Under tough business environment, your low cost carrier (LCC) is in financial difficulty. As the CEO of this LCC, you however believe that if the airline manages to control the cost, your airline can survive. You therefore decide to reduce the operating expanse including the labour cost but you would avoid lay-offs. What cost reduction measures would you implement and why?
In airline industry, the cost can break to two parts: fixed cost and variable cost. And there is very hard to cutting off of the fixed cost which is including the cost of fuel, landing fees, insurance, etc. because these costs are necessary. If we have to control the operating cost, I suggest that we should control the labour cost first. Labour cost typically range between 30-40% of total operating expense for airline.
Labor is the second biggest cost item to an airline. Also, it is more flexible. However, if we reduced the labour expense by lay-offs, it would cause out negative effects which will affect the business. When we decided to lay-offs, the decision may hit staffs morale. And it would diminish the quality of their service. What enables us to make a profit despite our low rates are methods for substantially reducing costs without greatly diminishing the quality of our service. And here are some methods about cutting cost without diminishing the quality of service: outsourcing, cut the extra bonuses, cut the Medicare, cut long tip allowance, slow down the promotion and the voluntary administration.
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A key question is whether the very successful, largely short-haul LCC business model can work over long-haul sectors? This paper compares the cost and other advantages of LCCs and evaluates how far they might be applied to long-haul sectors. It is estimated that cost advantages might be much lower than the 50-60% on shorthauls. Other factors such as the adoption by network airlines of some LCC ...
Certain airlines have responded to the burden of wages and employee benefits by contracting out, or outsourcing services. The first and the most useful method is outsourcing. For example: ground-handing services and maintenance services. Outsourcing is any task, operation, job or process that could be performed by employees within your company, but is instead contracted to a third party for a significant period of time.
Hiring a temporary employee while your secretary is on maternity leave is not outsourcing. In addition, the functions that are performed by the third party can be performed on-site or off-site. A carrier out-sources so much of its operations that it performs little beyond the marketing and sales function. It could be described in this way: An airline should focus on itscore competencies, which is operating a network of air services and outsourcing to others as many as its non-core activities and functions as possible.
An out- source has a lot of advantages and I would like to list out some of them. 1. Focus On Core Activities In rapid growth periods, the back-office operations of a company will expand also. This expansion may start to consume resources (human and financial) at the expense of the core activities that have made your company successful. Outsourcing those activities will allow refocusing on those business activities that are important without sacrificing quality or service in the back-office. 2. Cost And Efficiency Savings
Back-office functions that are complicated in nature, but the size of your company is preventing you from performing it at a consistent and reasonable cost, is another advantage of outsourcing. 3. Reduced Overhead
Overhead costs of performing a particular back-office function are extremely high. Consider outsourcing those functions which can be moved easily. This is important for airline because when there is off-season, lack of demand but still has same staffs will cause resources waste. 4. Operational Control
Operations whose costs are running out of control must be considered for outsourcing. Departments that may have evolved over time into uncontrolled and poorly managed areas are prime motivators for outsourcing. In addition, an outsourcing company can bring better management skills to your company than what would otherwise be available. 5. Staffing Flexibility
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Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you’re done. Airline industry is a seasonal business so if the staffing is more flexibility, it would help the airline easier to control the labour cost. 6. Continuity & Risk Management
Periods of high employee turnover will add uncertainty and inconsistency to the operations. Outsourcing will provided a level of continuity to the company while reducing the risk that a substandard level of operation would bring to the company.
Although outsourcing has lots of benefits, it still has some disadvantages such as it is hard to control the quality of staffs. Therefore when we want to decide outsource, we must think twice in choosing the agency. Overall, if we make the right decision in outsourcing, it would be the main method to reduce the labour cost.
The second way to reduce the labour cost is to cut the extra bonuses. The extra bonuses are the bonuses not including in the contract. It just a bonus which is occurs when the company is having positive growth in profits. And now our business not just has no positive growth in profits and we are have to reduce the operating cost. Therefore cut the extra bonuses is the directly way to release the pressure in operating cost.
And the third method is to cut the Medicare. According to the labour law, the business must provide Medicare to each employee. This Medicare is about insurance. This part cannot cut. And my point in cut Medicare is talk about the staff welfare in Medicare such as dental medicare. In past years, our company provides over six-hundred thousand in dental medicare. But the usability is less than 10%. This medicare fee is wastage. Therefore we decide to cut the dental medicare for reduce the cost.
The next method also about allowance, reduce the long haul allowance. Now, our airline’s long tip allowance is 2500 Hong Kong dollars per day and we provide the single bed hotel room to each worker. And we had some feedback in reduce the allowance that workers are not anti to this policy. Therefore, we decide to reduce the allowance to 1000-1200 HK$ per day and to booking double or triple bed hotel room for the long haul crew.
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The debate on health care spending has been highly contested and remains the top most agenda on the Obama administration. The U. S government has been pursuing effective health care reforms for quite a long period of time. Focus has been on developing a plan that reduces government spending on heath and home care reimbursements while increasing the regard for insurance cover. An important aspect ...
The staff, we believed, understood the rough patch our company was experiencing. We have the confidence that they would support the second to the fourth method. Because in one of the feedback, there is a summed it up very well: ‘We are all in the same boat.’ What we’re trying to do now is to keep the boat afloat while sailing through the storm.”
Then is to slow down the promotion. In our airline, we expense around $500000-600000 in promotion each year. When we promoted a staff, we should pay more about $20000 to him per year. If we slow down the promotion, it would save about $350000-400000 pre year. For coordinate this method, we also can provide the early retire and the long term no payment holiday.
The last but not least is the voluntary administration. We can reference to the British Airways (BA).
In June 2009, BA management asked employees to volunteer for a range of cost-cutting working arrangements with the aim of helping the company to weather the current crisis. These were: working without basic pay for up to four weeks spread over a period of up to six months, while still receiving allowances such as shift premia; taking up to one year of unpaid leave;
switching from full-time to part-time work for up to a year. At the end of June, it was reported that 800 staff had volunteered to work without basic pay for up to four weeks, 4,000 employees had agreed to take unpaid leave and 1,400 employees were prepared to work part time on a temporary basis. BA estimated the one-off cost savings at around GBP 10 million (€11.65 million) in 2009 and described employees’ response as ‘fantastic’.
Not just reduce the labour cost, we also can reduce the operating cost in other side. For example: airline to have introduced the first come, first served boarding system which is mean that no seat number was designated. There was only a division into three seating areas, listed as A, B, and C from the front.
She was told that she was free to take any seat she wanted within the designated area according to the order in which she boarded. And with passengers lining up early on to get good seats, it was possible to cut down greatly on the time it took to board. The benefit of this system lies in how it not only lowers costs but also prevents delays and cancellations. By reducing the time it takes to designate seats at the ticketing counter, the airline saves time on the overall boarding procedure, as well as the money that would be spent on renting a ticketing counter in the airport.
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The summer months offer a time for spending time with families, vacations, and the occasional lazy day. Most employees try to schedule vacations and time off in advance to allow their employers enough notice to cover their break, but there are those that will not give any notice of taking a day off. Some employees decide that morning they are going to take the day off and the employees will call ...
And other example is making a rule of conducting sales by Internet, it has avoided having to pay sales commissions to travel agencies and branches. For this method, we can reference to Air Busan. Air Busan is drawing major popularity with its year-round Internet discount system and early bird fare program, which explains its rising to account for 60 percent of domestic flights and 50 percent of international flights in terms of Internet sales.
In conclude, if we want to reduce the operating cost, we should first reduce the labour cost. It is because labor cost is the second biggest cost in airline industry. And reduce the labour cost not just only rely management level, it also need the employees’ support. It is the most important element. And except the labour cost, we also can reduce the operating cost by use new technology.
