Changes in Cost and Efficiency

Changes in cost and efficiency

The situation today in the airline industry is basically a price/cost war. Companies are battling to cut and keep their operating cost low in order to remain competitive in an industry that is strongly driven by price. The principal cost factors that drive the industry are labor and fuel. In terms of labor Neeleman, Jetblue’s CEO, said that “The biggest problem in the industry isn’t pay, its work rules”. Labor cost accounts for the 38% of the overall operating cost of an airline company. Depending on the system that a company uses, its labor cost and labor necessity will vary. The point-to-point systems requires less personnel and the aircraft is less time on the ground, and more in the air, being able to flight more times that those aircraft

flying under the hub-and-spoke system. The first system is widely used by the new low-cost carriers, while the hub-and-spoke is very typical of the traditional airlines (Appendix 1). Moreover, labor cost is rising, which increases the overall cost per seat (Wright, September 8, 2003). In terms of labor efficiency, low-cost carriers are reducing labor or either by e-ticketing or by doing what Southwest states on their contracts, any qualified employee can perform any function (load, unload, cleaning, etc) as needed (Thompson.2005).

The second,