How to transform your airline

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Major transformations of airlines are common, and frequently disappointing.

They are common for good reason: the industry is structurally difficult. Unit revenues have declined an average of 2 percent per year over the past 20 years as a result of intensifying competition and commoditization. The battle to reduce costs has continually run up against the substantial bargaining power of both labor unions and suppliers, along with the market whims of fuel prices. Meanwhile, governments have often prevented their national champions from exiting the market when times were tough. And, even in good times, airlines must base their plans on the assumption that a downturn is around the corner, as we recently discussed in our article “Winter is coming: The future of European aviation and how to survive it.”

Perhaps not surprisingly, these transformations are also hard—harder than in many other industries. Inertia can come from employees’ transformation fatigue, as many have already gone through multiple programs. It can come from strong functional silos that push back on transformation initiatives. It can result from the safety imperative, which should never be compromised—but whose name is often taken in vain. And it can come from the frequent risk of industrial action. As a result, leaders can be left feeling frustrated when their ambitions for fast-paced change run into a sluggish and change-resistant reality.

Nonetheless, airline transformations can succeed, and their effects can last. And by “transformation” here, we want to be clear: we mean an enterprise-wide, comprehensive performance improvement effort, not a thematic transformation around a specific topic, such as digital or procurement.

Based on our experience, we have identified five core rules for effective transformation in the airline industry: find the “Goldilocks” targets, leave no stone unturned, locate and mobilize different sources of meaning, track by the inch, and build a new culture—not just a new cost base.

Find the ‘Goldilocks’ targets

Transformation targets that are too low won’t spur employee ambitions or provoke the difficult trade-offs required for successful change. Targets that appear too high, without the facts to support them, will create employee skepticism, soon followed by a sense of failure and disengagement—and a talent exodus. Of the two, aiming too low is most common; in fact, we have found that targets two to three times a company’s initial estimate are routinely achievable.

To find the Goldilocks targets, neither too low nor too high, both ambitious and demonstrably achievable, airlines should begin by doing the following:

  • Start with a top-down assessment to set a challenge for what can be achieved, without focusing too early on exactly how it will be achieved.
  • Base the assessment on benchmarks that are the most granular available and intelligently applied across the entire business. For example, only when airlines break down marketing and sales costs into their underlying drivers,1A better approach to airline costs,” July 2017. a process that includes benchmarking and defining realistically achievable potential, do the opportunities become clear and irrefutable (Exhibit 1).
  • Boldly evaluate the business model. For example, airlines could choose to become a hybrid that combines full-service and low-cost models or to fly fewer long-haul routes. Such bold moves may not be necessary, but should be among the options considered. Decisions here will, in turn, guide the more detailed assessment.
  • Assume the mind-set of an activist investor or private-equity acquirer: be ambitious, disruptive, and unconcerned about maintaining the status quo.
Create a granular assessment by breaking down marketing and sales into their underlying drivers.

Leave no stone unturned

There is no silver bullet—no one opportunity that everyone has somehow overlooked. Instead, a successful transformation takes on 500 to 1,000 or more initiatives across the entire airline, all of which need to be identified, planned, prioritized, approved, executed, and refined. While larger themes provide strategic coherence and allow the CEO to focus, small initiatives are needed to capture all the value. The initiatives, once sized, should total 130 percent of the top-down target, given that some leakage will occur during implementation.

This effort will require some difficult trade-offs. Typically, most airlines have covered the low-hanging-fruit improvements, and the remaining potential lies in areas that require trade-offs. Reducing complementary in-flight service, for instance, shaves off costs but has customer-experience implications. Trimming scheduled block time to improve aircraft utilization and reduce costs may endanger on-time performance. Such trade-offs are common in the airline world. Making those difficult choices is an important part of the process.

Four recent case examples of airline transformation, shown in Exhibit 2, illustrate the breadth of action required and the differences in size and source of impact from one airline to the next. A few big-ticket items typically generate the greatest impact, such as increases in ancillary revenues and fleet utilization. We normally find a similar aggregate opportunity from identifying 500 smaller initiatives.

Four airline-turnaround cases provide examples of impact by category.

Find and mobilize different sources of meaning

Airline employees often love their airline. Many are “lifers.” They are emotionally invested, with decades of commitment. They identify their airline with the flag, glamour, and service. What doesn’t get them out of bed, except in the rarest of cases, is a commitment to corporate earnings beating the cost of capital on a through-cycle risk-adjusted basis … and who can blame them?

As success is impossible without employee commitment, airlines should leave nothing to chance. We recommend they take the following steps:2Increasing the ‘meaning quotient’ of work,” McKinsey Quarterly, January 2013.

  • Spend the time to establish a common vision and purpose on the executive team, with a clear sense of urgency.
  • Help each member of the executive team to tailor their own personal and compelling “change story.” Five common sources of meaning are helpful cues: the company’s survival or success, the individual’s own ability to contribute to society, customer support through superior products and service, a sense of belonging to and supporting a team, and personal development or empowerment.
  • Engage different communities of employees—pilots, cabin crew, support staff, ground-service personnel, and maintenance staff—early in the transformation by making sure they understand the need for change, know their roles in the transformation, and feel the responsibility required to make the change happen. Ways to do this include asking employees for input into the change story and asking them to write and share their own versions.
  • Embed change stories into the regular cadence of the transformation work. In weekly meetings, one team member at any level should describe why the airline transformation matters to him or her. While these testimonials could seem awkward and forced if done badly, they are often deeply moving and can reenergize the team.
  • Celebrate team and individual efforts far more frequently than normal. There are many well-known and productive ways to reward success, from badges for exceptional results and a photo on an office “wall of fame” to a cake or dinner to celebrate important milestones. Other small and unexpected rewards, such as the chief experience officer dropping by the employee’s desk for a handshake and a “well done” or a handwritten note thanking someone for a specific action, can also be highly motivational.

Track progress by the inch

Successful transformation programs establish thorough, persistent, and focused implementations. These implementations should include a rigorous stage-gate process, line-owned initiatives, and a relentless cadence to ensure rapid value creation.

A rigorous stage-gate process

As transformation tends to involve a few larger themes and hundreds of individual initiatives, airlines should follow a strict stage-gate process that, driven by a transformation office (TO),3 moves each idea step by step through five levels of review and decision making (Exhibit 3).

Follow a strict stage-gate process for implementation initiatives.

Line-owned initiatives

Hundreds of line managers need to take ownership as they push through the hundreds of transformation initiatives. Ownership is characterized by complete engagement and a personal drive to do everything possible to complete the initiative, from idea to realization. The TO and senior leaders provide decision making and other support for the initiative owners via coaching, training, and tools. Making line managers bear the responsibility for individual initiatives is also a great way to identify “superstar” talent in the organization.

A relentless cadence

A transformation is a marathon—not a sprint. To keep this lengthy process moving, airlines need to establish an unrelenting cadence with a clear focus on impact. We recommend setting up weekly TO meetings in which workstream leaders and their teams review progress on the tasks to which they committed the previous week—then make measurable commitments for the subsequent week in front of their peers. All relevant departments should attend these meetings to help break down any silos and create an atmosphere of joint problem solving.

Does your airline still cross seat belts? A ten-point lean checklist for leaders

Does your airline still cross seat belts? A ten-point lean checklist for leaders

We note that carriers shouldn’t run these meetings just to please some central entity. On the contrary, the meetings should be pragmatic, helpful, and energizing for the business. There are several ways to accomplish this. First, carriers should ensure that meeting preparations are efficient and informal: elaborate visual presentations are unnecessary; spreadsheets and handwritten whiteboard notes are effective enough. Next, the meetings should focus on resolving issues and immediately clearing any bottlenecks—either directly in the meetings or within hours thereafter. In fact, a sure sign that meetings are going off course is that they are dominated by process updates, not problem solving. Finally, leadership should work with the managers to perform a detailed analysis of each initiative on a rotating basis; in this way, carriers can enable meetings between third- or fourth-level managers and their senior executives, reinforcing feelings of ownership and accountability.

At one major airline, the CEO made a point of attending the TO meetings regularly, as he found the TO process the most effective way of shifting the company’s culture and creating long-term, sustainable change.

Build a new culture—not just a new cost base

To create lasting results in a transformation, carriers must understand that their performance and health are closely linked. This means that carriers must not only become more agile, more efficient, and better at cross-functional decisions and actions than ever before, but they must also tackle some of their most deeply ingrained behaviors and practices while ensuring that employees have the capabilities they need to be effective. Airlines that focus on both will outpace those that look only at performance.4Organizational health: A fast track to performance improvement,” McKinsey Quarterly, September 2017, and Lili Duan, Rajesh Krishnan, and Brooke Weddle, “The yin and yang of organizational health,” McKinsey Quarterly, November 2017.

At one airline, for example, a high-level assessment of the organization’s health revealed major improvement needs in four broad areas: accountability, direction, leadership, and motivation. Digging deeper, many employees’ comments touched on a “silo mentality,” “slow decision making,” “lack of training,” “bureaucracy,” and “lack of accountability.”

As a result, the carrier required some essential organizational changes. First, it implemented a select number of specific health interventions over time—not aiming to change every mind at once, but instead tackling one or two major themes per year. It split these themes into a high-double-digit number of initiatives in all areas of the business and pursued them with the same rigor as it did performance initiatives.

Second, the carrier embedded elements of its long-term health into its performance initiatives. For example, to reduce the number of acceptable deferred defects in maintenance, the company not only implemented a new tracking and follow-up procedure but also initiated trainings for certified engineers in handling these defects, for planners in making sure more time was reserved and parts were available (via improved forecasting tools), and for team leads and managers in modeling the correct behavior. Only when the engineers’ mind-sets regarding the importance of every single deferred defect changed did the real transformation take hold.

Airlines that have followed these five rules for success have been able to pursue ambitious targets and generate powerful results. One airline, for example, implemented more than 1,000 initiatives, with an average impact of $1 million apiece; as a whole, these initiatives allowed the airline to boost revenues and cut costs by a total equivalent to 15 percent of its preturnaround revenue. The airline not only met its targets for the 18-month transformation but also was able to overcome transformation fatigue, increase employee satisfaction, work across functional silos, strengthen safety focus, and avoid the kind of industrial action that sometimes accompanies major airline change—setting itself up to move ahead of the pack in this challenging sector.

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