Improving the Airline Industry

The variety of successful strategies in use today was in full display at the ATW Winning Strategies conference in Washington, where some of the airline industry's keenest minds shared their wisdom.

Dr. Adam Pilarski, senior VP at consultancy Avitas, opened the conference with a controversial statement, "the myth of overcapacity is an urban legend," pointing out that historically high load factors should push fares up. "If airlines don't make money when they have the highest load factors ever, there is something wrong with their business model."

He implied that airline managers overthink their strategies and fail to follow what he called "Adam's Rule: Revenue greater than cost equals good." The first thing to do is "Don't be stupid," he said, adding a list of "stupid" strategies:

Mini-mes (Ted, etc.).

Avolar.

Don't insult customers.

No extreme yield management.

No bad airline names.

No adversary relations with employees.

Do not have stupid business plans.

"Please remember you are in a service industry," he said, and try to avoid what former Continental CEO Gordon Bethune referred to as "sky nazi" cabin service. He criticized "nickel-and-dime" attitudes toward cutting amenities, scoffing at airlines' publicized moves to remove olives and pillows. You must cut costs in ways that make sense, related to productivity." Cost control "has to fit the business model, and must be related to productivity."

The importance of productivity is reflected in Southwest's average pilot salary, now $53,000 higher than UAL's average, yet United still can't turn a profit, Pilarski said.

Pilarski borrows his rules for success from Southwest. They start with treating humans decently-employees and customers-plus "underpromise and overdeliver," love your job and of course Adam's rule: Revenue > Cost = Good.

One reliable cost reduction is outsourcing maintenance, said Colin Karsten of Pratt & Whitney. He said the major drivers pushing the overall growth of the outsourced maintenance market include:

Growing low-cost carriers are loath to invest in maintenance capability.

Broad component support is emerging.

US carriers' fully burdened labor rate is 50% higher than average US MRO rates.

He predicted that "total MRO activity will grow 5.3% per year through 2013."

Use of the term low-cost carrier doesn't fit the customer orientation airlines should maintain, said Maurice Coleman, head of commercial strategy at Aer Lingus. "LCC is an internal focus. We prefer low fares airlines." In order to become an LFA, he said, a carrier must "simplify the customer selling proposition.