Changes in Cost and Efficiency

Changes in cost and efficiency

The situation today in the airline industry is basically a price/cost war. Companies are battling to cut and keep their operating cost low in order to remain competitive in an industry that is strongly driven by price. The principal cost factors that drive the industry are labor and fuel. In terms of labor Neeleman, Jetblue's CEO, said that "The biggest problem in the industry isn't pay, its work rules". Labor cost accounts for the 38% of the overall operating cost of an airline company. Depending on the system that a company uses, its labor cost and labor necessity will vary. The point-to-point systems requires less personnel and the aircraft is less time on the ground, and more in the air, being able to flight more times that those aircraft

flying under the hub-and-spoke system. The first system is widely used by the new low-cost carriers, while the hub-and-spoke is very typical of the traditional airlines (Appendix 1). Moreover, labor cost is rising, which increases the overall cost per seat (Wright, September 8, 2003). In terms of labor efficiency, low-cost carriers are reducing labor or either by e-ticketing or by doing what Southwest states on their contracts, any qualified employee can perform any function (load, unload, cleaning, etc) as needed (Thompson.2005).

The second, most important factor that determines the cost structure in the industry is fuel cost. It is said that for one-dollar increase in the price of a fuel barrel, is costs the industry a billion a year (Tang, C. April 11, 2005). Moreover, in the future, the price of fuel is expected to continue increasing, what will tighten even more profit margins.

What other companies have done to lower their cost is to eliminate meals. Instead, in short flights, snacks are served to the passengers, and in long-distance ones, costumers are allowed to bring food with them or buy it on board. From the efficiency point of view, it has been proven by low-cost carriers that the point-to-point system is more efficient. Other aspects in where companies have to be efficient are in ticket processing, luggage handling, timelines, etc. Those companies able to control their cost and handle business efficiently will be prospering.