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REVIVAL OF SICK AIRLINE33

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					REVIVAL OF SICK AIRLINE




    SUBMITTED BY,
    SLT SHRADDHA JAGTAP
                      INTRODUCTION

The first step focuses on the future of the organization (HIND AIRLINE):
what will happen in the next two years? The next five years? A labour
development plan is then developed, including the actions that must be taken
to attain long-term growth objectives. The strategic reflection activity strives
to compile a balance sheet for the current situation. This balance sheet will
be produced through an analysis of the external environment. The operation
involves identifying those elements that will influence the organization’s
development and establishing a diagnosis of the internal environment this
will enable the organization to identify its strengths, its competitive
advantages and the areas where it must improve.


Main issues involved are:
I. Increasingly being faced with tough competition
II. Aging Fleet and Low Profitability
III. Poor On time performance
IV. Lack of Leadership
V. Unhealthy Industrial Relations
VI. Inadequate Cash Flow




The global perspective

The airline industry as a whole generates less than 2 per cent of the world's
total CO2 emissions - less than the world's cattle and a sixth of the
CO2 output generated by road transport.

Today's passenger aircraft are typically 70 per cent more fuel efficient than
those of 40 years ago, and 20 per cent better than those of just ten years ago.

Latest models - like the Airbus A380s and Boeing 787s ordered by
various one world member airlines - burn three litres per 100 kilometers
(78.5 miles per gallon) per passenger. This is helping make aviation one of
the more fuel efficient forms of transport available. Today's aircraft are
typically 50 per cent quieter than those of ten years ago and some 20
decibels quieter than those of 30 years ago. The "noise footprint" of a
typical new jetliner is 15 per cent smaller than the aircraft they replace. Air
transport delivers mankind and the world with many benefits. According to
IATA (International Air Transport Association), the total economic impact
of air transport on gross world output is at least US$1,360 billion. It
provides 28 million jobs worldwide, rising to 31 million by 2010. An
industry responsible for 2 per cent of the world's CO2 emissions generates 8
per cent of world economic activity. Now the world's airlines are working
towards the target, set by IATA Director General Giovanni Bisignani at the
association's 2007 annual summit, of zero CO2 emissions within 50 years.
IATA's 240 member airlines have agreed a four-pillar strategy on climate
change:

      Invest in new technology
      Build and use efficient infrastructure
      Operate aircraft effectively
      Consider positive economic measures while working with
       governments to define an emissions trading scheme that is fair, global
       and voluntary.




TO IMPROVE ONTIME PERFORMANCE

Punctuality is one of the key performance indicators in the airline industry
and an important service differentiator especially for valuable high-yield
customers. In addition, improved on-time performance can help achieve
significant cost savings: Airlines report delay costs from 0.6 to up to as
much as 2.9% of their operating revenues.
Consequently many carriers have started initiatives and set up special teams
or organizational units to achieve these potential cost savings and service
improvements. Although these initiatives can appear to be expensive at first
glance, if they are well conducted they can generate significant pay-offs.
Research on the performance of major airlines suggests that there is a
positive correlation between on-time performance and operating profit. This
is a similar phenomenon to that found in manufacturing industry—where the
cleanest factories tend to be those with the highest productivity.
In rising to this challenge airlines need to take a strategic perspective and
apply a comprehensive framework that addresses the three main levers for
punctuality improvement that are within their reach:
— Network planning and control
— Aircraft availability
— Ground operations and departure process
Tools such as simulations, statistical sampling, process monitoring and key
performance indicators build the foundation to drill down to the root causes
of delays. The key success factor is to merge quantitative analytical rigor
with the rich qualitative information from front line observations, know-how
and staff experience.
Once agreement on the root causes of delay has been reached, the path to
solving the problem is in most cases clear. Quantifying both costs and the
benefits of individual improvement measures allows the trade-offs between
punctuality, investment, turnover, utilization, and other performance targets
to be managed effectively.




LACK OF LEADERSHIP


In truth, leadership stability can be found at the core of many of the world's
best airlines. A careful look at some of the best managed airlines reveals
common similarities in their leadership development and succession
practices:

      Often, but not always, a "duo" at the top, with one person taking the
       externally-focused CEO role and the other the more internally-
       oriented President and/or COO position;
      A small cadre of highly qualified potential successors one level down,
       typically at the Executive Vice President level (or equivalent), in
       commercial, operations, and finance;
      A fairly clear indication of who is in line for the next one or two
       succession moves;
      A high degree of commitment on the part of the best-placed
       individuals to stay with the organization, despite the efforts of others
       to lure them away;
      Regular rotation of the top executives across functional areas so as to
       round them out in preparation for general management; and
      An effective management development and rotational program
       feeding the succession funnel from below.



The difficulties confronting airline leadership succession
Ensuring effective leadership succession in airlines is much easier said than
done for several important reasons:

      Poor economic returns in the airline industry often make it difficult to
       both attract and retain top talent;
      Airlines are notorious for raiding each other's top management ranks,
       often seeing airline industry experience as a must for their leadership
       solutions;
      Developing internal solutions requires hard work over years, if not
       decades;
      There often just isn't enough "room at the top" for a good CEO and a
       credible lieutenant, particularly at small and mid-sized carriers; and
      Airline organizational structures are devoid of profit-and-loss
       platforms.

The last point warrants elaboration. Most multi-billion dollar enterprises are
effective portfolios of profit-and-loss units. In a retailer, virtually every store
can be considered a profit-and-loss unit. Yet, given the network nature and
functional operational nature of airlines, there is usually only one profit-and-
loss statement in an airline and it comes together at the very top. As a result,
only the CEO of a large airline gains experience managing a profit-and-loss.
Of late, that platform has been shared with a President in the context of a
duo managing the airline at the top.
UNHEALTHY INDUSTRIAL RELATIONS
The airline industry suffered particularly badly from the economic downturn
at the beginning of the 1990s, which forced many airlines to restructure.
Most airlines turned to their governments for state aid to help them
restructure successfully.

The European Commission’s approach to state aid was to ensure that it
genuinely met a need for restructuring, without distorting competition on the
market. In 1994, it set out the principles and criteria for evaluation of state
aid for airlines, in the form of guidelines. Under the guidelines, state aid may
be approved by the Commission, subject to a number of conditions, as
follows:

      it must form part of a comprehensive restructuring programme of
       limited duration to restore the airline's health and long-term viability;
      The restructuring programme must be self-contained, requiring no
       further aid for the duration of the programme or in the future. The aid
       may be granted only once;
      the programme must include capacity reductions, if necessary in order
       to restore the company to financial and commercial viability;
      the programme must not lead to any increase in the number of aircraft
       or seats; and
      Governments must not interfere in the management of the company,
       which must be run according to commercial principles.

Overview of employment and industrial relations implications
In terms of employment, the airline sector has seen a considerable amount of
restructuring and change over the past 15 years. Net employment levels
increased from 435,400 in 1988 to 489,700 by 1996 (The European airline
industry: from single market to world-wide challenges, European
Commission Communication, 1999), although employment growth among
national flag carriers was minimal (0.04%) New forms of work, aimed at
increasing flexibility, have spread around the sector.

In industrial relations terms, the challenge for trade unions has been twofold.
In the case of traditional carriers, unions have been concentrating on
negotiating acceptable terms and conditions for their members in those
carriers undergoing restructuring. Nevertheless, many carriers have modified
terms and conditions of employment for new employees, for example,
employing new recruits on fixed-term contracts or operating a two-tier pay
system. The practice of subcontracting has also increased, particularly in the
case of ground handling and catering operations. With regard to the new
low-cost airlines, trade unions have been trying to recruit new members and
gain recognition for bargaining purposes. However, they have faced hostility
on occasion, for example from the Irish-based carrier Ryan air, which does
not recognize trade unions.




INADEQUATE CASH FLOW
Although generalizations are dangerous it is perhaps possible to sum up the
key issues facing airline managements as: the fuel price; cash conservation
and generation and for some, their ability to survive and the actions that they
are going to take to ensure it. The fact that each $1 variation in the price is
reflected in a $1.6 billion change in operating profit and cash flow for the
airline industry gives a clear indication of the magnitude of the shock. At the
time of writing1 (late July 2008) the jet fuel price was $166 a barrel having
fallen 7.1% in the previous week but one which results in a forecast for the
year of some $141 a barrel and a fuel bill almost $90 billion higher than in
2007 leaving a gap of almost $80 billion to be filled to reach breakeven from
a combination of hedging benefits, higher fare revenue and lower costs;
however it is not just 2008 that is the issue; the impact on profits and cash
are likely to be even more significant in 2009.

Although in inflation adjusted terms the fuel price may well have been
higher in the oil crisis of the 1970s, part of the problem has been the speed at
which it has increased and the fact that a large proportion of airline revenue
is pre-sold and the recovery of higher costs either through overt surcharges
or just higher fares lags the increase in cost.
Whilst the performance of the fuel price will impact all airlines, the
operating environment faced varies region by region; In Europe and North
America there is in addition an economic slowdown and the prospect of a
recession with concomitant effects on the demand for both business and
leisure travel; In Europe and India (in particular) there was already
significant excess capacity; In most of the world there is now also the threat
of inflation which will feed through into reduced travel demand. The
industry faces what appears to be a structural change in its cost structure
whilst at the same time in a number of markets a demand squeeze.


The route to salvation and success
Of course the main route to salvation is to generate sufficient revenue for the
size of the business and make the necessary returns; which in itself raises a
number of issues as the rules of economics apply to the airlines just as they
do to any other company. Even at the simplest level the consistently low
returns for the overall industry suggest that there is too much capacity to
enable it to generate the returns that it needs although some airlines clearly
succeed in this respect. In broad terms it is possible to argue that in order to
reach a satisfactory return the industry overall already needed to reduce
capacity by 20% - however this was never going to happen. The main driver
for capacity reduction now is the avoidance of cost and cash outflows. On
the other side of the equation less capacity, at least in theory, gives a better
opportunity to improve revenue through higher fares but this depends on
sufficient demand being available at these high fare levels which will depend
upon the rate at which underlying traffic may slow. For “low cost carriers”
where growth has been largely a function of the rate of new route openings
and where routes may not be immediately profitable, there is also the issue
that their performance will increasingly dependent upon growth through
their established network which will be subject to the economic pressures.
However the failure of one or a number of low cost carriers may provide an
opportunity for others in the sector to enter the market. This is unlikely to be
through the acquisition of the failing or failed airline. Rather it will be
through the redeployment of some of their own equipment although the
success here is likely to reflect how well the brand is already established.
The rise in the fuel price has fundamentally changed the relative cost
structure of all airlines and this has a consequence on the nature of the
adjustment process. For some airlines grounding equipment results in the
avoidance of some 60-65% of the costs incurred. A number of airlines have
already announced that they are reducing flying in the winter season in the
Northern hemisphere. Ryan air has announced that it is grounding aircraft at
both Stansted and Dublin, withdrawing completely from some airports,
whilst at others retaining its network but reducing frequencies. At the very
minimum this route represents a “less worst outcome”. Expect a stream of
announcements over the next few weeks as airlines firm up their schedules
for the next operating season - winter 08.
For capacity adjustment to have a more meaningful effect there is a need to
remove the fixed costs too and here a number of US airlines have embarked
on this route (Ryan air too has announced that it is reducing numbers
employed). There are however costs associated with such changes and to the
extent that they are more than balance sheet write-downs they add a near
term demand for cash and one where the hoped for payback materializes in
terms of timing and amount.
                           Conclusions

It is clear that the European airline sector has experienced immense changes
over the past two decades and is still subject to constant restructuring and
change. The emergence of many low-cost airlines, following liberalization
of the sector, poses a significant challenge to the more established national
carriers in terms of competition on the basis of cost.

Employment in the national carriers has been reduced significantly in many
countries, as they shed staff in an attempt to cut costs and increase
competitiveness. Conversely, the emergence of new airlines has been a new
source of employment for many.

In industrial relations terms, there has been significant and ongoing upheaval
in many countries, as the established airlines try to cut costs and many of the
newer low-cost airlines offer reduced pay and terms and conditions to their
employees. Trade unions are also engaged in battles over recognition and
representation in the newer airlines, and are concentrating on upholding
existing terms and conditions and saving jobs in the more established
airlines.

In terms of collective bargaining, the sector is characterized by the fact that
company-level agreements predominate, reflecting the dominance of
national carriers. Dedicated employers' organizations for the sector do not
exist in several countries. Even in Germany and Austria, where sectoral
bargaining generally predominates, there is no sector-wide collective
agreement for the airline sector.

As to the future, restructuring and change in the sector is likely to continue
in the medium term, as liberalization and privatization of national carriers
has not been fully completed in many countries.


At the risk of stating the obvious, this is an unprecedented period for the
airline industry; it is undoubtedly a pivotal moment for the airline industry
and attention should now focus on the shape and size in which the industry
will emerge from this period of turmoil for whilst this is a period of
exceptional challenge for airline managements almost by definition it is also
a period of opportunity in a number of areas.

				
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posted:10/19/2011
language:English
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