Friday, 1 February 2019

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

Thursday, 29 November 2018

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.

Wednesday, 28 November 2018

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.

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.


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


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.


Wednesday, 14 November 2018

Questioning value of intuitive decisions in shaping system performance

It is hard for us to understand how the system works because the constantly changing interactions between people and processes are mostly invisible, complex, non-linear, hard for our brain to digest and for computers to model.  As a result, we often make system decisions partly based on interpretation of simplistically computed data and partly by trusting our intuition unaware of cognitive biases shaped by what we see and by our experiences. The problem is that what each of us see and experience is different. 

To avoid these biases, we need to get closer to the truth beyond numerical values representing the system outcome and express it in an easy-to-understand, actionable way, so that the risk of underperformance in cost and service quality is kept at the lowest level. 

We can get there if we start learning from cross-system variables, focus on what matters from system perspective, put it in a meaningful context, and know what questions to ask before our gut feelings slip in. In this way, we are allowing smart system analytics and intuition to work in concert.

The practical framework for making system decisions is described in the second edition of my book ‘Beyond Airline Disruptions: Thinking and Managing Anew’ and are at the core of my consulting work.

Wednesday, 31 October 2018

Denial Of the Understanding As a Cause Of System Disruptions

'Just because you don’t understand it
…doesn’t mean it isn’t true.
…doesn’t mean it isn’t important.

If we spend our days ignoring the things we don’t understand (because they must not be true and they must not be important) all we’re left with is explored territory with little chance of improvement', says Seth Godin

This is why an unexplored territory of system disruptions in aviation keeps growing unattended. If you are keen to make real improvement you need to understand disruptions.  I have written 'Beyond Airline Disruptions: Thinking and Managing Anewto offer you some guidance.

Wednesday, 24 October 2018

Announcing the second, revised edition of my book Beyond Airline Disruptions: Thinking and Managing Anew

This revised edition of Beyond Airline Disruptions is written to inspire existing and aspiring leaders, regardless of their hierarchical rank, to think afresh and act anew and to see an organisation as a flexible learning network that needs constant fine tuning and occasional upgrades to keep up with complex and dynamic changes in operational environment.

It sets the framework for a new way of planning and for connected, adaptive, decision making that learns from critical misalignment between strategy and operations manifested through operational disruptions. This makes it possible to consistently surface and address underlying causes behind real-world problems allowing leaders to inspire changes where the increase in passenger loyalty and lower cost come as natural consequences, resulting in non-imitable advantage.

‘Thinking and Managing Anew’ is a practical guide based on my diverse experience and learning from system thinkers across industries.  It is meant to develop wayfinding skills by looking through the system rather than from above it. This motivates people to get together, bypassing procedures and structures that set them apart. It is a leader’s guide to reality.

Friday, 11 May 2018

Monopolies, Oligopolies, Market, and Passenger Choice

‘Every public company seeks, at some level, to be a monopoly, an organization with enough market power to dictate pricing, profits and the future of the market. And monopoly is also a critical failure of capitalism. When monopoly occurs, when the customer no longer has a choice, prices go up, innovation goes down and mostly, consumers have no voice. A key role of government is to create an environment where monopolies don't happen-and when they do, to intervene and eliminate them. Choice is the key word in making markets work. No choice, no market’ says Seth Godin.

In the airline industry, cost of air travel goes up despite lower fares. On-time arrivals are becoming less certain and the amount of time passengers spend on the ground often exceeds travel time and incurs additional costs. In a deregulated industry regulators act as observers, the concentration of power happens through airline mergers and alliances so much so that the government seems to have lost the key role. Call it monopolies or oligopolies, the results are the same – passengers are losing their choice and voice.

If ‘choice is the key word in making markets work’, then ‘no choice, no market’.

Are there lessons to be learned?

Tuesday, 19 December 2017

How to Switch from Legacy to Systems Thinking and Make the Work Really Work for Airlines and Passengers - My Interview with John Seddon

Despite incomparable growth in airlines size, system complexity, and operational dynamics, airline management styles, basic organisational structures, and performance measures haven’t changed much since 1950s. Decisions are still downloaded from the top without taking into account the natural, cross-functional flow of work and its impact on overall performance. Corporate reports are made of disjointed financial and operational figures and are unsuitable for supporting the system improvement. The result: poor service, decline in operational efficiency, and dubious financial results.

Rather than improving from inside, airlines sought relief in expanding through the non-core businesses and passing on responsibility for service quality on external service providers – strategies that only exacerbate problems of their core business. The question is, is there a better alternative to manage an airline, to bridge the gaps between system management and operations, to ensure adaptability of the system that is a part of a bigger system that constantly evolve, to bring clarity to that which appears fuzzy, and make the work really work for airlines and passengers. 

Being personally involved in designing the method that supports these values, I have always been on lookout for new ideas within and outside the airline industry, especially while writing the second, extended edition of my book ‘Beyond Airline Disruptions’. Not long ago I was discussing these issues with people working in financial and insurance sectors and was advised to look at John Seddon’s Vanguard Method which they were considering applying to their work on system improvement. After watching the suggested video ‘The origins of Vanguard Method’, I instantly recognised that this concept is applicable to airline organisations, but it was after I read his books ‘Freedom from Command-and-Control: A Better Way to Make the Work Work’ and ‘I Want You to Cheat’ it became clearer that the Vanguard method provides answers to most of the above questions, and that its general principles have much in common with my work.

I contacted John explaining my interest in his work, and was soon welcomed by him in his office in Buckingham. It was a real pleasure talking to John, experiencing the clarity of thoughts with which he explains things that many people see as complex and hard to comprehend. I was happy to hear that John spent four years working for British Airways in mid-eighties and has had an opportunity to feel the feel of life inside the airline.

John is a change-maker who proved through practice that there is a better way to make the work work than through the system governed by command-and-control mentality instilled in top-down organisational hierarchies. He has a rare ability to inspire people to change the way they think about their work and apply systems thinking in daily practices.

John is an occupational psychologist, researcher, professor, management thinker and leading global authority on change, specialising in the service industry. He is the managing director of Vanguard Consulting Ltd based in UK, with franchisees in Scotland, Ireland, Denmark, Sweden, New Zealand, Australia, Croatia, and The Netherlands. 

The following are the highlights from our talk and John's writing focused on   
Vanguard approach to systems thinking seen from airlines’ perspective. (JR-Jasenka, JS-John)

JR: When we look at airline organisational charts, everything looks orderly. Functions are sorted and linked vertically and horizontally so that managing numbers, controlling people and their activities comes easy from hierarchical perspective. In the real world, however, the work is cross-functional and interacts with changes in the external environment. Inability to understand and control these flows comes at a high price: it is the underlying cause of rise in system inefficiencies, complexity, costs, and the decline in service quality.
JS: We think of our organisation as top-down hierarchies, we separate decision making from work. Top-down, hierarchical, functional organisation might help us navigate our way around to answer the question 'who-does-what and who-is-to-blame?’, but it does not help us discover anything about how and how well the organisation achieves its purpose. The typical consequences of failure are: failure to achieve them, increased variability, more waste (errors and rework), higher costs, demoralisation of the workforce and, ultimately, disrespect for management.
We need to reject classical conceptualisation of the organisation. Taking a system view always provides a compelling case for change and it leads managers to see the value of designing and managing work in a different way.

JR: How does Vanguard address this problem?

JS: The Vanguard approach to systems thinking is a completely different logic to command-and-control. While all systems thinkers agree that a system is a sum of its parts and the parts must be managed as one, the Vanguard approach is unique in that it starts and ends with the work. It makes thinkers and doers cooperate naturally. It is about changing management thinking which is the key to changing performance.
Vanguard is a methodology for change and improvement that engages the organisation. Any change is based on an understanding of demand from an ‘outside-in’ or customer perspective, identification of the value work, adoption of relevant measures and then designing out the waste within key process. People who do the work must be engaged in these activities. It also provides the means to develop a customer-driven adaptive organisation; an organisation that behaves and learns according to what matters to customers. If the system is to have viable economics, it could only be understood and developed from this point of view.

JR: The special thing about Vanguard approach is that it cuts costs as service improves and increases profit. This is quite opposite from what traditional management is about.

JS: Most managers equate improvement in service with increased cost. It is because they have been conditioned to do it that way. They cannot ‘see’ where their costs really are.  When managers learn to see their organisation as a system, they see the scope for improvement and the means to achieve it. They can see the waste caused by the current organisation design, the opportunities for improvement, and the means to realise them.

JR: Understanding what ‘system thinking’ is really about is too abstract for some people, which is why there are lots of different interpretations that fit in local contexts, especially when compared with command-and-control way of thinking.  I found the following comparison table from your book Freedom From Command-and-Control: A Better Way to Make the Work Work’ really useful for clarifying the differences:

JS: When command-and-control thinkers listen to system thinkers they hear the words, but don’t appreciate their meaning. If system thinkers point out the value of working outside-in, command-and-control thinkers just treat it as an example of what management should be doing in any event.  Should system thinkers point out that traditional, command-and-control measures were part of the problem and should not be reintroduced, the command-and-control thinkers will insist such measures to be the fundamental stuff of management.
JR: More and more often airlines expand their operations beyond airport capacity limitations and their own ability to handle the consequences. They invest in more aircraft, fly more kilometres and more passengers to more airports just to outnumber the competitors, and are later surprised by ‘unexplainable’ losses, rise in passenger complaints and compensation claims.
JS: The measures associated with command-and-control thinking tell managers nothing about the system because they are based on a resource-management logic.  This logic assumes that when capacity needs to be increased, it requires extra resources. In service organisation, especially the complex ones, waste is much harder to see. It is hard to see rework, it is hard to see work flow, and it is hard to see demand. They see the figures but are not in a position to reduce their costs and improve their service. The people-managers and workers alike are locked into dysfunctional system. But the better way to improve capacity is to remove waste: adding resource to wasteful system just compounds inefficiency.
Once the abundant waste inherent in the current design is removed, the capacity increases, lessening costs and providing scope for growth. Measures and roles need to make the system solution work. You have to be prepared to change the system, the way work is designed and managed; especially the way measures are used in management. 

JR: System decisions depend primarily upon information and measures surrounding decision makers. They often distort reality as managers don’t like bad news.

JS: Firstly, managers need to see for themselves the dysfunctional consequences of their current measures. Only then will they engage in devising measures that will be more beneficial. In the systems solution, measures are derived from purpose (not the budget) and are used by the people who do the work to understand and improve it. The benefits are significant.  People change what they do, something it is impossible to accomplish in a command-and-control design. Managers’ roles change from working in the hierarchy to acting on the system. It is important for managers to ensure they limited their actions to the things that would be important, and, at the same time, develop their understanding of their organisation as a system.
JR: Functional measures always cause suboptimisation because parts are optimised locally at the expense of the whole. What kind of measures should be used to ensure better system decisions?
JS: To measure work with functional measures might seem logical from a top-down perspective, but its weakness is that it tells you nothing about what is going on. It will only tell you what has happened, and then only from a functional point of view. Functional measurement is dysfunctional, creating fear, destroying teamwork, and encouraging rivalry. It drives short term performance of functions at the expense of the system.  Worst of all, it fosters politics. Political behaviour fills the void created by management detachment from the work. Controlling work through functional measures can only be harmful to flow. All work goes through some kind of flow, so we would be better having measures for it. Managers worry about this idea because they assume it may threaten costs. They cannot see the costs associated with the waste caused by functional management. Only by managing costs end-to-end, associating cost with flow, can you reduce costs in a sustainable manner.

JR: Every change in schedule incorporated in annual budget triggers changes in cost and revenue without managers being aware of it. Communication between operations and management responsible for monitoring causes of critical variations in operational performance doesn’t exist. 
JS: This is a typical example how we separate decision making from work. We expect managers to make decisions with measures like budgets, standards, targets, activity and so on. We teach managers that their job is to manage people and budgets. At the heart of this logic is separation of decision-making from work that come at higher costs and poor customer experience.

Read the full interview

Sunday, 5 November 2017

Are Airlines Using The Right Metrics To Manage Their Business? Is Anything Missing? - My Interview With Alex Dichter

The airline industry is facing its greatest challenges ever. Hub networks are getting critically congested at its busiest parts, space for growth is limited, operational dysfunctions are more frequent and quality of service is at its lowest level ever. Both legacy and low fare airlines are in search for new identities, merging the elements of low-cost and full-service business models.

Despite growing operational difficulties, in 2015 European airlines achieved an average operating margin that was three times higher than at any time in the past decade and the airline industry as a whole achieved above the normal return on invested capital. The fact that profits generated in 2015 and 2016 were mainly the result of a cyclical fall in the price of jet fuel raises many questions about the industry’s prospects. Still, major airlines continue to invest massively in fleet expansion, risking overcapacity, more disruptive air travel, and increased pressure to reduce prices.

Preoccupied with financial metrics disconnected from changes in operational reality, airlines are drifting deeper into failure. Instead of improving from within, they are constantly looking for the next in the line of temporary financial reliefs. They continue to measure progress by fragmented KPIs which are poor proxies for reality that say nothing about quality, nor about its relationship with cost as system measures. Airlines actually do so poorly on the cost and quality side, that they have started to pass on further reductions in cost to passengers, deluding them with lower fares while worsening their travel experience.

How well will airlines be prepared to face the next cycle of higher fuel prices, and how hard it will be for companies exposed to a high level of operational risk and passenger dissatisfaction to keep their business afloat? What is it that drives airlines in the direction that doesn’t look sustainable in the long run, and what are the remedies?

In search for answers, I came across Alex Dichter’s articles that shine more light onto these controversial issues. Alex is a Senior Partner in McKinsey's London office and leads the company’s global Airline, Travel and Aviation practice. He is a former pilot, instructor, and a very frequent traveller - a rare combination of experiences that include financial, strategic, operational, and organisational side of the airline business. He kindly accepted my invitation for an interview to share his views, and explain not so obvious issues that are shaping the future of airline business.  

(JR-Jasenka Rapajic, AD-Alex Dichter)

JR: Corporate performance reports are the compilation of disjointed financial and operational inputs translated into KPIs and as such don’t seem to be reliable enough for making good system decisions. On the financial side, ROIC (Return On Invested Capital) is increasingly used as the industry benchmark for airline financial performance. Is this the right measure of the capital, and how much does it divert the attention from deteriorating business fundamentals like sustainability of the existing business models, stability of operational performance, and service quality?

AD: Whether or not ROIC is distracting, very few people lower down in an airline will think about ROIC. For the most part, they are focused on operational performance metrics and hopefully on driver based metrics. If you run an airline, you want your head of airports to focus on the number of gate agents per departure, or the percent of self check-ins. These are the things they can locally control and include cost and quality. But, at senior management level, there are some issues with ROIC that have a potential to distort decision making. This is one of the essential traps in the industry. The first among them is the way in which airlines account for costs. Accounting standards allow them to account for maintenance expenses on a cash basis. For example, when you buy a new plane, for the next five years you basically show no maintenance cost, and you end up with very high cash flow, very high P&L returns, and also very high ROIC. It doesn’t change the fact that every hour you fly that airplane it is one hour closer to a C check or a D check or major maintenance. The same happens to labour costs. Take flight deck as an example. A first-year pilot’s pay of say $60,000 a year can rise up to $160,000 for a pilot with twelve-year experience. There are many ways to distort the equation to get a high ROIC for a period of time. It is relatively easy when you are a young and growing airline and you have a high ROIC, but that doesn’t necessarily mean that you are making the right decisions in the long run.

The other interesting disconnect in the airline industry as a whole is that it technically doesn’t make money. Airline business is a not a good business for shareholders, but the return on owners’ equity is actually quite good. So, if you look at airline entrepreneurs, people that start airlines and own them, they do quite well because they are able to borrow money and use other people's money, so it is easy for them to do well. They make a few hundred million and then move to the next thing, leaving the problems to someone else. I would like to see longer term metrics that show what it takes to make an airline healthy in the long run.

I also think that we, as an industry, are making a mistake by focusing so much on the aircraft, particularly because their competitive advantage is zero. And it is a trap. You buy the first new planes from an aircraft manufacturer because you think you are going to have a competitive advantage. In about two years lots of airlines have one. When the price comes down, airlines that don’t have these planes think they have to have them to avoid the disadvantage. There are however airlines that decided not to fall into that trap. They have developed in-house maintenance and modification capabilities to get good use of their older airplanes and are likely to continue with that for quite some time.

JR: In the context of performance measures, why would a low-fare carrier with short turnaround times and no slacks wish to start operating or even moving their base to the congested, Gatwick-like airports risking costly disruptions? At the same time, major legacy carriers are reducing their operation at the capacity constrained airports, finding the opportunities for expansion elsewhere.  Is it possible that the desire to expand can be so strong as to ignore the longer-term consequences of such decision on cost, quality, and reputation? How much does the lack of system metrics contribute to this situation?

AD: Firstly, if you are a low-cost carrier, you are making money by offering places that stimulate demand. You are offering low prices, taking into account how much money people have, and you also have to be competitive.
And the second thing, which I assume is true for most airlines, is that they make most of the money in cities in which they are dominant from the capacity standpoint. In an attractive location, this creates an arms race where you want to become number one as quickly as possible, and you have the potential to make a lot of money in these places, despite the fact that operational performance is very poor.

There is a very interesting point however: do airlines make these kinds of decisions with a full understanding of the operational risk? The answer is almost certainly no. Airlines are making decisions based on long term averages and, to some extent, hopes. These are the rules of thumb. They are not driven by data, nor by any real understanding of operational risk. And, as mentioned in some of your articles, the data is incredibly rich and it’s readily available. For example, I can tell how much a particular plane will be delayed at Gatwick on a given day of the week based on experience. With this understanding, airlines will be designing the schedules pretty much differently. And we will see that airlines operating from congested airports will start readjusting their thinking. But it is a long road.

JR: There are many aspects of quality which is the result of complex interactions between people and processes and cannot be measured in a conventional way. This has become even more difficult considering that quality of service and passenger experience are now mostly dependent on outsourced service providers. As mentioned in your article Buying and Flying, often more than 60 percent of an airline’s cost base goes to suppliers. How do airlines control the quality of outsourced services?

AD: I don’t see any technical reason why an outsourced provider cannot provide as good, if not better, service than the airlines could themselves. I think this is the big issue we face today. There are two different ways to outsource the process. 

Read the full interview

Monday, 30 October 2017

Fresh Thinking: How to Break The Historic Trade-Off Between Lower Cost And Better Experience - my interview with Martin Geddes

As airlines race to ensure traffic growth at congested airports and airspace intensifies, knowledge about how far they can go with low fares to avoid losses has become crucial for their survival. Their inability to control authentic costs and service quality has become a critical issue, especially for complex hub operators.  

The difficulties arise because both cost and service quality are system issues and as such have no place in the existing performance measures and management practices. 

Legacy mindset is still strongly present in governing how work inside airlines is designed and managed. Fragmented information systems, departmentalised optimisations, and top-down functional hierarchies are just some of the issues. They keep managers out of touch with operational reality and damage the way customers are dealt with. The consequences are high costs and poor service quality. No wonder that in order to remain profitable airlines look for temporary rescues in mergers and acquisitions and also invest in massive fleet expansion, which is all a part of financial gaming. It increases the risk of financial failures in the longer term - oversupply of capacities can fuel an even fiercer pricing war, passing additional burden onto passengers.

To succeed in these unfavourable circumstances, airlines need to turn inside and explore their hidden potential for improvement. This includes changes from functional cost cutting to revenue enhancing mentality combined with smart cost adjustments – things that cannot be copied by competitors. The process starts with seeing people behind passenger numbers, understanding their travel experience and becoming more responsive and helpful when they need it most, especially during unexpected interruptions of their travel plans. Passenger loyalty built on trust is the main competitive differentiator that begins from the moment they buy the ticket. Measuring cost and service quality and keep testing it in reality is the key to knowingly reduce the impact of pitfalls in network design and costing, and reinventing pricing strategies (this is contrary to current practices based on assumptions made at the top of hierarchies). The workable business model transformation then starts spontaneously, without forceful changes and practice of copying the competitors. 

This is at the core of my work at Astute Aviation, founded to help airlines create platform for reducing costs and improving passenger experience simultaneously. It is based on my first-hand experience and opportunities to see problems from various departmental and system perspectives. Some of these problems and solutions are described in my book “Beyond Airline Disruptions”, with a second extended edition on the way. 

I found much inspiration for my work from system thinkers both within and from outside the airline industry. One of the insightful “outsiders” and a “fresh thinker” is Martin Geddes. Although he is a telecoms expert, Martin’s connection and interest in airline industry goes well beyond his experience as an air traveller.
His father worked for British Airways (and its predecessor) for 34 years as a maintenance engineer. Martin grew up in a Heathrow neighbourhood, in a home scented with kerosene, watching Concorde streak by his window. He witnessed historical ups and downs of BA, and his travel experience stretches from a standby passenger to a Gold customer. On the professional side, for a brief period in the late 1990s, Martin worked as an IT consultant to BA, architecting the first Web check-in systems.
But this is only a part of the story about his interest in the airline industry. More of it is published in his insightful articles, among them ‘‘Brand suicide case study: British Airways”, which was my first encounter with his work. It is a rare mix of personal experience, business insights and parallels between the two industries, with glimpses of new possibilities for improvement.
This lead me to further explore Martin’s work. I found his The Tao of Telecomsquite inspirational: the universal principles described in his blueprint for a ‘‘lean” industry transformation are applicable to many areas of airline business, and industry as a whole. By rising above industry boundaries, Martin gets us more deeply into the world of new possibilities, challenging conventional thinking.
Having been inspired and provoked to think more deeply by his work, I was really thrilled when Martin accepted my invitation for an interview. We had an amazing conversation lasting much longer than we planned for. We discussed the issues faced by airlines and telecoms, each experiencing different disruptions, but sharing the same underlying management problem.
Martin’s ability to step above industrial divisions, quickly grasp common underlying problems, “see” the solutions, and explain them in an easily digestible and inspiring way, is truly astonishing.
The following are the parts of our conversation regarding disruption-related issues, mostly from an airline perspective, including quality, cost, optimisation, risk, passenger experience and some aspects of the “lean” quality revolution. (JR-Jasenka Rapajic, MG-Martin Geddes)
JR: It seems that airlines have forgotten that core reason for their existence is to ensure that passengers reach their destination at or near the time they were told they will when they bought their ticket, and that they will be cared about if their flight is delayed or cancelled. Most of the problems are related to absence of measures of system values like quality of service and authentic costing, resulting in increased fragility of operational performance, growing passenger dissatisfaction, and higher risk of financial failures.
MG: It feels to me like airlines have fundamentally misunderstood their business, as has happened in networking. The core (wrong) belief about packet networks is that they exist to deliver “bandwidth”, and thus should process as many packets as possible as quickly as possible. In reality, this is an insane economic model where revenues are tied to the quality-insensitive traffic and costs to the quality-sensitive. Instead, they should be thinking about the resource trades.

Likewise, airlines see themselves as being in the people cargo business, when really, they are meant to be designing systems of travel and identifying the profitable “trades” of supply and demand in space and time.

Airlines are carrying lots of historical baggage, especially constraints like runway and slot capacity. To resolve this undesirable situation, airlines need to deliver supply that does not under-deliver quality, that eliminates over-delivery, and is agile in responding to inevitable changes in the nature and structure of demand. Dealing with it means rethinking the model.

JR: What does this mean in practice?

MG: The airline industry is still based on stocks rather than flows. There is a stock of seats they are trying to fill up. Even if the planes physically move around, they have a static stock view of the nature of industry. The moment you sell the seat reservation, you sell the arrival option.

To reinvent aviation you can create a “virtual airline” which buys capacity and sells arrival options to different segments, categorised by performance. The basic idea being borrowed here from computer science is the concept of “semantics” or meaning. There are three meanings: intentional, denotational, and operational; or, in other words: what do we want, what do we ask for, and what do we get. And success is lining these three things up.

JR: Cost-saving measures can be the underlying cause of sporadic but costly disruptions. For example, under pressure to save costs, the maintenance department can decide to reduce the stock of spare parts. This may seriously disrupt operations, generating losses disproportionate in comparison to the expected savings. It may become a cause of disruptions, with lengthy ripples spread across the network, affecting passengers and a whole range of operational services, flight and maintenance schedules.  But no one would notice that, because the links between spare parts, disruption costs, and passengers experiencing disruptions are not visible.

MG: The cost optimisation models are tied to the static world whereby disruptions are seen as exceptions: we wish them to go away, but they keep coming. They are probably unable to understand the relationship between the nature of the cost optimisation they do for normal operation, and the impact they need to recover from normal variation. They are trying to locally optimise local functions. This happens in every part of an organisation.