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Airline Strategies

Wed Aug 04, 2004 6:39 am

I have a scenario for you all.

If you were the CEO of an airline, what strategies would you put in place to ensure your airline survived at least until 2010.

I know this question is very broad, however it would be really interesting to see what areas you all see as being the most important. And how you would all deal with the crisis facing the industry at the moment.

It will be really interesting to see the different points of view from people all over the world... esp the differences between the US and EU... with a little OZ/NZ and asia to boot.

Go for it!!! You never know, there may be an airline exec reading your replies!!!

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RE: Airline Strategies

Wed Aug 04, 2004 7:43 am

Excellent topic!

One of my immediate concerns would be rising fuel costs. As much as possible, I would acquire the most fuel efficient jets and turboprops on the market. I would also match my aircraft to appropriate routes. For example, if I'm flying from Phoenix, AZ to Tucson, AZ, a distance of 100 miles, and the average load factor for such flights is 50 percent on, let's say an Airbus A320, I would substitute a smaller, more efficient aircraft that would likely have a load factor of 80-90 percent on a consistent basis. For example, I might use an Embraer 170 or a CRJ-700 or 900.

Another important issue, one that is plaguing many U.S. carriers, is labor costs. Many of our major carriers here are squeezing wage concessions (pay cuts, benefit reductions) from their employees. I would analyze my labor costs in terms of several factors, including experience, required training, merit of the employee, and productivity. If my airline doesn't currently have an ESOP (Employee Stock Option Plan), I would implement one. If my airline doesn't have a profit-sharing plan, I would implement one.

Route structure is a third area I would address. If I were CEO of an existing carrier, I would analyze which routes are producing the most profit AND highest average load factors. I would also examine routes that are marginally profitable, as well as those that are losing money. If a route is marginally profitable, I would look at what it would take to increase the profits as well as the load factors while keeping costs under control.

If a route is losing money, many major carriers have dropped them. This has cost smaller communities to lose air service. Rather than dropping a losing route, I contract with a commuter or regional carrier to continue providing service and split the revenues, giving the other carrier the lion's share since they're the ones putting out the costs.

There is one area of costs that I haven't touched on. It's executive salaries. In other threads on, I've been blasted for suggesting that CEO's take paycuts when they ask their employees to take cuts. I've been criticized for suggesting that perhaps a CEO doesn't have to receive $750,000 and up per year. My answer is a strategy which pays reasonable salaries that will attract those willing to roll up their sleeves and work hard. I would examine my corporate structure to determine what levels of management are top-heavy and which ones need more support.

As with my rank-and-file employees, I would base executive pay on performance of the employee as well as performance of the company.

One final area I would address is the topic of landing and gate fees at airports. I would seek to negotiate with the airport authority involved to reduce these fees as much as possible, if allowed. If the airport is unwilling or unable to lower these fees, I would either reduce the number of gates and flights into and out of that facility, or seek an alternate airport within a reasonable proximity to the one my airline currently uses.

Long live the RJ!
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RE: Airline Strategies

Wed Aug 04, 2004 7:57 am

Good stuff AZhetgeek,

I like it... I agree with you whole heartedly.
I would also look at developing a strategic partnership with a group of airlines that would give me exclusivity to my local area. With a share swap to ensure each partner is bound to the agreement, such as that between KLM and NWA.

I would also try and re-engineer the services offered to match and/or exceed those offered by competitors such as JetBlue. I believe this setup of being low-cost, but offer a superior product to be the way of the future.
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RE: Airline Strategies

Wed Aug 04, 2004 8:06 am

I agree, excellent topic Aerohottie!

"I've been blasted for suggesting that CEO's take paycuts when they ask their employees to take cuts. I've been criticized for suggesting that perhaps a CEO doesn't have to receive $750,000 and up per year."

It amazes me that you've been blasted/criticized for that!

Let me know when you start your airline, I'll send you my resume'!  Smile/happy/getting dizzy
The only justification for looking down on someone is to help them up
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RE: Airline Strategies

Wed Aug 04, 2004 8:50 am

It really depends on what airline. In my opinion there is no "blanket strategy" that could be applied anywhere and everywhere that serves as a magic recipe for success. Each airline is unique, and has unique problems, and it's my opinion that good management teams are the ones who recognize that and work with what they have to solve the problems that they alone have.

For instance, take Ryanair and US Airways. Ryanair is alienating customers, breaking laws and developing a nasty image, but its costs are low and it can operate profitably. US Airways is providing good service, but has lost a lot of money and needs to improve their financial health. At Ryanair an ideal new CEO would move in, redesign the company's image, improve service, come clean about illegalities and repay illegal subsidies, and work to rebuild the company's reputation as an honest, reliable carrier to deal with while also working to win back passengers alienated by O'Leary The Mad, while at US Airways an ideal CEO would work on restructuring debt, working out solutions to labor costs, improving performance and moving towards profitability.

Each airline has a totally different set of problems requiring a totally different set of solutions.

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RE: Airline Strategies

Wed Aug 04, 2004 9:31 am

The airline industry has its fair share of risk, so by planning for future a detailed risk assessement plan needs to be conducted before going out on a spending spree to get new and efficient planes and to open exoctic destinations.

Planning for survival is simply not enough.
Going about costing: equipement, personel training, maintenance, insurance, and operating costs (inclusive the major FUEL component) are all one side of currency; with each one of these varying around the clock, makes the process of prediction even more challenging.

There is no silver bullet for earning profit, nor for minimising cost; However a simpler look at this can be put in two words: 'Continuous improvement'
From a higher management point of view, it is about aligning each department with the company's view and interest, and passing this image down to every employee (This is implied financially).

A growing business implies more investement is needed to 'accelerate' its growth and profit. This sometimes means building alliances with similar and/or bigger companies that share the same vision.
And like WGW2707 mentioned, each airline takes on a different approach to their operations hence faces different set of problems.

AZjetgeek, had you been with a CEO 24-hours a day, you would totally understand the kind of responsbilities and 'headaches' he has to bear. And you would see how his 50k a month can be understandable. But I couldn't agree more with you about the paycut should it need to be actioned.
But also on the other hand, should there be any profit that exceeds plans, each employee has a right for a bonus.

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RE: Airline Strategies

Wed Aug 04, 2004 9:45 am

1. A slavish addiction to low costs.
2. A used fleet until a 10yo ROI forecast indicated an investment grade payback on a new fleet.

I dumped at the gybe mark in strong winds when I looked up at a Porter Q400 on finals. Can't stop spotting.
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RE: Airline Strategies

Wed Aug 04, 2004 1:07 pm

I agree with all of you so far... it seems interesting how we each have a different point of view on the same topic.

So as WGW2707 has pointed out, each airline faces its own challenges, and management need to recognise these and formulate the plan to fit.

So from here on, the replies should name the airline you are answering for, and how you would deal with the challengers facing that airline specifically.

I'm really looking forward to reading what you all have to say... go for it!!!
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RE: Airline Strategies

Wed Aug 04, 2004 3:05 pm

*Go hard out into LCC mode to keep loads up and get bums on seats.
*Fuel surcharge would be a good idea and using secondary airports would decrease costs as well.
*Employee pay may not be as genourous (still good though) as other airlines.
*main trunk routes would be a priority, and secondary/new routes would be opened with smaller aircraft and a few stopovers (eg. AKL-SIN/HKG - ATH/STO/CPH/MAD) So that the aircraft would pick up loads and passengers at 2 main hubs rather than 1 befor reaching it's destination).

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RE: Airline Strategies

Wed Aug 04, 2004 4:05 pm

Even the LCC model has started to change, mainly since the introduction of carriers such as JetBlue.
The new breed seem to have the common LCC goal of keeping costs and prices down, while at the same time offering (in most cases) a very competitive product. The product in some cases is even superior to that offered by "legacy" carriers.

I think this is going to be a trend the world over. It has really only taken off in the US, but I think Europe and Asia/Pacific will surely follow. These new carriers are able to offer the same level of offering as the majors, but at less cost due to many factors including a smaller amount of debt and less seniority among staff. I think these carriers are able to operate into and out of major hub airports unlike the Southwest trend of using secondary ports.

I believe the second level of carriers will follow the Ryanair model (I know some of you think O'Leary is a dick, but nobody can say he isnt trying to challenge the mold), of striving to make the seats free, and make money through secondary and auxilliary offerings such as in-flight services, fee for checked baggage and charges for pre-assigned seating etc etc. These carriers will still be forced to serve the secondary ports to ensure costs are kept to a minimum.

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RE: Airline Strategies

Thu Aug 05, 2004 5:42 am

7E7 - Every CEO is different. In his book, "Splash of Colors", John Nance talks about Harding Lawrence's reign at Braniff. It sounds as if Lawrence did put in many 24-hour days and did earn his salary. CO's Gordon Bethune is another very hard worker.

Still, I think you're still missing my point. I'm not saying that CEO's are lazy or are stealing money by taking big salaries. My point is that the CEO doesn't fly the planes, load the baggage, serve the drinks, fuel the jets, make the repairs, or drive the tug. Pilots, especially, have the most stressful job in the airline industry. Mechanics are right up there as well. Even the slightest mistake by either one could cost hundreds of lives.

LCC's are here to stay, but has been suggested, they must be able to offset lower revenues per seat mile by charging for other services, such as Ryanair does. They must also be able to provide a level of service that keeps customers comfortable and relaxed and encourages them to fly with their airline again.

Long live the RJ!
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RE: Airline Strategies

Thu Aug 05, 2004 5:53 am

I would analyze my labor costs in terms of several factors, including experience, required training, merit of the employee, and productivity.

This, of course, would have to be after you broke the unions.
"To he who only has a hammer in his toolbelt, every problem looks like a nail."
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Gemini Air Cargo

Thu Aug 05, 2004 6:14 am

Anyone know how they are doing these days? Are they benefitting from the rebound in the air cargo market? What does their fleet look like these days - still four MD-11s and six DC-10s? Are they approaching profitability? I heard that Carlyle Investments would like to get rid of them but can't find a buyer at a decent price.
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RE: Airline Strategies

Sat Aug 07, 2004 10:20 am

The cargo operators seem to be doing better than their passenger cousins. Perhaps passenger airlines should put more emphasis into cargo operations to weather the downturn better??? Just A though
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RE: Airline Strategies

Sun Aug 08, 2004 3:38 am

If you were the CEO of an airline, what strategies would you put in place to ensure your airline survived at least until 2010.

Start with a really really really really really really large sum of cash!  Big grin

Then take your money and open some Starbucks stores! Big grin
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RE: Airline Strategies

Sun Aug 08, 2004 3:53 am

If I was to control a US-Airline, I would try to get a freighters and finally start to take a bite out of the 'real' cargo biz, which is your everyday maindeck cargo. Large consolidations or outsized machinery parts, this is the bread and butter IMO. With exception of NW, everybody else seems to be okay with foreign airlines from all hemispheres doing this job and earning that money. The CEO of UAL Cargo tried to bring back the DC-10F and got sacked for it.... Insane
"I really don't know one plane from the other. To me they are just marginal costs with wings."� Alfred Kahn, 1977
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RE: Airline Strategies

Sun Aug 08, 2004 4:04 am

Find a niche, and dominate it.
Spend a couple years doing some serious research and building a bullet proof business strategy. Then it takes the tenacity and courage to just do it.
Personally, I think the next best idea is for a LCC for transatlantic routes, flying 767's or A330's. Possibly based out of Dulles or JFK.
Go in with as much cash as possible, lots of hype, and plenty of enthusiasm.
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RE: Airline Strategies

Sun Aug 08, 2004 4:30 am

From one Aero to another

Interesting question, but you would have to sign a non use legally binding document if I were to give you my thoughts  Smile I wouldn't mind if a CEO of an airline were to read my musings. What I would mind is if they were implemented by him  Smile
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RE: Airline Strategies

Sun Aug 08, 2004 5:07 am

1. Pick your battles and avoid going head to head with carriers that will try to crush you. Not every market is right for you.

2. Grow slowly. Don't try to go everywhere at once and overextend your capital, aircraft and personnel. look how many airlines got grabby didn't do research and crashed and burned.

3. Shop the used market for some of your aircraft. Not every route is meant or requires brand new equipment. Of course they're more efficient, pleasing, and cheaper to maintain but they ain't cheap.

4. Treat your staff right and they'll treat you right in return.
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RE: Airline Strategies

Sun Aug 08, 2004 12:05 pm

Lat41 - I think thats is about the most sensible response so far!!!
But how would you go about re-engineering an existing carrier to survive?
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RE: Airline Strategies

Sun Aug 08, 2004 10:59 pm

American Airlines:

1) Return to the "rolling hub" concept. Make every hub and focus city a rolling hub. Current delays at ORD are causing congressmen and the FAA to suggest that perhaps slot-controls are necessary. Rolling hubs are proven to reduce delays, and this concept helps #3 significantly.

2) Reduce dependence on RJs. While RJs have a higher yeild when replacing larger jets flight-for-flight, when flight numbers must be increased to meet the available demand, RJs are not an effective option. On routes where RJs are being used more than six times per day, I would substitute MD-80s. This would allow me to reduce the number of flights to a more managable number (helping out #1), reduce costs due to fewer flight hours being paid, all while keeping the same number of seats while providing enough options for any reasonable traveller.

3) Utilize aircraft more. Again, this helps out #1. By operating aircraft as frequently as possible, I can actually reduce the number of aircraft I need, increase my revenue-generating capacity, have minimally increased variable costs, and decrease the per-flight load of fixed costs. This also helps increase the efficiency of my gates, aircraft, and other fixed-cost assets.

4) Rationalize my fare structure. While AA tried to do this in the early 1990s and it resulted in a fare war, a slow, methodical reduction in both the price and variability of airfares could bring the company into line with the LCCs in terms of ability to sell last-minute tickets to business travellers. Instead of fifty different fare classes being sold on a single route, perhaps only five fare levels and a few sale fares. While of course I would still have a comparative premium for last-minute First Class seats, that premium would be reasonable to a business traveller, rather than exhorbitant, and make the passenger more willing to travel my well-known and established network rather than the lesser-known LCC.

5) Stop asking for wage concessions. Airline employees are still paid very well, but not as well as they once were. Current wage levels are more than reasonable to the airline if the first four conditions are met. Every time there are wage concessions, it hurts the morale of the employees, which will show through in the service that is given to customers. Unhappy customers means an unprofitable company.

6) Hedge fuel. Southwest has stated that, without fuel hedging, they lost money last year. Hedging fuel at lower prices, at least for the near term, is necessary for any fuel-intensive operation, including air, rail, and road transport. In the future, as prices begin to fall (we can hope), hedging my not be necessary. However, if the airline so chooses, it might continue to hedge its fuel costs in order to keep in practice and to bet against sudden price spikes.

I have more ideas, but I must get ready for work.
Those who fail to learn history are doomed to repeat it in summer school.
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RE: Airline Strategies

Mon Aug 09, 2004 2:23 am

It would really depend on the airline!
Fly High!