By Sascha Feuerherd *
In a nutshell (and in theory) it is relatively easy to describe successful airlines. The sole target of a successful commercial airline is to safely fly from A to B and back to A, while generating revenues that exceed their cost.

Unfortunately, in practical life, it is a much more complex undertaking. From the first idea of starting up an airline to successful operation of an airline, thousands of decisions have to be taken, each of them potentially endangering the success of the company. And what is true for start-ups is not really different for established carriers. Each day the future success of an airline is threatened by internal or external developments and wrong or right decisions. Once a company is up and running, it is important to keep several factors constantly under control to ensure long-term success. The following list of factors to keep an eye on is by far not complete, but constitutes a first idea on the complexity:

•  External factors (E.g. Volatile fuel costs and FX rates, political upheaval as currently in the EMEA region and unresolved government debt as in the EURO zone or in the US, existing and potential competitors and their activities, customer demand and behavior, natural disaster, etc...)

• Operations (To safely and efficiently operate as an airline. This includes the day to day business in Flight Operations, Ground Operations, Maintenance & Engineering, etc. Since running an airline is not for the pure fun of flying, but clearly linked to the target of charging for it, one has to include commercial, financial and administrative functions into this set of factors too)

• Revenues (One of the beauties but at the same time challenges of the airline business is, that for the very same service class on the very same flight a large spread of different revenues exist. Sole target in this field is to ensure the maximum possible revenue for each and every sold seat for as many seats as possible. In addition one should aim to generate additional/ancillary revenues wherever possible and in line with the corporate strategy)

• Cost (This factor comprises basically each and every activity and good used to operate an airline. Although there are thousands and thousands of individual cost drivers, one could start the list with the main ones as for instance aircraft, fuel, maintenance, staff, infrastructure, etc.

Since we are living in a constantly changing world with developments in and changes to each of the above mentioned factors and sub-factors, it is necessary to define corporate objectives and a corporate strategy (as well as the derived business unit and department strategies) to allow steering such a construct and ensure that the delegation of responsibility will not lead to the breakdown of the system. A well-defined strategy will enable executive, senior, medium and lower management as well as all other staff to understand the general direction of the company and to double check if their activity is congruent with it.

Let’s concentrate on the factor “cost”, although one could write books on each of the other factors and sub-factors.

Successful airlines around the world distinguish themselves from the less successful competitors in many ways. One common criteria for the successful candidates is the exertion of full cost control and constant cost optimization (wherever possible without compromising safety and any other set strategic objectives). Major players conduct corporate improvement projects on an annual or latest bi-annual basis. Other important production factors (e.g. operations, human resources or revenue management to name a few) are handled by hundreds of experts and dozens of managers in each and every airline, while cost is due to its nature hidden in pretty much every activity and thus delegated to each and every employee. Solely the quantitative (and in the case of strategic controlling the qualitative) effect is summarized by corporate controlling. Contrary to typical controlling, cost management needs to be part of each and every process on a day to day business and demands the full understanding of the process by the relevant subject matter expert. That’s, what makes successful cost management such a complex and revolving effort. But, since each penny saved directly translates to a bottom line improvement of the very same penny, it is definitely worth the effort.

There are many articles, training courses and books available in the market, but in reality each airline faces a unique set of challenges which must be analyzed and understood individually. Only then can appropriate solutions be developed and implemented based on firsthand knowledge from many of the leading airlines of the world combined with innovative paths for cost reduction and additional revenue generation. Only in very few cases, airlines have the appropriately qualified personnel on their payroll. Still it is an effort, that should not be completely performed by external experts. Best solutions merge the available internal knowledge of existing processes and procedures with the external expertise on best in class as well as project execution. This allows for a good mix as well as a professional training on the job and development of appropriate know-how to continue the efforts in the long run. It is close to a mission impossible to objectively analyze the own performance and weaknesses.

It is absolutely correct, that you cannot shrink your company to health (by continuously cutting cost), but while serious efforts are taken on the revenue side of the business, one should not forget the factor cost. Cost need to be constantly monitored and checked, since otherwise they tend to quickly grow… Within our industry with small margins, no airline can afford to waste money. This is true for stagnating or small growth markets as well as for the top performers, which are dominantly in the ArabAviation world. But similar to all other industries and markets, even in over-proportionally growing markets, the ones having a lean cost basis will be running up front considering all other factors are equal.

There is no time to waste: look into your airlines' cost performance now!

*Sascha Feuerherd is a leading aviation industry professional with over two decades of experience specializing in airline restructuring and implementation of cost reduction programs. Sascha was Senior Director with Lufthansa Consulting in charge for Airline Restructuring, more recently headed all airline consulting projects for IATA Consulting and now runs a boutique airline consulting company.

For more information:
ManagingDirector@feuerherd.de
www.feuerherd.de