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.