Lessons Learned From the Airline Industry: How Procurement Can Benefit Mature Industries

Spend Matters welcomes this guest post from Eleonore de Montjoye, of GEP.

Like other mature industries, airlines have high fixed costs, capital and labor as the major cost buckets. While the legacy airlines are consolidating at least in part to gain synergies, the low-cost airlines have gained momentum with ambitious savings strategies while remaining flexible to the demands of their increasing customer base.

Because capital is a major cost driver for all airlines, having a good procurement strategy and using the right levers increases flexibility while lowering fixed costs. Several factors can yield effective results:

Timing. Demand began to fall in 2000 and accelerated after the Sept. 11, 2001, terrorist attacks in the U.S. Some low cost airlines saw the opportunity, renewing and increasing their fleets, in some cases at a low cost by buying used aircrafts from legacy airlines. This shows the important leverage potential of the political and economic climate. Companies in mature markets can strengthen their market position by increasing their understanding of how external forces affect the industry.

Simplifying specifications and increasing volume. Ryanair and Norwegian Air Shuttle have both ordered the Boeing 737 in bulk. In addition to large discounts per unit, acquiring a simpler, updated and more fuel-efficient fleet, simplification can bring direct value engineering, increasing operational efficiency and flexibility in the process. By removing the back seat pocket, Ryanair reduced the time needed to clean the airplane before its next flight, which encourages a competitive turnaround. While the difficulty to reduce specifications will vary among industries, this is an important objective to gain flexibility in mature companies.

Fleet uniformity also provides economies of scale in training and maintenance. For example, an airline with only a single aircraft type only needs to offer two types of pilot training: for first officers, and for captains. In other cases, simpler fleets mean staff are often trained on only one aircraft type. This lowers labor and training costs. A simplified maintenance also increases savings, as spare part stock management is simplified, volumes result in better rates, and aircrafts can be repaired more effectively, improving fleet reliability.

Outsourcing services yields savings in administrative costs, improves labor flexibility and has gained importance in specialized labor such as IT or maintenance and repair. Passenger handling and other ground services have also been assigned to external agencies, when the work cannot yet be delegated to technology.

Marketing is also an area where savings are gained by outsourcing some of the costs to partner airports. Some airlines put peripheral airports up for bids against one another, negotiating on landing fees and on assigning some of the marketing costs to the chosen partners.  

Partnerships must be carefully evaluated. By choosing not to belong to an alliance, low-cost players can maintain their flexibility advantage and stay focused on expense control and forego the IT, marketing, airport-service and other expense associated with alliance participation. This mean foregoing the often significant revenues from an expanded “virtual network” through code-sharing and other alliance cooperation. While, historically, low-cost players have limited these partnerships, some, like Canada’s WestJet, have lately re-evaluated this approach.

All these examples show how an effective sourcing strategy enables companies in an industry that is greatly dependent on energy costs, the weather and other elements often out of their control to remain competitive. Airlines are a case in point that an effective procurement strategy can result in effective savings on important fixed costs, without trading off on flexibility or customer satisfaction. Companies in mature industries should therefore ensure the most effective procurement organization is aligned with their overall strategy to yield the best results for the long term.

Thank you to Rob Britton, partner at AirLearn, for his precious contribution to this article.

For more interesting thinking on procurement, visit the GEP Knowledge Bank.

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