Cost-Cutting and Technology Investments in the Airline Industry - Perficient Blogs
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Cost-Cutting and Technology Investments in the Airline Industry

Cutting unnecessary costs and investing in technology (e.g., digital, planes) to support the business is a complex task, but certainly a requirement for long-term growth. Fuel costs – the number-one non-labor expense for airlines – can only be hedged to the degree the petroleum market allows and that is by and large outside the control of airlines. Labor expenses continue to increase, and the cost of new technology isn’t getting any cheaper. However, investment in new technology can help decrease labor and operational costs over the long run. Planes are more efficient than ever before thanks to improved engines, better aerodynamics, and more sophisticated materials. They burn less fuel. New aircraft equipment requires less maintenance.

During the latest review of the company’s performance, Johan Lundgren, CEO of easyJet, an airline that focuses on cost control, said, “I’m changing the structure in that I am creating the new position of chief data officer, who will report directly to myself and will further build on work we have already done with data science to exploit the opportunity of the billions of data points [we have] within the organization.”

On the company’s most recent earnings call, Delta CEO Ed Bastian said, “With 60 new aircraft to be delivered this year, our up-gauging strategy is set to produce some of the greatest efficiency gains in Delta’s history and will play a key role in returning our cost to a better level.” Paul Jacobson, Delta’s EVP and CFO, said the investment “will drive some of the greatest efficiency gains in Delta’s history with over $100 million in expected non-fuel savings this year alone.”

Jacobson also said the company would invest $450 million in technology in 2018, similar to what it spent in 2017. An area of focus will be digital, which will “benefit our employees and our customers and allow us to serve those customers better.”

United is also heavily focused on digital. Andrew Levy, United’s EVP and CFO, said, “We’re making a lot of investments in technology and that’s very deliberate. That is to be able to better take care of our customers, give our employees the tools they need to be better able to take care of our customers. It’s going to drive operational efficiency and therefore lower costs on the back end as well, and we’re making a lot of investments in infrastructure, disaster recovery, things of that nature that are foundational and really critical that we do.”

The company laid out some employee-facing achievements:

  • Took several actions to improve the overall customer experience, including providing more tools for employees to assist customers and increasing compensation for denied boarding
  • Rolled out a new system-wide Customer Solutions Desk with a dedicated team to develop creative solutions that help customers reach their final destinations when their travel plans don’t go as expected
  • Continued improving the mobile tools that employees use, including the first release of the “in the moment” care app, and new functionality in flight attendant tools to better serve customers
  • Launched a new online portal, United Jetstream, to simplify the travel management process and give corporate and agency customers an intuitive suite of self-service tools

Similar to airplanes, technology, and security, investments in airport projects that include revamping terminal facilities will allow companies to improve the customer experience, as well as expand their footprint, all of which bolsters revenue. The reason for the substantial investments into airport terminal enhancement projects is to “create a world-class customer experience,” said JetBlue’s president and CEO, Robin Hayes.

When speaking about airports, Steve Priest, JetBlue’s CFO, said the airline has “now deployed self-tagging technology in 12 lobbies.” He went on to say, “This initiative is part of a broader effort to empower both our customers and crew members and allow crew members to focus more on what they do best, providing outstanding hospitality.”

During a presentation to investors, Delta said that it will invest $12 billion in airport facilities over the next decade, with the intention of improving the customer experience. The goal is to build “airports of the future,” keeping in mind possible future trends.

As critical investments are made to drive revenue and improve the customer experience, cost-cutting initiatives continue to be carried out. Notably, in December 2016 JetBlue announced a structural cost program aimed at generating $250-$300 million in cost savings by 2020. According to the company’s 2016 annual report, the program focuses on:

  • Technical operations, with an eye on driving efficiencies in maintenance
  • Planning, automation, and execution in airport operations
  • Finding further efficiencies through sourcing and in its support centers
  • Decreasing distribution costs

While new investments in technology and cost-cutting programs remain important initiatives for airlines, other factors, like tax reform, can spur growth, too. The impact of lower corporate tax rates in the U.S. has created a jubilant atmosphere, as the rates are expected to boost earnings for many airlines. “We are very excited about the potential for increased business demand with the tax cut,” said Glen Hauenstein, president of Delta. The company believes its earnings will increase by $800 million a year.

As soon as the new U.S. tax law was enacted, JetBlue gave a $1,000 bonus to its crew members. The company said tax reform “will have a positive impact for our company” and will give JetBlue “the opportunity to do good things for our crew members, customers and owners.” Southwest was another airline that gave $1,000 to employees.

The bottom line is that airlines must understand where it makes sense to cut costs and where to make the proper investments. It’s about creating value for customers, partners, and shareholders.

Perficient published a new guide that focuses on the airline industry – the companies that operate air transport networks. It looks at the current and future state of the industry. Specifically, it discusses some of the initiatives on which airlines are focusing in the hopes of driving growth and value for their businesses, as well as their customers, employees, partners, and shareholders.

Download the 2018 State of the Airline Industry guide.

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