Historically, labour was the biggest operating cost for airlines, before the oil price hikes of the early 2000s pushed up fuel costs. Even now, labour remains the biggest cost for many carriers and is probably the most important ‘controllable’ cost for all. At the same time, labour is the main agent for service delivery in any service industry and airlines must balance labour cost reduction with maximising the output of labour.
This tension remains a key dynamic for European airlines, whether they are legacy carriers looking to restructure in the face of unions' foot dragging, or low-cost carriers looking to maintain their advantage based on greater labour mobility and flexibility across the continent.
CAPA's analysis of the labour productivity of 14 European airlines reveals a wide range of levels of performance, pointing to what could be an irreconcilable gap between those that will succeed and those that may disappear. It again highlights the success of the low-cost model, particularly Ryanair and easyJet, and the significant challenge faced by legacy flag carriers, who, in some cases, still need dramatic – not just incremental – improvements in productivity.
Labour is still a big slice of the cost base. Contrast Vueling and Ryanair
Perhaps not surprisingly, labour is a much lower cost as a percentage of revenues for Europe’s LCCs than it is for the legacy carriers. What may be more surprising is how wide a range there is in this percentage. For Vueling and Ryanair, labour cost is less than 10% of revenues, while for Air France-KLM and SAS is more than 30%.
It is no coincidence that the latter two are among the least profitable European airlines and that they are focusing sharply on restructuring and improving labour productivity.
It is also striking that IAG and Lufthansa are a significant step below Air France-KLM in labour costs as a percentage of revenue. In spite of this, they too are focusing on productivity gains, since the gap to the LCCs remains even more significant. Note that the composition of the different companies’ activities has an impact here. Those with significant ground-based activities (eg maintenance and catering), such as the Lufthansa Group, have a higher percentage of revenues eaten up by labour as such activities tend to be very labour-intensive and do not generate as much revenue per employee as flying activities.
Lufthansa is the only one of the airline groups that reports enough detailed information to allow its two flying-based business segments (the Passenger Airline Group and the Logistics segment) to be included separately in this analysis. If these two segments were a separate company, their labour costs would account for only 16.7% of revenues, rather than 22.8% for the Lufthansa Group.
European airlines labour cost as a percentage of revenues 2011 or 2012*
One of the reasons for discrepancies in the importance of labour costs in an airline’s cost base is how much each employee costs to keep at work. This can be a function of many factors, including social charges that employers must pay (which are typically higher in continental Europe than in the UK, for example), the seniority mix of employees, the level of pension contributions, the degree to which contract staff are used and, of course, the level of wages paid.
Unionisation and history can play a major part in all these areas, particularly for carriers that were once government-owned, or remain at least partly so. The chart below shows that Flybe has the lowest employee cost-per-employee, at EUR48,000, perhaps surprisingly, given its losses. TAP Portugal and Ryanair are very close to it on this measure.
Less surprisingly, the SAS Group has the highest employee cost-per-employee, at a remarkable EUR106,000. It remains a significant, if not insuperable, challenge for SAS to address. The second highest employee cost-per-employee is paid by Norwegian, which might not have been expected in view of its overall low costs and reasonable profitability. It does manage to extract quite a lot of output from its employees (see below), but this is a measure that can be hard to reverse if circumstances become difficult.
The Lufthansa Group is positioned quite low on this chart, but this partly reflects its relatively high proportion of ground staff in positions that pay less than flight crew. Two final points to note from this chart is that easyJet pays a fairly generous EUR70,000 per employee, a lot higher than the other LCCs in the group, and that Aer Lingus remains firmly in the flag carrier bracket when it comes to how much an average employee costs it.
European airlines employee cost per employee 2011 or 2012*
As noted above, Norwegian is generous towards its employees, but they are among the more productive European airline workforces. A traditional method of measuring employee productivity is to look at total available tonne kilometres (ATKs) per employee – how much traffic can be squeezed out of one employee? This combines both passenger and cargo traffic, although available seat kilometres per employee is sometimes also used, and there is a very wide gap between the best and worst on this measure. On ATKs per employee, Ryanair is way out in the lead, ahead of a cluster of other LCCs Vueling, Norwegian and easyJet (in spite of a lack of cargo traffic to boost their ATKs).
The gap between the LCCs and the legacy carriers on ATK per employee is striking and is a key strategic differentiator. Not only do LCCs typically have fewer cabin crew per passenger, but also their short routes allow for very efficient rostering compared with their longer haul counterparts. Flybe’s positon at the bottom of the pile on ATK per employee suggests it has significant work to do in improving productivity and dilutes the beneft of its low employee cost per employee.
European airlines Available Tonne Kilometres (‘000) per employee 2011 or 2012*
Combining employee costs per employee with ATK per employee tells us how much one employee has to be paid to produce one unit of traffic. On employee cost per ATK, Ryanair is again the pick of the crop, while SAS is in danger of rotting before the harvest. Norwegian, strong on traffic per employee, is only in the middle of the pack on employee cost per ATK due to the high sums it pays to each employee. Flybe is again worryingly at the high end on this measure.
Among the big three legacy flag carrier groups, Lufthansa performs the best, especially if its ground-based businesses are removed from the calculations. Also of note, here and in the other charts, is the strong performance of Turkish Airlines. As a full service carrier, it is containing its employee costs with productivity levels approaching those of the LCCs and comfortably ahead of other European full service competitors (being outside the Eurozone does help in this respect). Finnair too performs well on this measure.
European airlines employee cost (EUR cent) per available tonne kilometre 2011 or 2012*
Now we have seen how the European airlines pay very different amounts to their employees to produce a unit of traffic, but what about the other side of the profit equation – revenues?
The chart below demonstrates how successful Vueling, easyJet, Norwegian and Ryanair are at squeezing revenues out of their employees, all of them achieving more than EUR500,000 per employee.
At the other end of the scale, TAP Portugal only generates EUR225,000 in revenues per employee, suggesting scope for improvement, either by the current management or any future owner if the privatisation process restarts.
See related report: TAP Portugal privatisation. Will TAP be back in the shop window soon?
The big three flag carrier groups are also at the lower end of the scale on revenues per employee, again highlighting the urgency of their current restructuring programmes. As with the cost and traffic related productivity measures, Lufthansa looks better when its ground-based businesses (MRO, catering and IT Services) are removed. Flybe also looks weak on this revenue per employee comparison, pointing perhaps to a need to reorganise its workforce.
European airlines revenue (EUR) per employee 2011 or 2012*
Our final chart sums up the previous analysis by showing operating profit per employee. Ryanair is the runaway winner among European airlines, generating over EUR81,000 of operating profit per employee in the year to Mar-2012 (it should be even higher in the current year).
easyJet is second, with EUR49,00, comfortably ahead of Norwegian in third.
Norwegian achieves its position by generating high levels of traffic and revenues per employee, but it is less formidable on employee costs per ATK due to high employee costs per employee. Its long haul expansion plans could make it challenging to retain its third ranking on profit per employee.
See related article: Finnair, SAS and Norwegian, The Nordic Three: is consolidation on the way?
European airlines operating profit (EUR) per employee 2011 or 2012*
Air Berlin is the biggest loser on this measure, although there does not appear to be an obvious reason emerging from this productivity analysis. It performs quite well on employee costs per ATK and is among the ‘best of the rest’ on revenues per employee, after the four strongest performing LCCs. Perhaps this is due to its failure to be the very best in any one area, reflecting an historic lack of strategic focus. It has a restructuring programme (‘Shape and Size’), a developing partnership with Etihad, new membership of oneworld and a new CEO, so the only way is up.
SAS is also a straggler and, although it is a long-time member of the Star Alliance, it does not have the luxury of a significant outside partner to catalyse change.
In the sub-category of the big three European flag carrier groups, Lufthansa gets the award, with Air France-KLM trailing well behind. Lufthansa is not resting on its laurels, but is pushing on with its SCORE cost saving programme and its transfer of non-hub continental flying to LCC subsidiary Germanwings.
IAG’s position in the middle of the pack disguises the relative strength of British Airways and the weakness of Iberia. Its current attempt to restructure Iberia, which must revolve around achieving higher levels of labour productivity, cannot afford to fail.
Air France-KLM is well into its own restructuring programme (Transform 15), but, although its unions have signed new labour agreements and management is making progress towards its financial targets, it is still likely to need more radical productivity improvements.