How to transform your airline

Major transformations of airlines are common, and frequently disappointing.

They are common for good reason: the industry is structurally difficult. Unit revenues have declined an average of 2 % per year over the past 20 years as a result of intensifying competition and commoditization. The battle to reduce costs has continually run up against the substantial bargaining power of both labor unions and suppliers, along with the market whims of fuel prices. Meanwhile, governments have often prevented their national champions from exiting the market when times were tough. And, even in good times, airlines must base their plans on the assumption that a downturn is around the corner, as we recently discussed in our article.

Perhaps not surprisingly, these transformations are also hard-harder than in many other industries. Inertia can come from employees’ transformation fatigue, as many have already gone through multiple programs. It can come from strong functional silos that push back on transformation initiatives. It can result from the safety imperative, which should never be compromised but whose name is often taken in vain. And it can come from the frequent risk of industrial action. As a result, leaders can be left feeling frustrated when their ambitions for fast-paced change run into a sluggish and change-resistant reality.

Nonetheless, airline transformations can succeed, and their effects can last. And by “transformation” here, we want to be clear: we mean an enterprise-wide, comprehensive performance improvement effort, not a thematic transformation around a specific topic, such as digital or procurement.

Based on our experience, we have identified five core rules for effective transformation in the airline industry: find the “Goldilocks” targets, leave no stone unturned, locate and mobilize different sources of meaning, track by the inch, and build a new culture not just a new cost base.

 

Find the ‘Goldilocks’ targets

Transformation targets that are too low won’t spur employee ambitions or provoke the difficult trade-offs required for successful change. Targets that appear too high, without the facts to support them, will create employee skepticism, soon followed by a sense of failure and disengagement and a talent exodus. Of the two, aiming too low is most common; in fact, we have found that targets two to three times a company’s initial estimate are routinely achievable.

To find the Goldilocks targets, neither too low nor too high, both ambitious and demonstrably achievable, airlines should begin by doing the following:

• Start with a top-down assessment to set a challenge for what can be achieved, without focusing too early on exactly how it will be achieved.
• Base the assessment on benchmarks that are the most granular available and intelligently applied across the entire business. For example, only when airlines break down marketing and sales costs into their underlying drivers, a process that includes benchmarking and defining realistically achievable potential, do the opportunities become clear and irrefutable.
• Boldly evaluate the business model. For example, airlines could choose to become a hybrid that combines full-service and low-cost models or to fly fewer long-haul routes. Such bold moves may not be necessary, but should be among the options considered. Decisions here will, in turn, guide the more detailed assessment.
• Assume the mind-set of an activist investor or private-equity acquirer: be ambitious, disruptive, and unconcerned about maintaining the status quo.

 

Leave no stone unturned

There is no silver bullet no one opportunity that everyone has somehow overlooked. Instead, a successful transformation takes on 500 to 1,000 or more initiatives across the entire airline, all of which need to be identified, planned, prioritized, approved, executed, and refined. While larger themes provide strategic coherence and allow the CEO to focus, small initiatives are needed to capture all the value. The initiatives, once sized, should total 130 % of the top-down target, given that some leakage will occur during implementation.

This effort will require some difficult trade-offs. Typically, most airlines have covered the low-hanging-fruit improvements, and the remaining potential lies in areas that require trade-offs. Reducing complementary in-flight service, for instance, shaves off costs but has customer-experience implications. Trimming scheduled block time to improve aircraft utilization and reduce costs may endanger on-time performance. Such trade-offs are common in the airline world. Making those difficult choices is an important part of the process.

Four recent case examples of airline transformation illustrate the breadth of action required and the differences in size and source of impact from one airline to the next. A few big-ticket items typically generate the greatest impact, such as increases in ancillary revenues and fleet utilization. We normally find a similar aggregate opportunity from identifying 500 smaller initiatives.

 

Find and mobilize different sources of meaning

Airline employees often love their airline. Many are “lifers.” They are emotionally invested, with decades of commitment. They identify their airline with the flag, glamour, and service. What doesn’t get them out of bed, except in the rarest of cases, is a commitment to corporate earnings beating the cost of capital on a through-cycle risk-adjusted basi and who can blame them?

As success is impossible without employee commitment, airlines should leave nothing to chance.

 

Build a new culture—not just a new cost base

To create lasting results in a transformation, carriers must understand that their performance and health are closely linked. This means that carriers must not only become more agile, more efficient, and better at cross-functional decisions and actions than ever before, but they must also tackle some of their most deeply ingrained behaviors and practices while ensuring that employees have the capabilities they need to be effective. Airlines that focus on both will outpace those that look only at performance.⁴

At one airline, for example, a high-level assessment of the organization’s health revealed major improvement needs in four broad areas: accountability, direction, leadership, and motivation. Digging deeper, many employees’ comments touched on a “silo mentality,” “slow decision making,” “lack of training,” “bureaucracy,” and “lack of accountability.”

As a result, the carrier required some essential organizational changes. First, it implemented a select number of specific health interventions over time not aiming to change every mind at once, but instead tackling one or two major themes per year. It split these themes into a high double digit number of initiatives in all areas of the business and pursued them with the same rigor as it did performance initiatives.

Second, the carrier embedded elements of its long-term health into its performance initiatives. For example, to reduce the number of acceptable deferred defects in maintenance, the company not only implemented a new tracking and follow-up procedure but also initiated trainings for certified engineers in handling these defects, for planners in making sure more time was reserved and parts were available, and for team leads and managers in modeling the correct behavior. Only when the engineers’ mind sets regarding the importance of every single deferred defect changed did the real transformation take hold.