Air Transport World

Divide and prosper. (airlines spinning off units to form profit centers)

In the quest for efficiency, several large airlines, mostly outside the U.S., are spinning off various functions into smaller units that they call profit centers. But contrary to the concept's shorthand name, profits don't always result and cost reduction often is the focus as much as profits.

Profitable examples include Singapore Airlines' Singapore Airport Terminal Services. Since its creation in 1972, the company has split into three units--airport services, catering and security-whose 1993-94 pretax profits totaled sS 162 million ($144.6 million) of the group's total of S$871 million ($616.8 million). From its Singapore base, SATS has expanded abroad and SIA has created separate units for other aviation activities.

Also consistently profitable is American Airlines' Sabre. While not reported separately until recently, its high-flying margins have propped up the flight operations of its less-successful parent. In 1993, pretax income was $184 million, compared with the airline's $429 million pretax loss. Now, parent AMR Corp. has divided into the Air Transport Group, Sabre Group and Management Services. Outsiders speculate that the division is a tactic to reduce the profits unions point to when faced with requests for concessions.

But there are business reasons for the split, among them to reduce management levels and to separate the airline from services that the other two groups want to sell to actual or potential American competitors. So far, though, competitors might see the division as a distinction without a difference. Employees in Sabre still say "we" when referring to American Airlines. That is not surprising, since they've received paychecks from American for a long time. It is Sabre's biggest tomer and many of Sabre's products spring from it.

Not all profit centers have prospered. United Airlines tried to shake up its lumbering bureaucracy in the 1970s by decentralizing into three geographic divisions. That proved to be an accounting nightmare, so UAL recentralized. In the 1980s, the company tried a different tack, this time dividing into hotel, airline and car rental units. That concept didn't have time to be proved. The tactic started a years-long pilot rebellion, culminating last year, when United's employees took control of the company. Now, in yet another stab at boosting profits and reducing costs, UAL has returned to a semigeographical profit center, creating Shuttle by United in the California market.

Despite United's experience, Swissair tried geographical profit centers a few years ago--and also abandoned them. Air France Chairman Christian Blanc carved up the carrier's system into five route centers but the airline has recentralized its route planning under the guidance of Executive Vice President Rakesh Gangwal, formerly with United. …

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