All industries are interested in cutting costs and growing their business. But the stakes are different for airlines due to three major headwinds. Pilot shortages plus ongoing recoup efforts of concessions made in a post-911 world are driving up labor costs. Fuel comprises approximately 15-20 percent of an airline’s cost at 2017 prices.1 As the price of fuel rises, only a portion of the cost increase may be passed on to customers due to current supply and demand dynamics. Capacity growth of approximately 6 percent CAGR globally between 2011-2017 resulted in a yield decline of roughly 5 percent CAGR on long haul and 4 percent on short to medium haul markets.2 3 As capacity continues to grow, airlines will face lower margins and limited ability to pass along these costs to the customer.
These headwinds affect profitability and are pushing airlines to find new ways to not only survive, but also grow. Many have launched major cost-reduction initiatives. In fact, 60 percent of the G1000 have announced major cost takeout.4 But only about half are able to sustain these savings for one or two years. This short runway of benefits isn’t enough for airlines. Airline leaders need to think bigger about cost reduction.
Thinking bigger about cost reduction means having a larger set of goals. For instance, rather than just cutting costs, an airline should think about:
As explored in our report on sustaining value through a zero-based approach for airlines (ZBA), airlines can achieve all of this when they move from traditional to new cost cutting approaches (see graphic).
Zero-based approaches are taking off in other industries as a means to gain forensic visibility into enterprise-wide spending and funnel savings back into growth initiatives. ZBA looks at every line item and sets it to a zero-base, from core airlines functions to back office and everywhere in between—labor, fuel, fleet, distribution, maintenance, airports and G&A. Ultimately, its is about instilling a radically different value system that encourages ownership and accountability among employees.
But as with adopting any new mindset or way of working—requires change. Airlines can make the move to ZBA in these ways:
Lead by example. Airlines need to activate leaders and have them “walk the talk” of cost transformation—it will pay off in the long run. Accenture has found leaders that use cost reduction to fund new capability and growth are three times more likely to increase shareholder returns.
Gain visibility. Technology can enable full cost visibility and ensure real and trustworthy figures through standardized and unique cost definitions. Analytics allows benchmarking and analysis of where money is being spent. Airlines end up with a full spend baseline that reveals opportunities to reduce costs.
Shift mindset and behaviors. ZBA cannot be a crash diet. It must become part of the culture. Airlines can ensure adoption of ZBA by using a people-focused approach that incentivizes the organization to achieve the results and promotes the acquisition of new ZBA skills. Ultimately the mindset of aggressive and strategic cost reduction will become hardwired into the organization.
A new route to growth
The zero-based approach to cost reduction opens up new possibilities for airlines. By changing the cost structure, applying digital technologies to maximize efficiency and uncovering savings opportunities across all areas of the business, airlines can achieve savings up to 10-20 percent within three to five years. These savings can then be reinvested to solve business challenges, enable new capabilities and support business initiatives that differentiate the airline and fuel growth. There is no better time to think bigger about the future.