AIR TRANSPORT MANAGEMENT- Part II First Project Assignment “REVIVAL OF A SICK AIRLINE” PRESENTED BY: DEEPTHI BADRI CONTENTS 1. Introduction 2. About AIRHIND 3. Increasingly being faced with tough competition 4. Aging Fleet and Low Profitability 5. Poor On time performance 6. Lack of Leadership 7. Unhealthy Industrial Relations 8. Inadequate Cash Flow INRODUCTION ABOUT HIND AIR LINES: Hind Air Link Pvt. Ltd. of Hind Industries has been involved in Airline Business. It is a company formed by a group of professionals with the expertise and investment coming from the parent organization HIND GROUP, established in 1981, which has diverse and multi-disciplined business interest. The company has consistently explored various ways to being premium value to its customers and has always believed in setting benchmarks in quality of service and customer satisfaction. Our name has become synonymous with excellence and commitment. Increasingly being faced with tough competition Innovation is the key to sustainable competitive advantage, and its pursuit is the holy grail of most companies with global ambitions. Innovation comes naturally to most small, entrepreneurial companies because it is vital to their survival and growth. Innovation in large companies presents more significant challenges, since they tend to be more financially driven and less tolerant of risk. In this paper, we look at this issue and how three companies, Danfoss1, Hewlett-Packard2, and Qualcomm3, have stimulated innovation in a relatively short time period by harnessing the power of the business plan competition, a concept that was leveraged from the world of entrepreneurship. Building and managing long-term supplier networks The overriding goal of a value-oriented overhaul of the purchasing function is to build long term supplier networks from which all partners derive clear advantages. In order to assume the new role of central creator and manager of an effective supplier network, purchasing departments need to acquire completely new skills and abilities. Above all, partner like cooperation and open communication within the organization and to the outside are vitally important. ―These kinds of abilities are critically important to the successful implementation of value sourcing programs,‖ Dr. Heiss explained. ―Best practice companies incorporate their suppliers into their planning processes, whether in product development or marketing. For this to succeed, they need to build up suitable skills, processes and structures.‖ To achieve lasting cost advantages, the entire value creation strategy should be reconsidered and redesigned from a value perspective. One outcome of such optimization programs can be the reduction of product variants, achieved through the use of modular product programs, same-part strategies or changes in specifications in order to reduce unit costs. The goal is to achieve permanent cost savings by means of a comprehensive value chain optimization. According to Dr. Heiss, such measures can reduce costs by more than 20 percent in all stages of the value chain. To preserve the cost savings achieved in this manner, the internal and external value creation should be continuously measured and checked against best practices. A permanent controlling and benchmarking program will ensure that the results are achieved and the processes are constantly revisited. ―Value sourcing programs are designed to shift attention away from short-term price considerations in favour of creating lasting value. When completely implemented and carried into practice, value sourcing helps the company attain lasting cost leadership, exploit shared growth potential and boost the innovation capacity of the supplier network,‖ Dr. Heiss said. Value Sourcing combines a number of key advantages 1. Long-term focus Value Sourcing goes far beyond short-term cost reduction measures. Although profit and cost pressures are intensifying in all industries, short-term gains should not be allowed to dominate the project agenda at the expense of permanent improvements. Successful companies combine short-term efficiency gains with the implementation of forward-looking strategies. 2. Concentration instead of breadth The growing share of value creation shifted to suppliers is fuelling an inexorable increase in the complexity of the procurement function. For that reason, success comes not from working on many sourcing categories at once, but from concentrating on each procurement category to achieve far-reaching improvements. 3. Focus on innovation In today‘s environment of global competition, innovation has become a critical success factor. Therefore, Value Sourcing seeks to initiate continuous improvement processes and joint development projects with suppliers, to promote the success of both sides. 4. Partnership and trust Building a supplier network that is among the best in the world with respect to cost, quality and speed is a long and difficult process. Value Sourcing relies on partnership and trust, instead of one company exploiting its market power to gain short-term advantages at different links of the value chain. 5. Global orientation Successful sourcing knows no boundaries. In this era of globalization, physical distance is no longer a barrier. No corporate function is feeling this transformation more directly than procurement. An enterprise that does not take advantage of global markets is wasting vital opportunities for productivity, innovation and growth. 6. Continuity The continuous evolution and growing dynamism of markets have a direct impact on procurement. Therefore, Value Sourcing is not to be understood as a single project, but as an on-going value enhancement process. This is the only way to attain and preserve competitive advantages over time. Aging Fleet and Low Profitability Aircraft, like cars, require more maintenance as they get older. This increased maintenance has a major impact on operating cost, reliability, availability and, at some point, continued viability as part of a fleet. The impact of aging on maintenance costs. To Aircraft Cost Evaluator and Life Cycle Cost program may know, have used an aging curve for the cost of parts and labour for some years. Recently revised this curve, based on better data. Three new sources and while some of the data is for parts and some for labour, it does show a very clear trend. One source of data was provided by the published cost of parts for two business aircraft guaranteed maintenance cost programs. Both programs are well accepted and can be assumed to be fairly representative of what operators face when they buy parts as required. Take the published prices and normalized them so that they are at 100 in year 5. In Aircraft Economics magazine it was an interesting article about the ratio of scheduled to unscheduled maintenance labour for ―D‖ checks for the Boeing 727aircraft. These checks, which are typically required every 5 years, show that at the first ―D‖ check, the ratio of scheduled to unscheduled labour is 1:1. However, at the 5th one (at year 25), the ratio has increased to 2.7:1. In short, the amount of scheduled time for inspections doesn‘t change, but the unscheduled work that results from the inspection goes up by a factor of almost 3 over the course of 25 years. The early years when the aircraft are young and warranties are in effect show very low maintenance costs – less than half of what they are at year 5. However, when the aircraft is 30 years old and wear and tear is taking its toll, the maintenance costs are 2.2 times what they were at year 5. But aging extracts an even greater toll in the areas of reliability and availability. And this can cost a lot more than the increase in maintenance costs discussed above. First, availability is defined as the number of days an aircraft is available for flight operations divided by the total number of days in the operating year. Reliability is usually measured as the percentage of departures that leave within a specified number of minutes of the scheduled departure time and is referred to as the ―dispatch reliability‖. Thus, if on average, one departure in 50 is delayed for maintenance reasons, the ―mechanical dispatch reliability‖ is 98%. Airlines aim for and get a 98 to 99% mechanical dispatch rate and the data shows that operators of corporate aircraft achieve the same kind of reliability. As aircraft age, the increase in unscheduled maintenance associated with scheduled inspections also requires a great deal more maintenance down time. Similarly it will take more and more maintenance to achieve any kind of acceptable dispatch reliability. Both detract from the availability of the aircraft for flight operations Available data shows that availability drops from the 95% range for aircraft up to 15 to 20 years of age to an average of 70% at age 25 and 55% at age 30. What this means for a charter operator is that as the aircraft availability decreases, so does its revenue and profit potential. Consider, for example, a typical operator with a Hawker 700 that flies about 725 revenue flight hours per year. That equates to just about 2 revenue hours per day. Thus, for each day that the aircraft does not fly because of lack of availability, the operator loses $4400 in revenues (at a typical rate of $2200 per hour). Let‘s assume for this analysis that the 95% availability up to age 20 is acceptable. Then as availability decreases to 70% at age 25 and 55% at age 30, here is what happens to revenues: Age (yrs) Availability (%) Revenue Days Lost Revenue Lost 0-20 95 18 79200 25 70 110 484,000 30 55 164 721,600 And at the same time, maintenance costs are increasing! A similar picture can be painted for corporate operators of old aircraft. The difference is that decreased availability translates into increased cost for charter rentals to provide the air transportation required by the company. Clearly, at some point, an old aircraft is no longer economically viable and should be withdrawn from service. In fact, the in-service rate of older aircraft parallels the availability rate. Up to age 20, almost 100% of the aircraft produced are in service. At age 25, the average in-service rate is 90% but can be as low as 75% for some makes/models of aircraft. At age 30, the average in- service rate is just under 80% and below 50% for some makes/models. And at age 35, the average rate is just about 50%. Unfortunately, there is no clear standard that spells out when an aircraft should be withdrawn from service because of these factors. Instead, what needs to be done is to keep track of the key parameters: -Mechanical Dispatch Reliability -Aircraft Availability -Maintenance Cost per Flight Hour Keeping careful track of these parameters is the best way to support senior management in their decision to keep or to retire an aircraft from your fleet. Punctuality: How Airlines Can Improve On-Time 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. Despite the increasing attention that airlines pay to punctuality the industry‘s on-time performance is still far below satisfactory levels. In 2000, approximately 25% of all ﬂights in the USA and Europe were delayed by more than 15 minutes. A good portion of this can be attributed to increasing congestion of air space and poor operational performance of air traffic control and airport facilities. Nevertheless, the individual improvement potential within an airline‘s reach is signiﬁcant. Exploiting this potential requires a key insight and mind-shift by the airline‘s management: Punctuality is a key leadership challenge throughout the organization and should rank high on the management agenda—from strategy and planning all the way to front-line operations. 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. Punctuality Does Matter Punctuality differs widely between airlines. It has become a competitive differentiator, both in positive and negative ways—and customers do care strongly about it. When following newspaper headlines it is clear that airlines are active in sharing good punctuality performance with the world, and when they have problems with their punctuality, it is unlikely that the world will not quickly hear about it in the press. More importantly, however, punctual airlines appear to be more proﬁtable. Our research shows that major airlines with above average punctuality rates have been more proﬁtable than those with lower than average punctuality performance. Acknowledging this cost relevance of punctuality, top management must take a ﬁrm stance on at least two major trades-offs: — Punctuality vs. turnover and yield — Punctuality vs. cost and equipment utilization Punctuality vs. turnover and yield. Short-term revenue considerations such as display visibility in the global distribution systems (GDS) do in most cases work against punctuality. Maintaining slots at peak times during the day, short connecting times and tight block times are valid sales-based arguments. However, they may ultimately result in poor operational performance, and may therefore become counter- productive to revenue maximization in the long run. Punctuality vs. cost and equipment utilization. One of the most obvious and easy measures to increase punctuality is to remove bottlenecks and add capacity (e.g. the number of aircraft, longer block times, and more ground staff and equipment). Without a solid quantitative business case, based on analyzing potential savings from avoided delay costs, it is unlikely that a controller will support such ideas, especially as most of the savings are variable while the capacity increase builds up ﬁxed costs. TYPICAL DELAY COST BREAKDOWN—CLIENT EXAMPLE Holding Yield reduction (re-booking) Passenger care Bound A/C capacity Flight crew In-ﬂight acceleration Station cost Processing cost Lost yield Supplier capacity and more Setting the Punctuality Target Punctuality performance differs widely across airlines. Europe has seen a span of performance of up to 30%-points during certain months. It seems difficult to achieve and maintain punctuality levels of 85% and above. Punctuality targets are usually deﬁned in terms of 15-minute punctuality, i.e. a ﬂight is still counted as departing on-time, if the plane goes off-blocks within 15 minutes of the scheduled time of departure. Using this approach the industry allows itself to ―steal‖ 25% of the average travel time on a domestic ﬂight in Europe. The argument that a 15-minute departure delay still allows on-plan arrival is not really valid. Although on-time arrivals are important for connections and the execution of the rotation plans— in the awareness of the traveller‘s mind it is departure punctuality that deﬁnes his or her impression of an airline‘s on-time performance. Consequently the 15-minute bar is not appropriate—especially for short haul operations. Ultimately, this means up-front acceptance of failure. In a similar way to the total quality movement or six sigma philosophy applied by leading ﬁrms in the manufacturing sectors, it is mandatory to strive for a zero-defect strategy in the turnaround process. Allowing, for example, a 95% on-time performance (i.e. a failure rate of 5%) at seven supporting sub-processes for the departure (the total number of such support processes is actually much higher) will in combination lead to only a 70% on-time departure rate. This means the targets for the sub-processes have to be set much higher—but how can this be realized if the airline industry‘s quality understanding of the end product allows 15 minutes or 25% slack? Three Main Levers to Push Punctuality An effective framework for approaching punctuality in a structured way should use three main levers — Network planning & control — Aircraft availability — Ground operations & departure process Network Planning & Control Sound network planning and control is the foundation for high punctuality. Our work with clients, which has included extensive analysis and simulations, enables us to quantify the proportion of delays which are inherent in the schedule and the rotation plans. Statistical capabilities are extremely important in the airline planning process. The capability to execute complex simulations is a critical tool for understanding schedule dynamics. A capability to carry out what-if analyses is crucial for simulating schedule changes and quantifying their impact on punctuality. The ﬁne-tuning of simulations is best achieved by using real historical data. Therefore, it is critical that airlines capture operational data, in real time if possible, and use it to feed the systems used for schedule simulations and planning. The ﬁrst step to overcoming poor planning and control, is to develop an integrated planning process, in which all the planning entities work in the same context and, if possible, use the same systems—or at least the same timetables and rotation plans. Harmonization of the level of detail used throughout the planning process is important; the plans for each function must connect seamlessly to those of prior and consecutive functions. Achieving a high level of detail early in the process can be cumbersome, but in our experience, it will result in a more stable operational platform. A sound network structure and appropriate block, ground and slack time deployment are key to a good plan. Adding slack time is expensive. A possible solution is to identify the ﬂight numbers where the punctuality impact on the total schedule is the highest—the ―star ﬂights‖—, add some appropriate buffers for them and in reverse tighten time frames for other, less critical ﬂights. The operational procedures on the execution day (―day zero‖) are another critical success factor. Deﬁning an operations control ―center of gravity‖ is of utmost importance. Some airlines still run separate planning and control centres for the major operational functions. These have to be centralized, or at least work closely together and be driven by integrated processes, systems, and a common command structure. Hub operations in particular struggle with on-time performance at peak times when their own network knots coincide with highest traffic loadings. Managing this problem requires the airlines explore new ways to share the airspace, either in concerted actions with other airlines, ATC providers, airport operators and regulators or by driving for new market driven methods of slot allocation. Effective strategies for recovering from ‗disaster days‘ are also very important to deliver sustainable, high rates of punctuality. To start tomorrow‘s operations effectively airlines must consider cancelling some ﬂights if necessary—yes, take a hit on the holy schedule regularity. This will pay off in the increased stability of the overall system. Aircraft Availability Aircraft availability is the second main lever in the punctuality framework. If the punctuality target is really taken seriously it needs to have an impact on ﬂeet planning and structure. It is not only the sheer size of the ﬂeet that is affected; it is also about the variation within and across the aircraft types. Vulnerability to version and equipment changes, or spare part logistics problems, has a direct impact on the ability to quickly restore punctual operations after irregularities. Punctuality management needs to raise this problem early with the network and ﬂeet planners. If, as a result, the airline decides to increase the number of reserve aircraft it is critical to deploy them carefully and not in a sweeping fashion. Monitoring their deployment avoids the tendency to simply use them as a buffer for maintenance requirements. Unscheduled maintenance is a major driver of low aircraft availability rates. This is especially true for intensive hub and spoke operations with tight rotation plans. The direct impact on punctuality is not surprising Ground Operations and Departure Process: Signiﬁcant improvements in on-time-performance at a low price—without major capacity investments and undue impacts on the sales front—can be achieved through focused process engineering in ground operations and in the departure process. This entails thorough operational diagnostics, followed by a careful design of the multitude of tasks that build the departure process as well as the implementation of the improvement measures. Sound ground operations are based both on solid up-front plans and process designs as well as on highly motivated people. The empowerment of front line staff, combined with a high level of discipline supported by adequate incentive schemes do more for punctual operations than millions of investment dollars spent at the wrong areas. Ground operations are increasingly outsourced by airlines, with the expectation of (at least) equal service levels but at lower—and most importantly—variable costs. Our observations show, however, that airline operations typically do not have the processes and systems in place that are necessary to monitor supplier performance in an adequate way. Traditional airline supplier measurement systems focus on costs and product quality, whereas assessing timely performance on a minute-by-minute scale is not widely applied. This is a major deﬁciency in the case of the very complex multi-user and multi-participant ground handling processes. Here, the famous ―extended enterprise‖ approach to managing the entire process beyond organization boundaries can be an effective remedy. Performance indicators related to critical milestones throughout the whole departure process are essential and it is particularly important to integrate them with well-designed contractual agreements with the suppliers. Tackling All Three Levers Experience shows that there is no single ‗silver bullet‘ that will ﬁx punctuality problems. Airlines need to use all three of the main levers described above simultaneously in order to be successful. The potential contribution of each area will obviously depend on the airline‘s speciﬁc situation, but it can be determined using analyses that identify the ‗real‘ delay root causes and the irrelative importance. Conclusion: Punctuality deserves to rank high on the agenda Punctuality is not only a quality issue—it reduces costs. Punctuality differentiates airlines from their competitors. Punctuality is a powerful performance indicator that drives total operational excellence. When an airline runs a punctual operation with high service quality, most other indicators are likely to be in the green. Not many industries have such dominant indicators. Punctuality is a tool for bridging functional boundaries, which will always be there regardless of any organization model. Managing the extended enterprise effectively requires the use of punctuality as a key indicator next to quality and cost in contractual agreements. Finally, punctuality is a leadership challenge. It requires all the skills we expect from advanced leaders: Motivate people, create followers, decide on facts, create understanding, and drive the wedge! LACK OF LEADERSHIP As the HIND airline industry enters another dark chapter, executives come under even sharper scrutiny. As difficult as it is to admit for airline executive recruiters, the best leadership transitions often come from within. 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. As well, successful airline CEO successions tend to occur when four other basic conditions are in place at the board-management interface: Succession planning is viewed as a fundamental and ongoing board responsibility closely tied to management development; There is clarity about the CEO's role versus that of the board in the succession process; There is a common understanding of the corporate strategy among the board and CEO; and There is an ongoing, logical and measurable role for the CEO in the succession process. 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. INDUSTRIAL RELATIONS Industrial relations has become one of the most delicate and complex problems of modern industrial society. Industrial progress is impossible without cooperation of labours and harmonious relationships. Therefore, it is in the interest of all to create and maintain good relations between employees (labour) and employers (management). The term industrial relations explain the relationship between employees and management which stem directly or indirectly from union-employer relationship. Industrial relations are the relationships between employees and employers within the organizational settings. The field of industrial relations looks at the relationship between management and workers, particularly groups of workers represented by a union. Industrial relations are basically the interactions between employers, employees and the government, and the institutions and associations through which such interactions are mediated. The term industrial relations have a broad as well as a narrow outlook. Originally, industrial relations were broadly defined to include the relationships and interactions between employers and employees. From this perspective, industrial relations cover all aspects of the employment relationship, including human resource management, employee relations, and union-management (or labour) relations. Now its meaning has become more specific and restricted. Accordingly, industrial relations pertains to the study and practice of collective bargaining, trade unionism, and labour-management relations, while human resource management is a separate, largely distinct field that deals with non union employment relationships and the personnel practices and policies of employers. The relationships which arise at and out of the workplace generally include the relationships between individual workers, the relationships between workers and their employer, the relationships between employers, the relationships employers and workers have with the organizations formed to promote their respective interests, and the relations between those organizations, at all levels. Industrial relations also includes the processes through which these relationships are expressed (such as, collective bargaining, workers‘ participation in decision-making, and grievance and dispute settlement), and the management of conflict between employers, workers and trade unions, when it arises. The key factors to be considered in conducting an analysis of the management- labor relationship: 1. Environmental or external economic, technological, political, legal and social forces that impact employment relationships. 2. Characteristics and interaction of the key actors in the employment relationship: labor, management, and government. 3. Rules that are derived from these interactions that govern the employment relationship. INADEQUATE CASH FLOW Cash Flow is King This applies to for-hire and not-for-hire operators. If Cash In less Cash Out is positive, you survive to see another day. In the case of the not-for-hire it means living within your (reduced) budget and conserving cash whenever possible. In order to effectively manage cash, you need. . . A System to Capture Data You can't control what you don't measure. If your aviation operation has three or four big cost categories (fuel, maintenance, personnel, facilities) then you will have a tough time identifying the areas where savings can be had. Too many times operators can focus on the wrong costs or the right costs for the wrong reasons. Everyone will focus attention on significant cash flow spikes or emotional events while other, more frequent, but less noticeable events can deplete your cash resources. An effective system, that is both detailed and easy to use, can help identify where those dollars are going. Here are a few areas: Warranty A first glance we think warranty applies to new aircraft. True, but incomplete. Every aircraft has numerous parts that were purchased new. All those parts have some sort of warranty associated with them. A few years back, we reviewed one operator's work orders and found $40,000 in lost cash from not aggressively tracking warranties. You may be able to reduce your parts costs by 10% by tracking and pursuing warranty issues. Inventory We need inventory to improve the efficiency (availability) of our aircraft. Inventory is not just limited to spare parts but can also include such items as; fuel, labour, aircraft, and ramp space. Having inventory has its associated costs: Storage and handling costs would include the actual space required to contain the inventory, the climate control, shelving and furniture (for the inventory personnel), and utility costs. Handling costs would include the personnel time associated with receiving and stocking parts, etc. Insurance and Taxes - Coverage of inventory is part of any general business insurance policy. If the inventory is significant enough in value, separate coverage may be required. Specific taxes on inventory and property taxes can vary by state. Obsolescence. Service bulletins and directives can, in some cases, render an item obsolete immediately. What if your fleet changes? Do you still have items associated with the old aircraft? Theft and Damage. Parts can "walk" and parts can be damaged by improper handling or storage.
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