tackle high cost of fuel in aviation industry. The different approaches used to minimise cost includes in airline industry includes; retrenchment, optimization of fleet dispatch, using improved technology, fuel hedging, reducing the dead weight, making fast turnarounds, airport fee negotiations and using secondary airports, and using similar aircraft models to reduce maintenance cost. The most common approach used by majority of airlines is fuel hedging which stabilises the cost of aircraft fuels even when the global fuel prices goes up (Belobaba, Odoni & Barnhart, 2015). In theoretical terms, reducing the cost is expected to results in higher profits and improved cash flow. Nevertheless, this may not be the case always. The main challenge is identifying suitable cost-reduction actions which do not unfavourably affect revenues and quality of customer service.
Minimising Cost in Airline Industry
In many cases when aviation industry faces financial challenges, reducing the number of staff is the first option (Rhoades & Waguespack, 2008). During an economic boom or when the airline industry is enjoying significant growth in profits, cost minimisation does not necessarily get the consideration they deserve. However, severe economic downturn demand critical measure that might sometimes compel airline industry to take hard and drastic measures such as retrenchment in order to cut the labour costs significantly. Retrenchment is a lay-off approach of staffs in order to reduce the cost of labour (Rhoades & Waguespack, 2008). Though the strategy is not favourable to employees who end up losing their jobs, it is sometimes the only alternative during great economic crisis. However, reducing airline labour costs should go along with increasing employees’ productivity (Wright, Groenevelt & Shumsky, 2010). Nevertheless, this approach is only used during severe economic downturn. This means that this approach is used as the last option when all other approaches have failed to yield reasonable reduction of cost.
Strategic integration of maintenance management systems can provide significant merits in cutting maintenance cost (Belobaba, Odoni & Barnhart, 2015). Unlike retrenchment which requires workforce restructuring, this approach least affects the workforce structure. Strategic outsourcing of maintenance services can significantly reduce the cost. Currently, big airlines are outsourcing their maintenance services from MROs (Maintenance, Repair and Overhaul facilities) which are most found in developing nations such as El Salvador, Singapore, Mexico, Turkey and China. US Airways and Southwest fly planes make use of MROs in El Salvador, while Delta airlines gets services from MROs in Mexico (Suntsova, 2016). Major airlines make use of MROs in China, Singapore and Turkey in the bid to reduce the maintenance cost.
Also, cost minimisation in maintenance can be achieved through getting the best aircraft technology. There are several aircraft technologies in the market that have better efficiency and require less maintenance. There is need to replace the old aircrafts with new models that have better fuel efficiency and improved technology. Replacing old model with the new models for the purposes of preserving fleets’ high performance and lowering fuel consumption significantly reduces maintenance cost (Wright, Groenevelt & Shumsky, 2010). Many airlines are turning to new aircraft models that are more fuel efficient in order to reduce fuel cost. By making use of more gas-efficient aircrafts, the fuel cost is reduced significantly (Suntsova, 2016).
Another outstanding approach to cut maintenance costs is to make use of only one kind of aircraft model. For example, Southwest and Ryanair only uses Boeing 737s to avoid diverse maintenance and training sessions. This approach significantly minimises cost on maintenance and repair, since the airline only has to stock parts for the only make and model of aircraft they use (Clausen et al, 2010). The approach also minimises cost of training pilot, flight attendants and maintenance engineers, since the need of using separate training programs for different models of aircraft has been eliminated.
Additionaly, another approach used to cut airline cost is making quick turnaround. Quick turnaround is ideal way of optimizing flight working hours and reducing unproductive time (Suntsova, 2016). Main airlines are concerned with keeping their planes in the air, where they earn rather than spending more time on the ground where they incur more expense. For example, Air Asia ensures that it fly’s as early as is commercially possible and ends its journey at midnight. It also has a twenty-five-minute turnaround compared with traditional carriers, which take an hour. This means that the airline approximates that each airbus is in flight for twelve hours a day while a traditional transporter only manages just eight hours.
Consequently, fuel cost reduction is a key strategy employed in aviation industry to minimise airlines operating cost (Chang & Shao, 2011). This strategy does not intend to reduce the cost of fuel as it might be presumed, however, it embarks on critical procedures that minimises fuel wastage and cost. There are four vital approaches that constitute this policy. These include; optimization of fleet dispatch, creating fuel hedging strategies and reducing the dead weight of the aircraft.
Fleet dispatch optimization is achieved through monitoring aircraft performance methods and dispatching different types of aircrafts to execute short haul and long haul flights (Belobaba, Odoni & Barnhart, 2015). Through monitoring staff working hours and creating reasonable schedules flight hours for flight crew in order to avoid over-time flight hour payments can significantly reduce the labour cost. Successful airlines such as Virgin Atlantic reduce cabin crew over-time working hours through keeping cabin crew’s total flight hours reasonable and by effectively dispatching cabin crew (Eller & Moreira, 2014).
Fuel hedging strategies involves negotiation gamble against the unstable future price of aircraft fuel (Chance & Brooks, 2015). According to Eller & Moreira (2014), fuel hedging is the most prevalent methods of cost minimisation across the airline industry globally. This is because fuel prices are affected by economical dynamics in the global platform (Chang & Shao, 2011). Factors such as war, natural calamities and global economic recession can prompt rise in fuel prices. Therefore, if an airline speculates that the cost of aircraft fuel is bound to rise in the near future, they can sign contracts with the jet fuel suppliers locking in the current price for months or even years. If by chance the fuel prices increases significantly in six months or a year, the airline company would be buying fuel at agreed price. However, if the aircraft fuel prices drop significantly, the airline company will still stick to the “locked in” higher rate. Almost all airlines use fuel hedging (Morrell & Swan, 2006). Southwest Airlines used $3.5 billion lower than the industry average for aircraft fuel by involving aggressive fuel hedging approach between 1991 and 2008 (Chang & Shao, 2011).
On the other hand, airlines major on cutting the dead weight of the airplane in order to minimise spending on fuel (Chang & Shao, 2011). Fuel expense is a major part of the airline cost; thus airline companies do whatever they can to reduce the weight of the plane in order to save fuel. Lighter materials are also used in the interior to reduce the overall weight (Gerardi & Shapiro, 2009). For example, the airplane seats have been made lighter as well as smaller, while the food trolleys used for catering service in the plane have been replaced with lighter ones. Also, heavy log-books and instruction handbooks have been substituted with lighter tablets.
Most importantly, airport fee charged on hourly basis significantly increases the cost in airline business. Cost can be minimised by seeking cheaper airports (De Neufville, 2008). Better prices can be achieved through enthusiastic negotiating, but if negotiations do not bear substantial deduction, it is economical to use cheaper and underutilized airports. Busy airport such as Heathrow, Los Angeles International airport, Dallas international airport, and Chicago O’Hare among others tend to charge high airport fees because of the huge traffic they control. These airport charge higher fees because of the high demand they have. Since the landing fee at these major airports is usually astronomical, airlines look for less popular airports which charge less landing fee in a city or airports close to main destinations (De Neufville, 2008). For example, instead of using Chicago O’Hare, airlines make use of Chicago’s Midway Airport which is less popular but serves the similar basic function enabling aircraft to take off and land close to the Chicago metropolitan.
Though staffs make up a significant proportion of overall cost in airline industry, there are different approaches used to minimise these cost in order to ensure stability and success in the industry. These include retrenchment, maintenance cost reduction, fuel cost reduction, using similar plane models, secondary airports and airport fee negotiation. These methods can be used to achieve significant saving in the industry. However, the most common method is fuel hedging which is used to reduce jet fuel cost. This is because fuel prices are affected by economical dynamics in the global platform.
Nevertheless, danger is that over-aggressive minimisation of overheads, using cheaper raw materials or reducing pay rates might have unfavourable effect on quality and customer service. It is significant to understand that cost minimisation does not necessarily entail reducing the quality customer service, it always important to ensure customers’ satisfaction is achieved.
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