Airline Industry , Breakthrough Performance , Business Model , Business Thinking , change management , Industry Problem , Managing Growth , Operations , Organization Transformation , Problem Solving , productivity ,
“Airlines in India are in turmoil”, this has been now the headlines for over a couple of years now.
The argument goes like this:
Indian aviation market is one of world’s most expensive one, due to high levies on fuel, (appx 24%) and airport charges, (while the base oil price itself has surged 40% during past year), adverse impact of depreciating Rupees (more than 10% this year, while more than 1/3rd of operating cost is dollar dependent). Further, the Indian sky has opened wider, leading to cutthroat competition. And finally, the threat of another slowdown is looming large. And ……. To come out of this situation, Indian aviation industry believes that it now needs huge FDI.
Given this situation, airlines are cutting cost by, timely payments to Oil companies ( 10-15% discount), efficient flying (saving 2%, taxing with one engine, flying short route flights at low altitudes, better cleaning to reduce friction etc.) and re-negotiating Food contracts(saving 0.5%).
The industry as a whole feels that, it can not do much about fuel price, depreciating rupees, artificial low ticket prices. They know that they can bring the cost in other areas. And so, they are squeezing every penny, laying-off staff, outsource internal work and adopting automation.
After using all the tricks in the book to cut the cost, it is now waiting for Policy clearance on foreign investment. Wrong prescription for a classical management problem.
Yes, this is a pretty classical state of industry description.
Consider this, India is one of the fastest growing aviation market (growing at 20% YOY).
And look at Rahul’s blog, on Indian aviation industry, to know how poorly Indian aviation industry is being managed… Kingfisher hasn’t seen black since 2005. Market leader Jet Airways hasn’t sniffed profits since 2007-08.
The less said about AirIndia, the better it is. Mohandas Pai’s lamentation in the Economic Times on the state of affairs at the national carrier is not without reason.
But despite all odds Spicejet and Indigo have shown quick turnaround and healthy prospects.
The question is, why big airlines are going burst despite significant growth in the passengers. Their finger pointing on external issues does not seem justified, and least to one who has spent time in ‘Operations.’
Lets see more things:
Gartner brings out yearly status (or maturity) of different technologies, called hype cycle, that help technology creating and adopting organizations to build strategies on when they want to enter the market. Some of the organizations (read start-ups), play early in the hype cycle, where they build on the initial market euphoria and high valuation, with an intention to quit when the hype peaks. These hypes are created by media, subject matter experts, entrepreneurs, investors and consumers by outlandish projection of benefits of each technology, as the all time best opportunities. And as we know not several of these early stage companies last longer, despite which a large number of entrepreneurs are able to cash out rich.
Characteristics in Service sectors in any growing economy, like India, follows a similar pattern. Whether it is telecom, retail, power, renewables, infrastructure or for that matter aviation industry. Not for nothing, the sustained high single digit growth of India, led to setting high expectations and sequential projections, that led to high aspirations of entrepreneurs and businesses (also government). Organizations, therefore, took long range shots, but committed and elevated their capacities too early, in the hope that the growth will be unidirectional. Every airline tried to book and hoard as many aeroplanes as possible (even created artificial production constraints for aeroplane suppliers), they recruited and created bench for as many pilots as possible and over built ground and office resources as much as possible. While they were doing this, they built their books fatter and claimed higher valuation. They amassed massive debts and operating cost, much before the demand actually took place. And since the market does not remain as you think initially, organizations were locked in the debt trap of their investments. As troubles kicked in, they further lost focus of good business, as their attention was diverted towards protecting and justifying investment than on increasing revenues.
The way they built their organization was on building infrastructure and capacity, too early. They followed the philosophy of ‘more from more’, which is a trading mentality (and of speculation). Managers after managers brought in new capacity enhancement plans, new routes, new buying agreements, expensive media expenses, hiring of costly pilots, all went year after year. The top management got their bonuses and hefty hikes; and airlines started protecting their investment while the productivity continued to plummet. And, they waited till the slowdown and global phenomenon to strike, to find a guinea pig. And now they say that there is a policy constraint.
Thus a majority of these players was to cash on the early hype and build valuation, (and possibly, exit before the hype peaked). But it did not happen so. Actually, it happens rarely so.
You can bet that there is no single individual in Airlines Industry, who ever thought that Fuel prices would not rise the way they did last year, dollar would not fluctuate the way it has, competition would not kick start the price war, India is not price sensitive etc. Every body knew it, but were blinded by their forecast and the way people act in a growth economy. Which means that these risks were considered in the strategic plan itself. So why are they crying foul, now. Of course, now there is a big deal of when an airline opens up a new growth story.
The real growth of an organization as we know is, increase in revenue productivity. Thus, Organizations went all wrong. They never considered productivity as a parameter, whether productivity of money or people.
Having built the fat, now they cut the fat. In a rush they signed all sorts of contracts and now they are spending enormous attention of management on re-negotiation, even on supplies that could be less than 0.1% of their cost. And people who cut the fat or cost fastest, get the reward and career growth.
The fundamentals remain the same. A business has to sustain and flourish on its own. Its business model must be innovatively built and operated excellently. Every organization, need to have a decisive edge for the space it wants to operate. If there are n number of companies, then there has to be n different business models and n differentiators. No two companies can be operate the same way in same space for long time. Today, you have more than two companies with identical business model.
There is no bigger necessary condition for businesses than to increase their revenues, and these revenues must increase faster than the increase in cost, while other things remain the same. Plenty of examples are available in airlines and other industries about the native innovations in business model. Indian airline industry so far rode on the growth curve of general economic buoyancy, can not do justice to its aspirations if it does not innovate itself. As of now we do not see any major innovation, than just replication of Easy jet, www.ryanair.com/ and South West Airlines business model.
Since changes will happen externally as well internally, with notice or without notice, things have to change by design, quickly within the organizations to make it nimble enough to deal with change. Of course, the ability to respond faster to change is dictated by how flexible and responsive is your ‘operations’. Cost cutting will make one only slim; but approaches of lean, six sigma and execution excellence could create long term competitive edge and hedge against changes in market place and prove viability of airline business.
Why do I say that airlines in India are merely copy pasting external model; because they lack the behaviour and heart while implementing those models. Take for example, you would see that in the name of low fare, the airline staff is almost as fickle (sometime rude) as it can be, without realising that it is still a part of hospitality sector. Often, they treat low fare or no frill passenger worse than your city bus conductor and driver do. They are yet to understand, what it means to offer desirable service at low cost. Even for the bottom of the pyramid, C K Prahlad warned that it is never low cost but lower cost at the same quality. It is true sometime that you can migrate bus and train passenger to take flights, but if you do not give the right experience, you would lose your business not too late. The fact remains that not only low fair airlines have misread the template of their business models but full service ones that run low frills and full service, you see the difference in attitude and quality of service. Every body knows that sheer focus on cost is only going to break the service quality.
Just look at, how well have airlines segmented their customers, not just by their paying capacity but by intrinsic need of passengers. Luxury clients definitely want to have their exclusivity, and therefore, mixing both class of passenger takes away the value an airline provides for luxury loving clients. The erstwhile full service airlines are trying to make a ‘difficult’ balance between the cosy comforts of full service model and low frill model. But the mistake they are making is often an ugly compromise for both the model. As we know, a compromise is not a sustainable solution, for it places your staff as well as the passengers into great conflicts on regular basis. What is needed is separation of the two model with a win for both class of clients, since the airlines are not yet matured to find synergy between the two types of operations.
What spice jet and indigo have done is precisely being focused on a particular segment of clients and allow themselves to grow naturally. They are trying to promise what they can deliver, and not more. So passengers have the right expectations. They are creating a difference on the level of satisfaction based on their promise, that is only increasing with time with their competitors. Now as they move ahead, they are going to create loyal clients who got used to their commitment. And it is just the time that they are going to add other benefits to their clients. Contrary to the general operation philosophy of huge economy of scale is not a necessarily a key reason condition for their early stage superior performance, they have modelled their business and executed the model in such a focused way that they are able to create a unique experience to passengers with just enough scale. And as it is, the market is big enough not just for existing airlines, but for a few more. Big boys, Jet, KF and Air India, all thought that by having best of both world, they would derive huge scale of operations, and ran after market share; but they failed royally in trying to grab market share and made ugly compromises. This has nothing to say that bigboys’ business is not profitable, it only means that they have got their model mixed up and wrong, with what ever objective they built it, it is not built to transform with the changes in airline as well as external industry. Also the lessons they need to learn is that when the opportunity is aplenty, instead of committing to fulfil all needs of the market, it is important to fulfil at least one significant need of the clients like no other player can and would, and thereby create a differentiation. Today, low cost airlines have created at least one such significant need of the clients by an order of margin compared to full service players.
Now as airline industry looks forward, the investment policy for investment of foreign airlines would come in when it would come in, but that should not be the reason for the existing airlines to improve their business model. By waiting for the policy to come and then act, will be too late. Nothing prevents them from getting operationally prepared, when the policy comes and have a head start. As of now, not many are really thinking about the head start, they are looking at a valuation game a la telecom, power and infrastructure sector.
The release of TCS Story and beyond by its CEO, Ramadorai, is timely in this respect, and airline industry as a whole has a lot to learn from it. It tells why not to blame external parameters that could be as strong as license restrictions or policy inadequacy. TCS is a story of dreaming to fulfil a necessity to bring India on global road map, about entering intellectual business, and making is happen, irrespective of odds. It just happened that after a decade of its entry , opportunities followed a plenty. You would also understand from the book, why TCS is a class apart and why TATA is a brand that it is, because its business is not born to exploit an opportunity, but fulfil a need, meet a necessity and solve a problem. TCS has its own business model and its own DNA.
Let’s see how things unfold, even when more passengers are taking flights. It will be worth watching how organizations battle it out, and if they make business model innovation and operation excellence, central to their business. The least they should blame is unfair low pricing by competitors or policy bottlenecks for investment. The guy who created disruption in pricing, has already encashed his investment and in any industry, there can not be too many Captain Gopinath; it is time to operate the system more efficiently and effectively, that is where the buck lies. There is no other way , “Take it or leave it”, as my friend Alfred Angula, the mass leader from Namibia says.
There are a plenty of ways to improve operations of airlines. But do you have pearl of ideas that seamlessly weave into a business model that can make a successful and unique airline business. And most importantly, it should not only be built to perform profitably today, it must also sustain its superlative performance in future as well.
If you look at the performance of Spicejet during the past two years (this year Q1 was a blip), you would get some idea, but I am still not convinced about the future as they ‘buy’ more aircrafts and a large number of aircraft will cause them to get into higher maintenance cost as well as downtime (read B, C and D checks.) and if they are aware of innovating their model. Their last years annual report says that their performance was mainly due to high load factor. And you can very easily understand that load factor is nothing but the utilization, which is a prime operational metric. Spicejet is what it is today, primarily because of operational excellence and the way they opened up their business model ‘one step at a time’. For them cost reduction is not the driver, rather cost effectiveness is inbuilt in the design itself (a la Tata Steel). So they do not take knee jerk reaction to worsening situations around.
There are three layers the way you drive your revenues ( and Spicejet is not too far in working on them). First Flight Plan- the sector-wise distribution of flights, which comes in the domain of flight planning. Second- Aircraft availability, which is how fast aircraft is turned around in B, C and D check (as of now, because of leased airlines, Spicejet is not facing the burden of D-check on its availability), this is in the domain of operation engineering and maintenance department (MRO). Third –Utilization, which is the load factor, i.e. revenue per available seat kilometre. It is not just these 3 parameters that Spicejet has excelled and is ahead of others, the important point is that, Spicejet did not blindly copy paste any body’s business model. Rather it leveraged advantages of their being new organization and avoided all the disadvantages of the incumbents, which is an inherent characteristics of a successful Startup company. They are just 6 yrs old, and still seem to have the agility in their business model to meet external challenge.
The fundamental that organizations somehow miss is that investment in business is done to create value and generate revenue. Without creating enough value with the already invested money, trying to seek more investment is not the way to meet the demand. Look at the operational parameters of full service airlines and look at their operating parameters, they actually have not done justice to their investment. So their call for more investment does not hold water. Keep it simple, organizations are not able to operate as promised. They must first operate the existing business more effectively and efficiently, before they ask for more money and changes in policies. And Rahul is pretty much right in complaining on behalf of stakeholders, for the enormous loss these organizations have caused.
So do you see any good movement in the thinking process of other airlines. Let me know if you got any idea, on how Indian airliners need to move ahead. Or wait for a complete business model, when it comes out here.
This posting can also be downloaded at slideshare.