The situation itself looks as follows. In 1995, the labor productivity was given
by 2.87 billion dollars in revenue divided by 0.93 billion dollars for labor expenses
equals to 3.08 as the labor productivity. You see here that this was a significantly
higher number than US Airways had at that time.
Sixteen years later, Southwest was able to grow its business to $13.65 million.
However, labor expenses also grew significantly and went up $4.18 billion,
creating a labor productivity of 3.26, which is actually slightly lower compared
to the current numbers at US Airways. But what does a higher labor productivity
actually mean? Are the workers working any harder?
Have we squeezed out the idle time? Is the process underlying the operation
smarter than before? What really accounts for the difference?
Consider again our definition of labor productivity as a ratio between revenue
and labor costs. Now, work with me through the following
equation. We can rewrite the revenue to the labor
cost as the revenue divided by revenue passenger mass created by the airline time
the revenue passenger miles times the available seat miles times the available
seat miles divided by the employees times the employees divided by the labor cost.
Now, you might be scratching your head here a little bit but at least you will
hopefully agree with me that mathematically this equation is true.
After all, this term cancels against this term, this term cancels against this term,
and this term cancels against this term and we are back to the initial expression.
Now, what is the benefit of writing the equation this way?
It reminds us that there are multiple things going on that are all driving the
labor costs, the labor productivity. We see here in the first factor, the
revenue to the number of miles that we sell, this is really driven by the
airline's pricing power. For that reason, oftentimes, this is
what's called the yield. How much can we yield? How much do we get
out of the seat capacity that we have available?
The revenue passenger mass divided by the available seat-mass really measures to
what extent we are able to fill our aircraft.
In many ways, this is a form of utilitzation of capacity.
Now, the last two of these ratios here are actually really touching the labor.
The first of these ratios is, how much capacity can we get out of each employee?
The second one looks at the cost of sourcing these employees which is
basically their wages. Notice that these four different ratios
catch up four different things. I cannot go to an employee at US Airways
and say, hey, your labor productivity is low just because the pricing has been done
poorly or the aircraft has been flying empty.
With this in mind, breaking up the aggregate level per activity into these
smaller drivers is quite revealing because it tells you what really is going on in
the operation. Let's apply the new knowledge by going
back to the US airline industry and compare the labor productivity across the
big carrier. He says, that labor productivity was
driven by the ration between revenue and the labor cost.
So, for the case of American Airlines, we divided the revenue,.divided Divided by
the labor costs, and we can copy this to the cells of the other carries.
We notice quite some variations with Frontier getting a labor productivity
ratio of six. And quite interestingly, Southwest being
at the bottom of the pack, with a productivity ratio of 3.2.
We'll then look into the drivers of this effect.
We compute the yield of this ratio between the total revenue, and the number of
passenger miles that were actually sold by the airline.
For this, again we look at the revenue divided by the revenue of passenger lines.
And you roll this out across all the carriers.