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.