Strategy - the Ups and Downs of Management
Experts agree that airlines must make fundamental changes to deal with the new economic realities. But exactly how should that be achieved?
When Rudolph Giuliani became Mayor of New York City in 1994 his new head of police, William Bratton employed “Broken Window” theory to tackle crime. The work of criminologists James Q. Wilson and George L. Kelling simply proposes that a minor problem, such as a broken window, sends a signal that anything goes—triggering further crime.
So Bratton concentrated policing efforts on smaller misdemeanors, such as the squeegee men who attempt to wash vehicle windscreens at intersections or public drunkenness. It worked. By 2005 crime in the city had fallen by 75% from its 1990 peak and homicides were at their lowest rate since 1963, the first year of reliable figures.
Broken Windows is, effectively, a bottom-up strategy; it suggests that making minor changes can lead to a major improvement. The question is whether this holds true for the aviation industry.
Evidently something must be done. A number of factors suggest the industry will not be able to ride out the current “perfect storm” and resume business as before. Most significant is the debt being accumulated by consumers, which suggests they will not return to “normal” buying habits for some time, if at all.
In the US, household debt is estimated at $13.8 trillion. A significant slice of that—some experts have said around $5 trillion—will have to be repaid before the level of debt becomes sustainable. And while defaults will wipe some money off the total, interest charges will add to it. With flatlining salaries also coming into the equation it will be a number of years before “normal” expenditure returns.
For many, it is a time for decisive action. As Giovanni Bisignani, IATA Director General and CEO points out, aviation is in survival mode. “Whether this crisis is long or short, the world is changing,” he says. “Even if we try to look beyond the crisis, we must recognize that it will not be business as usual.
“The assumptions of our past are no longer valid,” he continues.
“After September 11, 2001, revenues fell by 7%. Almost immediately, we returned to growth that was fuelled by strong economies. This time we face a 15% drop with a global recession. It’s a different world. Our future depends on drastic resizing and reshaping by governments, partners and airlines.”
Proposals for major change abound. One of IATA’s goals is a relaxation in ownership and control rules, allowing airlines to seek capital on a global basis. Bisignani has called for normal commercial freedoms to be delivered effectively and urgently. The move would facilitate greater cooperation between aviation and governments.
For example, safeguarding jobs and boosting the economy are top priorities but restricting airlines unnecessarily puts 32 million jobs and the global economy at risk. And while protecting citizens is essential for governments, the $5.9 billion airline security bill has not noticeably progressed harmonization and the mutual recognition of standards.
Hubert Horan, an independent aviation consultant, agrees the fundamental issues are strategic. “If regulations, subsidies or inertia prevent higher-cost lower-quality capacity from exiting the market, it becomes even more difficult for better run airlines to get their financial houses in order,” he says.
However, he also warns any changes will be hard won. “There are clearly pockets where suppliers—often government run or government franchised—can still charge rates that are increasingly out of line with their customer airlines’ ability to pay,” he notes. “Unfortunately, the political and market causes of these problems tend to be complex, and vary widely from case to case. As important as this question is, major breakthroughs will be difficult.”
The end of conventional thinking
Nawal Taneja, Professor of Aviation at the Ohio State University, takes up the point, saying it must be the industry itself—rather than outside agencies—that make the top-down changes. “I agree the playing field isn’t level and there are carriers who operate outside the laws of economics,” he says. “But we must work around these constraints as they won’t change any time soon. In fact, some countries—Canada and Argentina, for example—are tightening their grip, not loosening it.”
Taneja implores the end of what he describes as “conventional airline thinking”—the notion that business traffic will return to the same level at the same price.
Taneja believes airlines now have the means available to provide unique product elements. “Fully transparent to passengers, such an innovative approach would break down today’s silo environment into one where any airline could initiate and complete any passenger-generated request across all channels and geographic boundaries,” he says.
He also calls for greater integration at alliance and codeshare levels, noting partners still have plenty of room for improvement in areas such as real-time information sharing and cargo operations. Taneja goes even further, suggesting that scheduling can be brought closer to the departure date and that declaring flights six months in advance will become outdated. “Technology can overcome these logistical challenges to bring real-time possibilities,” he opines.
Airline CEOs seem to view top-down strategy as an integral part of rebuilding. From seeking mergers to significant changes in capacity, many have been looking to make far-reaching decisions. Lufthansa’s acquisition activity is just one example.
“There’s nothing wrong with a top-down approach, especially in times of crisis when leadership is key,” says Chin Yau Seng, Chief Executive, SilkAir. “Clear directions have to be set and tough decisions have to be made. However, top-down doesn’t mean sitting on Mount Olympus and shouting down commands from high up. On the contrary, active communication with all stakeholders is perhaps the most important aspect of effective leadership in tough times.”
Horan concurs, adding that external market realities often force highly uneven cuts, with some areas eliminated and others improved. “It takes years for this type of communication to become highly effective,” he suggests. “Staff will not fully buy in until they’ve seen a consistent pattern of behavior. But given the likelihood of volatile conditions going forward, establishing these communications capabilities becomes an urgent priority.”
Small is beautiful
David Savy, Executive Chairman of Air Seychelles, believes changes have to reflect the gravity of the situation. He agrees communication is especially important as a loss of focus and direction is a real challenge when change comes thick and fast.
But what of Broken Windows and incremental steps? Despite emphasising the need for strong leadership, Savy doesn’t dismiss the ‘small is beautiful’ approach. “Strategies have a shelf life and need to be re-visited and aligned to the realities of the time,” he suggests. “This is so true for the airline industry, which is so dynamic and of a global nature. Little victories can be notched up in adversity as well, and these should be celebrated widely. Look at how much cost saving the industry has managed over the past years when faced with adversity.”
Recently, British Airways scrapped complimentary sandwiches on short-haul flights, a move that will save it $36.3 million (£22 million). Malaysia Airlines has looked at the figures for every single flight it operates in an effort to improve efficiency.
Chin concurs the bottom-up approach still has its place. “In the airline business, where profit margins are razor thin, any improvement, whether major or minor, matters,” notes the SilkAir CEO. “We must have the discipline to keep driving positive
change, in both good times and tough times. And this must be part of the airline’s DNA, so that it doesn’t have to keep reinventing itself, or be in danger of folding, each time a crisis hits.”
The idea of major versus minor changes has a long tradition of debate in philosophical terms and the argument is as relevant today to the airline industry as it was to the likes of Edmund Burke. But perhaps it has entertained philosophers precisely because there is no correct answer. Surviving the current crisis will entail airline management making both top-down and bottom-up decisions.
“Our business is, by nature, subject to business cycles,” says Chin. “Hence, it would seem foolhardy to switch strategy each time we hit a peak or a trough. The strategy should naturally take business cycles into account.” In other words, when making major decisions airlines must also consider the many minor ones that will inevitably rear their head.
“While major changes are essential to keep the company afloat, minor changes have also got their role to play, especially those that impact staff morale and well-being,” notes Savy. “A resilient and motivated work force is what is needed in such times.”
Bratton’s success with New York crime rates has been the subject of extensive scrutiny. A host of contributory factors have been introduced into the success of Broken Windows, not least a very top-down decision to vastly increase the number of officers.
Managing a crisis involves utilizing every means at your disposal.
Lessons from simplifying the business
Philippe Bruyère, IATA’s Global Head of its Passenger division, says a successful strategy must have both top-down and bottom-up elements.
Bruyère has overseen several successful project implementations, most notably 100% e-ticketing, which saved the industry $3 billion. First, he notes, there should be a fundamental business issue that needs to be addressed. These issues arise from the shop floor but solving them requires a vision—a top-down activity.
“But putting a deadline on a dream, so to speak, involves a back-and-forth between an organization’s leadership and those on the front lines who would be responsible for executing it,” he says. “The involvement of both elements is critical to make sure the strategy is feasible and will work given the particular operating context of the organization in question.
“In Simplifying the Business (STB), the way we execute strategies is through campaigns where StB representatives in regional and field offices engage with the industry,” he adds. “They agree on their targets and are empowered to represent the program to airlines and airports in their area.”
Through IATA country managers, StB “champions” and project-level working groups involving airlines, airports and solution providers, the program builds the network required to deliver change.