Good article
From Dallas Morning News 18 Nov. Rather revealing what a large hurdle the other pax carriers have in overcoming their excessive costs compared to SWA.
Airlines' budgets 'broken'
Southwest's costs are lower in virtually every area, study shows
11/18/2002
By ERIC TORBENSON / The Dallas Morning News
The nation's major carriers would have to slash a total of $24.5 billion a year from their budgets if they want to match Southwest Airlines Inc.'s low costs, according to a study to be released Monday.
The figure represents the difference between what nine majors – including TWA, now part of American Airlines Inc.– spent in the 12 months ending June 30 vs. what they would have spent if they had Southwest's costs.
"Everything is broken," the study said of the major airlines' costs. "Everything must be fixed."
The study comes from the former Robert, Roach & Associates, longtime aviation consultants who recently joined Unisys to study airline economics.
Now called R2A, the group publishes a monthly "scorecard" on the industry.
The prospects for Southwest's competitors aren't good, the authors said, because their costs are higher than the Dallas-based carrier's in virtually every area.
The study comes as the industry continues to struggle with cost cutting. On Sunday, United Airlines Inc. said it would cut 9,000 more jobs. On Friday, Delta Air Lines Inc. announced that it would trim $2.5 billion from its annual costs by 2005.
At AMR Corp., parent company of Fort Worth-based American Airlines, chief executive Donald Carty wants to trim $3 billion to $4 billion every year and has found $2 billion in cuts so far.
The R2A study suggests that Mr. Carty should keep chopping. American spent $5.3 billion more than Southwest would have for the same flights in the year studied and can only cut that much by reducing employee wages.
"Any serious effort to close the overall cost gaps between Southwest and the other majors requires significant reductions in unit labor costs," the study said.
Mr. Carty has said such cuts may be inevitable, but he hasn't asked for union concessions.
The study came to its conclusions this way:
It started by comparing Southwest's unit costs – what it spends to fly one seat one mile, about 7.6 cents – to what other large carriers spent. American, for example, spent about 11.5 cents per unit.
The researchers adjusted those figures by the average distance flown by each carrier's flights. That creates the truest comparison between airlines, the study asserts. Some of the findings:
• Southwest's average flight travels 504 miles, far shorter than major carriers such as American, whose average flight – at 1,016 miles – is the longest of the major carriers. Longer flights allow carriers to spread costs over more air miles. By projecting Southwest's cost savings over longer flights, the cost gap grows considerably.
• One of the biggest differences between Southwest and its competitors remains labor costs. If the nine majors could have operated at Southwest's labor costs, they would collectively have saved $8.2 billion from July 2000 through June 2001, the study said.
"That's more than enough to turn things around," the study said.
United, struggling to avoid bankruptcy, had labor costs 68 percent higher than Southwest's during the year studied. American's were 51 percent higher, and only America West Airlines – considered to be a low-cost carrier by most industry experts – had lower overall labor costs than Southwest.
• Of those higher labor costs, pilot pay made up the biggest share. Southwest's competitors paid their pilots a total of $3.3 billion more a year as a group than if they flew at Southwest rates.
The study's authors conclude that Southwest works its pilots harder and more efficiently than its competitors. An average Southwest pilot flies nearly 800 hours a year; a United pilot works about half that.
The study has some caveats.
Southwest is a different kind of airline than American and other "hub-and-spoke" carriers. It flies only domestically and from point-to-point and doesn't have to finance expensive hubs. Southwest also lacks the frills of other carriers, such as movies and in-flight meals, also a substantial cost saver.
American, while it wants to lower its costs, does not intend to change how it flies to match Southwest.
Southwest flies only one aircraft type, and major carriers fly wide-bodied planes internationally, flights where pilots make the most money.
The year the data was gathered ended before the terrorist attacks of Sept. 11. That event was the catalyst for big carriers to start their cost-cutting drives.
Some carriers such as Delta and Continental Airlines Inc. have seen their costs drop since the terrorist attacks, the report says. Southwest's costs also have dropped slightly. Others, such as bankrupt US Airways, saw their costs rise.
Of growing concern for American and its network brethren: more low-cost competitors such as JetBlue Airways and AirTran Airways.
Together with Southwest, the low-cost airlines made up about 22 percent of total seat miles flown domestically in October.
Delta, in a Friday presentation to investors, projects that total to rise to as much as 40 percent and is launching its own low-cost airline to compete.
