Originally Posted by Michael Boyd

Airline Labor Costs: A Whole Lot More Than Hourly Rates

Last month, the president of Boyd Group International was honored to have been invited to provide an outline and discussion of emerging airline industry trends to the board of directors at Southwest Airlines.

Naturally, among the many areas covered was the issue of labor costs. Southwest - to its credit - has some of the highest-paid employees in the industry. This leads some of the veneer analysts in the financial world to conclude that the airline has a prima face labor cost disadvantage. At the discussion with the board, the following "industry heresy" was put on the table. Heresy, because it runs counter to "what everybody knows," which tends to threaten the status-quo thinking.

Fact: Labor Rates Do Not Concretely Equate To Labor Costs. It's easy to compare hourly wage rates for most airline classes and crafts. It's less easy, but possible to compare the costs of various labor structures at airlines. And any high school kid or media reporter can pull down BTS data and make a fool of himself by assuming the cost comparisons between airlines are valid.

True airline "labor costs" are the expense of getting the job done. It is not whether the airline-employed ramp agent is paid $25 an hour, or whether it's farmed out to subcontractor with staff being paid $15 an hour. It's the total cost of getting, say, the bag from the check-in counter, to planeside, onto the aircraft, off at the passenger's destination, and delivered to the claim area. Successfully. Efficiently. On-Time. Without tire tracks across the front of the Samsonite.

Outsourcing May Be The Only Path, But... To many of the financial analyst types, some of whom wouldn't know a bag tag from a Starbucks receipt, the dollars spent on raw labor and benefits are the only costs to consider. But in the airline industry, how the job is done, and - critically - the quality and efficiency of the work - is the true cost. Unfortunately, standard accounting practice doesn't give any mechanisms to track the total comparative costs of in-house labor v outsourcing.

To be sure, outsourcing may be less expensive when all is considered - that is true. But as it stands today, there are virtually no systemic mechanisms in airline accounting to fully encompass all of the metrics involved. For a simple example: the difference between treating passengers as customers, as opposed just processing them. (Not that this isn't a situation that takes place daily where there is no outsourcing, but it's a lot more likely when the person dealing with the passenger has no skin in the game, career-wise.)

At the baseline, it can be (generally) assumed that an airline employee (if professionally treated and directed) will at least have the opportunity to have more incentive and pride in her work compared to a low-paid contract worker who knows that this career path will last only until the contract is re-bid in a year or two.

It's not always the case, but regardless of protestations from the budget department to the contrary, that factor alone - having no future at the airline - has some additional costs built into the outsourced $15 wage rate. One is the natural tendency not to go the extra mile in doing the job - because the outsource system provides no incentive to do so. Another is the fact that some of the outsourced staff are there only until something better opens up. So, regardless of the work ethic of the outsourced employee (which could be excellent) there is no career in the job - and that has consequences.

It's Not Sophisticated Or Difficult Work, Right? Another argument for outsourcing is that many of these jobs are, well, menial. Like, what does it take to load a bag? Answer: a lot. Running a ramp operation is not like a chain gang. Staff are working on time-certain deadlines. They are working within a coordinated set of movements of airplanes, passengers, baggage and cargo. They are working around and operating ground equipment - tugs, belt loaders, baggage carts, etc. (a.k.a. "aircraft-seeking devices" to those of us who have managed ramp operations.) They are not shoveling coal into a furnace: they are loading the property of customers onto and off of multi-million dollar airplanes.

One Late Departure And Poof! Go The Labor Savings. The A4A just estimated that a delay costs an airline $78 a minute. A couple of minutes can really eat into that great saving of farming out the ramp work. Anybody who's managed an airport ramp can today probably see lots of "$78s" going out the door from time to time at almost any outsourced hub ramp.

Lots of Opportunities For Running Up The Real Labor Tab. Give it a thought: what's the cost of just one bag not loaded on the right airplane? What is the cost of not having the right bag removed at an intermediate point on the aircraft routing? What's the cost of handling passengers who missed their connection because the RJ arrived late, and the outsourced ramp staff either had no idea, or no incentive to hustle off the "carry on" from the rear bin? What's the cost of a ticked-off business traveler facing a creeping three-hour departure delay, when none - none - of the outsourced "customer service" staff have any idea why the flight isn't leaving on time? (Not a hypothetical, by the way.)

Not that these events are by nature inevitable to the practice of outsourcing. But, logically, they are more likely than on a ramp operated by motivated (and that's sometimes problematic) team of airline employees. Therefore, the true savings of outsourcing key tasks are not fully identified.

Necessary, But Not Always As Cost-Effective As It's Cracked Up To Be. Let's face it. Increased outsourcing is a now a key - and probably in many cases, necessary - part of the operation of airlines in the US. In the EU and Asia, it's been SOP for decades. It is also a reality that in many cases wage rates and work rules have skyrocketed the cost of airline operations, leading to the option of just farming out as much as possible.

But there is a set of costs that in some cases may well make the practice a lot less economical than the $10 per hour (or whatever) difference cost-effective.

Quality has a cost.