AirTran Embraces New Cost Metric - TheStreet

AirTran Embraces New Cost Metric

The carrier prefers a nonstandard way to track costs -- measuring the number of employees per aircraft.
Author:
Publish date:

Airlines typically track costs by a measure called cost per available seat mile, or CASM. But Stan Gadek, CFO of AirTran (AAI) , says CASM should be cast aside as the primary measure.

A better way to track productivity and cost efficiency, he says, is by the number of employees per aircraft, a statistic that AirTran recently began to report. At the end of 2006, the carrier had 60.4 full-time equivalents (FTEs) per aircraft, the lowest in its history and apparently the lowest among its peers.

"The number is important because it tells you how many people are required to support and operate an aircraft, which is your unit of production," Gadek said in an interview. "It's a really relevant number because you don't hire and fire people on a quarterly basis."

By contrast, he says, CASM can be manipulated. Since it measures cost per mile flown, a carrier can show improvements simply by flying longer flights or delaying routine maintenance.

To be sure, CASM cannot be ignored. Not only is it an industry standard, it can also validate FTE-per-aircraft numbers. To critics who contend that AirTran keeps FTE counts low by outsourcing heavy maintenance, Gadek notes that fourth-quarter CASM excluding fuel was 5.94 cents, reflecting five consecutive years of reduction. It's only "when one number is going in a different direction

that you have an issue," he says.

FTE Numbers in Comparison

It is to AirTran's advantage to consider FTEs per aircraft, because that is an area in which the carrier leads its two primary competitors,

Southwest

(LUV) - Get Report

and

JetBlue

(JBLU) - Get Report

. Gadek says legacy carriers provide less-relevant comparisons because most perform heavy maintenance in-house and operate complex hubs with international flights, requiring higher staffing.

Southwest employs 68 FTEs per aircraft. On the airline's January conference call, CFO Laura Wright said, "We have lowered our employees per aircraft from 86 in 2003 to 68, which is extraordinary progress in three years." Southwest had 32,664 employees at year-end, about the same total as three years earlier, despite a 30% increase in capacity.

JetBlue, meanwhile, employs 78 FTEs per aircraft, after a 14% decline during 2006. "It's 78 and going lower," CEO David Neeleman said on the company's fourth-quarter conference call, noting that the carrier is adding airport kiosks and moving to reduce the number of flight attendants on its A320s. On Tuesday, Neeleman indicated it is unlikely that JetBlue will add employees to correct shortcomings exposed by the carrier's recent

snow-related cancellations.

American

(AMR)

, by contrast, does not track FTEs per aircraft. "We do not think it is a meaningful comparison because each airline has a different type of operation -- hub

or point-to-point, long-haul international

or all-domestic, etc.," says spokesman Tim Smith. "And larger aircraft drive more employment -- pilots, flight attendants, ground crew, gate crew, etc."

Internally, American measures FTEs per available seat miles, Smith says, because "ASMs are our product." In 2006, the average American FTE produced 2,392 ASMs, a 37.5% improvement over 2002.

Frontier

(FRNT)

opposes tracking FTEs per aircraft because it does not account for outsourcing. "In theory, if we outsourced everything, our FTE-to-aircraft count would be zero," says spokesman Joe Hodas.

No One Perfect Metric

Airline experts say FTEs per aircraft is a useful metric, but like any statistic it must be examined in context.

"FTEs per aircraft is a good variable to look at because, over time, it provides a good indication of trends in efficiency," says Roger King, a CreditWatch analyst. But there are variables: high-growth airlines, for instance, may staff up in areas where advance training is required. "The ratio will come down as you add more planes," King says.

But CASM has shortcomings that include the prevalence of stage length adjustment, King says. Obviously, a plane flown 1,000 miles will have lower CASM then a plane flown 500 miles, because costs -- particularly takeoff and landing costs -- are spread over more miles. Unfortunately, "there's no real way to adjust for stage length," King says. "Everybody does it their own way, so it is kind of meaningless."

Forrester Research analyst Harry Harteveldt says the FTE-per-aircraft metric provides more consistency than absolute CASM because it does not vary with oil price fluctuation. But it does not provide an absolute standard either -- it is affected by outsourcing and it could obscure a passenger-satisfaction measure. "If you've got rotten employees, it's a problem, whatever the number is," Harteveldt says.