The Math Flies
All the Numbers Add Down for the Nation's Low-Cost Carriers
By Keith L. Alexander
Washington Post Staff Writer
Sunday, February 29, 2004; Page F01
The nation's low-cost carriers are profitable even as the venerable "legacy" airlines barely tread water. How can they make money while offering fares that are 40 to 70 percent lower? The reasons are many -- cost of labor is a big one -- but here are 10 major differences between the cheeky upstarts and the big boys.
1.3 million
That's the minimum number of potential annual airline passengers a city must offer before a low-cost carrier will consider it as a destination. Airline industry consultant Michael Boyd of the Denver-based Boyd Group says low-cost carriers avoid smaller cities and target only those areas where they can get the highest revenue. Airports within a 45-minute drive of such locations are sought out by the carriers.
Low-cost carriers, Boyd says, have no plans to take their large jets into such cities as Ithaca, N.Y., or Lubbock, Tex. "All these small communities want low-cost carriers, but they're more likely to get a moon launch than service from one of these airlines," he said.
84.6
That's the number of employees per aircraft at Southwest Airlines. And it's the figure the industry uses to measure employee productivity.
Compare that number with 116 employees per plane at United Airlines, a number the airline achieved last year during its bankruptcy reorganization. The United number had been 173 in 2002, said airline analyst Vaughn Cordle of Airline Forecasts.
Small wonder the so-called legacy airlines are trying to get that number down to get productivity up, Cordle says. The United reduction resulted in a savings of about $2 billion and boosted productivity by 33 percent.
2%
That's the percentage of ticket sales that JetBlue Airways makes through traditional travel agents. By contrast, travel agents sell 61.2 percent of US Airways tickets. The number is about 50 percent for American Airlines.
Selling airline tickets via the Internet, on an airline's own site or on a site like Expedia.com is the lowest-cost channel for an airline -- and that's where the majority of the low-cost carriers do most of their business. In fact, it costs an airline only about 1 percent of the ticket price to sell it online.
While legacy carriers have drastically reduced the commissions they pay travel agents, selling the traditional way remains the most costly method -- between 7 and 9 percent of ticket value. And the big carriers still offer some of the largest agents steep discounts in exchange for moving market share to that airline.
The legacy carriers are looking for ways to attract travelers to their sites by offering steeper discounts, bonus frequent-flier miles or other incentives.
Also, low-cost carriers such as Southwest were among the first to implement electronic ticketing to avoid the costs of printing and mailing. During the past two years or so, legacy carriers have expanded their use of electronic ticketing as well.
40%
That's the percentage of American Airlines passengers who connect to another flight to reach their final destination. The number is significant because routes that include connections are more expensive than direct, nonstop flights.
In general, the low-cost carriers have set up their schedules to focus on point-to-point flights. Southwest Airlines calculates that only 10 percent of its passengers connect to another flight to get where they're going, in large part because the airline focuses on flights to and from destination cities. In essence, the burden for any onward travel is on the passenger to arrange, not the low-cost carrier.
Nonstop, direct flights are cheaper for several reasons. First, because airline employees are paid by the hour and connecting flights take longer to get to a destination, there is extra pay for flight attendants and pilots. Also, connecting flights require more manpower, says American Airlines spokesman Tim Wagner. Remember, bags have to be loaded, then offloaded on the first leg, then reloaded and offloaded again on the final leg of each flight. Also, taxiing for each takeoff and landing burns more fuel than flight time does, Wagner said.
As they grow and add destinations, low-cost carriers such as Southwest and AirTran will offer more connections. And airline consultant Boyd says that as the number of connecting flights increases, so will any airline's costs. Also, of course, a limited number of flights means that a carrier such as JetBlue simply does not need as many employees as a larger airline does.
23 and 0
This is the number of U.S. cities and foreign countries that JetBlue Airways, the nation's 11th-largest carrier, serves. It's a far cry from the 109 cities and 23 foreign countries reached by the nation's second-largest airline, United. And even those large amounts exclude United's code-sharing alliances with other airlines.
By focusing their routes on U.S. flights, low-cost carriers avoid the costs associated with flying into foreign countries. These longer-distance flights require larger, more expensive aircraft. Also, the airline's workers at a foreign destination are governed by that country's labor rules, some of which, in Europe especially, restrict hours and call for generous benefits.
$215,000 a year
That's the average salary for a captain at Delta Air Lines. In contrast, captains at low-cost carrier AirTran earn, on average, $135,000 a year, although they also receive stock options.
Overall, pilots are the highest-paid labor group in any airline, and labor represents the biggest cost for a carrier. Salaries are often based on a pilot's seniority, which points up another cost advantage the small new airlines have over the legacy airlines. Delta's 7,500 pilots -- 3,500 of whom are captains, the highest rank -- range in seniority from five years to 35 years, said Delta spokeswoman Karen Miller. By contrast, the majority of low-cost carriers are less than about 10 years old. The average seniority for AirTran's entire work group is two years, said spokesman Tad Hutchinson. Four hundred fifty of AirTran's 850 pilots are captains.
As part of its drastic cost-cutting measures, Delta -- which lost about $3 billion during the past three years -- is trying to persuade its pilots union to agree to substantial cuts in their pay and benefits. Delta's pilots are among the highest-paid in the industry.
As seniority increases at low-cost carriers, so will salaries. Pilots at Southwest Airlines, which turns 33 this year, already rank among the highest-paid in the industry, attributable in large part to their seniority and their stock options.
$9.99 an hour
Of the industry average total compensation of $31.23 an hour, $21.24 represents wages and $9.99 goes to benefits, according to compensation consultants Watson Wyatt, based on Bureau of Labor Statistics data.
Bureau statistics show that in general industry, benefits put an employee's total compensation 38 percent above his or her wage base. In the airline sector, in general, benefits add 47 percent to salary.
Employee benefits obviously affect every company's bottom line, and the older airlines simply offer more of them. Delta, for instance, offers medical benefits and a 401(k) savings plan to its workers in addition to a traditional pension plan.
The low-cost carriers generally do not have traditional, defined-benefit pension plans, but most offer medical insurance and 401(k) plans, which are far cheaper than pensions, even when the company matches employee contributions with a contribution of its own.
0
The number of downtown ticket offices low-cost carriers such as Southwest, JetBlue and AirTran operate. US Airways alone has 13 such offices.
The majority of legacy carriers -- Delta, American, Continental and United -- operate these ticketing offices, where passengers can purchase tickets, make travel changes or just get information. US Airways said it costs about $2 million a year to operate the offices, including rent, personnel and other expenses. As part of its cost-cutting move, Northwest Airlines recently announced it would close all 25 of its ticketing offices by the end of March.
$21 an hour
This is the average base pay, excluding benefits, of one of US Airways' 1,930 telephone reservation agents. Before the Sept. 11, 2001, terrorist attacks, US Airways had 3,762 reservation agents.
The average pay for one of JetBlue Airways 700 reservation agents, by contrast, is $8.25 an hour. JetBlue's agents also receive benefit packages that include a 401(k) plan and medical insurance, but they work from home, saving the airline rent on a reservation center.
1
This is how many types of planes JetBlue flies -- the Airbus 320 jet, period. In 2005, however, the airline will begin taking delivery of 100-seat Embraer 190 regional jets as the airline begins flying into secondary markets.
Delta, on the other hand, flies 16 kinds of aircraft.
It's because, the legacy carriers explain, they fly longer routes and more transcontinental and international flights. Such long-haul travel as across the Pacific and Atlantic oceans calls for larger, more expensive planes. So the equipment is inherently costlier.
But, in addition, moving a pilot from one category of plane to another requires about eight weeks of training. That entails the cost of training the pilot as well as the cost of covering the pilot's existing route during training. Because the low-cost carriers have only one type of aircraft, they require little additional training and fewer arrangements because of that training.
//////end of article////////
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All the Numbers Add Down for the Nation's Low-Cost Carriers
By Keith L. Alexander
Washington Post Staff Writer
Sunday, February 29, 2004; Page F01
The nation's low-cost carriers are profitable even as the venerable "legacy" airlines barely tread water. How can they make money while offering fares that are 40 to 70 percent lower? The reasons are many -- cost of labor is a big one -- but here are 10 major differences between the cheeky upstarts and the big boys.
1.3 million
That's the minimum number of potential annual airline passengers a city must offer before a low-cost carrier will consider it as a destination. Airline industry consultant Michael Boyd of the Denver-based Boyd Group says low-cost carriers avoid smaller cities and target only those areas where they can get the highest revenue. Airports within a 45-minute drive of such locations are sought out by the carriers.
Low-cost carriers, Boyd says, have no plans to take their large jets into such cities as Ithaca, N.Y., or Lubbock, Tex. "All these small communities want low-cost carriers, but they're more likely to get a moon launch than service from one of these airlines," he said.
84.6
That's the number of employees per aircraft at Southwest Airlines. And it's the figure the industry uses to measure employee productivity.
Compare that number with 116 employees per plane at United Airlines, a number the airline achieved last year during its bankruptcy reorganization. The United number had been 173 in 2002, said airline analyst Vaughn Cordle of Airline Forecasts.
Small wonder the so-called legacy airlines are trying to get that number down to get productivity up, Cordle says. The United reduction resulted in a savings of about $2 billion and boosted productivity by 33 percent.
2%
That's the percentage of ticket sales that JetBlue Airways makes through traditional travel agents. By contrast, travel agents sell 61.2 percent of US Airways tickets. The number is about 50 percent for American Airlines.
Selling airline tickets via the Internet, on an airline's own site or on a site like Expedia.com is the lowest-cost channel for an airline -- and that's where the majority of the low-cost carriers do most of their business. In fact, it costs an airline only about 1 percent of the ticket price to sell it online.
While legacy carriers have drastically reduced the commissions they pay travel agents, selling the traditional way remains the most costly method -- between 7 and 9 percent of ticket value. And the big carriers still offer some of the largest agents steep discounts in exchange for moving market share to that airline.
The legacy carriers are looking for ways to attract travelers to their sites by offering steeper discounts, bonus frequent-flier miles or other incentives.
Also, low-cost carriers such as Southwest were among the first to implement electronic ticketing to avoid the costs of printing and mailing. During the past two years or so, legacy carriers have expanded their use of electronic ticketing as well.
40%
That's the percentage of American Airlines passengers who connect to another flight to reach their final destination. The number is significant because routes that include connections are more expensive than direct, nonstop flights.
In general, the low-cost carriers have set up their schedules to focus on point-to-point flights. Southwest Airlines calculates that only 10 percent of its passengers connect to another flight to get where they're going, in large part because the airline focuses on flights to and from destination cities. In essence, the burden for any onward travel is on the passenger to arrange, not the low-cost carrier.
Nonstop, direct flights are cheaper for several reasons. First, because airline employees are paid by the hour and connecting flights take longer to get to a destination, there is extra pay for flight attendants and pilots. Also, connecting flights require more manpower, says American Airlines spokesman Tim Wagner. Remember, bags have to be loaded, then offloaded on the first leg, then reloaded and offloaded again on the final leg of each flight. Also, taxiing for each takeoff and landing burns more fuel than flight time does, Wagner said.
As they grow and add destinations, low-cost carriers such as Southwest and AirTran will offer more connections. And airline consultant Boyd says that as the number of connecting flights increases, so will any airline's costs. Also, of course, a limited number of flights means that a carrier such as JetBlue simply does not need as many employees as a larger airline does.
23 and 0
This is the number of U.S. cities and foreign countries that JetBlue Airways, the nation's 11th-largest carrier, serves. It's a far cry from the 109 cities and 23 foreign countries reached by the nation's second-largest airline, United. And even those large amounts exclude United's code-sharing alliances with other airlines.
By focusing their routes on U.S. flights, low-cost carriers avoid the costs associated with flying into foreign countries. These longer-distance flights require larger, more expensive aircraft. Also, the airline's workers at a foreign destination are governed by that country's labor rules, some of which, in Europe especially, restrict hours and call for generous benefits.
$215,000 a year
That's the average salary for a captain at Delta Air Lines. In contrast, captains at low-cost carrier AirTran earn, on average, $135,000 a year, although they also receive stock options.
Overall, pilots are the highest-paid labor group in any airline, and labor represents the biggest cost for a carrier. Salaries are often based on a pilot's seniority, which points up another cost advantage the small new airlines have over the legacy airlines. Delta's 7,500 pilots -- 3,500 of whom are captains, the highest rank -- range in seniority from five years to 35 years, said Delta spokeswoman Karen Miller. By contrast, the majority of low-cost carriers are less than about 10 years old. The average seniority for AirTran's entire work group is two years, said spokesman Tad Hutchinson. Four hundred fifty of AirTran's 850 pilots are captains.
As part of its drastic cost-cutting measures, Delta -- which lost about $3 billion during the past three years -- is trying to persuade its pilots union to agree to substantial cuts in their pay and benefits. Delta's pilots are among the highest-paid in the industry.
As seniority increases at low-cost carriers, so will salaries. Pilots at Southwest Airlines, which turns 33 this year, already rank among the highest-paid in the industry, attributable in large part to their seniority and their stock options.
$9.99 an hour
Of the industry average total compensation of $31.23 an hour, $21.24 represents wages and $9.99 goes to benefits, according to compensation consultants Watson Wyatt, based on Bureau of Labor Statistics data.
Bureau statistics show that in general industry, benefits put an employee's total compensation 38 percent above his or her wage base. In the airline sector, in general, benefits add 47 percent to salary.
Employee benefits obviously affect every company's bottom line, and the older airlines simply offer more of them. Delta, for instance, offers medical benefits and a 401(k) savings plan to its workers in addition to a traditional pension plan.
The low-cost carriers generally do not have traditional, defined-benefit pension plans, but most offer medical insurance and 401(k) plans, which are far cheaper than pensions, even when the company matches employee contributions with a contribution of its own.
0
The number of downtown ticket offices low-cost carriers such as Southwest, JetBlue and AirTran operate. US Airways alone has 13 such offices.
The majority of legacy carriers -- Delta, American, Continental and United -- operate these ticketing offices, where passengers can purchase tickets, make travel changes or just get information. US Airways said it costs about $2 million a year to operate the offices, including rent, personnel and other expenses. As part of its cost-cutting move, Northwest Airlines recently announced it would close all 25 of its ticketing offices by the end of March.
$21 an hour
This is the average base pay, excluding benefits, of one of US Airways' 1,930 telephone reservation agents. Before the Sept. 11, 2001, terrorist attacks, US Airways had 3,762 reservation agents.
The average pay for one of JetBlue Airways 700 reservation agents, by contrast, is $8.25 an hour. JetBlue's agents also receive benefit packages that include a 401(k) plan and medical insurance, but they work from home, saving the airline rent on a reservation center.
1
This is how many types of planes JetBlue flies -- the Airbus 320 jet, period. In 2005, however, the airline will begin taking delivery of 100-seat Embraer 190 regional jets as the airline begins flying into secondary markets.
Delta, on the other hand, flies 16 kinds of aircraft.
It's because, the legacy carriers explain, they fly longer routes and more transcontinental and international flights. Such long-haul travel as across the Pacific and Atlantic oceans calls for larger, more expensive planes. So the equipment is inherently costlier.
But, in addition, moving a pilot from one category of plane to another requires about eight weeks of training. That entails the cost of training the pilot as well as the cost of covering the pilot's existing route during training. Because the low-cost carriers have only one type of aircraft, they require little additional training and fewer arrangements because of that training.
//////end of article////////
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