Cost-Control and Cost-Reduction — probably the two words you hear most when talking to airlines nowadays. Due to Corona and the whole pandemic situation, airlines are suffering enormous pressure to reduce costs. And I’m convinced that only those airlines that manage to control and reduce costs will survive in the long-term.
Of course, in the first step, airlines will focus on the most prominent cost reduction measures: reducing workforce, provider streamlining, expenditure freeze, etc.
If You Can’t Measure It, You Can’t Improve It
Nevertheless, besides these essential measures, I genuinely believe that airlines have (and certainly will) focus on operational costs too. However, in order to do that, it is inevitable to have the right Key Performance Indicators (KPI) in place. Always remember the saying: If you can’t measure it, you can’t improve it.
In this context, I would like to introduce six KPIs with this blog post to help airlines control essential aspects of the operations. The KPIs focus on different facets of an airline’s operation. And I think this is required to establish a holistic view of an airline’s operational costs.
Airline Cost-Control KPI #1: Compensation Costs
Let’s start with one of the most valuable but also very complicated KPI. Compensation Costs calculates the amount of money you’re airline is forced to pay for passenger compensations. Basically all compensations that are related to flight irregularities, such as delays or flight cancellations.
Personally, I think that this KPI provides enormous value since it directly shows the impact of your operations to your bottom-line. However, it also reflects a KPI that isn’t easy to set up. Why’s that? Because you have to set up a quite sophisticated set of rules. Compensation regulations might differ according to flights, the nationality of the passenger, the reason for irregularities, and so on.
That means you have to put in some work to define a calculation model and a related rule set. Nonetheless, I think the critical aspect here is not to go for a 100% solution in the first step. Even if your ruleset and calculation model is only 90% accurate (in the beginning), it is still extremely valuable.
Airline Cost-Control KPI #2: Delay Costs
The Delay Cost KPI reflects a cost-control KPI that is very straightforward and easy to setup. However, for whatever reason, many airlines still tend to show only the delay minutes or reasons instead of related costs.
There are two ways to approach this KPI. The more straightforward approach is to go for standard delay costs (for example, IATA or Eurocontrol figures). All you have to do now is multiplying your delay minutes with the standard delay costs per minute.
To have more precise value, you can again set up an airline-specific delay cost model. In that case, you can consider aspects such as type of flight (cont/intercont), aircraft type, airport, etc.
Again, it is reasonable to kickstart with standard delay costs and then step-by-step move to a more sophisticated calculation.
Airline Cost-Control KPI #3: Cost of Operations Changes
One of my favorite KPIs but still very rarely used by airlines. Actually, I only know one airline that is using it at the moment.
And again, this is not the easiest KPI to set up. So what is the KPI about? Summarized, the KPI calculates all costs occurring due to ad-hoc operational changes. Actions like aircraft changes, equipment changes, gate changes, crew changes, etc.
Indeed, it requires some work to define a calculation model that lets you assess the costs of such changes. And in that case, I believe it is vital to have a thorough calculation model first.
Here’s the exciting facet of this KPI: It perfectly shows the importance of a stable flight plan. Or conversely, it perfectly illustrates the costs related to an unstable flight schedule.
Airline Cost-Control KPI #4: Missed Connex
A KPI that is —of course— only relevant for a hub-and-spoke operator. In case your business model is based on point-to-point operations, you can jump to the next KPI.
Passengers that are booked on a connecting flight but miss the onward flight reflect an immense cost factor. Additionally, they are also impacting your operations. This, especially accounts if we are talking about larger groups of disconnected passengers.
Concerning the KPI, you can go for different forms again. The lean approach is to show the amount of misconnex passengers solely. Another method is to show the misconnex ratio. That means the amount of misconnex passengers in relation to all connecting passengers.
To have a stronger cost-focus, you can assign costs to each misconnex passenger. Accordingly, you can show the amount of misconnex costs instead of the passenger number only.
Airline Cost-Control KPI #5: Cost of Lost / Mishandled Baggage
Mishandled or lost baggage additionally reflects a source for operational costs. Costs that actually can be avoided.
Similar to the Misconnex KPI, you can —in a first step— simply calculate the number of mishandled/ lost bags. As a second step, you can assign costs to each bag and incorporate different cost drivers.
Airline Cost-Control KPI #6: Fuel Costs
Finally, a cost-driver that most-likely accounts for the most significant portion of airlines’ expenses. Unfortunately, fuel also represents a type of cost that is hard to optimize in operations.
However, I still believe that it is crucial to create a feeling for fuel-related costs across the entire airline.
There are many ways to calculate this KPI. However, the calculation method strongly depends on available (real-time) data. You can go for a calculation that relies on uplift figures and actual fuel prices at stations. A more straightforward approach is calculating the average fuel consumption of aircraft type and average fuel prices.