Kenneth A Cubbin

Hit by the triple whammy of September 11, the war in Iraq, and Severe Acute Respiratory Syndrome (SARS), the airline industry is suffering its worst cyclical decline in history. Most full-service airlines have furlowed thousands of staff, decreased service, pared salaries, and reduced costs where possible often at the expense of passengers. As an example of the adverse effects on the airline industry from SARS alone, in April 2003, Singapore Airlines deferred its decision to place new aircraft orders until later the same year because of a 13.6% cut in its weekly flights. Later the same month, Cathay Pacific, having experienced an 85% drop in traffic, threatened to ground its fleet indefinitely.

Analysts estimate that U.S. airlines alone collectively lost $3.5 billion in the first quarter of 2003. Apart from the aforementioned problems, these losses occurred because of rising fuel costs, increased insurance premiums, reduced demand, the cost of complying with government security mandates, employee remuneration, and punitive taxes. Obviously, something needs to change and soon.

Airline management teams have failed to identify and adapt to baseline trend movement, such as the loss of business class passengers, and the rise of niche market operators, like Southwest Airlines, JetBlue, Ryannair, and Easyjet. This has threatened the very existence of traditionally stalwart airlines like United. If airlines, particularly in the U.S., are to return to profitability any time soon there will have to be radical structural changes made to operations, fleet usage, and perhaps even differentiation of employee salaries.

For example, even after the massive wage concessions American negotiated from its employees to avoid filing for bankruptcy, its cost per seat mile remained around 30% higher than Southwest. This is particularly significant because discount operators compete with American on about 80% of its routes. This means that if American cannot generate at least 30% more revenue per seat mile than discount operators it does not stand a chance of even breaking even.

Unfortunately, full-service airline managers and unions seem to be at loggerheads when it comes to the transformation process that must occur if those airlines are going to survive long term. However, one thing is certain: never before has there been a more urgent need for flexibility in airline fleet operations. Fleet commonality, at least in some cases, may increase flexibility and help hold costs down.

A study conducted by Martin Liehr, Adreas Grobler, and Martin Klein at the Industrieseminar der Universitat Mannheim in Germany, found that, even though global economic cycles predict demand, the real causes of cyclical change in the airline industry are delay in management recognition of surplus capacity and delay in lead time for new aircraft acquisition. Extraneous events, they say, such as the Gulf War in 1991, and the triple whammy effects of recent times, only serve to deepen and prolong cycle stages.

The solutions proffered for management to flatten out industry cycles include counter-cyclical behavior, participation in strategic alliances, geographic transfer of capacity, and flexibility. In terms of flexibility, the authors suggest increased leasing and retirement of airplanes. Most airlines have already adopted this strategy. However, the esteemed authors of the study do not mention, in their report, the benefits that may be gained from fleet standardization that is, moving to fleet commonality.

In terms of larger jetliners, Boeing and Airbus offer airplanes that are almost interchangeable in function. So, theoretically at least, airlines could pick just one manufacturer to supply airplanes to fit their needs. This would give them the flexibility to initiate last-minute, non-disruptive, airplane changes to optimize load factors.

The ultimate proof of the benefits of standardization can be found in the most extreme case. Years ago Southwest Airlines developed the blueprint for niche market operators. Among other things, the proven formula requires that routes be carefully chosen, and that only one aircraft type be operated. Savings ensue from optimization of pilot usage, training, scheduling, ground handling, spares, maintenance, documentation and various other factors.

Recently Easyjet has chosen to go against this proven principle by mixing its B-737 fleet with A-319s. In what can only be described as a sweetheart deal, Ray Webster, CEO of Easyjet, has reportedly confessed that Airbus is willing to absorb the cost of introducing the A-319 into his airlines fleet an admission that operating a mixed fleet is costlier. Whether the increased cost of maintaining two different types will be recompensed by Airbus in the long term is questionable. This will be the deciding factor on whether Mr. Webster has made a sound decision. Only time will tell.

Obviously, airlines that offer full service on a multitude of sector lengths, both domestically and internationally, cannot operate only one aircraft type.

Airbus and Boeing design flight deck commonality into their jetliners. This supposedly provides significant cost advantages to airlines which operate more than one type from the same manufacturer. For example, Cross-crew qualification (CCQ) Airbus and mixed-fleet-flying (MFF) Boeing allow one pool of pilots to operate more than one type, such as A318/A319/A320/A320 and B-757/B-767.

There is, however, a fundamental difference between Boeing and Airbus design philosophies. Boeing incorporates multisensory clues for pilots, such as back-driven thrust levers, and interlinked, traditional flight control columns. Airbus, on the other hand, offers side stick controls that offer pilots no sensory feedback at all. For this reason, Boeing estimates that the cost of training a B-737 pilot to fly the B-777 is 18 to 32 percent less than the cost of training for a pilot coming from a side stick control cockpit. To be fare, similar savings could probably be expected from training an A320 pilot to fly the A340 rather than a B-737 pilot. The reason for the reduced training time comes from familiarity with design concepts and cockpit controls. This makes transition to another type of the same ilk easier.

Whatever the case, this if further proof that there are significant cost advantages gleaned from maintaining fleet compatibility.

There are economic and non-economic factors to be considered by airline management teams when new aircraft are required. The most important factor, as can be seen in Table 1, is that the jetliner must be suitable for the airlines needs. Once the pool of aircraft available is determined, competitive bids, management bias, and even political influence come into play.

For example, Gordon Bethune, CEO of Continental Airlines, used to work for Boeing before he was recruited by Continental in the early nineties. According to Rahsaan Johnson, a spokesperson for Continental, this fact was instrumental in the airline moving towards an all Boeing fleet. Mr. Johnson added, "Continental will be an all Boeing fleet within two years. This decision was made based on the cost savings that ensue from fleet commonality."

But not all U.S. airlines are sailing the same course. With reference to Table 2, it is clear that all airlines listed are currently operating mixed fleets. This is due to historic purchases and the difficulty of changing the status quo in the short term especially under current market conditions.

US Airways, on the other hand, has temporarily put on hold its intention to move towards and all Airbus fleet. Dave Castleveter, a spokesperson for US Airways, reported that US Airways would probably have gone all Airbus had it not been for the tumultuous effects on the industry following September 11.

"The cost of new delivery of aircraft", he said, "was hard to justify in an environment when the airline is trying to squeeze all it can out of every dollar." US Airlines, which came out of Chapter 11 bankruptcy early 2003, will also add up to 460 regional jets to its fleet, giving it more flexibility to lower costs on short-haul, low capacity routes.

However, availability of suitable aircraft to meet airline needs is also an important factor for purchase decisions. For example, Northwest operates B-747 freighters and currently Boeing has the long-haul cargo sector of the market virtually monopolized. While the MD-11 is also operated as a freighter now a Boeing product Airbus does not offer the A340 series in an all-cargo version. So Northwest, which currently operates a significant number of Airbus aircraft, couldnt replace their freighters with an Airbus product even if they wanted to.

Providing airport facilities are upgraded in time, this situation may change in the near future. Fedex is a leading all-cargo A380 customer having ordered 10 aircraft to be delivered between 2008 and 2011. As Boeing has elected not to produce a competing product, the A380 all-cargo airplane could eventually dilute Boeings dominance in this market.

So it would seem that, for the most part, U.S. airlines intend to operate, or are stuck with operating, mixed fleets in the future. Since we can assume that managers are not reckless decision makers, there must be some other very good reasons for not standardizing their fleets.

The actual cost of acquiring an aircraft amounts to about 10% of total operating costs over the life of the airplane. In reality, the real costs involved in everyday operations come from labor and fuel which, together, amount to about half of total outlay. Labor costs include training, and as we have seen, reduced training time gained in fleet commonality is a big incentive to standardize. However, one also has to consider the ability of the aircraft to produce revenue, and this is where Airbus claims to be superior at least in the A330/A340/A380 family.

Proof of this claim may lie in Qantas Airlines move to replace its aging B-767-200s with A330-200s. According to Geoff Dixon, CEO of Qantas, the A330 will give Qantas increased economies of scale, greater flexibility and a quantum leap in the number of passengers carried.

The A330, having a wider fuselage than its closest competitor, allows airlines to enjoy increased revenue from additional cargo while providing passengers with more comfort in the cabin.

Qantas is also a launch customer for the A380 which, over the long term, may eventually dislodge Boeing from monopolizing the very-large-transport (VLT) category of aircraft. As long as airports are adapted in time, Qantas will take delivery of twelve A380s between 2006 and 2011. Geoff Dixon believes that, if utilized between Sydney to Los Angeles and Europe runs, Qantas can increase capacity up to 40% while reducing operating costs.

Why the Qantas case is so important in the grand view of things is that, until the end of the year 2000, Qantas has been an all-Boeing fleet operator for the last forty years. The airline is also considered a very savvy selector of aircraft for best revenue/cost ratio, so many other airlines take careful notice of Qantas Airlines fleet planning.

However, Qantas still maintains a firm commitment to Boeing with a substantial number of B-747-400s being scheduled for delivery between 2002 and 2006. Boeing also beat out Airbus last year in a very competitive fight when Qantas urgently needed to add capacity to its domestic fleet to fill the gap left by the demise of Ansett Airlines. What finally won Boeing the deal to supply Qantas with fifteen B-737s, with an option to purchase up to another 60, was the companys ability to fill the order quickly.

Qantas Airlines shift away from an all-Boeing fleet is a blow to Boeings long reigning dominance in the global market. Obviously, Qantas predicts that the greater revenue generating potential of its mixed fleet will outweigh the costs involved in mixed fleet operations.

Boeing is not going to compete with the A380, other than with heavier versions of the B-747, and has abandoned its plan for the Sonic Cruiser. The company has, instead, decided to go for the B-7E7, a super-efficient replacement for the global, medium-size aircraft market. Airbus, caught a little off guard by Boeings new strategy, says that it will offer a competing product to the B-7E7, but that it may not be able to actually produce a product for another six or seven years. Having virtually blind-sided Airbus, Boeing may gain an edge in this market that is, if it actually goes ahead with its plans.

If Boeing now cancels its plans to go ahead with the B-7E7, alleges Professor Alan MacPherson from the University of New York, within 10 years, the company could abandon manufacturing commercial airplanes in the U.S. in lieu of more profitable military products. Because of inequitable labor costs in the U.S., he says, Boeing may move whatever commercial production it maintains offshore. A spokesman for Boeing vehemently denied this view. He said that Boeing is committed to continuing commercial airplane production in the U.S. and has no plans to move production outside the U.S. However, the fact that the issue was even raised underscores how competitive Boeing and Airbus have become in seeking customers and how their profit margins are being squeezed.

To further muddy the waters, Japan may offer a competing product in the near future. Currently under development by a Japanese consortium, led by Kawasaki Heavy Industries, Ltd., are two replacement aircraft for the Japanese Self Defense Force. The two aircraft, code-named CX and PX, may also be produced in commercial versions. If that happens, the CX would compete in the 250-seat market, and the PX in the 150-seat market. Japanese politicians and industry heavyweights hope that this project will propel the Japanese Aerospace Industry into direct competition with Boeing and Airbus. For those of you who doubt the Japanese could achieve their goal, think how the automobile industry has been revolutionized by Japanese innovation.

What this means for airlines is that there is no one-size-fits-all plan. In the future, there are likely to be more chances for airlines to play one manufacturer against another in order to get the best deal. And if airlines planning requirements show that the lower costs of operating a common fleet can be more than offset by the increased revenue afforded by a mixed fleet operation, then thats the way they will go. Like Easyjets example, manufacturer competitive bids for airlines business may encourage managers to ignore the proven one-type-equals-success formula.

And then there are safety issues to consider. While MFF or CCQ can help an airline utilize a pool of pilots more effectively, the jury is still out on whether safety is jeopardized by having pilots dual certified. For example, Delta pilots operate MFF on the B-757 and B-767, but have a separate rating for the B-767-400. Whereas US Airways pilots do not have any MFF on their B-757 and B-767 fleet.

The decision to replace older airplanes can be a difficult one to make, especially when the economy is down, or when there are new aircraft designs on the drawing board that may suit airlines projected needs better. Of course, the plus side to having a bunch of old airplanes in the fleet is that it gives airlines greater flexibility to reduce capacity quickly when the markets down.

To sum up, it seems that there are cost advantages afforded by fleet commonality, but airlines are either cash strapped and unable to change the status quo, or project that new jetliner offerings may have greater revenue generating potential. Personally I think the entire airline industry is on the cusp of reformation Airline Reformation -- Will Some Airlines Fail?. It is likely that we will experience a dramatic increase in the number of niche market operators in the next ten years. Ironically, some of these may be offshoots of current full-service airlines, which might be cut into strategic business units, each operating one-type of aircraft.

On the other hand, by the time this article goes to print, the Iraq war could be a non-issue, SARS might be controlled and oil prices may be back to around $20 a barrel. Passenger traffic may be increasing and airline revenue may eventually be showing an up tick. If this happens, managers may revisit their plans for updating fleets. However, as shown in this article this may not mean that airlines will move towards fleet commonality. In fact, we can be virtually assured that airlines will continue mixing it up.

Cubbin Consulting -- Airlines Economics, Marketing, Safety, Training and Project Management