UPDATE: Airline Industry Key Success Factors

Rivalry has continued to increase in the U.S. domestic airline industry, driving most U.S. airlines to reduce capacity in the last few years.


Click here to read the original article, “Airline Industry Key Success Factors.”

The original article presented 12 key success factors for the United States domestic airline industry and suggested they might have to be expanded as the industry matures, as rivalry increases, and consolidation continues. That assertion is still true, but as of early 2012 it is not yet clear what new key success factor(s) should be added. While international expansion had been advantageous, the world airline industry is more chaotic than the U.S. airline industry today, and for international business (about one-third of U.S. airlines total business in available seat miles[1]) margins have declined. And U.S. domestic airlines have a “dominant national home” in the United States because of cabotage laws.[2]

Photo: Julie Elliott

Rivalry has continued to increase in the U.S. domestic airline industry, driving most U.S. airlines to reduce capacity in the last few years. Too much excess capacity was keeping costs up. Revenues fell, largely due to the worldwide economic recession. Prior to the pressures of the economic recession airlines felt capacity expansion would lead to increased revenues.

Annual capacity peaked in 2007 at 1.06 trillion available seat miles (asm’s). In 2008 and 2009 capacity declined to 1.04 and 0.98 trillion asm’s respectively. In 2010 capacity climbed to 0.99 trillion asm’s and based on data through October 2011 (0.85 trillion asm’s) whole year 2011 capacity may climb to about 1.02 trillion asm’s. The effect of reducing capacity is indicated by the “load factor,” which is the capacity utilized (revenue passenger miles) divided by the available capacity (asm’s). For the peak year (2007) the load factor was 79.4%. It declined in 2008 to 79.2% then rose to 79.9% in 2009 and 81.6% in 2010. Through October 2011 the load factor for 2011 was 81.7.[3] Generally the reduction in capacity helped the load factor, which was the intention.
Consolidation has continued beyond the America West/U.S.Airways merger noted in the original analysis. Of the airlines included in the original analysis, Delta and Northwest combined in 2008 and Continental and United combined in 2010. And Southwest is now combining with AirTran (not in our original analysis). Further consolidation has been discussed since the bankruptcy filing of American Airlines in late 2011. Consolidation is a typical response to maturation of an industry. However it raises the question: Is bigger better?

In many industries there are economies of scale to be derived by growing an organization in those industries. But there are several industries where scale has its limits. The article “Exploring Scale” questions scale in the airline industry.[4] And earlier research suggested that scale effects are negative after some size in the U.S. domestic airline industry.[5][6] None of the combinations noted have demonstrated improved performance yet.

Jet Blue has now grown to about one-third the size of Southwest and seems to be successful by our definition.[7]

Only Continental of the six “legacy” airlines in our original analysis has not filed for bankruptcy. And now that Continental has combined with United it remains unknown whether a legacy airline could succeed independently without bankruptcy.
One of the next research efforts should be to answer the question “Is bigger better?” for the U.S. domestic airline industry. And what is the optimal size for a U.S. domestic airline?

For more on this topic, click here to read the original article, “Airline Industry Key Success Factors.”


[1] U.S. Department of Transportation, Bureau of Transportation Statistics, www.bts.gov. Traffic Press Releases. For 2010 U.S. airlines flew 301 billion international asm’s and 673 billion domestic asm’s (“December 2010 Airline System Traffic”). Through November 2011 U.S. airlines flew 288 billion international asm’s and 624 billion domestic asm’s (“November 2011 Airline System Traffic”).

[2] “Airline Cabotage.” U.S. Department of Transportation, Office of General Council. http://www.dot.gov/ost/ogc.

[3] U.S. Department of Transportation, Bureau of Transportation Statistics. Aviation, Air Carrier Summary Data; Schedule T-1, Unique Carrier, All Groups. http://transtats.bts.gov.

[4] Pil, Frits K., and Matthias Holweg. “Exploring Scale: The Advantages of Thinking Small.” MIT Sloan Management Review Winter (2003): 33.

[5] Lowry, Michael K., “National Airlines Step Out From the Pack.” Aviation Week & Space Technology, July 10, 2000.

[6] Lowry, Michael K., “Top-Ranked Airlines Share Entrepreneurial Drive.” Aviation Week & Space Technology, May 31, 1999: 60.

[7] In 2011, through November, Jet Blue flew about 34 billion asm’s to Southwest’s 95 billion asm’s. See [3] for data.

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Airline Industry Key Success Factors

Key success factors have several direct and several possible uses for any business unit whether it is for-profit or not-for-profit, large or small, domestic or foreign. In strategic analysis of a business unit, key success factors often initially appear as analytical tools for examining the character of the industry in which the business unit competes.[1]

Often key success factors next appear as elements of a competitive strength assessment in examining the relative strength of the business unit compared to its rivals in the industry.[2] When a strategic management control system is designed to ensure achievement of the business unit’s strategic objectives, key success factors may suggest either strategic objectives themselves or measures for strategic objectives for that business unit or both.

The key point of this examination for those in other industries is that practitioners of strategic management should look closely at the number of key success factors appropriate for the industry being examined at the time of the examination.

In the startup and early growth phases of an industry, the general guidance from Thompson et al. may be sufficient: “Only rarely are there more than five or six key factors for future competitive success.”[3] However, as an industry approaches maturity, rivalry among competing business units often increases. Consolidation of the industry often follows. As a rivalry increases and consolidation proceeds, the number of key success factors is likely to increase.

Although there are few purely domestic industries today, as rivalry increases in an industry, business units are increasingly likely to expand into foreign markets in order to grow. For several stakeholders at least for customers, employees, and suppliers additional key success factors may also be required as the business grows more complex, if only because of the increase in national and regional cultures to be considered.

This analysis examines the U.S. airline industry, an example of the use of key success factors in an industry which by many estimates is mature and consolidating.

…An industry’s key success factors (KSF’s) are those competitive factors that most affect industry members’ ability to prosper in the marketplace… KSF’s by their very nature are so important to future competitive success that all firms in the industry must be competent at performing or achieving them or risk becoming an industry also-ran.

Crafting and Executing Strategy[4]

U.S. Airline Industry

The U.S. airline industry has been in a chaotic state for a number of years. In 1993, a U.S. government report indicated that the industry had “Lost huge amounts of money in the past three years, and it has never made a sustained, substantial return on investment;….”[5] According to the Air Transport Association, the airline industry trade association, the loss from 1990 through 1994 was about $13 billion, while from 1995 through 2000, the airlines earned about $23 billion and then lost about $35 billion from 2001 through 2005.[6] Early in 2006 the association expected about a $10 billion loss in 2005.[7]

Table 1 Annual Loss and Earnings

>Annual Loss and Earnings
1990 $ 3.9 billion loss
1991 $ 1.9 billion loss
1992 $ 4.8 billion loss
1993 $ 2.1 billion loss
1994 $ 0.3 billion loss
1995 $ 2.3 billion profit
1996 $ 2.8 billion profit
1997 $ 5.2 billion profit
1998 $ 4.9 billion profit
1999 $ 5.4 billion profit
2000 $ 2.5 billion profit
2001 $ 8.3 billion loss
2002 $11.0 billion loss
2003 $ 2.4 billion loss
2004 $ 7.6 billion loss
2005 $ 5.7 billion loss
Source: Air Transport Association of America, Inc.
Economics; Annual Revenue and Earnings.

However, a few U.S. airlines are able to compete successfully. As defined in this article with regard to the current situation, “success” includes surviving for two or more years with growth in annual profitability (increasing positive net profits, not just operating margins) and growth in revenue services rendered (available seat miles flown). Southwest Airlines has a long record of success by this definition. While there are a couple of other successful airlines, they are much smaller than the eight major airlines examined in this article.

The Eight Airlines

This analysis and the codes used in this article’s data pertain to the eight largest U. S. airlines by capacity offered (available seat miles) and their capacity rankings: American Airlines (AA) (1), America West Airlines (HP) (8), Continental Airlines (CO) (5), Delta Air Lines (DL) (3), Northwest Airlines (NW) (4), Southwest Airlines (WN) (6), United Airlines (UA) (2), and US Airways (US) (7).

It should be noted that America West has acquired US Airways and will now operate as the US Airways Group, but the two will operate separately for awhile. In addition, Delta and Northwest are operating under bankruptcy court protection.

Except America West and Southwest, these airlines are known as “legacy” carriers because they conducted interstate flights before deregulation of the U.S. airline industry in 1978. Additional research might compare the performance of “legacy” carriers with that of startup airlines since deregulation. The “legacy” effects (on labor relations or leadership, for example) are likely to be minimal after more than 25 years.

The Key Success Factors

The origin of the key success factors focused on in this article dates from an earlier study by this author regarding the success or failure of new U.S. interstate airlines after deregulation in 1978.[8] That study explained according to 12 key success factors the success or failure of eight airlines that began interstate service between 1978 and 1995. A computer model of an airline was constructed and then simulated the operations of the eight airlines examined over the time periods studied, most of the airlines for a five-year period. Those same 12 factors can be used with today’s eight leading (by service volume) U.S. airlines to explain their respective situations and to suggest changes that each airline must make to survive in the long run.

Successful airlines must do many things well. Not doing well in any one area may not result in failure as we define it. However, performing very poorly in any one area, or poorly in two or more areas, appears to make success elusive.

Airlines are in part service businesses. To be successful, an airline must be effective in four general areas: 1) attracting customers; 2) managing its fleet; 3) managing its people, and 4) managing its finances.[9]

Attracting Customers

In this article, we use two factors of measurement with regard to customers: 1) the attractiveness of the airline’s service and 2) the effectiveness of the airline’s promotional expenditures. In the original research we used a rather complex model of an airline’s “attractiveness” relative to that of its competitors, for example including infrastructure convenience, and scope of service. The base was the attractiveness of the price of tickets. In this analysis only the relative price of tickets has been used because ticket price was by far the most significant factor in attractiveness. A lower relative price would generally be more attractive to most travelers.

Similarly, the derivation of the promotional effectiveness in the current analysis has been simplified to that of the base used in the original study model. A measure of ticket sales per dollar of promotion expense is used in this study, with higher sales per promotion dollar being advantageous. Except where otherwise noted, the data for the analysis are taken from the U.S. Department of Transportation databases.[10]

Managing the Fleet

In the area of fleet management, the same factors are used for this analysis as in the earlier study. Airplane utilization in hours per day deals with how well the companies’ major assets (airplanes) are used as a group. The load factor relative to the industry average indicates how well the average individual airplane is used. Simply stated, the load factor is that proportion of an airplane’s seats that are sold and actually filled at departure.

Managing People

We use two factors with respect to how well the airline manages its people. Productivity, in airline capacity per employee,[11] is a measure of how effectively the employees work together in providing the physical service of getting passengers from one place to another. Morale is a measure of how committed employees are to providing good service to the airline’s customers. As in the original study, productivity is measured in available seat miles per employee. Morale is measured using proxies since the original morale model is complex and requires information not currently available for the airlines being examined. In this case, lost bags per 1000 passengers and complaints per 100,000 enplanements derived from the Air Travel Consumer Report[12] are used as indicators of how committed airline employees are to serving their customers. The activities that result in lost bags or in poor enough treatment of passengers that they file complaints are indicative of the morale of the airline employees. Labor-management relations (including strikes and threatened strikes) are one example of a driver of these effects.

Managing Finances

The last of the four areas is financial management, for which six factors are used. Unit revenue and unit cost are important by themselves, but their relationship is also important. Therefore, we have compared both unit revenue and unit cost as well as the unit margins among the airlines. A measure of capacity to normalize these factors is used since the airlines fly all their available seats, not just those that are occupied. Better unit revenue may not be an advantage for an airline whose unit costs are out of line.

In addition to unit revenues and unit costs, funding for growth is an important factor for an organization’s long-term success. Most successful organizations choose to grow over time. In the case of the airlines, growth is measured in terms of capacity growth. Furthermore, in order to grow, an airline needs adequate funds. To be attractive for most equity investors, an airline must grow its equity over time. Moreover, to be attractive to most debt investors, a reasonable debt-to-assets ratio is desirable. In this realm of funding, this study is less precise. However, in light of this study’s prior research, the measures in this case appear to indicate the likelihood of enduring success for the airlines.

The Analysis

The second direct use of key success factors often occurs in the construction of a competitive strength assessment of the business units to be compared, the rivals within the industry. The first step in this assessment is analyzing the data. The second step is presenting the analysis in a comparative manner.

This article limits its analysis to U.S. airlines because the U.S. Department of Transportation maintains a database of information which U.S. airlines are required by law to provide to the government. Some of the same key success factors apply to airlines of other countries, but to the author’s knowledge, no other country has a similar consistent source of airline information, nor does the International Air Transport Association (the international airline organization).

Table 2 determines the scale number for each airline for each of the first eight factors. (For factors 9 through 12, see the separate assessments below.)

Table 2: Assessment Rubric for Key Success Factors
Scale* Relative Position Ranking Relative to the Average of the eight airlines.
1 Good 10% or more better than the average for all 8 airlines.
2 Above Average 3% or more, but less than 10% better than the average for all 8 airlines.
3 Average between 3% worse than average and 3% better than average
4 Below Average 3% or more, but less than 10% worse than average
5 Poor 10% or more worse than average.
Note: * Scale of 1 to 5 for first 8 factors







In marginal cases, a trend toward better or worse may influence the scale assessment over the 24-month period.

Table 3 lists the key success factors and the measures used to determine each airline’s situation with respect to each factor. Table 3 also identifies each airline’s position during calendar years 2004 and 2005 relative to the other seven rivals. The first eight of the 12 key success factors determines each airline’s position relative to the average of the eight airlines studied.

In reading Table 3, an example may help to clarify the relationships of the scale value to the measures. In the first factor, attractiveness, the lower the value, the better for the average customer, the stakeholder for whom the factor matters most. The lowest values are for America West, and they are more than 10 percent better (lower) than the average for all eight airlines. Therefore, in the example, the scale value of 1 applies to America West.

Table 3 for Comparative Analysis of the Eight Airlines

Summary of the Analysis

This section assesses the likelihood of each of the airlines’ “Ability to Prosper in the Marketplace.”[13] It is the second direct use of the key success factors discussed in the introduction, the competitive strength assessment. In this article, each factor is weighed equally. However, this is not a prediction of exactly what will happen to each airline.

This summary is based on the airlines’ rankings on the 12 factors in Table 3 and the summary below in Table 4, which provides a ranked score for each airline regarding the airlines’ abilities to prosper in the marketplace.

Table 4: Airlines’ Competitive Strength Assessment
Good Above
Average
Average Below
Average
Poor
American Airlines 1 4 5 2
America West 3 3 3 3
Continental Airlines 2 2 4 2 2
Delta Air Lines 1 1 5 1 3
Northwest Airlines 1 2 2 1 5
Southwest Airlines 6 3 1 1 1
United Airlines 1 3 3 2 2
US Airways 1 4 6

American Airlines (AA) scores average, below average, or poor on all but one factor. American can probably survive over the next several years, but the airline will have to improve in several factors to be considered successful by our definition.

America West (HP) (now part of US Airways Group) performs well (average or better) in all but three factors. The biggest issue for America West will be to effectively integrate US Airways with America West. US Airways Group (the combination of the two) may already be experiencing “merger turbulence.”[14]

Continental Airlines (CO) is better than American Airlines by these measures and is likely to continue to be so, but CO’s below average and poor factors may prove to be challenges.

Delta Air Lines (DL) has three poor scores. It is not surprising that Delta sought Chapter 11 bankruptcy protection. (In November 2006 US Airways began an attempt to merge with Delta.)

Northwest Airlines (NW) has five poor scores. As found with the Delta data, it is not surprising that Northwest sought Chapter 11 protection.

Southwest Airlines (WN) has recently been the model successful U.S. airline. It ranks good or above average in more factors than do any of its competitors in this analysis. Southwest’s faults are its low unit revenue and its low load factor. Southwest has grown more rapidly in the periods during which this analysis was made than it did for much of the airline’s existence. Careful growth has been one of the hallmarks of Southwest’s success. It would appear that Southwest might want to slow its growth over the next couple of years and trade that growth for somewhat improved unit revenues and load factors to ensure the airline’s continued success.

United Airlines (UA), which had been reorganizing under Chapter 11 protection for over three years at the end of our analysis and had shed significant pension liabilities, is still not in a good position from this study’s perspective to succeed by the above definition over the next several years.

US Airways (US), (now merged with America West), was by the definition a failure as an independent airline. The assessment indicates that approximately a year under Chapter 11 protection was not sufficient to make US Airways an attractive investment opportunity. Six poor factors and four below average factors do not suggest a path to success.

Conclusions

With regard to the key success factors in the U.S. airline industry, one question comes to mind: Why is the airline industry able to continue to attract enough investors to keep all these airlines in business?

US Airways’ merger with America West may be an indicator of a consolidation trend. However, something else may be involved. A 1995 Fortune assessment[15] concluded, “Chaos may just be in the nature of this crazy business.” The possible explanation that followed dealt with an economic phenomenon known as “core theory.” Fundamentally, core theory is a mathematical formulation of the competitive environment of an industry. As in many mathematical models, there may be many, one, or no solutions to the equations of the model. According to this theory, the model for the airline industry has no solution, therefore it is an “empty core.” A lot of things have changed in the ensuing decade, but the industry still seems to be just as chaotic as before. However, Lester Telser, the University of Chicago economist who is the proponent of core theory, is still exploring that theory with respect to the airline industry.[16]

While the economists pursue their theories, it would seem to be appropriate for more airlines to emulate Southwest and its few other successful rivals if not literally, at least in terms of the competitive strengths of the key success factors.

As explained in the introduction, an increase in the number of key success factors for a maturing industry is supported by this example. It is impossible to choose only five or six of these 12 and have confidence that successful performance will follow. In fact, as the industry further matures and more competitors are able to imitate the practices of the successful airlines, even more key success factors may be needed.

And more key success factors may be needed as more international expansion is pursued, as indicated in the introduction. Perhaps a risk assessment factor that includes such risks as currency risk or political risk (perhaps “Managing the Public Policy Environment”) will be appropriate as large organizations evolve to have no dominant national home.

This analysis raises additional questions. How does Jet Blue, probably the most successful recent startup, compare with the eight airlines examined? (Jet Blue has now probably matured sufficiently, for example, in terms of maintenance costs, to be comparable for this type of analysis.) Will the merger of America West and US Airways be consummated well enough to induce further consolidation of the U.S. airline industry? Will “legacy” carriers be able to succeed by this definition without Chapter 11 bankruptcy experience (American and Continental, so far) or with Chapter 11 bankruptcy experience (Delta, Northwest, and United)? These questions will have to be examined further in future studies.


[1] Thompson, Arthur A., Jr., A. J. Strickland, and John E. Gamble. Crafting and Executing Strategy: The Quest for Competitive Advantage – Concepts and Cases. Boston, et al.: McGraw-Hill Irwin, 2005.

[2] Ibid.

[3] Ibid.

[4] Thompson, op cit.

[5] The National Commission to Ensure a Strong Competitive Airline Industry. Change, Challenge and Competition: A Report to the President and Congress. Washington, D.C.: U.S. Government Printing Office, August, 1993.

[6] Air Transport Association of America, Inc. Economics; Annual Revenue and Earnings. Retrieved 19 October 2006, from http://www.airlines.org, selected years.

[7] Trottman, Melanie. “Continental Posts Narrower Loss: Forecast is Dim.” Wall Street Journal, 18 January: A-3, 2006.

[8] McCabe, Richard M. “Why Airlines Succeed or Fail: A System Dynamics Synthesis.” (Ph.D. diss., Claremont Graduate University, 1998).

[9] Ibid.

[10] U.S. Department of Transportation, Bureau of Transportation Statistics, TranStats databases, Retrieved 17 May 2006 from http://www.transtats.bts.gov, Aviation, Air Carrier Financial Reports for the B-1 and P-12 schedules, and Aviation, Air Carrier Summary Data for the T-2 schedule. (Two-letter codes are from this resource.)

[11] U.S. Department of Transportation, Bureau of Transportation Statistics, Press Releases. Retrieved 17 May 2006 from http://www.bts.gov/pressreleases/passenger_airline_employment.html, for selected dates. The median of the number of employees at the beginning and at the end of the period was used.

[12] U.S. Department of Transportation, Aviation Consumer Protection Division. Air Travel Consumer Report. Retrieved 17 May 2006 from http://airconsumer.ost.dot.gov/reports/, selected dates.

[13] Thompson, op cit.

[14] Trottman, Melanie. “US Airways Experiences Merger Turbulence,” The Wall Street Journal, 7 March: B-2, 2006.

[15] Smith, Timothy K. “Why Air Travel Doesn’t Work,” Fortune, 3 April: 43, 1995.

[16] Telser, Lester G. Theories of Competition. New York & North Holland: Elsevier Science Publishing, 1988.

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Wings of the Great Northwest

President and CEO of Horizon Air since January 2002, Jeff Pinneo has nearly 30 years of airline industry experience, more than 25 of those years with Horizon Air and Alaska Airlines (part of the same airline group). Beginning in 1990, he served as vice president of Customer Services at Horizon where he oversaw Horizon’s largest division, which included station operations, inflight services, security, and food and beverage service. Prior to joining Horizon, Pinneo served in Alaska Airlines’ marketing department as director of advertising. He was also responsible for the original implementation of Alaska’s frequent flier program, then known as Gold Coast Travel and now called the Alaska Airlines Mileage Plan. A graduate of the University of Washington, Pinneo holds an MBA through the Presidential/Key Executive MBA program at Pepperdine University.




Jeff Pinneo, President and CEO, Horizon Air




How many aircraft of what size does Horizon have?

We have 69 airplanes spread across three distinct fleet types at Horizon. First, we have 20 Q-400s, the 74-seat high speed/high tech turboprop made by Bombardier of Canada. These are very fuel efficient, very customer friendly, and very fast turboprop aircraft that are best in class for cost efficiency. We also have 21 CRJ-700s, the 70-seat regional jets also made by Bombardier. They are high tech, highly efficient regional jets that allow us to provide service to medium sized, longer-haul markets. And then we have 28 Q200s, a 37-seat turboprop also made by Bombardier that allows us to add smaller communities to the Alaska Air Group network.

Where are these planes based?

Our network emanates from Seattle and Portland in support of our position as “Wings of the Great Northwest,” but in reality, we fly them all up and down the West Coast. For example, we have 16 flights a day out of Los Angeles alone to places such as Eugene, Medford, Santa Rosa, Redding, Redmond-Bend, Eureka-Arcata, Reno, Sun Valley, and Boise. Back in the northwest, we fly every half hour between Seattle and Portland and every hour between Seattle and Spokane. All told, we serve nearly 50 cities in the western United States and Canada.

You’ve mentioned “cost efficiency,” how do you measure “unit cost” at the airline?

Our “output” is the “available seat mile,” or “ASM,” which is one airline seat traveling one mile. We track our cost per “ASM” as a key indicator of our relative efficiency. We also measure our revenue per “ASM,” or “RASM.” The goal of course, is to keep our “RASM” higher than our “CASM” [cost per ASM]. The Q400 has been a very effective tool in helping us to maintain this balance.

Recently, we placed an order for 13 additional Q-400’s to further improve the efficiency of our operations and reinforce our presence in our key “backyard” markets in the northwest.

So when you order new planes, I’m assuming you pay some percentage down and the rest on delivery or something like that?

It depends more on whether you finance and, if you do, how you finance your fleet. If you’re Southwest with nearly $3 billion in cash and liquidity on hand and very little debt, you’re likely to simply purchase aircraft outright. Most of the industry relies on debt financings or operating leases, which require equity and good credit respectively.

Alaska Air Group, of which Horizon is an operating subsidiary, has a healthy balance sheet as well with about $1.2 billion in liquidity and debt-to-cap ratios below 70 percent, so we’re hoping to use the balance sheet to directly fund a portion of our capital expenditures, along with some debt financings.

How do we account for Alaska Air Group and Southwest having cash when so many other airlines who’ve been around for a long time are strapped and either in, just out of, or facing bankruptcy?

It’s a long story, but I think it can be summed up in a few phrases: conviction over purposeful missions, people-centric strategies and smart, fiscal conservatism. Since the deregulation of our industry in 1978, both Southwest and Alaska/Horizon have been very clear about their commitments to customers and the regions they serve. Understanding your customers their needs and wants and the requirements of the regions you represent is the starting point to developing defensible competitive positions. From there, recognizing that business is a relational prospect that success is a function of being good at building value-relationships with those who depend on you is essential to building lasting loyalty, which is a key ingredient in any successful business model. Both airlines have been disciplined about reinvesting in their companies and maintaining healthy cash balances which support robust investment in the up-cycles and safe harbors in the downturns.

One of the biggest downturns the airline industry has ever seen followed the events of 9-11. What was Horizon’s unique experience during that time?

While the whole world changed on September 11, the economy was beginning to change dramatically nearly a year prior to that day, and the airline industry was feeling the effects. With the downturn came softened demand, more aggressive fare competition and the yield erosion that accompanied it along with increasing fuel prices. Then the terrorist attack occurred, and the industry was literally grounded for three days. The process of restoring flight schedules began once guidance regarding enhanced aviation security had been handed down from the government, but the restoration of traveler confidence lagged. It especially lagged when it came to short-haul business travel for which acceptable alternatives were readily available.

You may recall at that time passengers experienced great uncertainty about how long it would take them to get to their departure gates. The prospect of waiting up to two hours to get through security to then board a one-hour flight to a destination that you could otherwise drive to in three hours was heavy on many travelers’ minds. The result for us was a drop in our short-haul business travel which was, at the time, the core of our business our short-haul revenues dropped about 40 percent in the months following 9/11. We worked night and day to mitigate the effects, through collaboration with the TSA [Transportation Security Administration], the introduction of express lanes for our shuttle passengers, line wait guarantees you name it. Still, the effects were significant.

Can you compare that scenario to today’s?

Like a lot of things, we’re better off today partly because of all we did to restore the value proposition and partly due to factors, like improvements in the economy, outside our control. One of the primary strategies we employed was to diversify our revenue streams so as not to be so vulnerable to any one line of business or even to any one geography. I would say the short-haul business certainly as a percentage of our overall business is still much less than it was pre-9-11. Now having said that, the security process has been streamlined, with more predictable screening times as the result. In our key markets, we introduced express lanes for our shuttle and elite customers these folks can basically fly right through. We also had to work very hard on ensuring that our core promises to customers our commitments to ontime and reliable service were consistently kept, as any significant delay would call into question a customer’s decision to fly.

What would you say are the weaknesses in the airline industry today?

Where to start [chuckle]? As every business student knows, businesses strive to keep fixed costs low and revenues high and stable in the airline business, we see these factors reversed. Airlines have extremely high fixed costs and very volatile revenue streams. They are very capital intensive, given the need to invest in very expensive aircraft, and historically have generated very low returns on invested capital. On top of that, airlines are very heavily regulated, very heavily taxed, very heavily unionized and entirely dependent on monopoly/oligopoly infrastructures in the form of airports. The burdens on the business are pretty staggering, which is why the industry is in the midst of a dramatic transformation. Through bankruptcies, consolidation and the emergence of new, well-funded low cost carriers, we’re in the process of becoming very different. It’s coming at great cost, but the promise of a healthier, more vibrant industry is the outcome everyone is seeking. At Alaska Air Group, our two companies are very focused on achieving a level of returns that exceed the cost of capital that allow us to compensate investors for their risk and have enough left over to fund our future.

What is going to happen to the price of tickets in future years?

In spite of all the cutbacks and consolidation over the past several years, we still have excess domestic capacity, so price competition is likely to remain a factor in the years ahead. The industry needs to be able to price its services appropriately, but that’s tough to do when you have too many seats chasing too few customers. We’ve seen considerable rationalization of this imbalance in the past few years, but there’s more to happen. So for the foreseeable future, air travel is likely on average to remain a terrific bargain. In the years since the deregulation of the industry in 1978, industry yields (inflation adjusted) are down about 110 percent. Consumers have been the beneficiaries and have adjusted their expectations accordingly. They want value quality and low price and the industry is working to respond.

You have also seen introduced in the last few years simplified pricing structures: five fare levels instead of 30, the removal of restrictions on advance purchases, and the elimination of Saturday night stays. The most recent development is the introduction of one-way only fares. When you buy a ticket now, you can buy a one-way ticket, two-way tickets, or two one-ways added together.

So with simplicity and transparency offered through the web, you can use a shopping engine and get a full look at everybody’s fare structure. You’re going to see that capability bringing downward pressure on fares. At the same time, consolidation and capacity reduction will bring upward pressure on the floor.

How did you come to be President and CEO of Horizon Air?

I certainly had no “master plan,” other than to work hard, enjoy and appreciate every day, and be thankful for the people around me and any good thing that came my way. I’ve been with Alaska and Horizon for 25 years and have only applied for one job my first one. After that, each move was the result of an invitation, which, as a mentor explained to me, was the result of my “interview of life” the one that happens every day, in every meeting, and with every project. I think I’ve tried to live as much in the present as possible and to give and receive as much as there is to exchange in the job along the way. And good things have happened.

I’ve also been very fortunate to have great mentors. I can’t emphasize enough how valuable it is to have the support, encouragement, and counsel of someone who’s a lot further down the trail than you are.

Of course, nothing good would have happened were I not blessed with incredible team members every step of the way.  Somone once said that leaders are granted permission to lead by those who choose to follow.  That’s certainly been true in my case.

Where did your work attitude come from?

A lot of it stems from lessons that my parents instilled in me that were centered on the idea that we owe it to others to give our very best. Through the power of their example, they inspired me to place others’ needs first and to work very hard to leave those you come into contact with better off than you found them. Through them, and later through my faith, I came to know that everything we have is a gift from God, and our greatest achievements are measured in the difference we’re able to make in the lives of others.

You do a lot of visiting with employees to give let’s call it the “human touch” at all levels, from the top down. From that I am inferring that there’s a sense of being appreciated and of recognition within Horizon Air.

This gets at the core of what we believe about business that it’s a relational prospect, and that of all the relationships we’re focused on building, those with our coworkers are really at the top of the list. Senior leadership is responsible for nurturing the environment that enables people to bring their very best to the game. We think this requires us to be clear in communicating the realities we face and quick to recognize the contributions of others. Along the way, we work to serve those who are serving others and to model behaviors that we’d like to see at the center of the customer experience. As human beings, we’re by definition imperfect, and we frequently get it wrong. But on the whole, we’re aspiring to the right things, and working hard to encourage and hold each other accountable to achieving those aspirations.

We have a good friend of our business, Bob Farrell, who founded Farrell’s Ice Cream Parlor. His mom taught him that the three magic words in business are “I’ll be back.” The point of any business plan is to get your constituents to think or say, “I’ll be back.” It’s really a very simple principle, but the magic is in the execution, and in order for it to be “magic,” it needs to be genuine. We present these ideas to our new hires and ask them a few questions: What do those words mean for you today? And why should you care about something like that in the first place?

Our answer is that we think you should care because you’re in the process of writing a book that’s entitled “My Life.” And that book will have a chapter in it that’s titled the same as one in mine: “My Time at Horizon Air.” For whatever length of time that book covers, you have an opportunity now to decide both the content and the quality of your chapter. Wouldn’t it be great to say the following about that chapter: “You know, I recognized the opportunity to receive everything it had to give me. At the same time, I gave it everything I had I left nothing on the table that might have helped someone around me. Years from now, I could take you back there and show you the ‘footprints’ I left how the place is better because I ‘walked’ there.” Wouldn’t that be great? In this way, we try to get our people to focus on what Covey called “the end in mind” to begin with it and to be deliberate and decisive about those steps that will take you and all of us to a good place.

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