Airline Cost Control Strategies
Essay Preview: Airline Cost Control Strategies
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The airline industry is unique. It is capital-intensive but also highly labor-intensive. This labor and capital-intensive business is a service industry: selling airline seats which are perishable products (Airlines for America (A4A), 2013). The industry operates on tight financial margins with an average net loss over the past 60 years. The terms revenue, profits, and cost can be confusing in the airline industry (Cook, 2013, p. 8). The perceived profit loss is actually a cash flow deficit that is due in large part to the fact that “most airlines use their cash flow to repay debt, acquire new aircraft or upgrade facilities” (A4A, 2013). A friend of mine grew up in the farming industry. He quotes his father as saying: “There is a lot of money in farming but very little of it actually stays in your pocket”. A similar statement could be said of the airline industry. As airlines have struggled to survive in the first decade of the 21st century, there are many steps airlines have taken in an effort to regain or maintain profitability. One strategy taken by some airlines to successfully cut costs is to operate out of satellite airports that are located near large main hub airports rather than to fly out of the main airport. This paper will examine that cost-cutting strategy and determine whether the step has imposed a cost on another party.
Satellite Airport Advantages
Ryanair, Southwest, and JetBlue are three airlines that have taken advantage of cost-cutting strategies by operating out of smaller satellite airports rather than the larger, more congested hub airports. There are many advantages to this strategy. In London, the Heathrow airport is a very large hub airport. Ryanair offers flights from the nearby London-Stansted airport instead (Blystone, 2003). By operating out of the smaller satellite airport, Ryanair saves money by not having to pay the larger landing fees that are found at the larger airport. Since the airport is less crowded, operations into and out of London-Stansted are more efficient: saving fuel on approaches, departures, and taxi times. Because the gates are not so congested, the aircraft are able to make quicker turns, spending less time on the ground. All of the operating efficiencies combined with the lower fees afford tremendous cost-cutting measures to airlines choosing to operate out of the satellite airports.
Another airline that has successfully capitalized on operating out of smaller satellite airports is Southwest Airlines. For example, Southwest operates to the smaller Dallas-Love Field rather than the larger Dallas-Fort Worth Airport. The route structure and choice of airports that Southwest utilizes has led them to be an industry leader in on-time performance and quick-turns for many years.
If the savings in efficiency and lower fees were not enough, airlines operating out of less congested airports that are part of large