Why Do Airlines Burn Money Every Day? What They Can Learn From Formula 1 Racing Teams

Interview with Daniel Stecher, VP Airline Operations, IBS Software

Aviation has always been a tricky business and these days it seems to be trickier than ever. One after another, airlines are disappearing from the industry landscape, either by losing identity or in an old-fashioned way – running out of money.

Numerous attempts have been made to explain the reasons for these systemic failures and, deep down, they all have something in common: the way airlines interact with the randomness of their operations does not correspond to what strategists and decision makers expect.

​The disconnect between strategy and operations has become the main (still unrecognized) cause of growing operational disruptions, work inefficiencies, uncontrollable rise in costs and passenger dissatisfaction. Flight disruptions are still considered as purely operational issue, despite the fact that the majority of their underlying causes have strategic and cross-functional origins, invisibly shaping the quality of day-to-day operational decisions.

​This means that, for example, every time an airline decides to expand its operation to congested airports, increase aircraft utilization by reducing schedule buffers or shorten the turn-around times, it puts lots of additional pressure on operations control centre. This risks an exponential increase in changes to planned schedule, with all of the (unreported) consequences this can have on overall results. ​

As things stand, OCC’s are not adequately equipped to cope with high influx of changes that make their work even more complex, exceeding human capacities to handle them. Outdated technologies restrict the scope and speed of this process making improvements hard, perhaps impossible to achieve.

Most airlines have become too slow to respond and adapt, and this needs to change. And change includes adjustments where the interplay between human abilities to cope with complexity, and benefits offered by new technology are recognized and skilfully managed. How can this be achieved?

In search for answers I couldn’t think of anyone better able to answer this question than Daniel Stecher, a leading-edge operations and technology expert, fresh thinker, and enthusiastic leader who inspires change and is willing to share his insights.Daniel’s all-round knowledge and deep understanding of operations and technology comes from his first-hand experience at a major European airline and at a leading provider of airline software. He gets his messages across in many ways by visiting airlines, speaking at conferences, writing, blogging, tweeting, all this with rare ability to explain complex problems in a way that can be easily understood.

I asked Daniel to explain what it takes to bring together the best of what interactions between people and technology can provide.

I hope you will be inspired by this spontaneous and insightful interview with Daniel.

(JR-Jasenka Rapajic, Astute Aviation; DS-Daniel Stecher, IBS Software)

JR: Flight disruptions continue to grow faster than what airlines can perceive, and have ability to control. Still, they keep expanding even to most disruption-prone areas, unaware of the full consequences of this strategy on operations, cost, and revenue. They expect that, in the end, operations centres will somehow make it all work.

Being at the crossroad between disruptive strategies, disrupted schedules and disrupted passengers, the question is how do people in Operations Control Centre (aka IOC, OCC, SOC, NOC) cope with complexity arising from this situation which is not going to change in a foreseeable future?

DS: There is a nice quote from an industry friend who told me: people working in OCC’s don’t know what they don’t know’. That I think puts in one sentence the main issue and challenge for OCC’s because everything is pretty much reactionary and based on gut feelings and what has been planned based on a picture of future optimized weeks or months ago is suddenly not coming through. It is no longer relevant because the people who built the schedule, and the people who made the roster are unaware of the sources of disruption including technical problems, sick crew members, congestion at airports, and so on. The consequences are that, compared with the original plan, only 70-80 % flights on average operate as scheduled.

The first question is why don’t airlines make more realistic plans? This is because they are planning with forecasting models based on the past, whereas with predictive analytical models they could have a better understanding as to what is happening in operations and end up with fewer disruptions. Also, every year deviation from plans becomes the norm and every new annual plan becomes a fresh start. This is how problems accumulate and remain unnoticed in year on year company reports.

Secondly, more and more people are traveling and are affected by disruptions which have an impact on their personal lives, their business lives, their vacations, and, in the end, costs us all a lot of money. These disruptions also have environmental consequences because there is a lot of unnecessary fuel burnt which together with traffic expansion further increases CO2 emissions.

The question is how long will airlines be able to sustain this situation? I would say they are not working in a rational manner and I foresee some real changes in the industry.

JR: Airlines spend lots of time and effort on optimizing individual departmental functions. This frequently does not benefit the entire organization, and can even cause additional disruptions. The problem is that the dynamic, non-linear nature of disruptions doesn’t fit into the rigid structures of airline information systems and management reports. This leaves strategists and planners deprived of real-life feedback, hence an opportunity to spot and remove bottlenecks in workflow. In these circumstances, optimising disruptions as they happen seems like a daunting task. How does all this look from an OCC perspective?

DS: There is a lot of emphasis on the optimization of the various planning processes but very, very few airlines focus on the optimization of disruption management. Even though industry estimates vary, some figures indicate that cost of disruptions worldwide has reached a $60bn figure. There are some disruption related figures like compensation to passengers experiencing disruptions, especially in Europe. It has been estimated that over the last three to four years trillions would have been owed to passengers if each qualifying passenger had claimed compensation. If airlines had been forced to pay it by law, some of these airlines would have gone bankrupt based on the previous disruptions for which they were responsible.

And yet despite all this, very, very few airlines have changed the way they operate, the way they plan, and the way they attack disruptions. Everything is pretty reactionary, depending on the person who is on shift. When Jo is on shift, the decision making is completely different compared with when Angela is on shift. And the next day, Diana is on shift, so the best decision making is not always visible. This makes it difficult to avoid the effect of disruptions on passengers, aircraft, crew, airports and other stakeholders.

JR: How well are OCC equipped with tools that can support these complex decisions?

DS: You need good technology. The bottleneck for airlines is that they don’t have technology in place which follows the concept of smartphones.  So, we need to bring the concept of smartphones into OCC. Smartphones are highly integrated. You don't have to look for the data. The data is already there. There are plenty of apps which provide you with the relevant data. In the airline business it's the other way around.

When somebody needs the information, they try to find the source of this information using paper-based booklets where something is explained or have to call somebody, or whatever, and that's why things are very slow. A lot of information is not available in real time – which is why decision making is suboptimal - some data are missing some data are out of date.

My little smartphone is a good example of how complexity can be managed. Twelve years ago, while traveling to the US I had four devices: a camera for photo taking, a navigation system to get me from A to B, a cell phone to communicate, and a portable PSP to play some games. And then, if I took a picture and wanted to send it to somebody, I had to download it from the camera to the computer, connecting to it with a cable, and if it was not charged, then that was delayed, and then I couldn't send it via email to somebody. If I wanted to send my location - that was very complicated!

Today, all these things are done automatically. The software is developed in such a way that the device is thinking for the human being. We humans are not capable of grasping more complex problems. We can keep in mind up to seven items at one time. We are not made for multitasking, especially when we are under stress, so a tool such as a smartphone is very helpful because it can manage our entire lives. It allows me to connect with every airline system in the world, I can organize my finances, and it helps me with managing plenty of pictures. I've taken more pictures than I have ever taken in the past. So, it is not two Daniels or three Daniels required to manage the multitude of pictures I'm taking, it's the device which is helping me to manage the complexity and this is what I can see as the future for OCC.  

In a smartphone environment everything is in real time, everything is connected. If I take a picture of this meeting in London, I don't have to call my wife, it's in the family folder because that's how iOS does it. But if I take a picture of a naked person, and maybe don't want that picture to be visible to my wife, that means that I need to understand the consequences of integration. Using This concept is very powerful and will allow airlines to manage higher levels of complexity. 

Read the full interview

The following are links to white papers written by Daniel where you can learn more about topics related to our conversation:

How the lack of technology worsens airline disruptions:

Eye witness account and analysis 

Situational Awareness Technology in Airline Operations

The Flight Shame - How airlines can reduce CO2 emissions by 0.15% now

Airlines burn money every day!

Airline Crews are disconnected from Passengers’ Social Media - here‘s why.


If you are interested to learn more about a new framework for decision making that bridges the gap between strategy and operations, you can find some guidance in my book ​ Beyond Airline Disruptions - Thinking and Managing Anew and webinar Let’s Disrupt Disruptions.

A Bit More Food For Thought About Regulation EC261

Is this what passengers want?

What is wrong with regulation EC261? Who is really responsible for its enforcement? Why is it disliked by both airlines and passengers? How much we can learn from it about how the system works, what doesn’t work, and what to do to about it?

There is something unruly happening with regulation EC261, the EU rule set 15 years ago to ensure that passengers are compensated if their flight is cancelled or significantly delayed. Despite its age-related maturity, it’s ambiguity and lack of clarity made it increasingly disliked amongst passengers and airlines (*1). Also, it keeps resisting growing criticism of airlines, and is not working in line with ICAO core principles on consumer protection. As a result, the side effects of EC261 are getting worse, often hard to understand as shown in the following examples:

*       In the first week of September, Adria Airways had to cancel its evening flight from Ljubljana to Vienna after being informed that police in Vienna will ground the aircraft due to Adria’s refusal to pay 250€ compensation to an Austrian passenger after the passenger won the court case for a flight cancelled back in 2017. The whole story is not revealed but it is hard to believe that any airline would compromise its reputation for 250€ without a good reason.    

*       In January 2016 the Judge at Reading County Court ruled in favour of two passengers in an appeal case awarding them with €600 (£450) each for the five-hour delay of a Monarch flight. The judge ruled that lightning strikes are not one of the ‘extraordinary circumstances’ that excuse airlines from paying flight delay compensation. The Civil Aviation Authority do include lightning strikes in their list of extraordinary circumstances but the Judge said in the ruling, that this list is not legally binding and has been proven wrong in court a number of times.

Do these real-life stories cause you any concern? You can find myriads of them on social media. Don’t they illustrate the absurdity of the mechanics of regulation EC261 where written rules rest peacefully in the official document, trapped in linear understanding of complex non-linear interactions that are happening in real life? 

Identifying true reasons of flight disruptions do not belong to regulatory domain of this kind because of their intrinsic nature – they constantly change, interact, and are too complex to fit into the rigidness and prescriptiveness of institutionalised document. If EC261 is intended to assure passengers that they are looked after from above, while downloading the responsibility for compensating passengers experiencing flight cancellations and long delays to airlines even when they are caused by system issues, then it is not fit for the purpose it is intended to serve.

The damage is much deeper than what can be perceived. The legislation has incited animosity between airlines and passengers, as well as between airlines themselves, and caused confusion even at courts where the same reasons for delays and cancellations are understood and ruled in different ways. It has increased costs on all sides which will ultimately be paid by passengers.

The voices of both airlines and passengers are getting louder, asking for change but without success. This is because airlines didn’t come out with workable, fact-based evidence essential to support their case when presented to authorities - the problems are touched only at surface. And they can’t do that because this kind of information is not readily available – they are cross-functional and cannot be assigned to individual departments

At the very essence, most of the problems associated with flight delays and cancellations are caused by already critical airport and airspace congestion which is a collective, not a sole responsibility of airlines as this regulation suggests. Easing up the congestion problem can only happen by collective action organised by people who understand the functioning of the system from inside out.

To wrap up, EC261 is a by-product of dysfunctional state of the industry driven by legacy paradigms. At the same time, it offers us a unique opportunity to see what is happening in real life, understand how disruptions relate to regulators, airlines, airports and passengers, learn from them, and do something about it.

The breakthrough will happen only when airline leaders decide that they are ready to see operational failures, understand their own relationship with them, and understand others. Without conscious awareness about strategic aspects of disruptions and collective damage caused by their neglect there will be no clarity about what really needs to be improved.

The question is, will airlines get the courage to face reality before another even more restrictive regulation is introduced to ‘protect passenger rights’ and ‘public interests’? Or will the privatised and monopolistic industry find the way to a sustainable solution that works best for airlines and passengers? To get there, there is some work to be done. It starts with understanding operational dysfunctions and their strategic origins for which we need the right combination of new technologies and insights to keep strategy and operations connected and do the constant fine-tuning. Isn’t this more natural than wasting time in proving regulations wrong while losing even the most loyal passengers?

Take this as yet another call to change the way you think and manage the airline business.

After all, none of us wants to keep doing the wrong thing. To do things right, however, we first need to understand where does the ‘wrongness’ come from. As said, there is the work to be done and it is urgent.

Are you a change maker or an aspiring one? Let me know if you are ready to act.

Is This the End of Reputation?

Do major airlines need to worry about reputation, loyalty, and even care about passengers in a deregulated, monopolistic, privatised industry, coupled with dysfunctional operations fuelled by airport and airspace congestion - things experienced by most competitors? The answer is they do if they want to survive in the longer run. To learn about how to improve reputation and loyalty in the dysfunctional world, get inspired by Southwest. But look beyond things like short turnarounds or single fleet operation. Start from the inside, from main ingredients of their secret sauce.

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.