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One on One: Key Lessons for Our Industry

During the years that the  One On One airline management and operations series has been a regular feature in WINGS, I’ve received many requests to outline some of the key lessons for our industry stemming from the series. For sure, there are a lot of lessons that have come out of the many discussions I’ve held with airline CEOs. Following are some of the key points from the series to date for all of us whose business is in the air.



January 30, 2008
By Darren Locke

Topics

During the years that the  One On One airline management and operations series has been a regular feature in WINGS, I’ve received many requests to outline some of the key lessons for our industry stemming from the series. For sure, there are a lot of lessons that have come out of the many discussions I’ve held with airline CEOs. Following are some of the key points from the series to date for all of us whose business is in the air.

1. ONLY THE STRONG SURVIVE 

Perhaps the one key lesson above all others is that when it comes to the airline industry here in Canada, and indeed as a general rule worldwide, only the strong survive. The airline industry is, contrary to what some believe on the outside looking in, an inherently competitive and cutthroat industry that takes no prisoners. The trend toward growth with airlines is driven as much by the simple need to compete and survive as it is by any profit motive, as larger airlines tend to be more robust and have a greater depth of resources to draw on, more varied sources of business that are better able to withstand economic downturns and industry upheaval, and a greater ability to compete against and force out weaker rivals. To be successful, strength must not be concentrated just in one or two areas, but instead there must be “strength in depth” – a strong, well-performing route structure, a modern and competitive fleet, a strong operations and maintenance team, sufficient liquid-ity and a robust balance sheet, and above all else, tough and determined leadership and teamwork at all levels. If there is a critical deficiency in any one area of your airline, and if you can’t identify that deficiency and address it, then your competitors certainly will. The overall trend in the industry is definitely toward survival of the fittest, with weaker players successively eliminated either by being forced out of business, or forced to accept buyouts, mergers or consolidations. 

2. MISTAKES ARE LETHAL

In the fishbowl world that is Canada’s airline industry, any major mistake in business strategy will almost certainly be obvious to your competitors, especially given the deep strategic thinking and aggressive mind-set that predominates. Airlines study their competitors and their every move very intently in what is a thin-margin, hyper-competitive industry, looking for signs of weakness and strategic missteps that will create opportunities for them to expand and ultimately force the other guy out. It is therefore vitally important for managers and executives to plan carefully and execute with precision, ensuring that ongoing operations as well as new strategic initiatives are thoroughly planned and thought out and then executed in as error-free a manner as possible. Unfortunately, however, in a less-then-perfect world and in an industry where the element of change is very much a daily if not an hourly factor, mistakes in different degrees of magnitudes are inevitable. True airline management excellence therefore resides in not just making the right call on a frequent and ongoing basis, but in also having the courage and integrity to accept what has occurred when the wrong call has been made, and to rapidly address it. Delayed action in this regard can be truly lethal, whether the mistake is overexpansion, underperforming routes, or even something as fundamental as the wrong business plan. Quick action is therefore key to overcoming errors, and to recovering and learning from mistakes, instead of being overwhelmed by them.      

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3. PEOPLE ARE OUR GREATEST ASSET; TEAMWORK OUR GREATEST TOOL

Canada’s airline industry is characterized, as is the global industry, by extreme career mobility, with individuals moving as a general tendency from smaller carriers to larger ones, from charter to scheduled, from military to civilian aviation. To some degree this kind of career movement, especially for pilots and aircrew, is very much necessary to the industry’s overall survival, health and prosperity. But what may be good for the industry in a holistic sense is not necessarily good for airlines, and from a management perspective it’s well worth keeping in mind that every time a member of your team walks out the door for the last time, also walking out the door is a wealth of human potential. The most successful airlines therefore are the ones that realize this fact and that act accordingly. Valuing and rewarding people is a key element in building a strong airline, as is emphasizing personal growth, teamwork, and the free movement of ideas and innovation up and down the organization. Too many good ideas and too much innovation are lost, diluted, or misdirected at lower and intermediate levels in our industry before they ever reach senior executives. Without the energy and enthusiasm of talented people at all levels, and young people in particular, and without teamwork, the survival and future success of any airline is placed in jeopardy. From junior employees to the very top of our organizations, people are our most important competitive advantage and our primary asset, and we must actively seek to keep this asset engaged, rewarded, and committed. 

4. LIQUIDITY – A KEY FINANCIAL ENABLER

Maintaining ample liquidity is a financial essential for any airline, and it becomes even more important in tight competitive situations, especially where larger players are concerned. Having plenty of liquidity on-hand allows you to ride out situations such as new entrants or sudden deep discounting introduced by key competitors in an effort to build load factor, acquire more market share, and either knock weaker competitors off of lucrative routes and markets, or out of the industry altogether. Maintaining a strong liquidity position can also be of vital importance during off-peak quarters and general industry downturns, when weaker airlines will potentially be under threat. Having a strong liquidity position is also an enabler, in that it allows you to move quickly on opportunities that would otherwise be lost or capitalized on by competitors. It is therefore a key element in facilitating both offensive and defensive movement, as well as surviving situations in which cash-poor competitors will otherwise be forced into retreat and find themselves under threat.        

5. STRENGTH IN NUMBERS

While many low-cost carriers eschew airline alliances, interlining with other carriers, or various other cooperative and partnership arrangements, there are many advantages to be gained, particularly as an airline grows and seeks additional passenger and cargo opportunities. Airline alliances are generally the most formalized co-operative or partnership arrangement in this regard, and offer all kinds of benefits including the ability to capitalize on delivering passengers and cargo to a much wider geographical area, greater financial resources via the collective, economies realized through group purchasing of aircraft, equipment, systems, training, etc. There can also be downsides to alliances and partnership arrangements, however, including a potential loss of corporate independence and decision-making authority. Smaller carriers considering entering into partnerships and alliances also must consider what the potential implications could be in an alliance or partnership arrangement dominated by larger carriers, especially those with extensive rewards program liabilities. Will these impose a sudden, unsupportable drain on revenues? Will entering into a partnership or alliance be detrimental to airline growth and revenue-generation opportunities, especially exp-ansion into new markets and routes? Any such move must be considered very carefully and every pro and con weighed both short-term and long-term.    

6. ADD REVENUE THROUGH ONBOARD SALES

Driving revenues through onboard sales allows airlines not only to provide passengers with a better range of amenities including food and beverages in a time of strict discipline on costs, but also to boost revenues by turning the cabin into a diversified revenue-generation environment. Traditionally, revenue-generation in the cabin was limited primarily to duty-free and alcohol sales in Economy, but now an increasing range of amenities is being offered, from food and beverages to headphones and comfort items. A further benefit of charging for food and beverages as well as additional passenger comfort and convenience items is that savings accrued in no longer offering complimentary catering to everybody onboard can be passed on to airline passengers via reduced ticket prices. But airlines are also using complimentary amenities to distinguish themselves from other carriers and gain competitive advantage.

Charter carriers have proven particularly adept at taking advantage of this opportunity.

7. KNOW YOURSELF, AND THEN TELL OTHERS

Although this sounds like the most mundane and basic of tasks, airlines unable to decide their identity, market focus and direction right from the get-go very much suffer, especially when choosing the wrong corporate identity and focus leads to a loss of market position and visibility. The three of these elements tend to build on each other, and for a start-up carrier in particular, choosing the wrong identity invariably misleads you as to your market focus and future direction. My advice when asked about this is to simply think “Tim Hortons” and “Canadian Tire.” Think about how successful these companies have become in appealing to the Canadian mainstream, think about their market focus, and think about their emphasis on providing quality, service, convenience and value at a reasonable cost. These comp-anies epitomize Canadian identity and values in all they are and all they do, to the point that they have become Canadian icons unto themselves. Shooting for the mainstream whether nationally, regionally, or locally is the safest and smartest course of action – if people see a reflection of themselves in what you represent, they’ll be comfortable with you.

Choose an identity that’s too polarized, too far away from the mainstream, and you’ll be catering to the niches, which in mass transportation is where you don’t want to be. 

8. OVERCONFIDENCE KILLS

Just as surely as staying small when your key competitors are growing will get you killed in the airline industry, so too will airline corporate overconfidence in it’s most visible manifestation, over-expansion. So, choose your routes and your opportunities carefully, and don’t move onto new routes and into new markets when you haven’t got either the aircraft, the service support, or the infrastructure to handle them, and your competitors there do. Due in large measure to the extraordinarily mobile nature of our industry’s highest-value physical assets, there’s a remarkable tendency among airlines to overextend themselves and enter into new markets where the basic elements don’t exist to support them. The key is to find balance – balance between equipment performance and reliability, balance in terms of the impact on the rest of your operation and fleet of operating aircraft on far-flung routes, and balance in terms of cost and revenue. What looks like an opportunity to break into a new market may instead be just the opportunity your competitors have been waiting for, a market that will break you. So, choose wisely, watch closely, and if a mistake has been made, act quickly to remedy it.

9. A LITTLE HEDGING GOES A LONG WAY

As oil hovers close to US$100 a barrel, it’s worth noting the success that some airlines have had in running effective, well-managed fuel hedging programs. While nothing is a sure bet, fuel hedging based on informed, reasonable assumptions can truly give a leg up to any airline suffering from stratospheric fuel costs. A lot more can be done as well in terms of reducing onboard weight, and incentivizing passengers to forego the traditional allowance of checked baggage, but well-managed airline fuel hedging programs are definitely a key strategic survival tool if used properly. More airlines should put more effort into fuel hedging as part of their strategic tool kit, because the bet is safer then ever now that the one direction fuel prices won’t be going is down.  

10. CHARTER CAN BE A BEAUTIFUL THING

A last key point from the  One On One  series is that charter can be a beautiful thing, and offers all kinds of opportunities while limiting risk. The Canadian airline landscape in particular is replete with carriers that did not understand this, and that abandoned their status as charter carriers for what were perceived as greener fields in scheduled service. The sked game is a much more challenging proposition, however, fraught with risk, and due to its nature mistakes made playing it compound quickly and become very, very costly. While everyone likes to grow, in markets already dominated by one or more major scheduled players, there may simply not be room for more. Low-cost carriers were thought to be an exception to this in some airline executive quarters, with their ability to out-cost their traditional legacy rivals, but I believe this now mainly holds true only where low-cost carriers are equipped with modern, high-performance aircraft using high-efficiency engines with vastly improved fuel-burn. It’s unlikely that we’ll again see the day where airline entrepreneurs could fit out a start-up with older, inefficient aircraft burning vast quantities of jet fuel and still come out ahead based on lower salaries and benefits. Instead, low-cost start-ups now generally feature the most advanced and fuel-efficient equipment possible, truly a recognition that the era of cheap fuel is over, and that Canada’s airline industry just got a whole lot tougher to survive in.