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Airline profitability does not have to be up in the air anymore

Procurement and sourcing transformation can help airlines break free from a history of low profit margins and lower operating expenses.

Low profit margins have plagued the airline industry for years. Consider that only 14 of the world’s airlines are creating value for shareholders by managing their profitability.

To unlock profitability, some large carriers are consolidating through alliances and strategic partnerships, partial equity models, and mergers and acquisitions (M&A). But what else can airlines do to manage volatile profitability?

Procurement and sourcing transformation across airplane, airport, passenger and overhead expenses can lower operating expenses quickly and strategically. With profitability so elusive, even small cost reductions make a big difference.

Making meaningful changes to procurement and sourcing practices—many of which are ingrained in airline operations—cannot be arbitrary or ad hoc. To get results, airlines must pursue two distinct but complementary areas:

  • Strategic cost reduction cuts the fat from cost centers that airlines can control to eliminate waste and create cost savings.

  • Operational effectiveness supports lean processes, organizational structure and talent development to increase agility and lower costs.

Within these core areas, airlines can pursue several cost reduction strategies:

  • Zero-based budgeting. Airlines can lower SG&A by 10 to 25 percent with “smart spending” that involves transparency, cost analysis and benchmarking, and a culture of cost ownership. This is useful for airlines that may be increasing annual budgets without analyzing if old spending needs and patterns are aligned with the current environment.

  • Strategic sourcing. Sourcing strategies (such as competitive bidding, local purchasing, alliances and more) should vary based on the airline category. Airlines must asses both how critical the category is to the business and the complexity of the supply market. Such practices can deliver 5 to 10 percent savings on addressable categories.

  • Product standardization. Airlines in M&A and partnership models can reduce product cost by 10 to 25 percent by standardizing products through fleet harmonization, focusing on high-spend, high-complexity items first in areas such as cabin configuration, avionics and systems, and emergency equipment.

  • Supplier relationship management. Airlines should solidify relationships with their top tier strategic suppliers, improving collaboration, identifying innovation opportunities and cultivating local suppliers.

  • Supplier risk management. Procurement can take the lead on identifying and managing supplier risk from onboarding forward to reduce financial, operational and reputational risk.

  • Operating model transformation. Airlines that have pursued consolidation strategically naturally have more buying power. To make the most of it, they must determine the level of procurement collaboration—from information exchange in supplier negotiations all the way to standing up a shared services procurement organization—that saves the most money.

  • Digital innovation. Digital platforms and technologies—such as supplier analytics, virtual supplier rooms, mobile scanning technology and cloud-based internal procurement stores—can change how procurement organizations do business, enabling them to operate at lower cost levels. These organizations provide new strategic value to the airline working as “one” with the enterprise, the supplier network and through digital tools.

By pursuing strategic procurement and sourcing practices like these, airlines can influence the entire cost base in an environment where streamlined operations are essential to increase efficiency and free up investment ability.