A Point of View
Increasing supply-chain efficiency
Rob Britton tries to understand why so many airlines don’t question the role of the long-standing middlemen in catering and onboard supply
Most businesspeople and consumers do not like middlemen (or women) given that they tend to bump up the cost and restrict choice.
Whether consistently profitable or in crisis, airlines have focused on reducing expenses – particularly controllable expenses (in contrast to things like fuel) – for decades. And even more so in recent years, as markets almost everywhere have become more competitive. In sales and distribution, many have made remarkable progress in eliminating the cost and inefficiency of intermediaries. For example, between 1996 and 2011, Delta Airlines tripled its revenue but recorded a 42-point improvement in passenger commissions and selling expenses, from 8.7% of total expense to just 5.1% (and it continues to head down).
So why no similar commitment when putting things on board? Before answering that question, let me be more precise in my criticism. Some brokers and other intermediary suppliers do add value, for example by managing efficient supply chains and focusing on other logistics. A practical example: airlines don’t own warehouses,
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www.onboardhospitality.com
so someone needs to provide accessible inventory storage.
But in my long experience, these middlemen generally do not provide value for money, for many reasons. The first is because they itemise their pricing down to a per-case or per-lot basis, creating a sort of illusion where they appear inexpensive. The numbers are indeed small, but because airline volumes are typically massive, the total expense is large. They also tend to restrict choice, because of long-term tied agreements and exclusivity (this is especially true among food brokers).
“Never underestimate the power of inertia and status quo, nor the strength of long personal relationships between intermediary and airline buyer”
Paradoxically, many of these restrictive arrangements would be illegal, under US and EU law, in the realm of airline ticket distribution. Sadly, double standards abound in the airline business.
Thirdly, never underestimate the power of inertia and status quo, nor the strength
of long personal relationships between intermediary and airline buyer. Increasingly thin management at carriers amplifies this problem; as I’ve noted in previous columns, lack of management resource at airlines under siege has made it hard to progress a range of initiatives to reduce expense and raise quality. A fourth reason is vertical consolidation: the mega-caterers have acquired many input firms, forming rigid monocultures that reduce choice and competition – instead of dealing with many entities, it’s now just one, albeit wearing different brand names. Lastly, many end manufacturers and producers don’t seem interested in driving efficiency. A conversation I had with a large, starts-with-a-K, food manufacturer in the US, proposing a very elegant direct scheme, was discouraging. Management consultants and entrepreneurial start-ups have looked at this opportunity, but after one or two phone calls like mine, have concluded that there are other industries more receptive to disintermediation. My modest and very tentative prediction is that this will change in the coming decade, likely driven by fresh views at start-up airlines, from the kind of people unburdened by “we’ve always done it this way.”
rob.britton@
airlearn.net
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