Six Ways Airlines Can Mitigate Rising Labor Costs

It’s no surprise that hiring people is one of the big stories in businesses today. From the “great resignation,” to fast-changing worker expectations, hiring people is hard to do. How many times have you been to a restaurant where you see many empty tables but are told you must wait, because of staff shortages? Airlines need a lot of people to run. Some are highly skilled, like pilots and mechanics. Some are skilled but attainable for a much larger set of the population, like flight attendants. Some are high-attrition roles that compete with local restaurants and retail stores for talent, like many airport workers.

With a shortage of workers, jobs at all levels are seeing higher pay rates. Since people make up the first or second largest cost for any airline (depending on the price of fuel), raising pay but making no other changes puts pressure on margins. More likely, air fares would rise to make up this difference, but with high price elasticity for many travelers this means losing customers. So what can airlines do to keep fares where they are while labor costs are rising? Here are six strategies, all of which are in use to various degrees at most airlines:

Better Consumer Technology

Technology replacing people has been in place for many years. People book their own airline tickets instead of calling or visiting a travel agent, and trade stocks online without calling or visiting a broker. Increasingly fast food restaurants are using mobile ordering and in-store kiosk ordering rather than hire extra staff for this. The best rental car service is when you see no one until you hand your license to someone at the end who confirms that you can take the car you picked.

Airlines are doing this too, and can do more. You no longer need an agent to give you a boarding pass, but just put it in your Apple Wallet instead. Airlines are experimenting with self-tagged checked baggage, eliminating more agent staff. The more that customers can self-serve using their smartphone, the fewer people needed in the processing from ticket counter to gate.

Simplify The Business

In the airline business, complications always equal costs. Airlines that fly multiple fleet types require more spare parts, likely more mechanics, segregated pilots, and more training cycles as pilots become more senior. Having differing policies for different customers increases training for staff and requires more IT to know, for example, that this fare gets a free bag but this other fare requires confirmation of payment. It also may require more airport real estate.

Complications are found everywhere if you start looking for them. Customer and pricing policies, for example, are often added but rarely removed. Over time, some may conflict with each other and increase call times or customer confusion. Other businesses find this same effect. Restaurants with a more limited menu but where everything sells tend to do better than those with one-inch thick menus offering every kind of cuisine available.

Another fertile source for simplification is the organization chart. Many airlines have redundancy and excess in the way they are organized. Having fewer people, but each with clear responsibilities, will result in lower costs and faster implementation.

Increase Utilization

The fastest way to lower an airline’s cost is to increase utilization. Some people think of utilization in a strict, limited sense — the number of hours per day each airplane flies in revenue-generating service. This can be increased, but utilization is a much larger concept. How many people are needed for each process, how many flights can be operated from each gate rented, how many seats can be put in the airplane, and more.

Adding a row or two of seats shrinks the space for at least some customers, but also creates a larger base from which to spread all the costs. Adding an extra trip for each plane, each day, doesn’t change many of the costs of the airline but creates more ASMs and spreads fixed costs further. Finding ways to use fewer ticket counters, fewer gates, and less overall real estate while still operating the core schedule is something where every airline could likely find improvements. Once an airline takes on utilization as a measurable target and goals to increase it, they will be surprised at how many places they will find worthwhile fruit to pick.

Outsourcing Non-Core Activities

Airlines are in the business of moving people and goods safely. To make this happen, there are many supporting things they must do. But at least some of these things can be done more efficiently by other companies that specialize in that activity. Probably every airline in the world outsources some activities, but most could do more.

Many airlines outsource some or all of their maintenance. Not many airlines do the breakdown and restoration of modern jet engines for example. This is highly specialized work that in many cases is more efficient when completed by a company that does this as their primary business. Airport work, often divided as “above and below wing”, is often outsourced, especially at stations with small flight activity for any given airline. An airline may be passionate about having “above wing” agents dealing directly with customers, like at ticket counter and gates, be their employees and trained to their standards. But even these airlines may be more open to the “below wing” — ramp and baggage agents — be services bought from a company that does this for multiple airlines at a single airport.

A few airlines have tried to be truly virtual. Essentially they are marketing companies that sell tickets but outsource all activities — including flying the planes — to another company. This has been less effective for commercial passenger airlines. But every airline, as they look for simplification in the organization charts, can think of ways to lower their costs and improve their productivity by finding partners who build their business on doing a specific process, repeatedly and efficiently.

Measuring Profits By More Than Just Flight

John Dasburg, when he was the CEO of Northwest Airlines, famously said “the fastest way to stop losing money is to stop doing things that lose money.” Every airline worth their salt measures profitability by flight, and know, at least directionally, which flights disproportionately drive the company’s profitability. But the most efficient airlines measure the incremental profit and loss from other activities as well. Does the airline make or lose money carrying checked baggage? Does the onboard service make money or is it a loss-leader? Which distributors are net-positive contributors, and which provide marginal revenue at high incremental costs? Are there corporate contracts that would be better off canceled? Is there an entire fleet category that reduces the company’s ability to provide a reasonable return on capital?

Asking questions at this level points management teams to where the company can improve its operations, and in effect better offset higher labor costs. To stop doing things that lose money, you have to know this at very detailed, and various, levels.

Regular Review Of Every Expense

Having a cost initiative or special project can be helpful to address some big issues. But long-term cost control comes from having the discipline to regularly review every cost category at a detailed level and ask some key questions:

1. Can we stop this activity altogether?
2. Can we do this activity as we are today with fewer people?
3. Can we save money by outsourcing this activity?
4. Can we pass on the expense of this activity to another business partner or to our customers?

This discipline is the best long-term approach to offsetting higher labor cost, but often will require a cultural change at the airline to make it happen.

As labor costs rise and over time and become a higher percentage of an airline’s total cost, airlines can raise fares, reduce margin, or offset these higher costs by being more efficient. This usually means using fewer people, or using the people you have more productively. Collectively-bargained agreements may limit what any one airline can do in certain airlines, but using these six ideas to various degrees can help every airline deal with the higher costs of a changing labor force.