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Management Strategy - Survival of the Fittest

Aviation is used to crises. But what is the correct response for such a volatile industry?

Ten years ago, 9.11 rocked aviation and the world. Understandably, many at the time thought that this was a crisis to end all crises. The bursting of the tech bubble had already put the economy on the back foot but in aviation terms, 9.11 was indeed a watershed, defining not just security but also reshaping the industry. The lessons learned in managing through crises were important because a decade of turmoil followed.

Issues ranging from Severe Acute Respiratory Syndrome (SARS) to soaring oil prices, earthquakes, tsunamis, volcanoes, and a global financial meltdown hit the industry hard. The 2008/9 economic crisis alone cost airlines $82 billion in lost revenue compared with the $22 billion lost as a result of 9.11.

The flip side of this is that airlines got used to handling volatility. It took three years to recover the 6% revenue drop in 2001-2. Although the circumstances were very different, the global financial crisis struck in 2008, it took two years to recover the 14% revenue fall. Bitter experience has fine-tuned an industry that may yet again be riding the rollercoaster of fortune downward, as predictions grow of a double dip following stock market falls and fears about the euro-zone and the recession.

Forthright action

The 9.11 terrorist attacks put an enormous strain on the global industry but naturally had the greatest impact on US carriers. The prospect of a broad collapse of the airline sector spurred the US government to provide $5 billion in financial aid that prevented the failure of any large or midsize carriers, although some were forced to seek Chapter 11 protection over the next few years.

“Without financial restructuring no airline is strong enough to survive for long,” said Leo Mullin, Delta Air Lines CEO at the time.

The restructurings undertaken by the US airlines since 9.11 enabled them to weather subsequent shocks. They reacted quickly to the 2008 fuel bubble and the ensuing global financial crisis by slashing capacity, thereby averting another round of Chapter 11 filings, although some smaller carriers failed. Industry losses exceeded $26 billion for 2008-09 but the capacity discipline positioned them for profits in 2010. It seems that discipline is holding and profitability is still on the cards for 2011, with US airlines forecast to make around $1.2 billion.

Dave Barger, CEO of JetBlue notes that the airline remained profitable during the recession, focusing on controlled growth as well as cost containment. “We didn’t have to resort to furloughs or significant cutbacks in our product offering, which underscored our commitment to our customers and our crewmembers alike,” he says.

JetBlue was barely a year old when 9/11 hit and was able to make a small profit in the following few years, even as the major airlines registered losses in the billions. Barger has openly admitted he is now wary of growing too fast and has stuck to the principles that enabled JetBlue to grow through a decade of crises—what he terms a “hard-earned culture and making JetBlue a place where people truly enjoy to work.”

He adds, “That environment just makes for better customer service. Our collaborative culture allows us to be more nimble than the other guys and take market opportunities as they arise.”

Agility the key

Big or small, being nimble is the foundation most CEOs build upon to survive the endless cycles of boom and bust.

John Slosar, Chief Executive, Cathay Pacific Airways, stresses that no crisis is ever the same, and experience directs a carrier toward being flexible, fleet-footed, and resolute. When SARS combined with the Iraq War, the Hong Kong-based carrier grounded a significant percentage of its fleet in a very aggressive response. Cathay Pacific was quick to react to a strong bounce back though and the airline ultimately recovered its losses.

In 2008/09, when the global financial crisis again caused a downturn, the core of Cathay Pacific’s response was once more a determination to maintain flexibility. Slosar also adds a second element to the mix. He says the downtime was used to stress test the business model, reshape Cathay’s vision and mission strategy, and launch a series of operationally strategic projects to give life to its vision for success. “The strategy paid off, and we reaped  the benefits of recovery in 2010 and put the ground work in place to support our home city of Hong Kong in helping to play a part in the most exciting aviation market of this century—China,” he says.

 “And to plan for the next set of challenges and crises that come our way, of course.” Etihad CEO, James Hogan, agrees that the key to weathering crises is to remain agile and to keep one eye on the bigger picture. “As a young airline, Etihad is fortunate to be able to adapt quickly to changed circumstances and financial realities,” he says.

“Certainly, 2008/9 was no cakewalk for any airline, but in 2008 Etihad Airways placed the then biggest aircraft order in aviation history. I think this order demonstrated the airline’s desire to be optimally placed to kick on from the crisis.”

Getting aggressive

Kicking on from a crisis is easier said than done, of course, which is why some prefer to be as aggressive as possible during a critical situation. One philosophy stipulates the alternative to immediate forthright action today is much more expensive action—to much less benefit—in the months and years ahead.

Like Cathay Pacific, Dragonair emphasizes its proactive steps during the 2008/09 crisis. Though the airline followed a strategy partly based upon keeping its team together and reducing operating cost, it also pursued revenue generating avenues. A new route to Guangzhou was opened despite many querying the wisdom of this short hop from Dragonair’s Hong Kong base. The airline reports the service has resulted in a profitable route and has proven to be extremely popular among international passengers from the start.

Other airlines battened down the hatches when the financial crisis hit. Bangkok Airways implemented its own version of an austerity plan. President, Captain Puttipong  Prasarttongosoth reports they stopped unprofitable routes and reduced staff largely through voluntary redundancies. And thanks to the good relationship it had with aircraft lessors it was able to renegotiate contracts and delivery times. The strategy he concludes was “defensive, cautious, but successful.”

Cargolux CEO Frank Reimen similarly characterizes the Cargolux response to the 2008/2009 crisis as defensive. “Faced with the seriousness of the crisis and the uncertain outlook for economic recovery, we were keen to protect our resources and aimed to preserve short-term cash flow by operating flights provided they were cash positive at the final booking stage,” he says. “This approach worked well as we knew our fixed and variable cost structure in detail.”

Adaptability

But Reimen insists that this defensive approach was abandoned with the first glimmer of optimism. “The moment we saw signs of what we felt was a definite upturn, we were  aggressive in trying to expand our operations by wet-leasing three aircraft in late 2009,” he notes.

In other words, it was the airline’s agility that was crucial. As in evolution, it is not the strongest that survive, but those most adapted to their environment. Together with a strong
cash position and a focus on costs, this seems to be the key to surviving the market’s volatility. It is a lesson worth learning. Crises are so common to aviation that some observers
have dryly noted that being in a crisis is an airline’s natural state. Periods of calm and prosperity occasionally puncture this norm.

As JetBlue’s Barger sums up, “To be successful, you must build a company that prepares for the unexpected but never loses sight of its long-term goals and strategy.”

 

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