Economics of Passenger Loyalty

Have you ever thought that saving a customer can be ten times more efficient than finding a new one? This is something that Seth Godin calls economics of loyalty.

Here is the full Seth's post:

Responsibility and the power of 'could have'

"The us/them mindset of most corporate customer service is simple:

          1.   When you can, get it over with.

          2.   If at all possible, evade  responsibility.

Which means that when things go wrong, you’ll likely encounter a legalistic mentality that begins and ends with, “it’s out of our control.”

There’s an alternative.

It begins with understanding the economics of loyalty. Saving a customer is ten times more efficient than finding a new one. If it costs an airline $1,000 of marketing and route development to acquire a first class business traveler, it’s worth at least $10,000 in customer service to keep one. And that means that an extra ten minutes on the phone clocks in at a high value indeed.

And it continues with a simple tactic: Instead of defining the minimal legal requirement, outline the maximum possible action you could have taken.

“You’re right ma’am, that was a terrible situation. And we could have alerted you in advance that the plane was late, and we could have trained the flight attendants to be more aware of situations like this and we could have been significantly more responsive when we saw that the whole thing was going sideways. That’s incredibly frustrating–you’re right.”

Because it’s all true. You could have done all of these things. And it’s true, it was frustrating. If it wasn’t, she wouldn’t have called.

And then, after learning all the things you could have done, send the ideas upstream. It’s free advice, but it’s good advice. 

Because the race doesn’t go to organizations that do the minimal legal requirement. The race goes to those that figure out what they could do. And do it"

Just wondering what would it take and what would be the ratio if this measure of loyalty is extended to employees?

If You Think You Understand Airline Costs, Think Twice

Did you know that analysts claim that every year 2 trillion dollars is wasted globally due to poor implementation of strategy? The question is how big is the share of the airline industry, and what is it that drives the poor implementation of strategy, pretty visible through increased disruptiveness of air travel and unexplainable rise in costs?

There are many reasons for this, but let’s on this occasion focus on the strategic aspects of operating costs and their impact on operational underperformance. 

Traditional airline costing is among the biggest obstacles to alignment of strategies with operational reality. It is the by-product of the industrial approach to management and costing so firmly ingrained in the mindsets that even when a company decides to introduce the latest technology, no one even thinks about adjusting the approach to costing to improve the scope and quality of decision making.

So, what is it that stands so stubbornly in the way of understanding the true nature of costs essential for successful system management? At the very core, it is about departmentalisation of costs set as a standard many decades ago. It was meant to ease up the budgeting and control processes from the top without awareness of how much this mechanistic approach affects overall organisational results. It may have been understandable at the time when this short-sighted idea was conceived. Such costing standards have, however, completely ignored the intricate nature of costs based on the constantly changing interactions between data, people, and processes within and outside of an airline. This is why the gap between strategic assumptions and operational reality continues to widen, resulting in ‘unexplainable’ drop in operational efficiency and rise in costs. It deprives strategists from understanding the impact of their decisions not only on profit, shareholder value and lost revenue, but also on people, organisation, society and the environment.

Is it really so difficult to understand that costs apportioned to operational units without knowing their true origins can turn every decision into an undesired outcome? This is not only because this information is simplistic, but also because it is just a historic snapshot of data collected at the time of budget drafting and some years earlier. As soon as the ‘budget schedule’ starts to change (normally months before the start of a new scheduling season), it triggers changes in cost matrix, making the planned costs even less suitable for decision making. This is how decisions related to cost savings, network development, aircraft and hub operation, outsourced services, or investment in additional resources, become stumbling blocks for improvement in cost efficiency and operational performance.

Let's look more deeply at what the typical process of cost planning looks like. It starts with projected traffic, cost, and revenue for the coming year. The company’s finance director then sets a target figure for net results including the necessary return to shareholders. This is further broken down into management units and transmitted to senior directors responsible for squeezing the savings out of their respective departments. The initial figure may be adjusted several times during the year. There are reviews after the IATA slot coordination meetings and regular refinements in the light of information received on forward bookings, interim revenues, and yields. These adjustments can result in even tighter cost controls. The intense cycle of setting targets and searching for further departmental cuts is giving an early warning if a director is going to exceed the budget. If this happens, there are generally negotiations between the director and the CFO’s office to reach a satisfactory result. The process could be tightened further if necessary, using various management techniques.

There are two major setbacks in this process. The first one relates to the sources of information used for cost projections for the coming year based on too many assumptions. The second is the management aspect of cost control. Led by the nature of traditional cost information, managers put too much emphasis on cost control of departmental performance rather than on interrelated problem areas. As unforeseen problems start to emerge, senior directors have no other choice but to put even more pressure on middle managers and, through them on other staff to save more. The next round of ‘unexpected’ events includes the reset of targets, and continual search for new cuts from already well squeezed departmental cost - good for justifying efforts, but not good enough for improving business performance.

  

How can we overcome the limitations of these functional costing practices?

Take the fuel saving measures as an example. The process is usually assigned to the Flight Operations department. There is a whole set of principles used to minimise fuel consumption on the day of operation. They include things like flying at optimum speeds and flight levels, fuel tankering policies, careful weight and balance control or flying the ‘cost efficient’ air routes (not necessarily the shortest ones). In reality, however, most of these principles cannot be applied. Fuel consumption will be increased every time when a flight cannot operate at optimum flight level, when ATC diverts the aircraft to a longer route or puts it on hold over a busy airport, and in many other situations. According to industry research, about 10% of fuel consumption is attributable to operational changes. Reducing it at busy airports is becoming more and more difficult. Still, the fuel-saving programs circulate mostly around these traditional measures.

Much bigger potential for reduction of fuel costs, however, comes from inside the airline. It comes from people who decide which airports and routes to fly to, which aircraft can best serve these routes, how many hours it should fly, when to replace old aircraft and introduce more fuel-efficient ones. Then, there are schedule creators that have to make all these ideas workable by balancing requirements coming from many different sides inside and outside of an airline, people who negotiate fuel prices, repair and maintain the aircraft, provide service to passengers, and many other specialists and generalists – the cost architects. The impact of this process of creation and preparation for service delivery remains invisible to senior decision makers focused primarily on cost output expressed in numbers. Reinstating the connection between numbers and getting the insight in their origins requires a refined, selective approach. This approach should be based on identifying the cost-critical operational problems, bringing them to the attention of cost architects that have knowledge and power to fix them, and finally passing them on to senior decision makers who can balance their acts to achieve what is best for the organisation.

The same principle can be applied to every area of business management. Costs allocated to departmental units shouldn't be an obstacle if we don't stop there. Departments are integral parts of the company's organism. When a problem arises in one part of the body and its root causes are not identified, the treatment applied to the wrong part will harm other parts of the body and weaken the organism.

To inject more life into the planning processes, upset by limitations of traditional costing system, senior executives need to be regularly informed about the cost and quality-critical but avoidable changes in planned operations and their underlying causes that constantly stress the system. These insights bring profound changes in the way airlines plan and control their business, resulting in measurable improvement in operational and cost efficiency.

Being in a position to experience first-hand the strategic, operational, and information side of costing problems, I came up with a practical method and technique that support the creation of missing links between strategy and operations. It cuts through the complexities and brings new value to this still unexplored area of airline management, in particular when supported by emerging technologies. The basic principles are explained in my book ‘Beyond Airline Disruptions – Thinking and Managing Anew’ and webinar: Let's Disrupt Disruptions.

Why We Should Invest in More Slacks

Because of our limited vision of reality and  pressure to expand, to improve performance and productivity we tend to stretch already high aircraft utilisation even further. To make this possible we reduce airport slacks even at congested airports and peak times without understanding how much it will affect the on time performance, passengers, and ultimately cost and revenue. The system we are in and information we have available don’t allow us to see these connections. 

Here is how Seth Godin explains why we should invest in slacks:

'If your delivery drivers have to do six deliveries a day, they’ll rush from the first moment. They’ll be super efficient at easily measurable metrics. They’ll cut a few corners.

If they only have to make five deliveries, you can ask them to spend that ‘down’ time doing things your customers will actually remember. They can invest in less easily measurable metrics. Instead of cutting corners, they’ll embrace them.

Systems with slack are more resilient. The few extra minutes of time aren’t wasted, the same way that a bike helmet isn’t wasted if you don’t have a crash today. That buffer will save the day, sooner or later.

One thunderstorm can cripple the air traffic system for six major cities, because each plane is stacked so efficiently that the ripple cascades, leading to failure and cancellations. In the old days, when efficiency was measured over a longer term, there was enough buffer to absorb a bump like that.

The mistake happens when we over-index on the easily measured short-term wins and forget to account for the costs of system failure.

Competitive environments push profit seekers to reduce slack and to play a short-term game. If your organization hits the wall, the market will survive, because we have other options. But that doesn’t mean you will survive.

Slack is actually a bargain.'

If knowingly introduced, the benefits could make you change the way you measure productivity and rethink the way you work. Try it and take it as validated learning.

Accessing the recording of my Let's Disrupt Disruptions webinar

If you missed to register, here is the link to the recording of my latest 'Let's Disrupt Disruptions by Thinking and Managing Anew' webinar hosted by IBS Software.

CONTENTS and timeline INTRODUCTION WHERE WE ARE NOW  05:51     Strategic aspects of disruptions   05:59     Passenger perspective   07:19     Poll question – disruption related  09:06     What went wrong   12:34 CHALLENGING OPERATIONAL AND MANAGEMENT   PARADIGMS  14:47     What is wrong with our thinking?  14:55     Poll question – cost related  17:29     What do we know about costs?  19:39     What we don’t know about costs  20:47     What do we know about punctuality and its costs?  24:39     Bringing more clarity to decision making  26:09 A NEW FRAMEWORK FOR DECISION MAKING  28:02     To change our thinking, we need to change the perspective   28:10     System approach to disruption management  30:35     Decision making domains  33:51     Current framework for decision making  37:30     Creating the new framework for decision making  38:38     Reinventing decision making  41:00     Organising the process  43:06     Embracing new technologies   45:40 TO SUM UP  47:26     How to get started  48:22

The Importance of Reality Check

In complex and dynamic systems like airlines, making a real improvement comes from understanding the real causes of real problems manifested through real variation between what was planned and what really happened - call it disruptions, dysfunctions, variation, or failure but see them as an opportunity for real improvement. 

Join me on 7 May for a live webinar organised by IBS Software to learn about reality check of costs and quality of system decisions.

You can register here.

Announcing the second run of my webinar

Join me live on 7 May for the second run of the webinar Let's Disrupt Disruptions by Thinking and Managing Anew, hosted by IBS.  

I will be talking about modern approach to airline management, where cutting through system complexities to reduce cost and improve punctuality is achieved by diagnosing and rebalancing system imperfections manifested through operational disruptions. 

You can register here.

Announcing my Webinar Let's Disrupt DIsruptions

I will be talking about why we need to change the way we work and make decisions on 8th April during the webinar hosted by IBS. I will explain:

• Why our perception about costs is wrong

• Why we have a problem with understanding quality

• How to introduce a fresh approach to management adjusted to cope with the dynamics and complexity of airline operations

• How to prevent airlines from drifting deeper into failures visible and measurable through operational disruptions.

You can register here.

Copycatting or innovating

Many of today’s airline leaders don’t have time to innovate because they are too busy watching what their competitors are doing, then copying and pasting it, or thinking how to take them out of market (often becoming the victims, too).

This precious time could be spent more effectively by looking at what is missing inside their own organisation, bridging the information gaps, innovating, and making improvements that cannot be replicated. The time you spend chasing competitors can never be recovered.

Think about Southwest. Many airlines have copied the visible side of what they do like their fleet and network model, but none have managed to replicate the culture, the ‘secret sauce’ that made them the most successful airline in the history of aviation. As authors of the book Rework said, the tone is in your fingers, not in the guitar.

Take it as an idea worth exploring or revisiting. For those courageous, it can help with awakening hidden potential, enabling the natural flow of work, and improving intricate relationships between data, people, and processes so that on-time performance and satisfied customers are kept as ultimate goals at every stage of the process.

The Origins of Disruptions

(Excerpt from my new book  ‘Beyond Airline Disruptions:Thinking and Managing Anew’)  

The origins of today’s disruption problems were planted in the 1980s when deregulated US passenger airlines all rushed to copy the FedEx’s hub-and-spoke network model, assuming it is more efficient to fly passengers via huge hub airports instead of taking them straight to their destination (just as FedEx did with parcels). Judging by the outcome, it soon proved to be a big mistake. Missed connections at hubs created huge passenger dissatisfaction and inefficiencies and have contributed to the bankruptcy of almost every big US airline. Despite the obvious flaw in the business model, European airlines were quick to adopt it, ending up with series of failures or near-failures, including Swissair, Sabena, KLM, and Alitalia. Today, over 20 European hub airports are critically congested, with Heathrow already operating at the maximum of its technical, and much over its commercial capacity. Manipulative reporting that, apart from inaccuracies, hides dependencies between operational irregularities and airline health are prolonging the decline. 

Robert Crandall, the former chairman of American Airlines said that "the consequences of deregulation have been very adverse. Our airlines, once world leaders, are now laggards in every category, including fleet age, service quality and international reputation. Fewer and fewer flights are on time. Airport congestion has become a staple of late-night comedy shows. An even higher percentage of bags are lost or misplaced. Last-minute seats are harder and harder to find. Passenger complaints have skyrocketed. Airline service, by any standard, has become unacceptable."

Deregulation offered airlines an opportunity to grow fast, and at the same time the responsibility for making air travel more affordable while offering passengers good and reliable service. Many, however, underdelivered on quality so much so that the future looks increasingly uncertain for both airlines and passengers. Passenger travel costs are going up despite lower fares, on-time arrivals are becoming less certain, and the amount of time passengers spend on the ground more often exceeds the travel time incurring additional costs. The problem is that the opportunity for growth hasn’t been synchronised with airport and ATC capacities needed to accommodate growing demand for air travel. Congested airports and airspace are expected to be even more congested and restrictive in areas with highest demand for air travel. This will result in further decline in service quality and consequently increase in cost of air travel.

While we cannot change external circumstances and our organisational divisions as sources of problems, we can reconfigure our work and better adapt it to changed circumstances. 

As Abraham Lincoln once said: 

MY NEW BOOK IS NOW PUBLISHED

I am happy to announce that my book 'Beyond Airline Disruptions: Thinking and Managing Anew' is now  published. You can find it on:

 ROUTLEDGE  AMAZON UK  AMAZON

Find out more:

• Announcing the second, revised edition of my book 'Beyond Airline Disruptions: Thinking and Managing Anew'
• Inside My New Book
• Some other excerpts from 'Beyond Airline Disruptions: Thinking and Managing Anew'

Some other excerpts from 'Beyond Airline Disruptions: Thinking and Managing Anew'

I would like to share with you some more excerpts from my book ‘Beyond airline disruptions: Thinking and managing anew’ in hope that they will inspire you to start rethinking the way you work, and discover hidden opportunities for improvement.

You won’t find lots of data and statistics in this book. This is because you already have too much of them. You will rather learn how to make sense of numbers aggregated in your company’s reports, understand where do they come from, and how to create a platform that supports decision making in complex and dynamic airline system.

I invite you to embark on this exciting journey and hope that the following excerpts will give you a better idea what this is all about:

We need to recognise that inherited management methods and information systems can no longer serve the purpose. Traditional planning and forecasting are not suitable to keep the pace with what is happening in the real world. We need to find a new way of system management that acknowledges its dynamics and interactions, and constantly balances between profit and quality. The key to managing such a system is understanding of operational changes, especially when they exceed the acceptable level built in the company’s plan and start generating additional cost and decline in service quality with longer term consequences. These changes – that we will refer to as disruptions – are the sweet spots where the results of all systems activities, for better or for worse, become visible, measurable, and their deeper origins trackable. They are the place from where we can start connecting instead of counting dots.

By making decisions based on too many assumptions, we unknowingly create more problems elsewhere and are unable to measure their impact on the system due their complexity. When we compare the planned and actual results published in company reports, we cannot say what is beyond these figures, what really happened and why, and what we need to improve. Regardless of amount of data we collect and analyse, sometimes the impact of our decisions is minor, and sometimes it can have longer-term implications on the system performance that we wouldn’t be aware of. This is because the system we are in is not designed to manage things we are facing in real life.  Complexity arises from interactions between people and processes that are the very nature of airline business, but existing information systems and management do not recognise it. Hence the detachment between strategy and operations, plans and reality.

Getting to know disruptions is the process of discovery, learning, doing and aligning with what really matters to airlines and their customers. It changes the thinking about how the system works, what doesn’t work and why. It is an insightful approach to management that brings more clarity into decision making when faced with complex system issues. It also enhances communication and collaboration between people in different departments and their understanding of dependencies and contribution to achieving the common goal.

We need to change our learned views and introduce new measures related to disruption experience. We need to look at them in a positive way – see them as a guide to reality that tells us what to improve. This is because when you learn how to get to their origins, you will see the whole new world of interconnections between employees, customers and service suppliers. They tell leaders how far the company is from the desired course, help them see people beyond numbers, see costs as a result of movement and interactions, and understand the validity of assumptions made at the top and across the organisation. In addition, getting the insight into the cultural issues will inspire ideas for improvement in the relationship with employees.

Disruptions are a systemic issue resulting from interactions of numerous internal and external influences. Knowing about disruptions is not as important as understanding their relational causes.

Without reflecting on differences between what we had planned and what actually happened and looking more deeply into avoidable causes of problems, we will not know what to improve. Wilful ignorance of disruptions eventually leads to poor service, dissatisfied passengers, higher costs and loss of revenue.

Traditionally, costs derived from financial reports are statistically distributed to business units in order to be calculable at functional levels and easy to control. As soon as the ‘budget schedule’ starts to change (normally months before the start of a new scheduling season), it triggers changes in the cost matrix, making the planned costs even less suitable for decision making. Such practice ignores the fact that costs are more than just numbers – they are non-linear, interrelated and consequently cannot be measured in a conventional way. This is why answers to questions related to true effectiveness of saving measures, route network, aircraft and hub operation, outsourced services or investment in additional resources remain not only the stumbling block for improvement in cost efficiency and operational performance, but a source of additional costs and poor service.

The main objective of a disruption information system is to empower airline managers with the knowledge about the cost of operational changes and their underlying causes and help them to understand the impact of their decisions on the overall performance including passenger experience.

The task of establishing the relationships between strategic plans, operational decisions and airline financial performance may look too complex, especially in big organisations, and may put off many managers from even trying to understand these connections. However, managing an airline effectively without this knowledge is not possible. The system that we are about to introduce is aimed at simplifying this process by enriching operational information with elements of cost and revenue. This is meant to enable airline executives to be continuously informed about the cost- and quality-critical operational issues and their origins.

By becoming more familiar with causes of disruption events, decision makers can learn about organisational, managerial, cultural, interdepartmental and a whole range of other internal issues that they would otherwise not be aware of. These insights can be more important than accurate information about the costs involved in single events.

Complexity increases the number of trivial activities, making it difficult for senior managers to recognise and focus on things that deserve their attention. They can get easily involved in ad hoc operational problems that could be resolved locally, instead of spending their valuable time more effectively by making a small number of powerful interventions that can have a massive positive impact on operational performance.

Complexity itself is not the problem – it is organisational detachment and top-down management that channels work against its natural flow. When we start thinking in a new way, we can realise that the only way to understand the workflow is to start from outside, from operational reality where the results of all activities become evident. It then depends on where we then turn our attention to. In this case, we will be

focusing on causes of hidden strategic, organisational and management issues that are continuously and consistently hindering operational performance. looking at critical variations in service delivered to passengers

EU regulation on passenger protection has passed the burden of collective negligence and wilful ignorance about the problem onto airlines. They are seen as a culprit in a highly interdependent industry in which airports, politicians and regulators also bear responsibility for the growing decline in quality of passenger services.

While it was obvious that the flawed Regulation could not improve flight punctuality and regularity, nor better protect passengers, it has most certainly incurred additional cost for airlines.

The value of disruption management is that it provides not only tangible information but also the insight into internal relationships between managers and employees, and between employees in the environment where sharing the common goal is not ingrained in the company’s culture. Applying the principles of disruption management can improve these relationships: the method brings together people from different sides of an organisation around the same real-life problems and builds up the understanding of their interconnections and how the results of their individual and collective work affect the end result. The result is improved quality. By improving quality, we reduce costs and increase revenue naturally. This is how we can make a lasting improvement without forcing organisational changes and changes in management.

We should keep reminding ourselves that in this imperfect, hard-to-manage system burdened with lots of historical baggage, it is only people who can hold things together and make it work in difficult, unknown situations. It is the people who create bridges that reach beyond departmental boundaries and beyond what they are trained to handle. This is what people can do when they are driven by a sense of togetherness and belonging and when they are inspired to work towards the same goals – the kind of culture that can be built starting with collaborative gatherings that we talked about in this book. This is how our actions can become value-aligned.

Inside My New Book

The second edition of “Beyond Airline Disruptions: Thinking and Managing Anew” looks beyond the surface of airline disruptions to inspire systems thinking and actions that transform culture and drive long-term success.

The book will be published on 12 December. You can pre-order it here and save 20% using this discount code.

FROM THE BACK COVER:

Flight disruptions continue to thrive unnoticed, invisibly eroding airline profitability and causing growing passenger dissatisfaction. This is especially critical at airports where traffic expansion outstrips airport capacities. Hampered by legacy information systems, management practices and organisational detachments, decision makers across the industry have little or no understanding of the multiple causes of disruptions and their implications. Consequently, their actions are focused on resolving local problems without being synchronised at system level. As problematic as they are, disruptions create opportunities for learning about system interactions, a solid and appropriate foundation for resolving complex industry issues.

Beyond Airline Disruptions explains how airlines can become more competitive by utilising unexplored potential for gradual, consistent and measurable improvements, centred around cost and quality of operational performance. It describes practical methods and techniques essential for turning these ideas into daily practices.

This second, revised edition features updated content that introduces a fresh approach to airline management and decision making, more in line with future industry needs. It bridges the gaps between strategy and operations and inspires collaboration between airlines, airports, ATC, service providers and regulators to bring longer-lasting benefits not only for industry participants and passengers, but also for the economy, society and the environment.

TABLE OF CONTENTS

Introduction

Chapter 1: Obscured by the past

Chapter 2: The path to improvement

Chapter 3: Understanding disruptions

Chapter 4: Organising disruption information

Chapter 5 Reinventing decision making

Chapter 6: Thinking and managing anew

The way forward

EXCERPTS 

The way forward  

The process of disruption management described in this book is meant to inspire a new way of thinking and managing airlines. This is not a prescription, but an invitation to join the process of discovery, to explore a new dynamic and adaptive way of managing airlines in the age of increased disruptiveness. The following are the highlights of what we have discussed so far:    

·        Instead of managing departments, we should manage problems that cause our passengers to leave us even when our price is lower than our competitors.  

·        Instead of relying on predictions based on the past we should keep reconfiguring and adapting, fine tuning our operations to best meet passenger needs.

·        Instead of traditional planning and forecasting based on aggregate historical figures which tell nothing about their interconnectedness and true origins, we should focus on resolving the complex emerging problems that are threatening the system performance while aware about their deeper causes.

·        When we think about new ideas, we will have a better sense if they are going to work well for us and what we have to do to adapt when circumstances change. We will know better what to offer and how to assist our passengers travelling to and from disruption-prone airports and airspace.  

·        We will be more aware what an airline is capable of doing and what cannot be done. And if we decide to do what we cannot deliver at our best, we will know that this is a calculated risk measured against other known benefits but will ensure that the negative impact of such decisions on customers, partners, and employees is minimal.

This game-changing approach to management creates a shift in culture. And as a result, trust and care about the core purpose strengthen, the service improves and cost is reduced.

The method for disruption management can be introduced without big investments, organisational changes, projects or other conventional activities. It is simple to implement and, from very beginning, it starts to inspire people across organisation to engage their ingenuity in understanding and improving their work while sharing the common goals. It is accessible to all those with mind open to new ideas, those who seek long-lasting success, those willing to build their business based on trust and cooperation, caring for employees and through them for customers.

Let’s challenge ourselves to evolve, innovate, and experiment to create a better future.

MORE EXCERPTS TO FOLLOW