Industry Benchmarking

Back in the day, when compact discs (CDs) were an actual means of storing large data sets, I remember all of us analysts dreading the arrival of a nondescript cardboard box from the Department of Transportation (DOT). Inside that small box was the “Form 41 Airline Quarterly Results” CD which was a guaranteed migraine for anyone unlucky enough to be assigned to “Industry Benchmarking” that month.

For the uninitiated, Form 41 appears to be a rich data set, but anyone who has spent time with it knows that it can be very misleading. It is unaudited financial information that, for some reason (even after de-regulation), airlines are tasked with submitting every quarter. After years of questioning its existence, I was forced to eat my words when it played a pivotal role during the pandemic - the US Treasury (UST) used Form 41 data to support the Payroll Support Program (PSP). True story – while we were in the throes of the pandemic, just before the first PSP distribution, I was on a midnight call with the UST to explain a 20-cent variance in Form 41 data (no exaggeration!).  

Being able to identify what one airline is doing better than another should help highlight potential opportunities and strategic initiatives. For that reason, industry benchmarking analyses tend to attract research analysts and consultants, all of whom are unfortunately poorly equipped for it. Many tend to rely on Form 41 data which, as described previously, is best thought of as a red herring. Only an airline has the internal information and expertise needed to adjust its results for comparisons to others.

There are several factors that make external airline benchmarking challenging, to highlight a few:   

P&L Geography Differences

Anyone who has worked in the Finance organization during an airline merger will tell you how painful it is to map all the different accounts across two airlines. Basically, nobody puts all the same stuff in exactly the same buckets. It’s all a little bit different. Consequently, comparing SEC financial line items between carriers can be misleading. For example, some carriers allocated expenses from several P&L line items into regional expenses, while others did not or to varying degrees.

Structural vs Non-Structural Differences

It’s important to identify what are structural vs non-structural differences between airlines and to isolate and adjust for them as best as possible. For example, trying to compare a frontline employee group between two airlines with just 10-K reported headcount and expenses can lead to the wrong conclusions regarding labor rates and efficiency. The amount of outsourcing at each airline is governed by collective bargaining agreements and therefore a structural difference. Also, as alluded to above, outsourced vendor expenses tend to be in another P&L category than salaries and benefits. Finally, some mainline employees handle flights for regional departures, which can also distort metrics.

Network Differences

Every airline has a distinct network, comprised of a unique combination of hubs, and operated by a different mix of aircraft. It’s possible to highlight the rate differential, in terms of landing fees and rent, between hubs, but very challenging to quantify the operational efficiency of one hub over the other (another structural difference).  

In addition, the mix of flying impacts an airline’s stage length, which is basically the average length of a flight. A greater weighting of long-haul international flying increases an airline’s overall stage length. This makes unit economics comparisons challenging since fixed costs are spread over a larger denominator. Of course, there is an industry stage length adjustment formula that is widely used. However, in my opinion, all that does is add more distortion to the analysis. I much prefer moving a carrier along its own cost curve to match another’s stage length.

 To sum it up…

There is no doubt that Industry Benchmarking can be a valuable tool for airlines. However, I think the real value comes from internal airline groups using it for scenario analyses rather than misleading aggregate comparisons. By adjusting specific non-structural differences (essentially management decisions) to align with competitors, an airline can identify accretive actions for future margin growth.