The evolution of U.S. airlines' productivity and cost performance from 2004-2012
Evolution of United States airlines' productivity and cost performance from 2004-2012
Massachusetts Institute of Technology. Department of Aeronautics and Astronautics.
Peter P. Belobaba.
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In the past decade, the U.S. airline industry has undergone tremendous transformation triggered by major events such as the surge in fuel prices and the economic recession. Network legacy carriers implemented drastic measures to reduce cost and increase productivity. Some filed bankruptcy protection to restructure, and others pursued mergers for consolidation and cost savings through operational synergies. Low cost carriers have been profitable but are now faced with higher costs stemming from increasing labor seniority and aging fleets. Recently, the emergence of ultra-low cost carriers has intensified the competition, as these newer airlines operate at extremely low costs and offer rock bottom low fares. The main objective of this thesis is to examine the evolution of U.S. airlines' productivity and cost performance from 2004 to 2012. This thesis provides an in-depth analysis of unit costs, aircraft and employee productivity of 10 major U.S. passenger airlines, which are classified into three groups: network legacy carriers (NLCs), low cost carriers (LCCs), and ultra-low cost carriers (ULCCs). We compare the unit costs and productivity trends at industry aggregate and domestic operations level for these three groups. We also explore the underlying forces that drove these trends and the effect of stage length on unit cost and productivity. The results indicate that the gaps between NLCs' and LCCs' unit cost excluding transport related and fuel expenses, labor unit cost, and employee and wage productivity have decreased from 2004 to 2012. Most notably, the gaps between their unit cost excluding fuel and transport related expenses and labor unit costs were reduced by 48% and 67%, respectively. NLCs performed dramatic cuts in labor in the 2000s and increased aircraft and employee productivity by shifting their focus to international markets. LCCs had the steepest increase in unit cost and maintained the highest aircraft utilization but are losing their traditional labor cost and productivity advantage to ULCCs. In 2012, ULCCs' labor unit cost was about half of NLCs' and LCCs', and their employee productivity was 34% greater than NLCs' and 20% greater than LCCs'. ULCCs have truly achieved lowest unit cost with highest labor efficiency in the industry.
Thesis: S.M., Massachusetts Institute of Technology, Department of Aeronautics and Astronautics, 2014.Cataloged from PDF version of thesis.Includes bibliographical references (pages 126-129).
DepartmentMassachusetts Institute of Technology. Department of Aeronautics and Astronautics.
Massachusetts Institute of Technology
Aeronautics and Astronautics.