What we were . . . What We've Done . . . What We're Facing . . . Based on a summary of the first 12 months of Hughes Air Corp. man- age ment presented by Irving T. Tague, vice president and general manager of Hughes Airwest to the Civil Aeronautics Board, July 16, 1971. INTRODUCTION This obviously is not the happi- est time in the airline industrys his- tory. We do not plan to try and show that everything is rosy at Hughes Airwest; that all the problems have been solved since the present man- agement took over. We will attempt to show how far we have come, what has been done, what the effect has been, and what the major problems facing Hughes Airwest appear to be. tions. Were facing manageable, not unmanageable, problems; Two years ago Hughes Airwest was on the brink of disaster. We now feel that Hughes Airwest is a well operated airline that is making progress and providing good service. Hughes Airwest, like other air- lines, is facing severe economic pressures. Employee productivity is the key to increased total revenue for the airline. We can see some possible solu Page 1 The merger between Pacific Air- lines, West Coast Airlines and Bonanza Air Lines took effect on July 1, 1968. In 1968 expenses were $65.2 million. Revenues, or money brought into the company, were only $62.1 million. In 1969 our expenses were up to $85.5 million with revenues of only $68 million. Like any company, there are many costs over and above a pay- roll to keep us in operation. If we were to take all costs and all revenues and divide the sum by the number of employees, this is what it would look like for Hughes Airwest. In 1969 we took in $19,800 per employee, while we spent $24,000 per employee. Thus we needed to earn $4,200 per employee just to break even but didnt. The $4,200 gap includes subsidy. With- out it, the difference would have been $6,700 per employee. OPERATING REVENUE AND EXPENSE 1968-69 $ Millions 100 80 60 40 20 LOSS $3.1 Million REVENUE LOSS $17.5 Million L 1 CO z LU . X LU 1 REVENUE FY 1968 FY1969 $ Thousands 24 OPERATING REVENUE AND EXPENSE PER EMPLOYEE 1969 REVENUE EXPENSE I BREAKEVEN NEED PER -EMPLOYEE- $6700 PAYROLL 0 Hughes Airwest took control in April, 1970. With an enormous job ahead of us we had to map our plan of action: Our goal was to increase employee productivity. Page 2 1 MANAGEMENT TO INCREASE EMPLOYEE PRODUCTIVITY Page 3 Before the takeover by Hughes Air Corp., the airlines organization- al chart showed too many chiefs: 14 vice presidents, 8 assistant vice presidents (not shown) and 5 chief executive officers, including a cor- porate secretary. This is our present organization- al chart. It calls for three operating vice presidents, one of which has yet to be filled. Its a streamlined organizational chart and the end result is improved management communications. } BEFORE NEW MANAGEMENT VP CORPORATE SERVICES VP RESEARCH & DEVELOPMENT EXECUTIVE VP CHAIRMAN OF THE BOARD CHIEF EXECUTIVE OFFICER VP TRAFFIC & SALES VP OPERATIONS VP INDUSTRIAL RELATIONS VP COMMUNITY AFFAIRS VP GOVT AFFAIRS VP FINANCE VP LEGAL AFTER NEW MANAGEMENT TREASURER \ CONTROLLER STAFF V.P. LEGAL I STAFF V.P. INDUSTRIAL RELATIONS VICE PRESIDENT OPERATIONS VICE PRESIDENT MARKETING A number of steps had to be taken to increase employee produc- tivity. By reorganization we increased management information. Another means to increase man- gement information is budgeting. We now have a profit-and-loss state- ment, showing what weVe earned and spent each month, by the 10th working day of the following month. Budgeting, coupled with the financial studies (such as the prof- it-and-loss statement), gives man- geme nt the ability to pinpoint where we are financially and, more important, to see where we are los- ing money. Thus we can react and take fast corrective action. Page 4 I Page 5 SYSTEMWIDE TRAINING APPROXIMATELY 3000 EMPLOYEES (OUT OF 3530) ATTENDED ONE OR MORE TRAINING COURSES IN 1970 Training played an important role in our reorganization. We trained and retrained all Hughes Airwest employees who have con- tact with the public. All airlines have continuous training of their flight and main- tenance crews as well as new per- sonnel. This chart shows the courses in the Air West training pro- gram when Hughes Air Corp. took over in April, 1970. We added 36 new courses over and above the existing training pro- gram. We have, in effect, completely retrained our supervisors, hostesses, reservationists, salesmen, and sta- tion agents. Page 6 TRAINING COURSES IN EFFECT APRIL 1970 Initial Ramp Agent F-27 Recurrent/Freon System Initial Station Agent F27 Recurrent/Winter Operations Initial Operations Agent F27 Recurrent/Pneumatics Initial Reservations Agent Initial Inspection Supervision Basic Basic Indoctrination Maintenance initial Hostess F-27 Maintenance Home Study Recurrent Hostess DC9 Initial Maintenance Weight and Balance DC-9 Initial Electrical (R & E) F-27 Initial Maintenance DC-9 Initial Run-Up, Taxi and Trim F-27 Initial Electrical (R & E) DC-9 Initial FD-108 Integrated Flight IR&E) F27 Initial Run-Up, Taxi and Interconnect OC-9 Recurrent/Electrical |R & E) F-27 Recurrent/Propeller DC-9 Recurrent/APU F-27 Recurrent/Flight Controls and Rigging DC-9 Recurrent/Air Conditioning System F-27 Recurrent/Electrical {R & E) DC-9 Recurrent/Hydraulic System DC-9 Recurrent/Electrical System DC9 Maintenance Home Study TRAINING COURSES STARTED AFTER APRIL 1970 Supervision Intermediate Maintenance Plating Course Supervision Advanced Initial Supply Management Development Recurrent/Supply Creative Management Catering Hostess Requalification Air Freight Hostess Standards Air Freight Procedures for Supervisors Effective Listening Ticketing, Basic Data Processing Ticketing, Recurrent F27 Initial Avionics {R & E) Tariff, Basic F27 Recurrent/AC Deicing Generator System Tariff, Intermediate PNR Computer Training F-27 Recurrent/Avionics (R & E) (All Station Personnel) F-27 Home Study Mexico Station Special Training OC-9 Initial Avionics (R & E) Orientation Training for Sales Representatives DC-9 Initial Radar (R & E) (New York, Chicago, Miami) DC-9 Initial DME (R & E) Technical Assistance Training DC9 Initial Radio Altimeter (R & E} for Air Vietnam Personnel DC9 Recurrent/Pneumatic ITCAN Travel Agency Training DC-9 Recurrent/Avionics (R&E) Reservation Home Study Basic Electrical Maintenance (Shop) Station Home Study Page 7 In order to save money, we grounded or disposed of 10 air- planes that were uneconomical to operate. While other airlines were increas- ing their miles flown, we were de- creasing ours. We reduced shorthaul trips that were costly and non-productive. We did this by rescheduling the airline and cutting the number of aircraft miles flown . . . thus de- creasing our revenue miles flown. NUMBER OF decrease increase REVENUE MILES FLOWN 1969- 1970 o/ ALLEGHENY FRONTIER MOHAWK* NORTH CENTRAL OZARK PIEDMONT SOUTHERN TEXAS INTERNATIONAL DECREASE INCREASE 10 5 0 5 10 15 20 25 30 *0N STRIKE ON STRIKE The result was that we were able to reduce our departures around 17 per cent. It costs us money to be in the air. Fuel and personnel expenses alone are high. By (1) cutting our airplane miles, (2) grounding our older, more expensive airplanes and (3) re- ducing our departures, we reduced our time in the air. Thus we cut our revenue hours flown. Page 8 AIRCRAFT DEPARTURES 1969 - 1970 DECREASE INCREASE % 20 15 10 5 0 5 10 15 ALLEGHENY NORTH CENTRAL TEXAS INTERNATIONAL *ON STRIKE REVENUE HOURS FLOWN 1969 - 1970 DECREASE INCREASE 20 15 10 5 0 5 10 15 ALLEGHENY NORTH CENTRAL TEXAS INTERNATIONAL Page 9 When our passenger trip length increases, our revenue, or income, increases. We want passengers tak- ing longer trips on Hughes Airwest. As a result of schedule changes that give the passenger fewer stops, better connecting service to our own and other airlines and more di- rect service to their destination city, we increased the average pas- senger trip from 281 miles to 324 miles. A concentration of flights into large, metropolitan airports keep our planes in the air longer due to air traffic congestion. We added jet operations to satel- lite airports (airports within 60 to 90 minutes driving time away from a major metropolitan airport). Thus better service is offered to suburban customers and money is saved through less time spent wait- ing to take off or land. Departures per Week JET SERVICE TO SATELLITE AIRPORTS* n m 11 mil Mill 1II F M A N I F M A N F 1969 I 1970 BURBANK, OAKLAND, ONTARIO, SAN JOSE, SANTA ANA 1971 2800 4000 3800 We had to reduce the number of employees because the airline was losing money. 3400 We went down from 3,700 em- ployees in 1969 to 3,200 em- 3200 ployees currently. 3000 NUMBER OF EMPLOYEES Average Apr. 70 June 71 ^3448 Page 11 With all these changes came improvements. Our airplanes completed more trips. Our completion factor went up from 96 per cent to more than 98 per cent. Our airplanes were on-time. We are now operating at 85 per cent on-time. This 85 per cent is an aver- age for our entire system of 72 air- port stations. f Percent 100 98 96 94 92 0 COMPLETION FACTOR M J J A S O N 0 1970 J F M A M J 1971 Average Apr. 70 May 71 98.2% ON TIME PERFORMANCE Percent 90 80- 70- 60- 50- Abbreviated Scale 1969 * Within 15 Minutes of Schedule 1970 FIVE MONTHS 1971 More of our passengers are re- ceiving the jet service they desire. More than 82 per cent of our in- come from passenger traffic, or rev- enue passenger miles, is on jets. Our load factor has improved. Weve been filling our planes. Page 12 LOAD FACTOR Percent 45 40 35 30 Abbreviated Scale 1969 1970 SIX MONTHS 1971 Page 13 More indicative, our passenger density (average number of passen- gers per mile) has improved from 24.6 passengers for every plane mile we fly to the current 33.7. Improving the quality of our ser- vice and holding the line on flying hours and the number of employees has paid off. In 1971 our revenue ton miles per employee (or percentage of planes filled with revenue passen- gers and cargo) was up 37.5 per cent in two years over 1969. PASSENGER DENSITY Passengers per mile 35 30 25 20 Abbreviated Scale 1969 1970 SIX MONTHS 1971 Thousands REVENUE TON MILES PER EMPLOYEE 0 FY 1969 FY 1971 We've explained a few of the changes we made and the results of these changes. Still more had to be done and Is being done to improve our financial situation. Sales quotas have been estab- lished, implemented and are regu- larly checked. We also have financial reports for each segment, or flight, in our system. This is called a segment profit-and-loss statement. We have been working on our cargo sales. Our ton miles are up 25 per cent over last year. Page 15 Our old reservations system was inadequate. We were faced with do- ing something about it right after the April, 1970 takeover. We chose the Mutual Computer Services subsidiary of Continental Airlines, joining in time sharing with Continental, Piedmont and Ozark. Using this system, the cost per passenger is 14 cents. If we had put in our own computer system, the cost would have been somewhere between 50 and 60 cents per pas- senger. This new system makes it possi- ble for us to implement new mar- keting surveys using information about the passenger that is received from the computers. One of our major problems was yield, or how much we receive per revenue passenger mile. We had a yield gap. In other words, our yield was not up to aver- age with the rest of the airline in- dustry. If Hughes Airwest yields in 1970 had been at the local service industry average, Hughes Airwest revenues would have been $5 million higher. This amount would have accounted for three-fourths of our total operating loss in 1970. The yield problem is two-fold: We had too many discounts and too small a share of full fare traffic. We discontinued several discount fares, such as the Discover America Fare, in an attempt to get full fare pas- sengers. Now our full fare traffic is more than 80 per cent. Page 16 COMPARISON OF YIELD PER PASSENGER MILE FULL-FARE TRAFFIC % of 80 Total RPMs 70 60 50 40 30 20 10 0 i Page 17 Subsidy is dollar funding from the government that supplements the airline industry for monies lost due to unprofitable routes. From Fiscal Year 1968 on, sub- sidy for Hughes Airwest, as well as for the other regionals, had dropped sharply faster than we could offset inflation with in- creased revenue and productivity. The reversal of that decrease in total subsidy dollars for Fiscal Year 1971 has helped. AIR WEST SUBSIDY FY1967 FY1968 FY1969 F Y1970 FY1971 Here's where we are now. Page 18 In Fiscal Year 1970 and 1971 commercial revenues, or income from operating our aircraft, have gone up. OPERATING REVENUE AND EXPENSE 1970-71 SMillions LOSS $4.3 Million In Fiscal Year 1971 our ex- penses have gone up. Our revenue has increased. But our losses have decreased substantially. Our operating loss was cut in half, from $8.6 million to $4.3 million. (This is based on a Civil Aeronautics Board Fiscal Year which is June to June. Thus June 1969 to June 1970, and June 1970 to June 1971.) EXPENSE REVENUE LOSS $ Millions 100 } Page 19 The expense and revenue picture for each employee, or employee productivity, changed. While expenses to maintain each employee went up, revenue to sup- port that employee went up even more. The company lost $1,300 for each employee in Fiscal Year 1971, compared with $6,700 in 1969. EXPENSE $ THOUSANDS PER EMPLOYEE 30 I REVENUE PER EMPLOYEE LOSS PER EMPLOYEE 0 1969 1970 FY 1971 1969 1970 FY 1971 1969 1970 FY 1971 The remaining gap is going to be difficult to close. There are five major reasons, as we see it, for the gap. They are (1) uneconomic cities, (2) rising costs, (3) constraints on California operations, (4) what we call the aerospace recession and (5) route integration. Well explain these further. MAJOR PROBLEMS UNECONOMIC CITIES RISING COSTS CONSTRAINTS ON CALIFORNIA OPERATIONS AEROSPACE RECESSION ROUTE INTEGRATION Page 21 Other airlines are worrying about stops that do not enplane (board) 30 or even 20 passengers a day. Twenty-seven of our cities gen- erate less than 30 passengers a day. Our problem is that we have too many points that do not even board 10 passengers a day. We are still paying for crews, maintenance, and ground personnel for these low-productivity points. Other regional carriers serve an average of eight cities that enplane less than 10 passengers a day. Hughes Airwest serves 19 cities enplaning less than 10 passengers a day. Up to 10, or maybe 12, of these 19 cities are within some 60 to 90 minutes driving time of another major airport. It has been extremely difficult for us to find suitable, financially $ responsible third-level carriers (or carriers operating smaller airplanes) willing to serve these small cities. Uneconomic cities. /WRVUESr LOW-TRAFFIC CITIES 1970 Enplanements Number Per Day of Cities* Less than 10 19 10-20 4 20-30 _4 Total 27 'Total Air llVest System, Excluding Canada and Mexico. AIR WEST SERVES MORE THAN TWICE AS MANY LOW TRAFFIC CITIES* AS THE AVERAGE LOCAL SERVICE CARRIER Served by Local Service Carrier 83 Served by Air West J9 Served by Other Locals 64 Average Other Locals 8 *N0. OF CITIES WHICH AVERAGE LESS THAN 10 ENPLANEMENTS DAILY Our second economic problem is rising costs. Page 22 Our new wage contracts average more than 10 per cent in initial in- creases, with further raises to fol- low. ALPA Air Line Pilots Asso- ciation ALPA Hostess division ALEA Air Line Employees Association lAM International Association of Mechanics AMFA Aircraft Mechanics Fraternal Association ALDA Air Line Dispatchers Association STATUS OF LABOR AGREEMENTS INITIAL INCREASE STATUS JULY, 1971 EXPIRATION DATE ALPA Pilots 10%% April 1972 ALPA Hostesses 11% October 1972 ALEA Station, Clerical 11 % February 1973 lAM Storekeepers 12% July 1973 AMFA Mechanics In Negotiation March 1971 ALDA Dispatchers Negotiation Due October 1971 1969 1970 FIVE MONTHS 1971 Page 23 Fixed costs are rising. One exam- pie is our landing fee picture. Landing fees were up 13 per cent in 1970. In the first five months of 1971 landing fees are up 44 per cent and they will continue to rise. Wages and increased landing fees particularly hit our smaller aircraft, the F27s. Their block hour costs, or cost per hour in the air, are escalating. In 1969 it cost $220 per airborne hour to operate an F-27. It cost $287 per block hour for the first five months of 1971. { 50 % Cost of Landing Fees {% Increase over 1969) 1970 1st FIVE MONTHS 1971 F-27 OPERATING COSTS Dollars per Block Hour 300- 250 200 150 100 50 Constraints on California operations. Page 24 California is a very important part of our system, but the state presents some serious and unique problems. First, California fares are lower than local service carrier fares in other states. There is always a time lag involved in getting California fare changes moved upward. As a case in point, the fare in- creases approved by the Civil Aero- nanties Board to become effective May 7, 1971, are not yet effective in California. This is because this fare increase has to be approved by the California Public Utilities Com- mission. (As of September 30, 1971, it was still pending before the PUC.) As pointed out, California is im- portant in our system and since the increased fare is not effective in California it costs Hughes Airwest $1,700 a day in lost revenue. CALIFORNIA FARE LAG ("PHASE 7" FARES ONLY) Revenue Loss Per Day $ 1,700 X Days Lag May 7Oct. 1 x146 = Total Revenue Loss $248,200 Page 25 Competition within the state of California (called intrastate compe- tition) is severe. Intrastate carriers (or carriers which can operate only in one state) have many of the same routes in California as Hughes Airwest. This chart shows the duplication of routes by California intrastate carriers and Hughes Airwest. CALIFORNIA ROUTE SYSTEMS OF INTRASTATE CARRIERS November Schedules Pacific Southwest Holiday Airlines Air California > '''Jm TAHOE i/ .'^CTvfENfoX \\ " ' X \ \ SAN franciscoi^^^aklanXI \ SAN J0SEWrX.''\ w \ \'\ >x OA K L AN D \\ \' i \ \ \ ' BU.RBAr^K- I \K I \\ \ \ VV /lOTARIO/ y ioibv, ' '/RSIDE I liZo. ^ ,, ^ November schedules: shows only routes to points served by Air West. Page 26 This chart shows applications by intrastate carriers for new routes within the state of California. The dotted lines indicate appli- cations for routes over and above their present route structure. For example, new applications to Fresno, Stockton and Eureka are duphcations of Hughes Airwests routes. We feel these routes being sought by intrastate carriers would divert some $1.6 million annually from Hughes Airwest. Since intrastate carriers need only apply to the California Public Utilities Commission (and not to the Civil Aeronautics Board) for new routes, Hughes Airwest has asked the Public Utilities Commis- sion NOT to grant these routes to the intrastate carriers. EUREKA ARCATA^ \ \ ROUTE APPLICATIONS OF CALIFORNIA INTRASTATE CARRIERS (AS OF JANUARY, 1971) PACIFIC SOUTHWEST AIR NEVADA HOLIDAY AI R LI NES AIR CALIFORNIA