Crew Resourcing at Chinese Airlines: Optimization Opportunities to drive Performance?

Most airline executives believe crew costs (cockpit and cabin crew), which typically can account for up to 18% of their cost base regardless of business model, are lowered through the use of crew scheduling optimizers. Although optimizers do increase crew efficiency, airlines still experience crew cost overruns. Lacking understanding of the root cause of overruns, airlines often fail to take effective corrective actions, thereby missing their targeted budget for crew costs. 

This exposure takes many forms as colleagues John Thomas and Alex Lee recently described (click here):

• Management actions and behavior. Automated crew planning systems may construct a number of pairings that appear optimal and legal on paper, but in fact provide little buffer to absorb disruptions. In reality, scheduling practices leave little room for error and often result in crew costs that are significantly higher than the budget permits.
• Crew behavior. As crew members earn seniority and gain flexibility in scheduling, they are able to “game the system,” taking advantage of loopholes that can dramatically increase their pay while offering no added benefit to the airline.
• Post processing system limitations. Crew payroll is either handled by a pre-programmed “black box” or, at some airlines, calculated manually. Yet this process, which incorporates no effective checks and balances, is biased against the airline; an underpaid crew member makes sure it is corrected, whereas overpayments go uncorrected.
• Compensation design vs. reality. Given the highly complex nature of crew compensation, many airlines design their programs to “intuit” the most efficient and effective structure of crew compensation plans. However, reality does not match the conditions present when the compensation plan was designed. And the optimizers adjust according to the current set of rules and pay — they don’t say when certain conditions in the plan are unduly driving up overall compensation.

Crew Resourcing Efficiency is becoming ever-more important for Chinese carriers

One might believe crew resource efficiency to be of less importance for Chinese carriers, given the lower average wage levels here. And indeed, for top-tier airlines such as China Southern Airlines, China Eastern Airlines and Hainan Airlines, labor cost accounts for 5-7% total operation expenditure, relative to ~20% for some top international airlines.

But we believe such a mindset is faulty. First, as L.E.K. has previously noted, Chinese carriers greatly underperform in profitability relative to carriers in other regions. Such underperformance will not be overcome by ignoring easy-win efficiency gains.

Second, when accounting for routes and comparing “employee to ASK” ratio across international and Chinese airlines carriers, Chinese airlines in fact have significant room to improve their labor efficiency (around 15% saving potential).  

Third, Chinese carriers will soon face increasing labor cost pressures, driven by several factors:

• International network expansion will drive up crew costs. Labor costs for China domestic routes are far lower than for international ones, and as Chinese carriers expand their overseas routes, so too will their crew costs expand. Take Air China, for example, which experienced a ~10.6% increase in labor cost in 2014, largely driven by international expansion.
• Pressures on salaries of existing staff . While the China airline industry is still dominated by state-owned carriers, more and more private carriers have entered the market in recent years. These private carriers have been “gamechangers”, driving up salary levels of pilots and flight attendants. SOEs have had to respond to retain talent; for example, in 2014, Air China spent extra RMB1.489 billion to increase the salary for employees, which further increased its labour cost to 15.7% of total operation cost (14.9% in 2013).
• Potentially insufficient flight labor supply will create wage pressure, particularly for private carriers, to attract pilots and flight attendants. Chinese carriers cannot continue to rely on a cheap but talented pilot pool. Demand for experienced pilots is increasing, yet many top domestic pilots are in fixed-length contracts. These pilots can only be “poached” by private carriers with high premiums, e.g., 20%. As a result, some private carriers are looking toward the more-expensive international pool for talent (it is estimated that there are more than 1300 foreign captains in China).

For flight attendants, labor shortage manifests itself differently. Long working hours and high pressure with uncompetitive compensation, which has rarely increased for the last 10-20 years, limit supply. Some carriers are being forced to increase wages to attract talent.

China's Crew Planning Challenge

Without knowing the potential cost of its actions, the crew planning group often must make a number of policy decisions by the seat of its pants, including:

• Optimal level of reserves vs. overtime
• Level of reserves required in order to cover IROPs
• Optimal mix of long and short pairings
• Optimal length of pairings vs. potential for broken pairings
• Potential cost savings of longer pairings vs. increased cost to cover broken pairings
• Tradeoff between out-and-back crew rotation vs. “fly around the network” crew rotation practices
• Keeping cabin and cockpit crews together vs. optimizing crews separately

All in all, few airlines have the right tools to accurately forecast crew costs. Given the magnitude of crew cost overruns airlines are likely experiencing now, they simply must devote more resources to understanding the implications of their crewing allocations.

Airline crew planning and scheduling systems often are focused on publishing the next month’s pairings and on matching bids to pairings. They fail to spend enough time and resources on analyzing the effect of their policy decisions, not to mention the cause of cost overruns. The incremental costs of suboptimal crewing should motivate airlines to conduct deeper analysis and acquire advanced analytical tools. Better tools would not only allow them to optimize their policies, but also build in proper buffers, pay crew correctly, understand potential work rule changes during labor negotiations and reduce total crew cost.

All told, opportunities abound for Chinese airlines to improve crew resourcing efficiency. We believe the answers are right in front of the carriers, and waiting to act is risky and unnecessary.

Michel Brekelmans is a Partner at L.E.K. Consulting and Managing Director and co-head of L.E.K.’s China practice. He has 20 years of experience in strategy consulting and has been based in Shanghai since 2006. L.E.K is a global consulting firm that supports business leaders in evaluating investments and developing strategies and organizational capabilities to deliver significant impact on the performance of their business.   L.E.K. helps investors and executives across three major areas:

• Strategy formulation and activation
• Organisational and operational development
• M&A Services

L.E.K has been operating in China since 1998 through offices in Shanghai and Beijing.