XIAMEN AIRLINES: PAY FOR PERFORMANCE

Abstract: Even though, Xiamen Airlines, based in Xiamen, Fujian Province, China was recognised for
its safety performance and the company's "best practices" was widely acclaimed, deep
down there were challenges in onboarding and retaining pilots. Since 2009, significant
changes were made in the company's pilot compensation system that had aimed to
promote a stronger linkage between their pay and performance. The initial results were
positive, as they were increasing employee motivation and productivity. But with
increasing competition and dearth of qualified pilots more challenges awaited Xiamen.
Xiamen was concerned to know if the higher pay was a sustainable model and could this
help the company retain employees. The company also wanted to look up more avenues to
hire and retain qualified people
The Airline Industry in China: The airline industry in china was growing rapidly and was the second
largest air travel market in the world after United States. Data indicated that the potential
in this market was huge. At the same time, challenges and threats faced by the industry
were multifold. There were frequent Passenger outrages due to flight delays. The
upcoming Highspeed railway system and highways and increasing number of vehicles also
posed a huge threat.

Pilot shortage and turnover: another major threat in the industry.

 China faced a shortfall of 1000 pilots in 2014.
 This led to aggressive recruitment of foreign pilots which in turn led to
 With foreign pilots getting better pay, more days off, and easier flight
routes etc. the dissatisfaction among local pilots was high.
 Private companies provided more salary than the government
counterparts.
 National flying licences increased job hopping among pilots.
Regulation of Pilot Turnover .
 In 2005, a legal document regulating turnover of pilots was issued, wherein the
pilot had to compensate the airlines, which led to nation wide strikes and
protests. The pilots were unhappy with low compensation packages compared
to other counterparts in the industry.
Company – Xiamen Air (formerly Xiamen Airlines) is the first privately owned airline in the People's
Republic of China. Xiamen Air is the only major Chinese carrier which operates an all-
Boeing fleet. Xiamen Air was honored with the title of "The Best Airline in Mainland China"
for 6 consecutive quarters in the "Airlines Service Survey" made by CARNOC.com and has
been awarded various other awards.
By Dec’2013, the airline operated 102 flights, 218 domestic routes along with 26
international routes. It flew over 3200 flights per week. Xiamen Air ranked #5 among all
Chinese carriers by domestic capacity. It is the 27th consecutive year of profit for Xiamen
Airlines since 1988. With the long consecutive profit record and high profit rate, the airline
is regarded as one of the most profitable airlines in the world.
By 2014, Xiamen employed 11862 employees, including 1055 pilots.
By 2015, Xiamen’s fleet was planned to expand to 132 aircrafts
PILOT COMPENSATION:
 Top Management’s Priority : The new General Manager was extremely clear and was
committed to improve pilots working conditions. Pilot’s compensation and satisfaction
became company’s most important priority.
 Recruitment & training: The company had an extensive recruitment method, where
one of 400 applicants were selected, and underwent a training of 19-24 months. The
company spent almost .4 to .9 M$ per candidate. It also hired externally and the pay
packages of foreign and local captains were different. Short term contracts, monthly
contracts were also offered.

ISSUES
 Competition offering better salary package. Some of them can afford higher salaries due
to economies of scale.
 Flight captains were reluctant to coach newly graduated co-pilots, as it required them to
prepare for qualification exams, and implied more flight risk.
 Some Senior pilots and others who held part time administrative jobs were not willing to fly
extra hours beyond the minimum flying limit. This led to hiring of extra pilots incurring
significant costs.

MAJOR CHANGES IN THE COMPENSATION SYSTEM

From 2009 to 2011 the major reforms planned were communicated and the entire team was taken
onboard before implementing each of the processes.
The salient features were-
 Only 10 to 20% of pay was based on qualification and tenure. 80-90% was variable pay
based on flight hours, safety operation and responsibilities during the flight.
 Deviations from SOPs were penalised.
 Hourly pay rate based on responsibilities during the flights ensured that pilots coaching a
newly graduated pilots were compensated at higher rate.
 Second degree pricing – for every band of extra flight hours, the rate increased
correspondingly.
 Shorter flight pilots were compensated through take off and landing counts.
 Advanced operational skills and expertise were also factors determining the pay rate.

CULTURAL REFORMS
The salient features were-
 Life and health Insurance plans, paid vacations, housing allowances and many more work and
personal benefits for pilots and their family members.
 Cheaper Housing
 Expensive airport hotels for the employees to rest.
 Family taken care of by the company when the pilots are away on duty.
 Top leaders , general Managers would sit with the pilots at breakfast or would personally wish
them whenever they faced a challenging day motivated the pilots.
 Additional career titles to celebrate and recognize extraordinary contribution and
achievement.
INITIAL OUTCOMES OF THE REFORM
 Turnover rates decreased.
 Positive outcome in terms of increased performance levels.
 Labour costs decreased.
 Better training given to new pilots.
 Steep growth of 492% in company’s profit from 2009 to 2010.

ANALYSIS
The management of Xiamen Airlines understood the difference between labour rates and labour
costs. Though the compensation the pilot was receiving in 2013 was three times more than what
he was receiving in 2008, yet the management ended up paying less in labour costs as the
productivity had increased by 1.3 times.
The management also understood that in a service industry the cost of an unsatisfied employee
was much higher than the extra cost incurred to keep employees motivated and happy.
The new compensation system was designed in such a way that employees without competing
with each other could maximize their compensation. It depended on the employee alone and not
on what his peers were doing. This system was designed to incentivize performance without
affecting teamwork.
The cultural reforms that the company had done was a huge reason, that the employee attrition
rate had decreased. Even though there were competitor firms offering better packages, the strong
company culture where each employee felt valued and cared for, along with their families was a
huge reason for employees to stay.

Submitted by:
Rumee Sethi
Roll no: 102, Section B
PGPX