BoeingBoy
Veteran
- Nov 9, 2003
- 16,512
- 5,865
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And Now For Something Completely Different…,
Scorecard 9
By R2A Management Consulting
– The Aer Lingus ‘Reversal of Fortune’
In our last article on Europe we ended with a reference to Aer Lingus and their amazing reversal of fortune, going from the Swissair, Sabena column in 2001 to the “we made money†group in 2002. A recent trip to Europe included a stop in Dublin to get a more direct perspective on this amazing feat. After research, coupled with a long discussion, it appears that the turnaround has three components which can be classified as the three R’s, recognition, reaction, repetition.
Recognition
While reality has finally struck at almost every carrier worldwide – SARS having been the catalyst for those Asian carriers whose fortunes had been previously less affected – many airlines in Europe and the US were slow to grasp the scope of the crisis that was developing. The sheer magnitude of the 9/11 events made it harder to see that this was merely going to accelerate declines that had been underway for some months. Aer Lingus, however, immediately grasped that this time things were different and that the disparate factors that had been building for some time had finally reached critical mass. Once Swissair and Sabena failed, they correctly assumed that bankruptcy was a very real possibility.
In realizing that fact, they did something that none of their European or American cohorts did, they benchmarked against the real competition, Ryanair, rather than against the other network carriers. Unlike United, which set Delta’s costs as its benchmark**, Aer Lingus correctly perceived that they had to move to the lowest common denominator if they were to avoid the usual pattern of reaching a targeted goal only to find that the savings were insufficient and the process needed to be restarted. Unlike almost everyone else, they perceived that the new model, not the traditional competitors, posed the greatest threat to survival. Their own analysis contains language rarely seen, even now, from network carriers.
* Industry was in a state of denial.
* Networks used as a smokescreen.
* Gouging of business fare traffic.
* Failure to offer customers what they want.
* Misplaced investment in technology.
These statements are a strong condemnation of the existing business model, from one of its own players. In our ongoing consultations with network carriers, relatively few are willing, even at the brink of oblivion, to make such clear statements of the shortcomings of the business model – this despite ample evidence that they are all true in varying degrees.
Reaction
This realization led to an immediate and rather Draconian response, far more wide ranging and substantive than the programs implemented by many of Aer Lingus’ compatriots. There were no half-measures undertaken and the transformation that was begun was designed to deal with fundamentals rather than a singular downturn. These actions included:
* Cost reduction of 190 million, 16% of the cost base
* Reduce staff by 2000 or 30%
* Reposition pricing by...
• concentration on direct web marketing
• reduction of leisure fares by more than 50%
• increase capacity at these fares to over 50%
• reduce business fares by more than 50%
* Realign capacity with demand
* Revenue management focus shifted to load factor
* Commission reductions
* Fleet reductions and increased utilization
* Network analysis
Repetition
Finally, and most importantly, Aer Lingus fully embraced the idea that this new model was not a one-off event but an ongoing process, constantly dynamic and never complacent. One of the points often repeated during our discussion was the fact that the actions already taken were only the opening rounds of an ongoing battle to reduce cost and increase efficiency. They freely admit that their current position is still short of being fully competitive with Ryanair. However, they have a clear vision of that gap and a strategy to cope with its presence. The first aspect is to continue to reduce their costs and narrow the differential. The other part of the strategic plan is to create additional value in the Aer Lingus brand, giving substance to any fare differentials that may exist. Especially important to Aer Lingus is the customer service component, a point at which they judge Ryanair to be most vulnerable. What has been achieved?
*22% reduction in distribution costs (2002)
*Increase in internet bookings from 2%(Sept. 2001) to 40% now
*Business fares are lower and offered for flexibility, not comfort
*Business class is a choice, not a fare requirement
* “Non-traditional†destinations introduced successfully
*Transition from low loads/high fares to high loads/low fares
*Cut balance sheet debt by half
What were the hardest parts? Corporate culture is a powerful and useful attribute but it is inherently adverse to change because, as we all know, “that’s not how we do it.†Traditional airlines are full of, well, tradition, and radical changes to “our glorious past†usually meet with strong resistance. Aer Lingus was no stranger to that mindset. Radical downsizing always creates fear and uncertainty, but we were told that one of the interesting obstacles was the purposeful use of the word “cheap†to describe the new Aer Lingus product. Seen often as a desirable attribute from the customer perspective, internally it unleashed all the negative connotations and associations that network carriers associate with the low-cost segment. A small item perhaps, but a large hurdle in the path of the new identity and business model.
Other changes were equally suspect. Aer Lingus had previously, like most traditional carriers, entered new markets only after substantive study and anticipating a development curve, begun at a loss, with a 2-3 year period allowed for route profitability. Clearly, few airlines are any longer in a position to move so slowly to profitable return. Aer Lingus abandoned completely this established route development plan and simply inaugurated service to new, promising destinations – most clearly outside the established Aer Lingus pattern. The star performer thus far has been Malaga. Begun with two weekly B737-500 services, it has grown within a year to 13/14 per week, with some operated by A330 aircraft.
What is yet to be done? Given the substantive change that has already been achieved, most network carriers would consider the goal achieved, stabilizing and focusing on the successful outcome. However, that response, repeated constantly over the past decades, is not a part of the new model that constantly attempts to simplify, reduce and align itself with the market which is determining the revenue. Immediately on the horizon are the following initiatives:
* Establish brand value. Currently the average Aer Lingus European sector is priced at a 63, Ryanair at a 49. As stated earlier, Aer Lingus does not anticipate parity but hopes to create additional value, equivalent in the customer mind to the fare differential. The premium is to be service based, with a strong commitment to transporting the passenger despite conditions that would result in a cancellation and refund by Ryanair.
* Fleet rationalization. In September 2003 the company intends to make a decision on a new fleet plan, eliminating diversity and capitalizing on the inherent cost advantages of a standardized fleet.
* Achieve a margin of 15%. The turnaround profit in 2002 represented a 6% margin. The goal is to increase that by 2½ times.
* Create a new benchmark of customer value. Current mileage programs, while popular with customers, have never been especially good at determining true customer value. Aer Lingus intends to capture and use customer data to determine passenger value and then alter the way in which it rewards its best customers.
* Continuously improve online booking facility. The current 40% is scheduled to move to 50% in the coming year and to that end they have targeted an improvement in the added value capacity of the site, further cost reductions and the channeling of other business to the site such as direct corporate access. Additionally they plan to continuously upgrade the help facilities and improve error handling.
These are substantial goals, to be achieved by a leaner workforce with a (once again) growing network. But profitability and the stunning progress already made are powerful incentives to staff and stakeholders. They are successfully remaking their company in a new model and it is working. We wish them well and recommend the process to others still held captive by their past.
** According to United’s Plan for Transformation, issued 31 January 2003.
For additional analysis of airline performance, view our Industry Scorecards.
Scorecard 9
By R2A Management Consulting
– The Aer Lingus ‘Reversal of Fortune’
In our last article on Europe we ended with a reference to Aer Lingus and their amazing reversal of fortune, going from the Swissair, Sabena column in 2001 to the “we made money†group in 2002. A recent trip to Europe included a stop in Dublin to get a more direct perspective on this amazing feat. After research, coupled with a long discussion, it appears that the turnaround has three components which can be classified as the three R’s, recognition, reaction, repetition.
Recognition
While reality has finally struck at almost every carrier worldwide – SARS having been the catalyst for those Asian carriers whose fortunes had been previously less affected – many airlines in Europe and the US were slow to grasp the scope of the crisis that was developing. The sheer magnitude of the 9/11 events made it harder to see that this was merely going to accelerate declines that had been underway for some months. Aer Lingus, however, immediately grasped that this time things were different and that the disparate factors that had been building for some time had finally reached critical mass. Once Swissair and Sabena failed, they correctly assumed that bankruptcy was a very real possibility.
In realizing that fact, they did something that none of their European or American cohorts did, they benchmarked against the real competition, Ryanair, rather than against the other network carriers. Unlike United, which set Delta’s costs as its benchmark**, Aer Lingus correctly perceived that they had to move to the lowest common denominator if they were to avoid the usual pattern of reaching a targeted goal only to find that the savings were insufficient and the process needed to be restarted. Unlike almost everyone else, they perceived that the new model, not the traditional competitors, posed the greatest threat to survival. Their own analysis contains language rarely seen, even now, from network carriers.
* Industry was in a state of denial.
* Networks used as a smokescreen.
* Gouging of business fare traffic.
* Failure to offer customers what they want.
* Misplaced investment in technology.
These statements are a strong condemnation of the existing business model, from one of its own players. In our ongoing consultations with network carriers, relatively few are willing, even at the brink of oblivion, to make such clear statements of the shortcomings of the business model – this despite ample evidence that they are all true in varying degrees.
Reaction
This realization led to an immediate and rather Draconian response, far more wide ranging and substantive than the programs implemented by many of Aer Lingus’ compatriots. There were no half-measures undertaken and the transformation that was begun was designed to deal with fundamentals rather than a singular downturn. These actions included:
* Cost reduction of 190 million, 16% of the cost base
* Reduce staff by 2000 or 30%
* Reposition pricing by...
• concentration on direct web marketing
• reduction of leisure fares by more than 50%
• increase capacity at these fares to over 50%
• reduce business fares by more than 50%
* Realign capacity with demand
* Revenue management focus shifted to load factor
* Commission reductions
* Fleet reductions and increased utilization
* Network analysis
Repetition
Finally, and most importantly, Aer Lingus fully embraced the idea that this new model was not a one-off event but an ongoing process, constantly dynamic and never complacent. One of the points often repeated during our discussion was the fact that the actions already taken were only the opening rounds of an ongoing battle to reduce cost and increase efficiency. They freely admit that their current position is still short of being fully competitive with Ryanair. However, they have a clear vision of that gap and a strategy to cope with its presence. The first aspect is to continue to reduce their costs and narrow the differential. The other part of the strategic plan is to create additional value in the Aer Lingus brand, giving substance to any fare differentials that may exist. Especially important to Aer Lingus is the customer service component, a point at which they judge Ryanair to be most vulnerable. What has been achieved?
*22% reduction in distribution costs (2002)
*Increase in internet bookings from 2%(Sept. 2001) to 40% now
*Business fares are lower and offered for flexibility, not comfort
*Business class is a choice, not a fare requirement
* “Non-traditional†destinations introduced successfully
*Transition from low loads/high fares to high loads/low fares
*Cut balance sheet debt by half
What were the hardest parts? Corporate culture is a powerful and useful attribute but it is inherently adverse to change because, as we all know, “that’s not how we do it.†Traditional airlines are full of, well, tradition, and radical changes to “our glorious past†usually meet with strong resistance. Aer Lingus was no stranger to that mindset. Radical downsizing always creates fear and uncertainty, but we were told that one of the interesting obstacles was the purposeful use of the word “cheap†to describe the new Aer Lingus product. Seen often as a desirable attribute from the customer perspective, internally it unleashed all the negative connotations and associations that network carriers associate with the low-cost segment. A small item perhaps, but a large hurdle in the path of the new identity and business model.
Other changes were equally suspect. Aer Lingus had previously, like most traditional carriers, entered new markets only after substantive study and anticipating a development curve, begun at a loss, with a 2-3 year period allowed for route profitability. Clearly, few airlines are any longer in a position to move so slowly to profitable return. Aer Lingus abandoned completely this established route development plan and simply inaugurated service to new, promising destinations – most clearly outside the established Aer Lingus pattern. The star performer thus far has been Malaga. Begun with two weekly B737-500 services, it has grown within a year to 13/14 per week, with some operated by A330 aircraft.
What is yet to be done? Given the substantive change that has already been achieved, most network carriers would consider the goal achieved, stabilizing and focusing on the successful outcome. However, that response, repeated constantly over the past decades, is not a part of the new model that constantly attempts to simplify, reduce and align itself with the market which is determining the revenue. Immediately on the horizon are the following initiatives:
* Establish brand value. Currently the average Aer Lingus European sector is priced at a 63, Ryanair at a 49. As stated earlier, Aer Lingus does not anticipate parity but hopes to create additional value, equivalent in the customer mind to the fare differential. The premium is to be service based, with a strong commitment to transporting the passenger despite conditions that would result in a cancellation and refund by Ryanair.
* Fleet rationalization. In September 2003 the company intends to make a decision on a new fleet plan, eliminating diversity and capitalizing on the inherent cost advantages of a standardized fleet.
* Achieve a margin of 15%. The turnaround profit in 2002 represented a 6% margin. The goal is to increase that by 2½ times.
* Create a new benchmark of customer value. Current mileage programs, while popular with customers, have never been especially good at determining true customer value. Aer Lingus intends to capture and use customer data to determine passenger value and then alter the way in which it rewards its best customers.
* Continuously improve online booking facility. The current 40% is scheduled to move to 50% in the coming year and to that end they have targeted an improvement in the added value capacity of the site, further cost reductions and the channeling of other business to the site such as direct corporate access. Additionally they plan to continuously upgrade the help facilities and improve error handling.
These are substantial goals, to be achieved by a leaner workforce with a (once again) growing network. But profitability and the stunning progress already made are powerful incentives to staff and stakeholders. They are successfully remaking their company in a new model and it is working. We wish them well and recommend the process to others still held captive by their past.
** According to United’s Plan for Transformation, issued 31 January 2003.
For additional analysis of airline performance, view our Industry Scorecards.
