In response to American’s decision to shed 30% of its management and support workforce along with similar moves by United and Delta, industry analyst and former Pan Am, TWA, and American Airlines executive Bob Mann asks why management and support roles scale up as airlines grow in the first place. This is an interesting question and I’d like to suggest an answer.
No ill will meant to those affected, and (almost) industry-wide, it always puzzled me how 'in the information age', management and support ranks and costs seemingly grew as fast as the airlines themselves. Where was the efficiency?
— Robert W. Mann, Jr. (@RWMann) May 28, 2020
On the operating side, yes, they are labor (and capital) intensive. On the management ans support side, why are they, still?
— Robert W. Mann, Jr. (@RWMann) May 28, 2020
We usually think about cost disease, described by the late perennial Nobel contender William Baumol, as explaining rising wages in sectors without rising productivity but I think it also helps explain growing bureaucracies as well.
Baumol explained a rise in salary expense for jobs that haven’t become more productive as a result of having to compete for talent with industries that have seen greater productivity increases. Distance-learning notwithstanding, the average college professor doesn’t become more productive over time but their services in disciplines like economics, business, law and medicine could be easily bid away by the private sector and that pulls professor incomes up to retain and attract employees.
Just as a nurse takes the same amount of time – at least until we begin adopting remote monitoring technologies in hospitals – to check on a patient’s IV, airline managers using outdated legacy technology have a hard time scaling the number of routes they oversee or fares that they file. So as a hospital, or an airline, grows they need to hire more people to perform tasks.
Those jobs and employment relationships become stable in equilibrium during good times. It’s hard to lay off a third of your management ranks while earning billions of dollars annually. And why upset the apple cart when your business looks like it’s behaving like an annuity?
However external shocks, like COVID-19, can shake an organization out of its complacency and force it to confront its inefficiencies. A hospital, forced to scale its ability to care for patients and reduce the amount of time each patient is in the hospital, might resort to remote monitoring (especially when public funds get air dropped). An airline, even one skittish about IT capital investment, might embrace greater automation for ensuring that the right plane (e.g. overwater-certified!) operates on the right route, or that the right fares are being sold.
Furthermore the crisis becomes the narrative the organization needs to eliminate perks, and the factor that helps to rearrange status relationships. Fewer people actually need assistants to be productive. People can share assistants. And having assistants taken away no longer feels like being singled out or a demotion when you’re just happy to still have a job.
It’s not just airlines. I work for a hospital and we have at least doubled the amount of management and admin since the 2009 financial crisis. Quite a few have been “working” from home and very few missed. The hospital still cares for patients just fine.
I think it’s the nature of any business to become bloated over time if management isn’t continually evaluating costs for owners/shareholders.
I could point out that government never has to “confront its inefficiencies” and “30% of its management and support workforce”.
The growth of the ranks of management may arise in the same manner as the growth in the administrations of nonprofit institutions such as schools and hospitals. Administrators tend to see the importance of their function as of primary importance and continually find the need for more support staff of all kinds– often as they keep the number of clinicians, teachers, or what ever at a constant level. In order to attract people to supporting positions without having to pay them any more than necessary, administrators also invent a dizzying array of very complicated titles with which to reward these minions. Add to that the extraordinary growth in IT workers in recent times, and you begin to have quite bloated executive ranks.
Amazing how the there is little daylight between the parallels of airlines and Amtrak with the exceptions:
-The only manner Amtrak has to show its cutting costs is to frequently lay-off or buy-out its management. As any committed bureaucracy acts to protect its own interests, Amtrak historically has cut the management with in-depth experience and commitment, leaving the long-term desk jockeys to shuffle papers until retirement.
-Despite developing an intricate yield management system, Amtrak persists in failing to flexibly price its product to maximize revenues, e.g., failing to price empty sleeper accommodations for daytime travel at an attractive cost. As well, Amtrak has limited sales to avoid union contracts requiring an extra crew member when the number of cars exceed a pre-determined consist for the train.
As they say in the railroad industry: “Amtrak is flying on instruments, at night, in the rain and fog; but they’re not turned on…”
A large number of hospitals already use remote patient monitoring. In fact, a number of virtual hospitals already exist. Tele-stroke and eICU have been commonplace for a decade.
To compare airlines scaling up to hospital operations (At least as it relates to IT) is a bad analogy. Efficiency means getting the same or better outcome at a reduced cost. Telehealth solutions in healthcare have proven to cost less and require fewer Human Resources, but quality of care has not been maintained.
A nurse at a remote location or another unit of the hospital providing oversight by monitor is not as effective or caring as face to face care.
I imagine they kept too many people from the US Air merger…
Most businesses, even technology-based ones, need more people as they grow. Even tech companies that scale relatively efficiently will add people to manage the clients they add during growth, and add tech and support staff to ensure those new clients get serviced. Plus Finance & Accounting people to handle billing, “optimize” pricing, etc. Oh – and you’ll then need more HR people to recruit, train, and manage the people you hired. All good as long as you’re growing. But pull a significant percent of your revenue away suddenly, and you’ll need to adjust.
@otherjustsaying you could point that out. But then it would be pointed out to you that a government is needed for times of crisis like the one we’re in.
Should government be efficient, yes. But it is the name of efficiency that stocks of PPE in the USA were drawn down in the last few years. So when you need them, they’re not there.
Get your head out of Trumps behind once in a while. It will do you good.
This is why small businesses tend to beat bureaucratic ones, at least where nimbleness is required.
I started manufacturing/selling IBM-compatible computers in 1985 when they came out. I lived in LEX, where there was an IBM plant. Everybody knew numerous IBM employees. People said we were nuts to go up against such a big company, we’d inevitably fail, and as a result we couldn’t get loans.
We kicked the hell out of them anyway. 4 guys in a tiny office.
Different when it’s government-sanctioned, heavily-regulated near-monopolies like airlines or universities or railroads. They can just bloat like crazy, because the goal becomes enlarging one’s fiefdom rather than making money.
Warren Buffett runs Berkshire with something like 40-50 people. And I bet most of them are there to generate government-required reports and oversee regulations.
Arguably airlines have actually not become bloated, but are far more productive than they were 20 years ago. In 2019 AA carried 1,600 passengers per employee whereas in 1999 it was 740. United carried 1,475 per employee in 2019, while in 1999 it was only 930 per employee.
Back office management ranks at airlines (marketing, sales, HR, etc.) have generally been stable since 2001. The growth in numbers has come from the operational side where for every new aircraft and its associated flights there is employee growth. Adding flights means adding employees and while existing front line management can absorb growth for a while at some point it becomes unwieldy and you have to add a supervisor. Add enough supervisors and you add a manager. Add enough managers and you add a director.
So the cuts that are coming will land on the front line harder than back office. Not to say back office jobs aren’t at risk, just that the line is more direct between number of flights and front line management than there is between number of flights and, say, a sales manager.
Woe! The idea that ” back office jobs” – i.e. staff positions have been “sable since 2001” – is a complete myth. American is a classic example. There were plenty of unnecessary , redundant and nonproductive HDQ jobs prior to the merger and at USAir this was even worse. No meaningful cuts were made when the merger was completed and this highly bloated group continues to be employed at in the brand new and very costly headquarters campus.
While all this was going there was tons of administrative automation being implemented that should have reduced overhead, but the management did nothing to adjust for it. Over the past decades, with the exception of the A-380 – which no domestic airlines operate – there have been no aircraft introduced to trigger the headcount increases referred in line staffing. Rather, one of the biggest drivers are the union contracts that handcuff management form taking advantage of these merged work groups. American is a classic example.
End of the day, the blame resides with Executive management letting it get out of control. In good times, this is not an issue. But, as we will see now, it is way to late to do what needs be done.
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Airlines waste tons of staff optimizing revenue with all their crazily complex rules and dynamic pricing.
No wonder Luv is kicking their posterior!
Everyone needs a job. If every possibly superfluous manager or support staffer were laid off the U.S. would have quite an unemployment problem. I’m wildly guessing that 1/3rd or more of the folks on this forum could be considered superfluous if their position was seriously looked at.
Judging by the above comment, in the fee capitatistic nation/economy which provides most a lifestyle unparalleled in the rest of the world, a company needs to hire/retain excess non productive labor because “everybody needs a job.” WOW, welcome to socialism!!
@VH- I got no horse in this race, but to a bystander, Been There seems more credible. At least he quotes statistics that demonstrate AA is twice as efficient, and UA 50% more efficient since 1999, at least on a passenger/head basis.
What data do you have to support your assertion that headquarter staffs have become bloated in the last 20 years? Certainly union contracts mandate a certain number of staff per plane, mechanics, front-line staff. From where did the increase in efficiency come from that Been There cites?
The comparison to healthcare is interesting, but I think an (airline) administrator to (healthcare) administrator comparison is more apt than an airline administrator to nurse comparison. While the relative percentage of physicians and nurses have remained fairly stable over the past ~50 years, administrator ranks in healthcare have exponentially increased, while patient care has not changed significantly. This is partially because of increased complexity in dealing with insurance and regulators (hence, a justified increase in administrators), but also due to bloat whereby administrators beget more administrators. There are roughly 7 healthcare administrators now per one physician, which is problematic and just as many airline middle managers are arguably redundant, healthcare has the same problem if not more exaggerated.
While nurses play an integral role to patient care and in my mind (as a physician) will not be replaced by remote workers anytime soon, the legion of healthcare administrators — who provide “value” only by pushing for dubious “quality” measures that have been cooked up by other administrators but often have no bearing on improved outcomes — could be largely reduced without much change to patient care.