A personal selection of some recent contextual developments

October 2009

As the major European airlines continue to report declines in revenue and falling yields the pressure is once more on to reduce costs. Aer Lingus, Air France, British Airways and Lufthansa amongst others have announced more job losses. In part these are the direct result of capacity reductions. In part they represent attempts to reduce the wage bill by allowing older more expensive staff to accept voluntary terms, replacing them with staff who are either cheaper because of their lack of seniority, or are on lower wage scales. The low cost airlines appear to be taking a different approach by asking for volunteers for sabbaticals and unpaid leave = presumably an option which has now been exhausted by the major airlines.

For airline managers such continued focus on cost and the removal of jobs presents a number of challenges. Maintaining good industrial relations is a major goal, and despite the sabre rattling at British Airways it is doubtful if any airline will risk a major strike when cash flow is so weak. The timing of these latest proposed cuts is interesting, however, coming at the end of the summer and after several successful refinancing initiatives to bolster cash reserves. If any airlines are to risk possible strike action this coming winter is probably a good a time as any but unless the goal is fundamental change in working practices – rather than reducing headcount – the risk would appear high for only short term gains.

A second challenge for airline managers is to avoid ‘corporate anorexia’ (as described by Hamel and Prahalad in “Competing for the Future” in 1994 after the recession of the previous three years). In an increasingly competitive world the ability to seize opportunities as surviving airlines come out of this recession is likely to demand an enhanced management competence, not just an exhausted ‘band of brothers’. Shedding unnecessary positions that had grown during the good times is usually healthy. Managing for the upturn so that there is a competence to adapt, re-grow the business, and manage the complex system that is an airline does not necessarily require bodies, but it may require significant effort to reorient people from the necessary fire fighting and increased functional responsibilities back into a wider creative ‘one airline’ viewpoint. It is interesting to see how some European airlines have continued to invest in management training (albeit reduced) whilst others have reduced it to almost zero

A third challenge for airline managers is to retain a perspective about future scarce skills. Pilots are the perennial touchstone. They are expensive to recruit, expensive to train and maintain, and still – in relative terms – expensive to retain. With skilled professionals (and others such as engineers, system developers and web-expert marketers) there are fine balances in managing the talent to ensure it will be ready and available in five to seven years. Three or four years after previous recessions some airlines have paid the price for not adequately managing such talent and found that the open market for command ready pilots, specialist engineers, or open system software designers is both very small and very expensive.

Complicating such challenges is the globalisation of the airline market. At present whilst at least one European airline is “fighting for survival” and at least two others are affectively “up for sale” there is a temptation for airline executives to focus on only the middle box of Michael Porter’s five forces model – competing with each other. The likelihood is that executives will face other major challenges resulting from other forces. These include, for example:

  • The massive expansion of the Dubai and Abu Dhabi airports and the Gulf States view that these will become major international hubs – competing with European hubs. Their capacity and quality of facilities will stretch European airlines, as will the congested European airports be stretched in offering comparable products and services. These new airports are integrated with a range of other world class facilities (e.g. conference centres, hotels, communications, leisure services and the opportunity for fine living) and based with world class mercantile facilities (such as duty free ports, warehousing and fast and simple legal systems).

  • The continued growth of the BRIIC airlines (Brazil, Russia, India, Indonesia, and China). They too have seen declining growth recently, as illustrated by the first Chinese airline bankruptcy to put along aside several recent Russian airline closures. The underlying trend is for them to recover and grow quickly – as their underlying economies also take another step forward. European airline managers need to remind themselves that these countries already have excellent international airlines, and they will improve still further; stretching the ability of European legacy carriers to match them.

  • The evolution of the ‘low cost’ airlines into ‘new model’ airlines and a blurring of the distinction between the services traditional offered by network carriers and those available from lower cost airlines – with all increasingly charging for ancillary services. Ten years ago several consulting studies predicted that the low cost sector would have a natural market ceiling of between 20% and 30%. This has now been breached and Ryanair and easyJet have been joined by such as Air Berlin and Wizz Air. These are now preaching that there is no longer a single ‘low cost’ business based upon the translation of the Southwest Airlines approach into Europe. Managers from all airline types therefore need to keep rethinking their brand and positioning, and adapting.

  • The increasing pressure from regulators on ensuring market competition (a major concern in the USA at the moment with critics arguing that international alliances have stifled competition) and on better protecting the environment. The forthcoming Copenhagen Conference may well result in tough targets for airlines, and already there is a steady rise in ‘environmentally justified’ taxes on air transportation.

  • Coupled with environmental pressure the continued growth of European hi-speed railways, and the growing rail links between Europe and Asia. These developments are seen as more environmentally friendly than air travel and the latest developments in Italy and Spain, and the outline long term plan for the UK indicate that the integrating of air and ground travel may need to be rethought.

  • This recession has also coincided with the availability of new generation teleconferencing systems. The new Cisco (‘Telepresence’) and Hewlett Packard (‘Halo’) systems are in a different league to previous systems and whilst currently expensive do not require the avoidance of many premium class air fares to pay for themselves. It is no surprise that some travel by companies who have invested in such systems (such as Marriott Hotels and Nokia) may never return to previous levels. Is there, however, an opportunity for airlines to redefine their transportation offer to embrace such technologies as part of a total service?

  • Aircraft purchasing and planning are often an unknown skill for many airline managers. A province for specialist engineers, planners and consultants the complexity of comparing capacities, ranges, fuel utilisation, crew costs, and maintenance costs demands high level skills and strategic thinking. At present, however, the aircraft market shows some interesting developments. There are many aircraft now parked in deserts and on old European airfields, many of which will never fly again. There are good deals to be had on several short haul aircraft types (and their engines) from manufacturers and struggling airlines and lessors. There is also still a shortage of the most efficient long haul aircraft with prices remaining high, and delivery slots hard to obtain. The continuing delays to the Boeing 787 have exacerbated this and several airlines are now working out how to rebalance their fleets to meet even reduced schedule needs, and to compensate for the increased maintenance and operational costs that may be incurred in operating older or less suitable aircraft.

Airline management is never dull and in these particularly difficult times an important leadership skill will be the ability of executives at all levels to make sense of a turbulent market and create a narrative for their colleagues to follow, adapting it as the market and the tactical orientation of each airline changes in response to the competitive forces.