The airline industry is known to feature high costs for everything from equipment to fuel. Not surprisingly, cost-cutting is a major objective of top airlines. Let's take a look at four of the most interesting approaches.
The manual approach
Anyone who's dealt with a computer manual knows that it's heavy and bulky -- definitely not something to take on a plane. Air Canada (TSX: AC.B ) seems to agree and is cutting costs by replacing paper manuals with iPads. This might not seem like a big deal until you consider that each manual weighs about 35 pounds. Each pilot must have a manual, potentially adding more than 100 pounds of weight to long-distance flights that require larger cockpit crews.
Air Canada has been implementing a major cost-cutting plan and the replacement of paper manuals carries multiple positives. Not only does it save fuel due to weight reduction, but digital manuals can also be updated faster without needing to add additional pages every time the document must be updated. This approach reduces fuel consumption and increases efficiency.
Refining their own oil
Fuel costs are critical to airlines, and Delta Air Lines (NYSE: DAL ) has taken a new approach by purchasing an oil refinery to process its own fuel. While it does not protect Delta from oil-price fluctuations, the refinery does reduce the crack spread between crude oil and refined jet fuel.
The refinery is seen as a long-term, cost-saving project that will balance out the losses it posted in its first few quarters. Delta's third-quarter 2013 results showed the first positive quarter for the refinery -- a small profit of $3 million.
In the long term, Delta's refinery should produce more savings as setup costs are no longer incurred and production is optimized.
New aircraft can cut fuel costs but are also expensive and often require significant waiting periods for airlines. United Continental (NYSE: UAL ) has taken another approach by modifying its existing planes while adding Boeing 787 Dreamliners to its fleet.
The design of the latest aircraft includes numerous drag-reduction features. For existing aircraft, United Continental is adding winglets to reduce drag and cut fuel consumption. Not stopping at reducing drag, the airline is also replacing the heavier steel braking systems on some Boeing 737 aircraft with lighter carbon-fiber systems.
Bankruptcy is often seen as a last resort, but American Airlines parent company AMR (NASDAQOTH: AAMRQ ) has used the restructuring process for other reasons. Seeing an unpleasant outlook, AMR filed for bankruptcy in 2011 despite having roughly $4 billion in cash on hand and no near-term debt issues.
Today, AMR has slashed labor costs and brought its cost structure more in line with rivals that also went through bankruptcy. With the industry rebounding and a merger offer from US Airways (NYSE: LCC ) on the table, AMR common shares are actually trading higher now than they were prior to the company's bankruptcy.
As airlines look to slash costs, they will have to be creative to get the most from their businesses. While the bankruptcy process is not unique, the way that AMR used it stands in contrast to prior airline bankruptcies that left common shareholders with nothing.
Using strategies from refinery purchases to aircraft modification, airlines are finding new ways to slash costs and improve the bottom line. Airline investors should continue to monitor actions of individual airlines to see which are the best fits for their portfolios.
The two top cost-cutting airlines
Warren Buffett has claimed that investing in airlines is a surefire way to lose your hard-earned cash. But two airlines are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!