Tuesday, 18 April 2017

Are Airline Megamergers Becoming United in Losing Passengers They Can No Longer Afford to Serve? Does This Explain the Dr. Dao Story?

If there is an opposite to disruptions it is not punctuality, it is civilised air travel.

On Sunday 9th April Doctor Dao, United Airlines’ passenger, was violently dragged out from his seat just before the departure of his flight UA3411 from Chicago to Louisville. He was chosen to leave the plane against his will to make room for four unexpected employees of a partner airline who needed to get to Louisville by Monday morning to crew another flight. United originally characterized the flight as overbooked, but later said that was (obviously) not the case.

The incident would have probably stayed contained locally (as most of the disruptive events do) if it was not for the video that his fellow passengers posted on social media. It caused an outrage against United Airlines. Airline’s CEO Oscar Muñoz rushed to defend the employees' conduct and said that forcibly removed doctor had been "disruptive and belligerent". As the video went viral and company’s shares began to slide Mr Munoz reset the tone and softened his words. The way the case was handled has been widely condemned and described by some as a ‘mockery of the world leadership’.

Why would an airline that cares about its business and reputation ever think of allowing a paying passenger to be assaulted, so that its own employee could take his seat?  

To answer this question we need to dig a bit deeper. Doctor Dao’s case revealed the tip of the underlying pattern that is invisibly eroding the future of air travel. Major legacy airlines are caught in a self-made trap by choosing to operate a hub-network, wrongly assuming that they can expand indefinitely within finite airport capacities. Consequences experienced today include operational and financial volatility of major hub operators, a rise in operational disruptions and passenger dissatisfaction.

The origins
The situation that major airlines are in today started in 1980s when deregulated US airlines all rushed to copy FedEx’s hub-and-spoke business model, assuming it was more efficient and rewarding to fly passengers via huge hub airports instead of taking them straight to their destination (just as FedEx did with parcels). The idea of allowing fast expansion and offering passengers more travel choices sounded great, but soon proved to be a big mistake. Missed connections at hubs created huge passenger dissatisfaction and inefficiencies, and contributed to the bankruptcy of almost every big US airline.

The side effects
In the meantime, traffic concentration at major hub airports has continued to rise. Airlines have become less resilient and more vulnerable to even the smallest unforeseen events. The next big crises in 2001 (9/11), and 2008 (sharp increase in fuel prices, global economic downturn and increased low-cost competition) have shaken the industry even more as airport and airspace congestion restricted their opportunity for growth.  Airline consolidation was seen as the quickest fix in the battle for survival, creating unanticipated side effects that may have surpassed the benefits of mergers and acquisitions. The resulting massive cost cuts were made at the expense of employees and passengers. Deregulation allowed airlines to create monopolies wilfully ignoring the far-reaching consequences of such decisions.

The birth of megamergers and how it affected passengers
By definition, a megamerger creates one corporation that may maintain control over a large percentage of market share within its industry. This occurs through the acquisition, merger and consolidation. The big four megamergers (American Airlines, Delta Air Lines, Southwest Airlines, and United) now control 85 percent of the market, compared with 55 percent ten years ago. Having fewer competing airlines means that there is now less pressure to improve customer service or worry about losing passengers who often have no better travel alternatives. What they are still not measuring and accounting for are losses caused by increased inefficiencies and passenger dissatisfaction.

Beyond megamergers
As a result, flight schedules and system resources have become more difficult to manage and optimise. Despite some reduction in airline capacities, consolidation increased operational complexity resulting in growing number and harshness of flight disruptions with unreported consequences. Problems have been exacerbated by pushing aircraft utilisation and cabin load factors up, at times beyond manageable limits. And merging with partners’ schedules made things even more complicated. This has created a highly ineffective system prone to disruptions and inability to control them. The true causes of internally caused disruptions are not measured. Instead they are simplistically explained using the delay coding system designed to serve operational needs. Megamerged airlines have little control over their partners’ performance and losses they can potentially cause. Their own capabilities to respond to challenges have weakened, so that even the small unforeseen events can escalate the problems systemwide. The major airlines may have managed to survive and may financially flourish at times, but operationally, they are drifting into failure.

Who really cares about passengers?
Does the lack of competition give airlines the right to deprive passengers of dignified travel? There are no authorities nor passenger organisations that have the power to challenge the disruptive (and offending) airlines and protect passengers. Forced to reduce flight frequency at capacity constrained airports, megamerged airlines have increased cabin load factors, usually to barely manageable 80+ percent, which is why on monopolized routes their incentive to keep service quality up and fares down have disappeared. They also shifted some of the costs of standard services to passengers, like baggage charges and meals, to become source of airline additional revenue. The absence of enforceable regulations and complexity of the process itself have made a mockery of passenger protection and passenger rights to compensation. It will stay so as long as authorities and airlines continue to deny the reality and try to prove the unprovable through deceived delay reports and by ignoring passenger complaints. They fail to understand that it is not all about money. Passengers can never be compensated for loss in time, anxiety and as in the case of Doctor Dao, emotional scars.

Who cares about employees dealing with disruptive situations?
It is not just passengers that suffer the consequences of the rise in disruptive travel. It is also the employees. “Unhappy mechanics do not tend to go the extra mile—or the extra foot—to get the airplane ready to go,” says George Ferguson, a Bloomberg Intelligence airline analyst. Longtime fliers have noticed the delays, cancellations, and lost bags—and the short-tempered gate agents and flight attendants. “As individuals, they are really nice people,” says Jared Spool, a Web design consultant who flies 150,000 miles a year on the airline. “But they are in such a horrible situation, constantly trying to deal with customers that are not happy, and they’re completely powerless.” Does anybody pay attention to this kind of problem?

Who needs sterile surveys on customer experience and delay benchmarking?
Measuring passenger experience has become a farce. It is based on deceiving surveys on customer satisfaction carried out in a controlled environment, making them fit to justify directors’ compensation. The same applies to the misuse of airline delay reports which are not suitable for benchmarking and decisions made outside operational environment.

Who needs customer service departments in the age or social media?
Do airlines really need customer service departments that deny or ignore most of the passenger complaints and compensation claims?  In the age of social media, it is becoming more and more difficult for an airline to escape these costs and more and more easy for passengers to get the compensation using the power of social media, like the musician who wrote a song called United Breaks Guitars. It was the song that finally won him compensation, which he donated to charity.   

Back to reality
Back to flight UA3411 of ‘mega-merged’ United. It was operated under the umbrella of United Express (United regional airline) by Republic Airways’ Republic Airline (one of its 9 subsidiaries) which offers scheduled commercial passenger service as US Airways Express, United Express and under the American Eagle brand.

The question is, how do magamerged airlines control their businesses faced not only by their own complexity, but the conglomerate of merged, yet independent carriers? How much do their leaders know about the impact of disruptive events on airline profitability and what actions should they be taking to make them beneficial for all members?

Let’s scale it down. What lessons can be learned from Doctor Dao’s case? It will much depend on the way the incident and its consequences are recorded and willingness and ability to raise the right questions that lead to the roots of the problems. For this kind of questioning one needs to have a good understanding of how the system works. Standard numerics and segmented reporting systems won’t help much here due to the disconnection between operational and strategic sides of management information. The following questions may serve as a guide:

  • Which of the following codes was used to describe the cause of delay: 14 (Oversales, booking errors), 66 (Late cabin crew boarding or departure procedures), 67 (Cabin crew shortage), 68 (Cabin crew error or special request)?
  • For how long was the flight delayed? How long did it take passengers to reach their destination? How long did it take Doctor Dao to get to the place he needed to be and was he accompanied by his luggage? How long did it take him to heal his wounds?
  • Is there an IATA code for passenger experience and emotional scars they may wear for life?
  • What caused the sudden assignment of deadhead crew from the partner airline?
  • How much will it all cost the airline in refunds, compensations, and future revenue loss?
  • How many passengers on other routes experienced long delays and cancellations and what are the real causes of losses in costs, revenue, and reputation?
  • Do high load factors of over 80% cause more harm from disruption losses than benefits from increased revenue? What are the most critical routes?
  • How much does high aircraft utilisation contribute to disruptions and what are the related losses?
  • How much does adding more routes at congested airports really cost the airline?
  • How many passengers lost connections and how much did it cost the airline?
  • What are the losses caused by outsourced service providers and partners and can they be recovered?
  • Do surveys about passenger satisfaction include disrupted passengers?
  • Can employees cope with a surge in disruptions and how does this reflect on their attitude towards disrupted passengers?
  • What needs to be done to make a better balance between profit and quality?
Published results about United’s operational performance indicate the lack of these insights. They are well beyond its competitors’ metrics on quality, including delays, cancellations, mishandled bags, and bumped passengers. The airline has, since 2012, been the worst or near worst among its competitors. In 2012, when reported punctuality was 58.7% according to the U.S. Department of Transportation, United was responsible for 43 percent of all consumer complaints filed against U.S. airlines’. Even though the punctuality has improved in the meantime, it is still  below the industry norm. Read more United’s Quest to be Less Awful (Bloomberg, Jan 2016).

What lessons can be learned?
‘There are lessons we can learn from this experience’ has become a common closing phrase used by airline executives interviewed after major disruptive events. What lessons did they really have in mind at that moment? Considering that airlines don’t have a system that controls wider strategic and management aspects of disruptions, it is unlikely that real improvement can be expected.

How to make improvements in the age of disruptions
Disruptions offer a still unexplored, if not the only opportunity to improve system performance from inside out. These are unique events where system planning and assumptions meet reality and customer numbers turn to real people. It’s the only way to get an insight into the interactions between data, people, and processes and most critical strategic and operational inputs in need of adjustments. The answer is in working continuously on identifying the most damaging influencers at time and keep repairing the broken parts on the go - a chance that shouldn’t be missed.

Tuesday, 4 April 2017

Do You Really Understand Your Business?

 Every decision we make shapes our future and future of our organisation. We may not be aware of this because we are conditioned by traditional practices which are obscuring our views of interconnected reality. The bigger and more complex our company, the less competent we become, and our business more vulnerable to even the smallest unforeseen disturbances.  We are suffering from the pike syndrome.

Still we continue to believe that we are in control of our business by optimising parts of the system, summing up the results, and applying the step-by-step approach to resolve complex nonlinear problems. And when we end up with surprise losses and growing travel disruptions with epicentres at congested hub airports, there is always someone or something else to blame.

To test your competence, look at your last month’s management report and answer the following questions:
  • What was the impact of traffic expansion at congested airports on airline punctuality, cost, and revenue?
  • Which routes were exposed to the most costly disruptions?
  • What were the reasons for the unexpected rise in reported fuel and crew costs considering that there were no changes in fuel prices, traffic program, or crew counts?
  • What was the impact of unscheduled maintenance on crew productivity?
  • How much did external service providers contribute to the rise in disruptions and how did it affect passengers? Can these costs be recovered or invested in service improvements?
  • How efficient are schedule buffers at congested airports? Do they justify investment in additional aircraft capacities?
  • How many passengers missed their connecting flights, arrived late or didn’t arrive to their destination because their flight was cancelled?
  • How many passenger compensation claims were ignored by your airline and to what extent did the passengers’ comments and complaints on social media affect your company’s reputation?
  • What will you do about it?
If you cannot answer these questions, you don’t quite understand your business, which is why:
  • You may think that a combination of high load factors, high aircraft utilisation, and expansion at congested airports are performance indicators to be proud of, while not knowing that they are the causes of hidden disruption losses in cost and revenue and sunk investments that surpass the expected benefits.
  • You may think that the crew shortage reported as the reason for frequent and costly delays may increase the disruption risk and are considering investing in more crew. This could be the wrong decision if you didn’t consider that crew shortage could have been caused by the lack of spare parts or some other reason - problems expected to be resolved within the next few months.
  • You may think that you will increase competitiveness by reducing air fares on routes where you are losing passengers, without knowing that even your most loyal customers will never come back because of the way they were treated during and after their disrupted travel and because of poor services and lack of care when it was most needed.
  • You may think that you can recover hundreds of millions in disruption losses caused by ground handling company that damaged your aircraft (unserviceable for the whole week), without being aware that this is not possible because traditional information systems are not designed to measure long ripple effects of disruptions and link them with authentic costs.
This is why most of the boardroom meetings look something like this:

No current information system nor the gut feeling can help you get these insights. To become a competent decision maker you must be aware how your business is  performing now, not six months or a year ago. At the end of each month you need to dig deeper beyond figures in management reports and repair the broken links. 

It is essential that you constantly interrogate changes and measure their impact. This requires a method and technique that translate operational information into language of senior executives, whom I support in developing this practice as a management habit.

If any of the points mentioned in this post resonate with you contact me at
jasenka@astuteaviation.com to see how I can help.

Tuesday, 14 March 2017

The Importance Of Playing The Right Tone

“Guitar gurus say, “Tone is in your fingers.” You can buy the same guitar, effects pedals, and amplifier that Eddie Van Halen uses. But when you play that rig, it’s still going to sound like you.” (Jason Fried, Rework)

So many airlines have replicated the tangible structure of Southwest's low-cost model (single aircraft type, point-to-point network), but not many have made it beyond baby steps and adolescence. What they couldn’t replicate is the Southwest tone.

Monday, 16 January 2017

Can a Bit Of Southwest’s ‘Secret Sauce’ Help European Airlines Rise Above Challenges Linked To Airport Capacity Constraints?

The Southwest Airlines Way

In his recent CNBC interview, the current CEO of Southwest Airlines Gary Kelly described the ingredients of company’s ‘secret sauce’ to competitiveness as follows:
‘We’ve never had a layoff, we’ve never had a pay cut, we've been profitable every single year since our first year of operation in 1972. There is a lot to a culture. And it is easier to have a strong culture if you feel like you are a champion. And that’s the way our employees feel. The other thing that we try to do for our people is to give them the tools and the resources they need to provide a product they are proud of. We don’t charge bag fees, we don’t charge change fees. And mainly, we care about passengers. And we try to have a family at Southwest Airlines and ask our people to treat all their customers like their guests in their homes, and it’s worked really well for us. Our people are fantastic. It really is what sets us apart competitively in the industry, and they are the ones that make Southwest so successful.’ (transcript)

Of course, everything doesn’t go smoothly all the time. Disruptions happen, flights are delayed or cancelled, causing inconvenience to passengers. Even giving the best possible service won’t make everyone happy. What makes Southwest unique is the attitude of care and best possible response in difficult situations.

And there is another thing. When faced by challenges, Southwest do make changes but don’t give up on their basic values. Their current plan to expand internationally and grab the market share of its conventional competitors American, Delta, and United requires investment in new fleet, rise in labour cost, and loss of additional revenue opportunity by not charging passengers to change their travel plans and to check their bags (‘bags fly free’ policy) - not a pleasing things for investors. But Southwest resists change to the core of company values and view those still unique consumer-friendly policies as key elements of the company’s advantage.
The European way
For European low-fare counterparts this kind of ‘secret sauce’ to competitiveness is not on the menu. They are used to put the culture of growth in profit and market share before people and quality, assuming that by offering low-fares to their customers they free themselves from responsibilities related to travel mishaps, passenger anxiety and discomfort. Take EasyJet as an example. Their relationship with passengers is spiralling down, measured by service quality, on-time performance, and passenger claim processing, with lots of negative publicity. Things got worse since Gatwick, the world’s busiest single runway airport, became EasyJet’s biggest base following the fast traffic expansion. The consistent drop in punctuality from 80.8% in 2012 to 63.2% in 2015 illustrates the scale of mismatch between company’s strategic plans and reality. As a result, the airline has become more vulnerable to external events than other airlines facing the same difficulties. Still, EasyJet plan to ‘proceed with strategy of building leading positions at important airports in key summer beach and European city destinations’ putting market expansion before other values.
Unable to grow revenue and stay competitive while trapped at congested hub bases, conventional European airlines continue to buy growth through mergers and acquisitions. They keep reducing costs and improving productivity mostly by laying off people. And they don’t seem to be too concerned about a growing army of passengers experiencing unpleasant delays and cancellations. After all, their competitors do the same - European regulation on passenger protection can easily be ignored. Their records on service quality are partial and short of information about unpleasant consequences of flight delays and cancellations on customers. Airline delay reporting is voluntary, based on self-made flexible rules. Official delay statistics is therefore unreliable – the information is incomplete, inconsistent, and includes assumptions needed to make up for missing data. Reliable consumer reports do not exist.

Considering infrastructural limitations at twenty busiest European airports with no hope of expansion during the next two decades, disruptions are destined to rise and with them system inefficiencies, airline costs, and travel inconvenience. 

There are suggestions that more cooperation between long-haul and low-cost carriers is on the way.  EasyJet and Ryanair, Europe's two biggest low cost carriers, see their future in serving long-haul airlines operating from European hub airports. This is seen as a cost-effective way for legacy carriers to bring their passengers to hub airports for long-haul flights connections. Major hub airlines have already surrendered around 40% of short-haul flights and have been forced to slash further their costs to offer rock-bottom fares to remain competitive. Lufthansa and Air France-KLM still prefer growing their own low-cost units to avoid giving up more market share to the external disruptors. There are many hurdles to be overcome before these arrangements take place. While passengers may benefit from lower ticket prices and more connectivity at hub airports, their travel will undoubtedly become more disruptive, even more costly in time and money, and filled with more anxiety, especially if responsibility for compensating passengers for missed connections is not clearly assigned. EasyJet’s experience at Gatwick offers some clues.

The good news is that the ‘secret sauce’ remains an option for improvement in culture and quality and with it increase in revenue and overall profitability. For those for who consider words ‘culture’ and ‘quality’ too abstract and overused, the impact of Southwest’s ‘secret sauce’ can be demonstrated in analytical terms through geometric progression. Say, for the sake of simplicity, that on the route between airports A and B an airline was carrying 1000 passengers before it improved punctuality and overall care of customers. As a result, total number of passengers was up by 10%, there were 10% more return passengers, and revenue per passenger increased by 10%. The airline benefited from 33% rise in revenue without additional investments and sales efforts. With the addition of cost saving through improved punctuality, the very real potential for improvement in quality to increase profit margin can be understood.

The way forward
Obviously, elements of Southwest’s culture cannot be introduced overnight. But even the smallest progress in motivating employees and treating customers well can bring the rewards relatively quickly, as Ryanair proved recently. After tasting a bit of Southwest’s ‘secret sauce’ Ryanair put its latest financial success down to its low fare and “extraordinary customer service”. Their CEO admits he made a mistake in not focusing on customer service sooner. Moving in this direction can come in handy, especially if company decides to go ahead with plans to serve long-haul airlines operating from European hub airports.

Airlines with long history of hub entrenchment must work it out from bottom up, getting closer to reality. The fastest way to start this practice is by learning from disruptions, and digging more deeply into their self-inflicted causes. Disruptions are events where plans and management practices meet reality and become validated by passenger experience. Tracking their true origins at system level and understanding their impact on both passengers and overall business performance (as they unfold) is the key to improving competitiveness. And here is a hint – before making decisions, find out their impact on customers. Add to this an opportunity to insure against disruption losses equipped with well documented claims, and you will have even more reasons to look forward to better times ahead.     

So, the remedies are available, surely more effective than regulatory interventions that may be on the way. Unlike regulations, they cannot be forced on airlines, they are something that airlines have to choose.

Friday, 16 September 2016

What Kind Of Surveys Do We Really Need?

Surveys have become very popular in aviation industry when needed to fill up the information gaps (those related to passenger experience being the most popular) and sometimes to prove unprovable.  

What kind of surveys do we really need? In his blogpost Survey Questions Seth Godin explains:

Is this a survey or a census? A survey is statistically based, extracting insight from a few and being able to assert its truth across a wider population. A census involves asking everyone, and usually, matching up the answers with the person so you can take further action. 
If it's a survey, you probably don't need to reach as many people as you think you do. And if it's a survey, you are almost certainly going to get skewed answers, because surveying the people who answer surveys is truly different from surveying a statistically valid sample of your audience. SurveyMonkey doesn't actually run surveys of your total audience. It runs a poll of people who are willing to answer the questions.
It's pretty easy to survey everyone, ask every customer a question on checkout. In fact, online, it's easier to run something more like a census than a survey, because you merely turn it on and let it run. This is not a smart way to get a statistically accurate insight, but worse, if you run a census, you're wasting an opportunity if you treat it like a survey. If you ask every customer a question, you better be prepared to follow up on every customer who's not happy.
Are you looking for correlations? Causation is almost impossible to find in a survey. But if you're smart, you can learn a lot if you're able to determine that people who said "B" in answer to question 3 are also likely to believe "E" in answer to question 6. This is a huge step in your ability to determine worldviews and to ultimately treat different people differently.
It doesn't matter if 40% of your customers believe something about price and 39% believe something about features, but if you discover that 98% of the customers who believe this about price also believe that about quality, you just found something useful.
Is this worth my customer's time? It's super easy to commission a survey. Pay your money and you're done. But then what? Fedex sent Ipsos after me and thousands of other people by phone, wasted more than ten minutes of my time with a survey that never ended, and then they never followed up. Those ten minutes cost Fedex a huge amount of trust and goodwill.
Asking someone to answer a survey has a very real cost. Is the survey worth it?
Are you asking questions capable of making change happen? After the survey is over, can you say to the bosses, "83% of our customer base agrees with answer A, which means we should change our policy on this issue."
It feels like it's cheap to add one more question, easy to make the question a bit banal, simple to cover one more issue. But, if the answers aren't going to make a difference internally, what is the question for?
Are you push polling? The questions you ask actually end up changing the person who is responding. Ask me if I'm unhappy and I'm a lot more likely to become unhappy. Ask me who my favorite customer service person is and I'm more likely to look for good customer service people.
This is a challenge that most census-structured customer service surveys have to deal with. If you ask someone if they're satisfied and then don't follow up later, you've just made the problem a lot worse. If you ask your best customers for insight and then ignore it, you've not only wasted the insight, you've wasted goodwill as well.
Here's a simple test I do, something that has never once led to action: In the last question of a sloppy, census-style customer service survey, when they ask, "anything else?" I put my name and phone number and ask them to call me. They haven't, never once, not in more than fifty brand experiences.
If you're not going to read the answers and take action, why are you asking?
Best question to ask about a survey: Do we actually have to run this?

Monday, 22 August 2016

Airport Congestion Zoomed In

Heathrow, the most congested European airport, has been operating at 98+% of its maximum capacity for over a decade, unable to absorb even the smallest change in airline schedules without spreading the knock-on effects across the network. This, however, didn’t stop it from accommodating more flights into its schedule and even crossing the capacity limits by overselling the slots and keeping the overbooked flights circling in holding stacks before landing. The following are some of the consequences (based on 2010 figures): 
  • 54% of 224,497 incoming flights at Heathrow were held in holding stacks 
  • By comparison, 14% of Gatwick’s incoming flights were held in stacks and 5% at Stansted (NATS)
  • 18 million arriving passengers were kept circling in holding patterns for up to 20 minutes on a normal day and 45 minutes in bad weather (NATS)
  • Airlines wasted around £65 million in fuel while stack in the holding queues
  • Airborne holding at Heathrow amounted to the equivalent of having approximately 10 aircraft grounded at airport each day. By comparison, in 2004 the equivalent of 5 British Airways aircraft a day were circling in airborne stacks above Heathrow (BA)
  • Heathrow was responsible for 91.4% of the carbon emissions from stacking aircraft in Britain as a whole, with a total of 277,900 tonnes (NATS)
(Additional cost of crew, maintenance, passengers and ripples across international and domestic networks and reduced revenue are not included)

Five years on, and the increase in Heathrow traffic continues. In 2015, compared to the previous year, aircraft movements were up by further 5% and passenger numbers by 14%, indicating the use of bigger aircraft, more fuel burned, more unproductive aircraft time, more resources, more delayed flights and lost connections for passengers and an increase in noise and air pollution. On airline side this has resulted in an unreported increase in inefficiencies, rise in costs and disruptions, and for Heathrow Airport – a rise in related aeronautical and retail revenue.

Beyond these figures are unresolved differences in the way those involved in decision making perceive congestion and make their plans, and also declarations made by policy makers and regulators that doesn’t seem to match reality:

National Air Traffic Services (NATS) ‘From an operational point of view the reality is that holding is not actually a symptom of inefficiency. In fact, Heathrow Airport schedules holding into the system. This might sound crazy but holding is actually a very efficient way of ensuring an airport with constrained runway capacity, like Heathrow, makes maximum use of the landing slots it has available.’ (nats.aero)
Association of European Airlines (AEA) ‘Stacking delays are anathema. They have a substantial environmental cost and they play havoc with the airlines' schedule integrity. They also severely impact our customers, when an on-time departure turns into a significantly delayed arrival.’

British Airline Pilots Association (BALPA) ‘The amount of stacking at Heathrow is clearly a problem and is a symptom of the capacity constraints we have. One thing that may not be figured into official holding statistics is extended flight paths pilots have to sometimes fly after leaving the stack which can add another 30 miles of flying and additional time onto the approach.’
EU framework for slot coordination ‘The aim of the EU framework is to ensure the fullest and most efficient use of existing capacity at congested EU airports while maximizing consumers' benefits and promoting the competition.’
Eurocontrol ‘Despite the prospects of slower traffic growth, Europe continues to face a severe airport capacity crunch (by 2035), which will cost airports and airlines in excess of €40 billion in lost revenues and €5 billion in congestion related disruption costs annually. ‘
McKinsey - Management Consulting ‘Increased congestion makes connecting flights more difficult to schedule and maintain—another problem for airlines as connection-heavy airports get even busier, leaving less and less room during peak connection times.' 
'Is a congested home airport a good thing for airlines? The answer is yes, at least in the short term; congested airports may give airlines an opportunity to increase revenues.’ (Excerpts from Gridlock on the ground: How airlines can respond to airport congestion)

On the improvement side, NATS is leading the way in organised actions on reducing airborne delays and increasing operational resilience at Heathrow. The problem is that whatever the expected results (which usually look bigger from local perspectives) they appear to be modest in real terms compared to the consequences of airborne stuck delays. Among the ongoing actions is the XMAN project launched by NATS in April 2014 with reported reduction of up to one minute in holding times with annual savings of 8,000t of CO2 and £1.65m in fuel - respectable but not sufficient to avoid being wiped out by even a small increase in traffic.
Similarly, the benefits of the introduction of linear holding stacks will be seriously challenged by a further increase of traffic in congested areas. “If a modern system isn’t adopted in the next decade”, said Martin Rolfe, Chief Executive of NATS, 'the average delay to each plane caught in congested airspace will increase to 15 or 20 minutes, coinciding with an increase in air traffic”.
And, in the same way, continuous expansion in congested areas reduced the expected benefits of Operational Freedoms Trial project finalised in 2013. As explained by Chief Executives of CAA and NATS during Government inquiry on aviation strategy, the focus was on the creation of more space for resilience at Heathrow rather than adding more aircraft to it – something that airports and airlines are still not ready to accept.

Will other airports follow Heathrow example? Hopefully not. The holding stacks example demonstrates how much harm the decision to force extension of capacity constrained airport in the air brings to the system. It provides some insights into what the true problems really are and indications on how they can be tackled and resolved. 

There is no shortage of ideas and action plans for improvement. The problem is that they are partial, based on past experiences, and don't take into account interactions of system components that are constantly changing. This could be overcome by applying the technique for tracking the cross-system causes of major loss making events and making necessary corrections on the go. 

Visit www.astuteaviation.com for more information.

Tuesday, 26 April 2016

The Disruptive Nature of Regulation EU/261

Can responsibility for passenger compensation be more equally shared among those responsible for flight delays?
Interview with Sean Gates, CEO Gates Aviation

It's been eleven years since introduction of controversial regulation EU261 which holds airlines solely responsible for compensating passengers for delays caused not only by reasons within their control, but also for errors made by airports and service providers. And indirectly, they are paying for oversights of decision makers at industry level (including regulators and politicians), who failed to synchronise growing traffic with infrastructural resources thus causing continuous increase in airport congestion and consequently flight disruptions.

To make things even worse for airlines, interim rulings ratified by the Supreme Court are further increasing airlines responsibility for delays. A 2014 ruling says that airlines can no longer claim technical faults as extraordinary circumstances. They now must pay out compensation for flight delays caused by technical reasons even when aircraft becomes unserviceable due to a damage caused by a third party.

Some of the rules are determined by the laws in respective EU countries so that in the UK, for example, passengers can now back-claim their delay compensation within the period of six years. According to CAPA, this decision opens the door to more than two million compensation claims every year in the UK alone, worth an estimated £876 million. Historic claims dating back six years could potentially add another £4 billion.

The issue is getting hotter as a new breed of airline losses starts to accumulate.
Who else can better explain the regulatory side of this problem than Sean Gates, recognised as one of the best aviation lawyers worldwide and a professional with exceptional understanding of wider industry issues (Sean's Bio).

It was my pleasure to meet Sean and talk to him about this topic that, as he said, has been close to his heart for a long time.

JR: There are so many undeniable facts about short-sightedness of EU261. What is it that keeps airline complaints ignored by regulators for such a long time?
SG: The pernicious growth of EU261 continues unabated – fuelled by successive decisions of the European Court of Justice constructed on the illogical premise that airlines can continue to pay ever-increasing compensation for matters over which they have no control, all at no cost to the consumer. Knowing this to be untrue, various representatives of the Commission have, nevertheless, responded that a fundamental reversal of EU261 is impossible given the mind-set of the politicians in the European Parliament. For the politicians, the regulation can be portrayed as a nil cost consumer benefit to enhance their reputations, regardless of the impact on consumer costs and benefits; and ignoring the potential safety implications.

JR:  What is the role of IATA in protecting their airline members from cost burdens caused by third parties?
SG: A significant proportion of aircraft delays are attributable to the actions of third parties operating at the airport including ground handlers and others. With the increasing cost of EU261 claims, airlines are understandably reviewing, yet again, their rights to recover the amounts they are obliged to pay. If the damage is caused by third parties with whom the airline is not in contract that should cause little difficulty, but where the damage is caused by a ground handler with whom the airline is in contract – as is usually the case – the claims are abandoned and shoulders are shrugged at the prospect of the application of Article 8 of the ubiquitous IATA Ground Handling Agreement. There are various iterations of this agreement in existence; but in broad terms the agreement seeks to limit an airline’s right to compensation for its losses to direct repair costs capped at a limited figure with an exclusion of what are described as consequential losses, except where the damage was caused by recklessness with knowledge that damage would probably result.

JR: It seems that ambiguities of IATA Article 8/SGHA and new recommendations in Chapter 660/AHM regarding consequential losses (opposed by handlers) only add additional burden to airlines?
SG: To many, these provisions seem an insuperable bar to recovering losses sustained by an airline as a consequence of the operation of EU261 since it is assumed such losses are to be regarded as consequential. And since it is also believed that proving recklessness, let alone knowledge of the probability of damage, represents an excessively onerous burden; the costs would probably exceed the recovery.

JR: Why is the agreement so harsh on carriers when it is supposedly the result of measured deliberation between airlines and ground handlers within the auspices of IATA?
SG: The answer is, largely, ignorance and misrepresentation. Ground handlers (and even some airlines who also handle) pedal the view that if ground handlers were responsible for consequential damages, handling costs would skyrocket because of the concomitant increase in their insurance costs and, therefore, their charges to the airlines. Those propositions are untenable – if no damage is done, insurance costs do not increase. If an inferior handler repeatedly causes damage then its cost of insurance may increase compared to those of efficient handlers. All this means is that competition would weed out incompetence. In today’s insurance market it is, in any event, highly unlikely that premiums would increases a consequence of a few losses. They would certainly not increase until loss experience justified it.

JR: Ironically, it seems that the consequence of the current regime is effectively that airlines are the insurers of ground handlers with regard to consequential losses?
SG: Yes, as those losses are not recoverable from the airline’s own insurers (other than in a modest way with regard to business interruption) so the subsidiary argument of handlers that the agreement reduces industry costs by eliminating double insurance is also palpably untrue.

Thursday, 14 April 2016

What is the type of organisation you work for - Machine, Professional, Entrepreneurial, or Project oriented?

In his latest post 'Species of Organisation' Henry Mintzberg's shares his unorthodox and insightful views on the way we understand and 'discuss' organisations often unaware about how much the interplay between structures, management style, power relationships, and culture affects the company's output.

There are species of organizations just as there are species of animals. Don’t mix them up. A bear is not a beaver; one winters in caves, the other in wooden structures they build for themselves. Hospitals are not factories; advertising agencies are not fast food companies.

This may seem obvious, but while we recognize the different species of animals, we often mix up the different species of organizations. How often have management consultants come into one kind of organization and treated it like another—say tried to deal with a hospital the way they have just dealt with an automobile factory. (It might work in the cafeteria, but how about geriatrics?) Of course, we do use these kinds of words—hospitals, advertising agencies—but they designate industries, not the nature of their organizations.

Years ago I set out to address this problem, in a book called The Structuring of Organizations (later issued in shorter form called Structure in Fives). It has proved to be my most successful book, for many years widely used in schools around the world. But not successful enough: the way we discuss organizations remains primitive. So let me offer my framework of four basic species of organizations.

The Machine Organization  Many organizations function like well-oiled machines. They are about efficiency, namely getting the greatest quantitative bang for the quantitative buck. Accordingly, everything is programmed, to the finest detail—for example how many seconds before a McDonald’s cook turns over a hamburger patty. This makes it easy to train the workers, but not to keep these workers: their jobs can be boring and the controls stifling. The machine organization is great at what it does well—we want that wake-up call in the hotel at 8:00, not 8:01—but not outside its own context. (Would you like to lift the pillow in your hotel room and have a Jack-in-the-box jump up and say “Surprise!” You are not there to be amused. But you are in a movie theatre, so beware of films made by machine-like film companies.)
The Professional Organization This second species is programmed too, but in an entirely different way. It is about proficiency more than efficiency. In hospitals, accounting firms, and many engineering offices, the critical work is highly skilled—it takes years of training—yet most of the time it can be surprisingly routine. (Imagine being wheeled into an operating room as a nurse says: “You have nothing to worry about: this is a highly creative surgeon!”) In the professional organization, sometimes people seem to work in teams, but in fact they are usually working largely on their own. Everyone in that operating room is carrying out his or her own procedures according to the predetermined protocols. More to the point, each of the musicians in an orchestra is playing to the notes written for his or her own instrument by Beethoven, more than responding to the conductor.
The Entrepreneurial Organization  Yet we venerate the orchestra conductor as if this is the epitome of leadership. Again, we are mixing up species. In the entrepreneurial organization, central leadership dominates, while in orchestras there is more going on than this, as suggested above (and as will be discussed in the next two TWOGs).  The best examples of this species are often found in entrepreneurial firms created by visionaries—as in the case of a Steve Jobs at Apple. Sometimes older organizations in crisis take on this form as they centralize power around their leadership to deal with the problem. And let’s not forget totalitarian political regimes, like Putin’s Russia. When the boss of an entrepreneurial organization says “Jump!” the response is “How high sir?” (When the executive director of a hospital says “Jump”, the doctors ask “Why?” In an orchestra, some of the musicians might have a tantrum.
The Project Organization  This fourth species is different again. Here the work is also highly skilled, but the experts have to work in teams, to combine their efforts for the sake of innovation. Think about film companies, advertising agencies, research laboratories: this is found in many kinds of high tech industries. Here the experts work on projects, to create novel outputs—a film, an ad campaign, a new product. (Over the years I have called this species the Innovative Organization, and Adhocracy.) To understand the project organization, and if you are one of its managers not screw it up entirely, you have to appreciate that it gets its effectiveness by being inefficient. Without some slack, innovation dies.

Each of these species requires its own kind of structure, its own style of management, very different power relationships, and so on. I have no space to go into all of this here—an accessible reference, mentioned at the end, does that. Let me just add that these forms don’t just HAVE different cultures; they ARE different cultures. Walk into different ones and you can almost smell the differences.

Tuesday, 5 April 2016

Why Airlines Cannot Recover Disruption Losses Caused By Outsourced Handlers Who Damaged Their Aircraft, And What Needs To Be Done To Make Their Claims Successful

Interview with Ivar Busk

Airlines pay a high price for their ignorance about origins and true value of disruption costs. This increases their business vulnerability including unexpected events caused by external service providers. Among the most costly ones are ground handling incidents resulting in aircraft damage which cost major airlines over $10 billion annually. The majority of these costs are disruption related and impossible to recover using the existing, oversimplified methodologies. 

Instead of introducing the effective disruption cost/cause tracking methodologies as an integral part of airline decision making and applying them when needed, like in the case of recovering costs of aircraft damage, airlines either do nothing (and pay a high price when incidents happen), or opt for insurance protection with high premiums, high deductibles, and high legal charges when involved in long, hard to win disputes. This doesn't mean that carriers should not be insured against this kind of losses, but relaying exclusively on insurance protection they miss to understand their true exposure to risk of aircraft damage and work on its prevention and better protection. In this way airlines let this kind of ground handling incidents grow unnoticed and, apart from the financial impact, contribute to slow but inevitable deterioration of system performance and safety, especially at congested airports.

How do airlines cope with these problems in real life? What are the challenges faced by people directly involved in recovering consequential costs of aircraft damage?

I asked Ivar Busk, a veteran of 34 years in this field to share with us his insightful views about this 'niche' industry problem with the not so 'niche' consequences on airline cost, revenue, reputation and ramp safety. Ivar's impressive career as an ex SAS Manager Insurance, Head of Airside Safety, Aircraft Accident Investigator, Aircraft Engineer, and member of IATA Airside Safety Group, combined with his commercial business degree from Copenhagen Business School, and education at USC and FAA makes him a respectable contributor to the discussions related to the improvement in this sidelined area of airline business.

JR: According to handlers, 'carriers have been asked to provide quantifiable evidence of their damages ('loss of aircraft use') and they found it difficult if not impossible'. What are the main reasons behind airlines' inability to provide the evidence of consequential losses resulting from aircraft damage caused by ground handlers?
IB: Aircraft damage incidents are sporadic and unpredictable events so their assessment and claim recovery has not always had a high priority, and therefore no specific development and practice for aircraft damage assessment and claim recovery really exists. The aim for an airline is to minimize both direct and indirect losses following the aircraft damage and at the same time try to establish preventive measures to prevent reoccurrences in conjunction with the line operation.
And also, because of relatively small number of cases on a yearly basis, it is difficult to gain experience in dealing with claim recoveries which then require external expertise to help resolve the case. The problem is that there are not many companies with sufficient expertise. In order to minimize losses some airlines have established an extensive network of insurance companies and surveyors that can help them with reducing bureaucracy, ensuring quicker and more expedient resolution, and increasing the chances to win the maximum possible compensation.
Nobody expects losses related to aircraft damage on ground to be completely eliminated, but they can certainly be kept at minimum possible levels. This can be achieved first by raising awareness about the full scale of costs involved in aircraft damage incidents and by organising the process in an efficient way. This assumes continuous monitoring of operational risks, particularly at critically congested airports. It also requires preventive system measures and guidelines for dynamic approach to identifying event specific indirect costs of aircraft damage without which claims cannot be recovered. Many external influences including the latest economic crises have forced airlines (operating at low profit margins) to take actions to increase the claim recovery. As a result, they have started to make claims even for minor damages.

JR: Are there any estimates on how big the costs associated with 'loss of aircraft use' are?
IB: Consequential loss ("loss of use") is the big item and is on average approximately four to ten times higher than the direct costs. A special development of a model for calculation of “Loss of use” is therefore essential, for achieving the optimal results. Airlines are well equipped with figures representing structured information concerning, crew, maintenance, passenger interruption cost, ground operation, sales cost etc., however the knowledge of how to put them together and present them, has been hard to come by.

JR: The content of ground handling contract can increase or decrease chances for loss recovery. How difficult it is to reach the agreement on consequential losses? 
IB: Agreeing on contract is always a big challenge and it is hard and often impossible to agree about consequential losses related to disrupted operations...