Improving the Airline Industry

Improving the Airline Industry

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The variety of successful strategies in use today was in full display at the ATW Winning Strategies conference in Washington, where some of the airline industry's keenest minds shared their wisdom.

Dr. Adam Pilarski, senior VP at consultancy Avitas, opened the conference with a controversial statement, "the myth of overcapacity is an urban legend," pointing out that historically high load factors should push fares up. "If airlines don't make money when they have the highest load factors ever, there is something wrong with their business model."

He implied that airline managers overthink their strategies and fail to follow what he called "Adam's Rule: Revenue greater than cost equals good." The first thing to do is "Don't be stupid," he said, adding a list of "stupid" strategies:

Mini-mes (Ted, etc.).
Don't insult customers.
No extreme yield management.
No bad airline names.
No adversary relations with employees.
Do not have stupid business plans.

"Please remember you are in a service industry," he said, and try to avoid what former Continental CEO Gordon Bethune referred to as "sky nazi" cabin service. He criticized "nickel-and-dime" attitudes toward cutting amenities, scoffing at airlines' publicized moves to remove olives and pillows. You must cut costs in ways that make sense, related to productivity." Cost control "has to fit the business model, and must be related to productivity."

The importance of productivity is reflected in Southwest's average pilot salary, now $53,000 higher than UAL's average, yet United still can't turn a profit, Pilarski said.

Pilarski borrows his rules for success from Southwest. They start with treating humans decently-employees and customers-plus "underpromise and overdeliver," love your job and of course Adam's rule: Revenue > Cost = Good.

One reliable cost reduction is outsourcing maintenance, said Colin Karsten of Pratt & Whitney. He said the major drivers pushing the overall growth of the outsourced maintenance market include:

Growing low-cost carriers are loath to invest in maintenance capability.
Broad component support is emerging.
US carriers' fully burdened labor rate is 50% higher than average US MRO rates.

He predicted that "total MRO activity will grow 5.3% per year through 2013."

Use of the term low-cost carrier doesn't fit the customer orientation airlines should maintain, said Maurice Coleman, head of commercial strategy at Aer Lingus. "LCC is an internal focus. We prefer low fares airlines." In order to become an LFA, he said, a carrier must "simplify the customer selling proposition.

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We've got to start off having people buy our tickets. We can't sell them anything else until they do that. Added-value potential is dependent on maximizing core transaction volume." Added-value sales amount to 20% of Aer Lingus's profits and "it's nearly 30% for Ryanair . . . Air fares are down and they're going to stay down. Our projections are for further declines for the next three years."

Marketing the airline product is changing along with everything else in the airline world, several speakers said.

Branding well does not mean spending more money, said David Hedley-Noble, president and CEO of Aerobrand: "It costs the same to do branding well as it does to do it badly." He cited Aerobrand's campaign to elevate Spirit Airlines' image. Company morale was low and Spirit's image transmitted only one message, low fares, he said. "The livery design is the most important brand attribute, and the cost is exactly the same as a bad paint job." A new livery, then uniforms and finally accessories helped to change the perception of the airline to words such as "modern/young," "technological," "sophisticated/professional" and "safe/reliable.

Brand Value Spirit's low cost base gave it room to create a range of fares. "Create brand value so you don't have to be the lowest fare," Hedley-Noble said. A business class, Spirit Plus, was added to provide product differentiation. An ad campaign followed: "How do you upgrade on JetBlue? Fly Spirit." The changes helped to attract $150 million in new capital, used to buy a new Airbus fleet for system expansion.

Ed Sims, GM-International Airlines for Air New Zealand, asked this pointed question: "Have you designed a message for your consumer, or [for] your board and senior management, the final arbiters of approval?" What group of people do you hope to attract, he queried. "How much does your consumer value images of smug entrepreneurs making credit card calls from first class . . . In simple terms, do we sell ourselves as a service provider or as a business?"

The key to effective marketing today is to project not the image of a big, powerful corporation but of a small, local and honest enterprise, Sims said. "Airline marketing has historically been the very antithesis of these values. It's been global, not local. It has projected size, not modesty. Small print has superseded honesty."

ANZ advertising allows staff to deliver the product without forcing them into a corner, he said. The company has abandoned a communications philosophy focused on customer research of the past, shifting it back toward the staff "to ensure they understand our business and their vital role in it."

Chris Rossi, VP-sales and marketing for Virgin Atlantic, agreed with Sims: "A lot of airline advertising is narcissistic." Fortunately for Virgin, its brand and image always have been unconventional. "We looked at our typical travelers, which was those who influence corporate travel policy or are not wed to it," and targeted them with the new "Go Jetset Go" campaign, "encouraging and enriching the people that move business and culture forward" with the goal of building "a unique and ownable position for the brand."

A key tactic was to "break convention, create some buzz and reignite the Virgin Atlantic brand. We didn't want people to choose us because of price, we wanted them to choose us due to product differentiation." A wide variety of mediums were employed, including roof signs visible to passengers. A fake emergency procedures card tipped into a major magazine contained cautions such as, "Virgin Atlantic Airways continues to enforce its 'No Bed Hair Day' policy with overwhelming success. Upon arrival, Upper Class passengers with an appalling bad case of bed head should report to the Revival Lounge for a rejuvenating shower." A recent success in that realm was the GlobalFlyer, which last month made the first solo unrefueled round-the-world flight with Virgin Atlantic's name splashed all over it.

AirAsia was an existing, conventional and money-losing company when Tony Fernandes arrived three years ago, and one of his first moves was to "knock down walls" literally, making common entrances for all crewmembers and staff to create a sense of common purpose. Pilots were coerced into cooking for the maintenance staff once a quarter and a relationship slowly built, Fernandes said. When the mechanics suggested a change in landing procedures, the pilots initially resisted, but when it was implemented, a set of tires that had lasted 80 cycles went up to 220. The goal to build an "internal brand," Fernandes seeking to create an atmosphere of cheerful cooperation among the AirAsia staff that then would extend to the customers.

His marketing focus for his first three years was on low fares, period. Boldly colored ads in print or billboards trumpeting extremely low fares became the standard media to push customers to do their own ticketing via the Internet. In a region of so many strong cultures, the branding had to be cross-cultural, the internal branding forming a team mentality that focused on quality and was oriented to meritocratic rewards. Flightcrews and mechanics were featured in ads, on billboards, the sides of buildings and even the tails of airplanes. Branding was simplified by using one color, "aviation red," and one logo. Only now, three years into building the airline's presence, is the marketing focus shifting: "We are spreading our attention to other things [such as] the interior of the aircraft and service."

Two successful US Regional airline executives touched on similar points.

Artificial Barriers Bryan Bedford, president and CEO of Chautauqua Airlines, noted that the restructuring of the legacy carrier group is not complete, "but by the end of the year at least we will understand who is likely to survive." The network carriers "must continue to simplify their business," largely by using fewer fleet types, and "there should be no artificial barriers to keeping the right-sized aircraft in the right-sized market. If the larger carriers cannot get the labor agreements to allow that, then the RJ operators will continue to expand up into their game," he said.

"Scope [clause] erosion will continue, allowing more outsourcing of larger RJs," he declared. He predicted, "This will lead to a convergence of LCCs and Regionals operating 90-plus seat aircraft." And while funding for legacy carriers is scarce, "capital is now available to RJ operators," allowing fleet expansion. Bedford concluded, "Our low-cost business model makes us competitive for new business" and the opportunity for growth may be offered by the LCCs themselves. "LCCs are starting to mature and their growth is slowing down. If we keep costs down, we'll be in the position to compete for additional growth opportunities."

Jonathan Ornstein, chairman and CEO of Mesa Air Group, said the cost side of airline operations in the US is not deregulated so long as the Railway Labor Act rules labor negotiations and hobbles expenses to the point that "airlines can launch routes that cover variable costs and yet still are not profitable. You used to be able to shrink to profitability. Now regional jets reach out to so many routes, and LCCs are present on 60% of all routes, so monopoly pricing from a dominant hub is no longer possible. If deregulated on the cost side it would open up lots of new markets-it would explode." However, the industry "has written off the hub carriers too soon," he said, predicting that most "will fix their labor costs, one way or another" and they will be resurgent.

When an airline gets into financial trouble, a reorganization can save the day, and Seabury Group MD Scott Gibson described Avianca's unique entry the US Chapter 11 process with "less than $500,000 in cash, unprofitable operations, significant overdue payables and lessors threatening action." It was able to access the US courts because most of its debt was in dollars with US debtors.

"Avianca relied heavily on an aggressive communication strategy to convince Colombian creditors who would have otherwise not been subject to the jurisdiction of the US court to voluntarily submit to the US court," Gibson said. It "managed to return the spread between RASK and CASK to positive territory, even with the higher fuel costs," he noted, citing the airline's adherence to Adam's Rule. "Cash began to recover shortly after the Chapter 11 filing. Through debt restructuring, Avianca is post bankruptcy and debt has been reduced by over $100 million."

Tim McDermott, head of aviation development at Manchester Airport, said early signs are very positive on his airport's efforts to lure new service into off-peak periods with pricing incentives. Manchester was served by more than 100 airlines, with its best slots already taken and the tariffs for the remainder thought to be too high. Differential charges were put in place during the 2001-02 season, allowing for a summer/winter passenger facility charge, a variation between international and domestic operations, transfer and feeder services, and including new-route incentives.

In the spring of 2002, the airport introduced off-peak charge schedules, cutting the tariff by approximately 50% on departures during slack periods. In addition, a progressive pricing policy was made available to all airlines that offered cost incentives for services to new destinations, plus deeply discounted passenger charges for new routes. The off-peak cuts encouraged dissimilar airlines-full-service, LCC and ITC-to compete on the same routes, "but targeting different passenger segments." The scheme has worked so well that Manchester has future plans "to widen off-peak bands and reduce tariffs within bands aligned to market fares," McDermott concluded.
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