3. Lean & Agile DNA
For many good or bad reasons, the airline industry still suffers from a triangle of anomalies: Significant over-supply of aircraft capacity; distorted number of less professionally managed, often state-owned legacy carriers or fantasizing privately held airline ventures; and an asymmetric margin distribution across the aviation value chain with the majority of suppliers dominating or bottlenecking airlines’ performance health. One can assume that those unique industry conditions will not just go away. Even with a significant concerted future rise of air ticket prices as we are currently witnessing in 2022, such inflation will be mostly a pass-through to compensate for fuel costs and climate matters. If all this is true, there is no other option for airlines but setting themselves up for success through a radical lean approach to their business.
A successful formula many of today’s successful low-cost airlines are implementing is to follow a nimble, flexible, detail-oriented approach to business. In short, developing mechanisms to challenge the status quo. Tactics airlines can undertake include running much more prudent cost optimization, renegotiating contracts with suppliers at eye level and with toughness (especially concerning aircraft financing & servicing) through the lens of win-win partnerships. Several ultra-low-cost airlines have gone a long way already to minimize their share of fixed cost by adhering to more flexible contracts, increasing the share of temporary and part-time workers across the whole organization, and variabilizing their fleet costs.
Regardless of size or positioning, all airlines will benefit from embedding a low-cost DNA into their organizations. This could require unbundling high-cost services (e.g., Emirates unbundling its business class offering to provide options with no seat booking or chauffeur drive at a lower cost) and switching to a variable cost model for most of their historically fixed expenses. Thus, low-cost is no longer a segment, but more of a business model imperative that should not hamper on customer experience.
At the same time, COVID-19 drove the need for more flexible, nimble, and speedy decision-making capabilities across several functional areas. For example, the pandemic has forced airline planners to make changes to their traditional thinking around airline scheduling. Earlier, with fairly predictable demand, airlines had visibility into future demand through advanced bookings, helping planners to forecast the required level of capacity. Currently, real-time demand changes are urging airlines to keep adapting their schedules continuously, which is a complex and time-consuming process, especially given the high volume of capacity changes happening worldwide. As a result, airlines will need to adapt to varying demand forecasts by further increasing the variability of their end-to-end cost structures, for example by implementing more flexible workforce management programs that can rapidly scale up or down manpower with minimal penalties.
From a fleet perspective, several players are reassessing their fleet planning, including their mix of owned and leased aircrafts, seeking new, regional, and high fuel-efficient jets. Opportunities for short-haul low-cost aircrafts are likely to surface more, though with risks of imposed limitations for environmental concerns. It is noteworthy to outline Airbus’s aspiration to develop carbon-free future commercial airplanes in the longer run.
On the commercial side, resilience and agility from planning to execution matter strongly. Airlines’ ability to respond to short-term market feedback and competitive moves by adjusting sales activities, fine-tuning marketing campaigns, and optimizing pricing across the various channels will be instrumental. Commercial agility will require a mental shift of leaders and teams in charge since it means making more decisions, taking more calculated risks, probing more changes, and allowing for immediate and more frequent correction of failures. Such entrepreneurial approach will require a proper tooling and upskilling through new forecasting methods, machine learning, process re-design, nimble themes, different level of position support, and injecting new sources of data to make decisions.
Leadership Implications:
Airline CEOs would need to build a culture of lean thinking, attention to detail and challenging of the status quo. Being cost conscious will not be good enough—being low-cost obsessive is the way to go. CEOs need to lead this spirit from the top, and the board of directors needs to back such a fundamental shift of attention with endurance and clarity, while adopting a spirit of value creation similar to private equity philosophies. This requires learning of new practices, establishing new processes, training associates across all levels, and should run not only into the company operations but across the whole P&L. Some of this mindset shift could be achieved from internal talent, while in many cases we believe that both junior and senior level hiring from competition as well as outside of the airline industry (e.g., e-commerce retail, network logistics, automotive suppliers) will help to accelerate and enrich the path towards a lean airline culture.
Achieving strong levels of agility and resilience will also require organizations to delegate decision making with a shift toward simpler processes, spurring a culture of empowerment and delayering of the organization. It is a cultural transformation for most airlines to go through and make stick with the wider organization. This will foster psychological safety across organizational levels that they are part of decision making and solution design, that they are fully empowered to co-drive change through their own initiative and ideas. These practices are critical for airlines to weather future significant crises or pandemics.
Not surprisingly, beyond establishing an agile leadership culture, top-notch talent injection will certainly help to foster a more agile and resilient spirit of thinking and acting. Sourcing talent will require a look at entrepreneurial technology organizations (e.g., Uber, Google) that have mastered nimble commercial abilities and also at several businesses that have agile and flexible working models, combined with internal talent spotting.
Ultimately, modern airline CEOs will need to role model authentically and continuously what shared leadership and organizational empowerment really means and communicate regularly, and visibly, the positive impacts and successes yielding from such new culture.
