AIRLINE REFORMATION?

By

Ken Cubbin

Since deregulation in 1978, evolvement in the airline industry has seen dramatic changes both for passengers and airline employees; especially for those employees who previously worked for stalwart airlines, such as PanAm or Eastern. In the last year, following the September 11 attacks, the industry has suffered its worst decline in passenger traffic in history. To make matters worse the threat of further terrorist attacks lingers like a dark cloud. The result has been a devastating drop in revenue for nearly every airline. The list of casualties is long. US Airways and United filing for Chapter 11 protection, and other airlines teetering on the verge of bankruptcy, have attracted much attention. Nearly all major airlines have reduced capacity and furlowed thousands of staff. Things are grim to say the least.

In last-ditch efforts to stay in business some airline management teams have sought to save money by nickel-and-diming operations, sticking it to passengers and/or reducing employee remuneration. But, for reasons I will explain later in this article, these actions will only exacerbate airlines problems.

With so much wrong with the industry the question is can airlines weather the storm and survive long term virtually in tact? Or will some have to fail so others can survive?

I would argue the latter is most likely.

In purely economic terms the metamorphosis we have experienced in the airline industry since deregulation is an entirely natural process. For example, in Darwinian evolution species either adapt to their surroundings or die.

Like animals, every business has a natural life cycle. No matter what the industry, each business entity goes through the process of conception, birth, growth, maturity, decline and death. It may happen over the course of a few years or over a hundred or more years. But the business life cycle  is inevitable. In other words, all airlines we know today, will, at some time in the future, not exist at least not in the same form.

Sounds bad, huh?

But it's not all doom and gloom. Some airlines that fail to adapt to change will be absorbed by others. And some, that are well managed, will adapt to industry changes and transform themselves into entities that serve the markets needs. In this way, mature businesses can be virtually reborn or regress to a younger stage in the cycle. But this can only happen if the entity adapts quickly to industry trends.

Unfortunately, for reasons I will now delineate, I don't think most airlines have the ability to change fast enough to save themselves.

Here's the problem. Airlines are generally mechanistic organizations that rely on strict adherence to business practices in order to function well. Most airlines are highly formalized and centralized organizations. This is because the majority of the day-to-day operations are mostly mechanical; providing a homogenous service on routine, scheduled flights. One other reason that airlines tend to have mechanistic organizations is the absolute need for safety.

To maintain safe operations, thorough maintenance planning and training procedures have to be set in place. For example, when a pilot operates with another pilot whom he or she has just met, he or she needs to know that the pilot's skills are proficient and that a set of standard operational procedures has been taught. If an airline suffers an accident or two, its future financial success can be threatened.

As a result of the intrinsic structure of most airlines, there is an inertia to airline operations that is hard to overcome. The machinery of airline operations must be slowed down significantly, if not stopped, before a change in direction can be initiated. In other words the momentum of everyday operations gets in the way of quick change.

Even if some airline managers want to introduce dramatic changes the process has to occur with the cooperation and understanding of employees. But most major airline managers have formed adversarial relationships with employees. Even in United, where employees own a major share of the airline, employee morale has declined significantly.

As a result of the general malaise of the industry, and the prevalence of traditional us and them management/employee relationships, hardly any major airlines in the U.S.A. has the ability to hold a finger to the wind and move quickly enough to react to changes in the industry. Practically every major airline in the U.S.A. is losing money, with one notable exception -- Southwest Airlines.

So the question is: What sets Southwest apart?

The answer is, its people; managers and employees together.

Let me explain.

Herb Kelleher has been recognized universally as a catalyst of innovation and a driving force behind the impressive culture that exists in Southwest. His focus on employees first is legendary. From day one Herb determined that employees would be hired for attitude and trained as needed. As a result, a sense of fun became a vital prerequisite for successful job applicants. Herb was particularly astute in setting this standard. For example, he once explained, "If employees know its okay to have fun while at work, then that increases their productivity. At Southwest Airlines, each employee does the work of three."

This management technique of having fun on the job appears to be unique in the airline industry; it clearly delineates Southwest from other major airlines. What's more, it clearly shows that airline employees who enjoy what they are doing are more productive.

Go figure!

Human resource management is one of the core competencies Southwest enjoys. In Herb's own words, "You can always train people for skills, but you cant train them for attitude. A positive attitude is very important at Southwest Airlines." But Herb didnt stop at encouraging his employees to have fun while they work. He was savvy enough to realize that employees performed their job better when they were empowered to make critical decisions without fear of retribution for errors of judgment.

By empowering employees and giving them latitude to invent, Herb and his successor, Colleen Barrett, have encouraged employees to react to environmental changes by their own volition. This is what has allowed Southwest to keep its finger on the pulse of the industry.

The organization at Southwest also operates with an informal open door policy that allows employees to circumvent formal hierarchy. This ensures that innovative ideas are not silenced at the middle management level and nurtures the attitude that everyone is important enough to be heard by senior management.

A much forgotten communication tool is the physical actions of upper management. Herb didn't just verbally encourage employees to have fun on the job, he showed how it was done.

When CEO, Herb was known to be always ready for a party and often engaged employees and passengers in lengthy conversations. He was, and presumably still is, a chain-smoking, whisky-loving individual whose sense of nonsense leant itself to acts, such as his 1996 annual message to employees where he was led on to the stage in a straitjacket under the theme "Still nuts after all these years!"

However, Herb was also known to regularly work 16-hour days and seven-day weeks. By his actions, Herb Kelleher communicated his credo of work hard, play hard.

And, all Southwest employees followed suit.

How many other airline CEOs do you know who have been able to evoke such positive work ethics in their employees?

The answer, I would guess, is none.

(Gordon Bethune was able to turn Continental around in the mid 90's, but that was when economic times were better. Continental Airlines is presently losing money like most other majors).

But it wasn't just Herb. He ensured that his unique philosophies would continue after his departure. Herb's legacy lives on under the steerage of Colleen Barrett and every other manager and employee at Southwest.

Southwest Airlines is also a formal and centralized organization structured according to functions. However, because it does not operate internationally, and because it has no systemic alliances with other airlines, its organizational structure is simpler than its competitors.

The fundamental reason that Southwest is able to maintain superb customer satisfaction levels and fast, innovative responses to industry trends is that it operates a loose-tight operation. Within the contexts of tight rules and procedures employees are empowered and encouraged to think for themselves. Customer service is decentralized and employees are able to try whatever they deem necessary in order to satisfy customers. If they make a mistake, they know they will not be punished; mistakes made with good intentions are considered learning experiences.

Southwest has always operated on the principle of putting employees first. The formula is simple yet effective. Make employees happy and they will treat passengers better customer service excellence ensues.

So as you can see, in the end, the answer to what makes Southwest different from the rest is simple its people.

And this is where other airlines hit a brick wall when trying to emulate Southwest's success. They have neither the inspirational leadership or the motivated and empowered workforce necessary to initiate change.

Organizational culture

Continuing the analogy of an airline to a living organism, the collective psyche of management and employees represents the vitality and organism's ability to adapt quickly to change. This collective psyche, or organizational culture, is defined as the common perception held by the organization's members; a system of shared meaning. It is represented by the attitude, values, mood, character and actions of its personnel; the underlying paradigm, or matter-of-factedness of how things get done.

This translates into manager-employee relationships, attitude, trust, responsibility, and work ethics. In layman's terms, culture can be expressed by the expression that is the way things are done around here.

Obviously, culture can be either a great asset or a hindrance to an organization's ability to change. However, whether good or bad, culture has an inertia that is very difficult to change in the short term.

A learning organization is one that is capable of varying its strategy due to the collective skills of its employees and its culture. One in which managers constantly question existing methods and monitor the environment for opportunities, and change occurs as a continual process often initiated from the bottom of the organization. To get anywhere near the ideal of a learning organization, and most academics still consider the ideal unattainable, employees must feel empowered to initiate changes, contribute ideas and not feel hamstrung by middle management.

Again, only Southwest appears come close to this category.

Dinosaurs

Organizations that do not have the wherewithal to change with industry trends experience shorter life cycles. History is replete with examples; think Olivetti typewriters. Quantum leaps in technology have created opportunities for entirely new industries, such as personal computers, and caused the virtual demise of other sectors, such as tape recorders.

Translated into the airline industry, this means that managers must constantly look to the horizon. It is not only important to react to changes today, it is vital to identify where the industry will lead us in the next five to ten years. Cues for change can come from many sources, however, one thing is certain. Change will occur, and probably faster than anticipated. This requires proactive rather than reactive strategies.

What most major airlines have failed to identify is the growing trend in the industry to split sectors into niche markets. While most of these airlines are fighting rear guard actions to protect the status quo, operators such as Southwest and JetBlue are expanding and making inroads into lucrative markets.

Southwest enjoys the lowest cost structure in the industry by maintaining a one aircraft-type fleet and operating a linear route structure rather than a hub-and-spoke system. It also utilizes ancillary rather than major city airports whenever possible, does not have seat allocation and turns aircraft around in twenty minutes or less. While these operational functions are vital to Southwest's success, attempts by other major airlines, such as United, Continental, Delta and US Airways, to replicate them have been unsuccessful. Partly, this was due to the imitator airlines not adopting the whole recipe for success as demonstrated by Southwest, but mostly it was due to the inability of the mechanistic structure and culture of the copycat airlines to adapt. In other words, they could talk the talk, but they couldnt walk the walk.

Ironically, that hasn't stopped United and Delta from having another shot at forming a low cost operation.

Maybe they'll get it right this time.

I doubt it.

Though they have occurred in the past, quantum leaps in the airline industry are not usually technology related. They are generally caused by changes in government policy, such as deregulation, dramatic shifts in demand, such as after September 11, or by entrepreneurial innovation, such as successful niche market operations.

The question is are we just experiencing a severe, temporary drop in demand, or we on the cusp of cataclysmic change?

If the answer is the latter, and I think it is, then recent actions by some major airlines to restrict advance purchase tickets for use on standby, cutting passenger services, furlowing staff, charging passengers for inflight meals (loosely defined as food) and reducing employee remuneration might prove to be the final nail in their coffins. The very element in the equation that airlines need to survive, the passenger, is being further alienated. And, as shown by Southwest's example, the very resource airlines need to service passengers, employees, are being hung out to dry.

Those employees who remain might be thankful to still have a job, but they are hardly filled with trust and good humor. They are more likely to be more concerned with not doing anything to jeopardize their job rather than being resourceful and identifying innovations that may prove invaluable in generating wealth for the airline.

These demoralized troops just go to work and fill in the blanks until knockoff time. And, most likely, they are keeping an eye on the job market for other opportunities just in case they are the next cab on the rank when more people are laid off. There is plenty of research data to show that job satisfaction, or an employee's attitude to his or her job, is negatively related to turnover. The more people who are laid off, the more dissatisfied the remaining workers will become.

Business class passengers gone for good

The lucrative business class passenger has virtually stopped fortifying airlines' balance sheets. Part of the reason business class travel has fallen dramatically is the after effects of September 11 and the failure of airlines to introduce fast-track, low-risk passenger security procedures. Another significant factor is the general downturn in the global economy.

However, the dominant factor that has caused business class passengers to stop paying exorbitant, last minute fares, is the virtual mass epiphany that occurred among companies. Sick of being reamed by airlines for business class tickets for many years, businesses across America shouted in chorus, We aint gonna take it anymore!"

For this reason alone, business class travel will likely never return to its previous levels. The sooner airline management teams realize this fact the sooner fundamental changes can be made.

An entirely new approach to ticket pricing and operations needs to evolve.

Of course, it is impossible for American, United, Delta, and other major airlines to replicate Southwest's operational example because the aforementioned airlines have far more complex route structures.

Southwest Airlines is a niche market operator and, as such, is not hamstrung by hub-and-spoke systems, multi-aircraft type fleets, international, domestic, cargo and feeder operations.

The biggest U.S. airlines seem to have run out of options. This has what has led to the nickel-and-dime scenarios described earlier. Just in the last few weeks, Delta and United have announced further layoffs and cost cutting procedures. On top of this, none of the major airlines seems to have inspirational leadership (Gordon Bethune being the possible exception) or the corporate culture in place necessary to radically overhaul its operations.

Desperate times call for desperate measures

The short answer to this question is, precious few.

Having held out their collective hands for government assistance in the last 13 months, airlines are now seemingly addicted to aid. Recently airlines have pleaded with politicians to be relieved of their share of the cost of increased security measures. As a result, some politicians are calling for re-regulation of the airline industry to bring back some semblance of order and profitability. And, secretly, many airline managers embrace this concept.

For passengers this will equate to fewer choices and higher ticket prices.

Because of adversarial management/employee relationships, most airlines have ended up reactive rather than proactive. As explained previously, this is because the entire organizational culture of the big players has not leant itself to visionary practices and quick change. And inertia suggests that even if dramatic changes were introduced by airline managers today, it would take several years before organizational culture could be dramatically shifted for the better.

With union assistance, it might be possible for airlines to split into strategic business units, each being operated independently. This would, in effect, create four or more airlines under the one corporate umbrella with each being responsible for its own wealth generation, cost control and profitability.

For example, Northwest could split into cargo, international, domestic and feeder units. But such actions would take huge concessions by unions, and unions generally are intractable when the issue of varying employee pay rates among airline operations arises. And for airlines to break down their operations into strategic business units, differential pay scales would be vital in maintaining profitability.

Simply merging several major airlines, such as United and US Airways will not work either. Mergers are inherently difficult in any industry and notoriously disruptive in airlines. Besides which, nearly all the major airlines are infected with the same debt blues. We would probably end up with two airlines failing rather than one.

So, finally, what have we left with?

Unfortunately the conclusion seems obvious.

Yes, folks, the irrefutable outcome of this mess we call the airline industry is that ultimately one or more of the major U.S. airlines we now take granted will shutdown completely.

Gone, along with forerunners PanAm and Eastern.

However, the void left by one or more major airlines failure may prove to be a blessing, at least to some passengers. High volume markets will either be snatched up by niche airlines, such as Southwest and JetBlue, or new niche carriers will rise from the ashes. As a result, we could enter an age of niche carrier expansion, each giving passengers in their selected market what they desire.

Some pundits think that global airlines may eventually merge so that, in the end, four or five major airlines will dominate world air travel. While some cross ownership may increase amongst global airlines, nationalism and limited ownership laws in various countries will probably prevent this from happening.

Alternately, politicians may step up to the plate, support failing airlines, re-regulate the industry and legislate ticket prices to ensure profitability.

Or, it's still possible that airlines may struggle through the next couple of years and become profitable again once the global economic growth improves. However, even if the last scenario is true, there is going to be a lot of pain felt by passengers and airline staff before the airline industry returns to a facsimile of its better years.

If I had to guess, I would say that United Airlines has a less than 50% chance of making it through the next two years. US Airways odds are only slightly better.

Whatever happens, the truth is that as long as politicians do not re-regulate the industry, niche market airlines are bound to proliferate. That is where the industry is heading. Passengers who commute from more populated areas will benefit while those in remote areas will suffer.

Yes, indeed folks, as JFK once remarked, "We live in interesting times".

Too interesting for my liking.

Personally, I wish that I hadn't gotten into the airline industry at all. With the hindsight of an armchair quarterback, I think that, in my youth, I should have become a plumber. After all, plumbers drive around in Mercedes Benz and are never going to be made redundant.

Water's gotta flow, toilets' gotta flush.

Still, if I am included in the next round of layoffs, plumber school might still be an option.

Ken -

Cubbin Consulting -- Airlines Economics, Marketing, Safety, Training and Project Management