ON THE SOAPBOX: Peter Davies, CEO and Founder of the Airline Management Group

Peter Davies recently gave a discourse to the Aviation Club on what was described as the “Art of airline management”.  Here he paraphrases his dissertation. (see BTN 28 September)

Having delivered four successful airline turnarounds in different markets my conclusion is that a single, intense period of change is not sufficient.  After restructuring, simple maintenance does not produce adequate results to ensure survival and future success.

The picture was the same at each of the four airlines for which I was CEO; they were good airlines but bad businesses and there was an urgent need to move from losses to profits. Leading to their decline was a combination of the lack of a number of factors including: commercial independence, strategic and economic cohesion, innovation, critical mass, management talent and culture and in particular the ability for people to “bury their head in the sand”.  While there were always layers of talent, innovation, experience, tenacity and passion amongst the staff, with knowledge of where the airline could be improved – but unfortunately the staff were never truly engaged.

My key focus was on creating the right environment in which others were allowed to succeed; managing the turnaround expectations, creating hope enveloped in a pragmatic business plan that intellectually understood and took advantage of the market.  These essential yet often forgotten soft issues of leadership, values, integrity, respect and honour are critical to ensure the hard business disciplines, objectives and processes are effectively transformed.

If I had to summarise my findings, it would be these four key principles of success:

1.   Changing middle management perceptions and behaviours

Middle management often controls the communications conduit, and it is there that information, genuine and sometimes malicious can be terminated, twisted, reversed or accelerated. I took positive control of the internal media, it is paramount, as important, if not more so, than external communications.

2.   Ensuring the alignment between production and unit cost was understood

It is critical for the internal teams and external partners and suppliers to understand the gap between unit cost and revenue, and the role they have to play in aligning these for the turnaround to succeed.  Our industry has moved further than most with outsourcing being wide spread, even in customer facing areas, but to what extent do the companies in these areas act as “True Partners” for their airline client?  Although many in the industry talk about the need for “partnership and collaboration”; the reality is that these have been unbalanced with respect to returns. Independent research has shown that suppliers in the transport value chain make an average return on invested capital well above that of the airlines at 4%.  The European legacy airline industry market is struggling to shed expensive, out-dated practices and collective agreements whilst the low-cost operators have, ironically, not only increased the size of the market, but also have exploited these inadequacies in improving their market share.  This particularly exposes the peripheral destination airlines that find it increasingly difficult to compete profitably.  Many small national flag carriers are being marginalised in a commoditising industry.

3.   Brand and culture.

In my opinion, to ignore brand is commercially suicidal and is far more important than simply a logo.  To me it represents the very essence, the passion, the embodiment of the values of the company and its people and customers; externally and internally and acts as the vanguard for everything the airline is striving to achieve.  I passionately believe that the values of a national carrier should equate to the values of their country.  The brand is part of the country’s sovereignty, national identity and a strategic asset for economic prosperity.  Yet it comes at a cost, all too often a cost that is prohibitive simply because those airlines lack the economies of scale and ignoble practices.

4.   Sustainability and shareholder return.

Willie Walsh recently commented, “the weak [airlines] do not have the right to stay”. In my experience weak airlines are the ones that make weak decisions, and some state-owned airlines struggle to make rational, sometimes tough, commercial decisions, which are often in conflict with their short-term social and political mandates.

Smaller airlines also have inevitable diseconomies of scale given the disproportionate size of some support and back office functions relative to front-line activities, with sub-optimal volumes and as a result they incur a cost burden.  Additionally, attracting and retaining management talent is becoming increasingly difficult where smaller airlines find themselves at a further disadvantage.

In today’s market, with low oil prices – what I call “fool’s gold” – and market growth there is a very real and lurking danger – short termism, creating a tendency to defer the difficult structural issues.  The challenge is whether the weak and inefficient airlines, and particularly in Europe with its economic challenges and competition frameworks, can change, and sufficiently quickly.

The new partnership

I firmly believe business as usual is not an option, even with the current fuel reductions.  The airline industry is not inept at change, the very embodiment of our business, our DNA has been driven by imagination and technology but we should be in no doubt however that we need to pursue a new global approach for weak airlines.

I believe this new approach to structural change is in adopting the lessons from hotel management companies, where the brand values of the hotel are absolute to the customer but the service provision is virtual and managed.  Fixed costs and many DOCs are spread over a much wider production and costs on a unit basis are reduced. By applying this model to our industry, airline operations become virtual and move closer to the self-sustaining virtuous circle. Keeping the in-house resources of the airline to the core, almost everything else could be outsourced to a new supplier partner relationship.

The new partnerships must be true strategic ones, where there is not only a demonstrable alignment of economic objectives, but also true revenue and risk sharing.  For example derivative management, procurement services or overarching management contracts can be remunerated purely on revenue, net financial benefit to the airline or better still EBIT performance.  Politically astute governments, shareholders and Boards of Directors could then maintain their brand and strategic relevance of their airline, without the incumbent cost penalty, dictated by size, geography and imagination.

I believe there is a solution that will allow some of our struggling airlines to move to a sustainable operating model – The 4th Alliance perhaps?

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Graham Stephenson, UK London

Peter Davies\' paraphrase of his excellent dissertation gives a very valuable summary of comments and ideas that can be applied to many of the aviation activities/organisations. His four key principles of success form a very useful tool for management and deserve very careful consideration.