On Anniversary Of Cuts, Airlines Urged To Lower Costs
<B> On Anniversary Of Cuts, Airlines Urged To Lower Costs</B>
By Jay Campbell
Despite major reductions in marketing and distribution costs, the airline industry is being advised to focus on cost management if it is to weather the next economic downturn.
The suggestion comes from airline consultants Roberts, Roach and Associates, which late last month released the fourth edition of its book, "Scorecard: Airline Industry Cost Management."
"The apparent shift in focus by both management and labor away from issues of financial survival--through controlling costs and improving balance sheets--to 'improved' customer service and higher employee awards" is one of several developments causing the firm to be "hopeful, but less confident, in predicting continued prosperity."
This week is the one-year anniversary of the commission cuts to 8 percent, led by United Airlines (<I>BTN,</I> Oct. 6, 1997), which, in conjunction with Delta's 1995 cap, was a "direct assault by the airlines and the most obvious change in marketing and distribution costs," the firm said.
Airline operating costs would be about 2 percent higher were it not for reductions in marketing and distribution (see chart, this page). According to the report, marketing and distribution expenses peaked in the mid-1980s at approximately 19 percent and dropped to just above 16 percent in the fall of 1996. Total marketing costs peaked at 20.24 percent of passenger revenue in 1986, but had declined to 17.43 percent by 1997.
The firm acknowledged it was wrong in an earlier prediction that airline profits would come from higher fares and, thus, higher yields. In fact, the report said, profits have come only from higher load factors as yields continue their 70-year decline and unit costs have been virtually flat for 20 years.
US Airways has the highest commission costs per revenue passenger mile, about twice those of Southwest, which has the lowest. US Airways is followed by Continental, United, Delta, Northwest, TWA, American, Alaska and America West.