Cost control lessons airline executives should learn from Bob Crandall
Gary Leff at 24. March 2021.
Former American Airlines CEO Bob Crandall appeared on the Confidential American Airlines Podcast. One of the most interesting discussions took place after Crandall landed. Ben Baldanza, presenter and former CEO of Spirit Airlines, told Bob Crandall’s story and drew attention to the cost.
My first year at American Airlines, this was the mid eighties and I had just graduated, I went to a meeting that Bob held in the first quarter of each year, he visited a lot of stations and what were called President’s Conferences or President’s Meetings….. he would then give the staff company news and answer questions, it was great.
So I’m a few months into the business, and this question comes….. as part of the answer that Bob gives: Everybody, look here, this is Bob, Bob is running our Oklahoma City station. Bob, tell everyone how much you spent on rags in your neighborhood last month.
…Bob says something, and Crandall looks up and says with his finger: I say to anyone who manages airports: If you don’t know how much you spent on rags last month, you don’t know enough about your neighborhood.
Baldanza told me how he felt about the importance of sweating all the details during my career. Baldanza, of course, was very concerned about Spirit Airlines’ costs.
Bob Crandall was known for his attention to cost
There’s a famous story about Bob Crandall who insisted on removing olives from first class salads, according to the CEO, so the airline would save $40,000 a year. One olive, multiplied by every first class seat, for every flight, every day, for a whole year, is a lot. And $40,000 is a lot of money when you multiply that decision by every employee making a lean decision in every part of the company.
Crandall’s stories sometimes seem apocryphal, but they serve to convey the extreme focus on cost. In another story about outing expenses, he even claimed to have replaced the night watchman with a watchdog sign.
These stories reflect a unique understanding of what it takes to make a business profitable
Crandall intuitively understands that passenger airlines are low-margin businesses (outside of areas where government restricts competition, such as slot control, foreign ownership rules, cabotage bans, and long-term leases at public airports that block new competitors).
Therefore, it is essential that you protect yourself from costly diseases and the creeping costs.
Crandall used his stories to draw attention to details in order to reduce costs without significantly compromising quality.
Airlines suffer from cost-related diseases
Cost disease, which originated with William Baumol, describes an increase in workplace labor costs without a comparable increase in productivity. This is partly due to wage growth in other sectors of the economy. Economist Alex Tabarrok explains,
Then in 1826, Beethoven’s fourteenth piece. The String Quartet was played for the first time and four people took 40 minutes to perform it. In 2010, it took four people 40 minutes to put on a play. In other words: The productivity of the string quartet has not increased in nearly 200 years, from 1826 to 2010.
…Fortunately, most other sectors of the economy have made significant productivity gains since 1826. …In 1826, the average hourly wage of a production worker was $1.14. In 2010, the average hourly wage of a manufacturing worker was $26.44, about 23 times more in real (inflation-adjusted) terms. The increase in average productivity has the surprising consequence that the (relatively) slow growing production sectors become more expensive. In 1826, with an average salary of $1.14, the 2.66 hours it took to perform Beethoven’s 14th symphony would have been much longer. It took a string quartet, which cost only $3.02. At a salary of $26.44, 2.66 hours of music production can cost $70.33. For example, Beethoven’s String Quartet No. 14 was 23 times (70.33/3.02) more expensive in 2010 than in 1826.
Union rules keep the numbers up. Just like the government safety regulations – one flight attendant for every 50 seats on board. Salary also increases with seniority – although an employee doesn’t necessarily become more productive, they do get paid more. The longer an airline has been in business, the higher the average seniority, the higher the wage costs, even if these employees are not producing more flights.
One area where airlines may benefit in the long term from the pandemic is in reducing costs by cutting management positions (several airlines have cut about 30% of their staff in this area) and retiring old aircraft. It can also temporarily prevent an increase in labour costs. Some airlines have succeeded in buying out former union employees, so that their labour costs per flight will also be lower in the future.
The cost of utilities also increases from year to year
Large organizations – such as major airlines – can become sclerotic in other areas as well. Managers who have already paid attention to lobe costs at an individual station find it difficult to pay attention to this level of detail and exert control over lobe costs at the station level when they move up and become senior managers. They pick their battles, and the uneven costs go up year after year at each station, because not every little expense is worth managing.
However, since employees are generally responsible for the consequences of the increased cost of rags or other items, they do not withhold the cost. They settle for small cost increases year after year instead of sourcing from suppliers or engaging in tough negotiations for small amounts of money. People are lazy or don’t work properly. And these small costs increase over time.
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