Management And The American Airline Industry - A Chronic Crisis In Leadership
Let's start this post with an undeniable truth. There is no such thing as a great company or by extension a great government or any other greatness associated with an organization. There are only companies, organizations and cultures which recognize the greatness of their people. There we will see greatness in leadership, in act, in management and in execution.
I've railed on the airline industry a few times here. Management in the airline industry continually ranks as some of the worst in the world. This is an industry that continually resists change, innovation, new ideas and transformation. Instead we see the same business models run by the same leadership (loosely termed) regurgitated time and again through bankruptcy after bankruptcy. The company names may change but we relive the same experiences over and over.
In the last few months four U.S. airlines have gone bankrupt. It's easy to blame high fuel prices but the airline industry problems are structural and are well beyond high fuel costs. Now we have private equity and hedge funds exerting pressure on these same incompetents to merge aka Delta & Northwest and United & US Airways (recently scuttled). This seems eerily similar to the Hechinger & Builders Square merger while trying to compete with what was a great organization with great leadership. That being Home Depot. Another great culture that was jeopardized by poor leadership. Last time I checked, combining two companies that are perpetual losers doesn't make a winner but we are at it again. The definition of insanity is doing the same thing over and over again and expecting a different result. This, indeed, is insanity.
How many times do we go through this Samba before anyone learns from prior mistakes? One positive outcome for companies is that consolidation to a minimum number of players does allow for monopolistic control of markets and ultimately pricing power. It's also a recipe for creating Soviet-style organizations with insular, unresponsive cultures where customer satisfaction and employee morale have no meaning or purpose to their existence. Competition does improve the breed. Airlines are seeing high load factors and have used bankruptcies to reduce the amount of excess capacity. So, we see improved load factors regardless of how little they value customer satisfaction or their employees. This is due to decreased competition as opposed to brilliant strategy or leadership. If you don't like flying today, it's probably going to get a lot worse as more competition is removed from the market place. If you support competition, free markets and not monopolies, write your Congressional representatives and tell them its time to put a stop to airline industry consolidation.
It's completely surprising to me that after nearly one hundred years of flight, only one airline in the U.S., Southwest, consistently gets it right. That same airline is again the only airline in the U.S. to make a profit something like thirty seven years in a row. And, also has some of the highest wages in the airline industry clearly dispelling the myth that flight attendants, pilots and maintenance crews must earn prison wages for an airline to be profitable. Not that unsustainable work rules, wages and benefit growth didn't contribute to the mess in the airline industry.
I've alluded to this fact before but this is something I believe every person should use as a litmus test when investing in any company's stock. Every company is a knowledge company. The days of a manager pointing a stick to a task and expecting a worker to comply without using their intellectual capital are over. Your company may not realize this yet but they will. Or they will end up scraping the bottom of the barrel for profit crumbs. As such, every company should aspire to hire the most talented people it can afford. Because talent determines what economic return an employee will bring to the organization. Strong wages determine the long term viability of any company or country. Companies who understand employees are vast reservoirs of knowledge to be tapped for leadership, productivity enhancements, innovation, transformation, customer service and commitment to excellence will be the leaders in the twenty first century. This very fact is a key reason why Toyota and Honda have decimated American auto makers for decades. And why GM sells less cars today than it did forty years ago while Toyota and Honda have grown to be colossus powerhouses at GM, Ford and Chrysler's expense. It's not a surprise that customer satisfaction is highly correlated to labor satisfaction. They are one in the same. Both are defined by organizations that respect and encourage the greatness of people be it a customer or an associate.
As I wrote about Toyota long ago, lean methods or continuous improvement relies on employee knowledge as the very foundation for building ongoing and self-reinforcing excellence. Therefore, hiring superior employees is a predicate to long term business success. The generally held beliefs of capital trumping labor that Wall Street has perpetuated throughout society over the last few decades is a complete fallacy. Because in today's world the most important form of capital is human capital. Profits flow from human capital. Without this truth, there will be no sustainable capital. (You might really want to think about what this means in today's global environment.) Those who don't tap the cumulative intellectual power of profits employees provide will be the laggards of tomorrow.
Herb Kelleher, a founder and former long time CEO of Southwest personifies greatness in leadership. I was once a longtime shareholder in Southwest. I was a shareholder for one reason - Herb Kelleher. Because from great leadership flowed a great culture that valued its people and customers above all other measurements. It is not an overly dramatic statement to say that Kelleher is one of the greatest leaders the world has ever seen. Leadership is something the world is searching for in this time of uncertainty. In a world of gimmicks, financial engineering, off balance sheet accounting and a general lack of employee respect shown by so many corporate leaders today, Kelleher used proven leadership tactics as ancient as civilization itself. He created and maintained an identity and value system, he instilled consistent organizational clarity, he hired great people, he treated associates and customers with dignity, he invested in associates and customers and he created a structure of personal accountability and empowerment. And he led by example. He walked the walk. Then his team went about crushing the competition by providing a superior product for superior value. Could Southwest have accomplished its goals without a primary requirement of hiring the best talent and an environment of empowering that talent? Absolutely not. It's not any more likely that United, American, Delta, Northwest or any of the other mismanaged corporations were going to beat Southwest than it was that the Soviet Union was going to win the cold war. There is no difference. For both situations were studies in how labor trumped capital. Just not in the way that Wall Street's financial crowd has convinced society to view labor and capital. But in the way that successful organizations and countries view labor and capital.
While the mega carriers continued to cling to outdated business models and incompetent management, Southwest quietly became one of the world's largest airlines at their expense. Just as Toyota, Nissan and Honda did at Chrysler, GM and Ford's expense. And Southwest did this while easily being the most profitable airline in history.
We've watched many of the mega carriers in the U.S. declare bankruptcy, cut wages drastically, fire tens of thousands of employees and default on pension funds. Necessary? Well, it's highly debatable that carriers could not have averted such disasters with strong management. They have repeatedly claimed that Southwest's business model wasn't scalable or that Southwest was a regional carrier and their clients required a national carrier. And on and on and on. All the while Southwest has become all of the things their competitors said they couldn't profitably become. And, they did so because their competitor's management never realized the greatness of their associates or their customers. In the end, that cost shareholders, customers and employees of these venerable institutions.
So, what's the latest tactic to restore confidence in the airline industry? A current strategy seems to include hiring pilots for near minimum wage. But you say that cannot be true! Are poor wages for technicians and engineers who maintain the aircraft far behind? Well, much of that business has already been outsourced to low wage workers in far off lands. The next time you book a flight, you might be flying on a plane where the pilot has less experience flying a plane than you have flying a kite. This is part of the "race to the bottom of the barrel" wage strategy endorsed by politicians and business leaders short on leadership skills or business acumen. And, it's pervasive. How confident are you flying with a pilot making minimum wage? Would you hire a cardiologist working for minimum wage? Would you work in a skyscraper if the engineering company designing it paid minimum wage? Maybe the airline CEOs should be making minimum wage.
The Delta-Northwest merger is another act of incompetence by leadership unable to manage these companies to profitability. And, if politicians allow this merger to go through without regard for anti-trust enforcement, we'll see more layoffs, more wage compression and more chronic issues with customer service. And more monopolies. Is it not ironic that deregulation of the airline industry has come full circle? Without fostering competition and enforcing anti-competitive practices we have once again returned to an environment where a handful of carriers now dominate the market. Of course, anyone who understands markets and the lack of enforcement of free market principals could have predicted this.
We shall see an emergence of greatness in the airline industry when we see greatness in its leadership. From that flows a culture that embraces the greatness of its most valued resources - its employees and customers. Maybe they'll even realize their greatest customers are their employees. Or that their greatest sales source is a satisfied employee.
I've railed on the airline industry a few times here. Management in the airline industry continually ranks as some of the worst in the world. This is an industry that continually resists change, innovation, new ideas and transformation. Instead we see the same business models run by the same leadership (loosely termed) regurgitated time and again through bankruptcy after bankruptcy. The company names may change but we relive the same experiences over and over.
In the last few months four U.S. airlines have gone bankrupt. It's easy to blame high fuel prices but the airline industry problems are structural and are well beyond high fuel costs. Now we have private equity and hedge funds exerting pressure on these same incompetents to merge aka Delta & Northwest and United & US Airways (recently scuttled). This seems eerily similar to the Hechinger & Builders Square merger while trying to compete with what was a great organization with great leadership. That being Home Depot. Another great culture that was jeopardized by poor leadership. Last time I checked, combining two companies that are perpetual losers doesn't make a winner but we are at it again. The definition of insanity is doing the same thing over and over again and expecting a different result. This, indeed, is insanity.
How many times do we go through this Samba before anyone learns from prior mistakes? One positive outcome for companies is that consolidation to a minimum number of players does allow for monopolistic control of markets and ultimately pricing power. It's also a recipe for creating Soviet-style organizations with insular, unresponsive cultures where customer satisfaction and employee morale have no meaning or purpose to their existence. Competition does improve the breed. Airlines are seeing high load factors and have used bankruptcies to reduce the amount of excess capacity. So, we see improved load factors regardless of how little they value customer satisfaction or their employees. This is due to decreased competition as opposed to brilliant strategy or leadership. If you don't like flying today, it's probably going to get a lot worse as more competition is removed from the market place. If you support competition, free markets and not monopolies, write your Congressional representatives and tell them its time to put a stop to airline industry consolidation.
It's completely surprising to me that after nearly one hundred years of flight, only one airline in the U.S., Southwest, consistently gets it right. That same airline is again the only airline in the U.S. to make a profit something like thirty seven years in a row. And, also has some of the highest wages in the airline industry clearly dispelling the myth that flight attendants, pilots and maintenance crews must earn prison wages for an airline to be profitable. Not that unsustainable work rules, wages and benefit growth didn't contribute to the mess in the airline industry.
I've alluded to this fact before but this is something I believe every person should use as a litmus test when investing in any company's stock. Every company is a knowledge company. The days of a manager pointing a stick to a task and expecting a worker to comply without using their intellectual capital are over. Your company may not realize this yet but they will. Or they will end up scraping the bottom of the barrel for profit crumbs. As such, every company should aspire to hire the most talented people it can afford. Because talent determines what economic return an employee will bring to the organization. Strong wages determine the long term viability of any company or country. Companies who understand employees are vast reservoirs of knowledge to be tapped for leadership, productivity enhancements, innovation, transformation, customer service and commitment to excellence will be the leaders in the twenty first century. This very fact is a key reason why Toyota and Honda have decimated American auto makers for decades. And why GM sells less cars today than it did forty years ago while Toyota and Honda have grown to be colossus powerhouses at GM, Ford and Chrysler's expense. It's not a surprise that customer satisfaction is highly correlated to labor satisfaction. They are one in the same. Both are defined by organizations that respect and encourage the greatness of people be it a customer or an associate.
As I wrote about Toyota long ago, lean methods or continuous improvement relies on employee knowledge as the very foundation for building ongoing and self-reinforcing excellence. Therefore, hiring superior employees is a predicate to long term business success. The generally held beliefs of capital trumping labor that Wall Street has perpetuated throughout society over the last few decades is a complete fallacy. Because in today's world the most important form of capital is human capital. Profits flow from human capital. Without this truth, there will be no sustainable capital. (You might really want to think about what this means in today's global environment.) Those who don't tap the cumulative intellectual power of profits employees provide will be the laggards of tomorrow.
Herb Kelleher, a founder and former long time CEO of Southwest personifies greatness in leadership. I was once a longtime shareholder in Southwest. I was a shareholder for one reason - Herb Kelleher. Because from great leadership flowed a great culture that valued its people and customers above all other measurements. It is not an overly dramatic statement to say that Kelleher is one of the greatest leaders the world has ever seen. Leadership is something the world is searching for in this time of uncertainty. In a world of gimmicks, financial engineering, off balance sheet accounting and a general lack of employee respect shown by so many corporate leaders today, Kelleher used proven leadership tactics as ancient as civilization itself. He created and maintained an identity and value system, he instilled consistent organizational clarity, he hired great people, he treated associates and customers with dignity, he invested in associates and customers and he created a structure of personal accountability and empowerment. And he led by example. He walked the walk. Then his team went about crushing the competition by providing a superior product for superior value. Could Southwest have accomplished its goals without a primary requirement of hiring the best talent and an environment of empowering that talent? Absolutely not. It's not any more likely that United, American, Delta, Northwest or any of the other mismanaged corporations were going to beat Southwest than it was that the Soviet Union was going to win the cold war. There is no difference. For both situations were studies in how labor trumped capital. Just not in the way that Wall Street's financial crowd has convinced society to view labor and capital. But in the way that successful organizations and countries view labor and capital.
While the mega carriers continued to cling to outdated business models and incompetent management, Southwest quietly became one of the world's largest airlines at their expense. Just as Toyota, Nissan and Honda did at Chrysler, GM and Ford's expense. And Southwest did this while easily being the most profitable airline in history.
We've watched many of the mega carriers in the U.S. declare bankruptcy, cut wages drastically, fire tens of thousands of employees and default on pension funds. Necessary? Well, it's highly debatable that carriers could not have averted such disasters with strong management. They have repeatedly claimed that Southwest's business model wasn't scalable or that Southwest was a regional carrier and their clients required a national carrier. And on and on and on. All the while Southwest has become all of the things their competitors said they couldn't profitably become. And, they did so because their competitor's management never realized the greatness of their associates or their customers. In the end, that cost shareholders, customers and employees of these venerable institutions.
So, what's the latest tactic to restore confidence in the airline industry? A current strategy seems to include hiring pilots for near minimum wage. But you say that cannot be true! Are poor wages for technicians and engineers who maintain the aircraft far behind? Well, much of that business has already been outsourced to low wage workers in far off lands. The next time you book a flight, you might be flying on a plane where the pilot has less experience flying a plane than you have flying a kite. This is part of the "race to the bottom of the barrel" wage strategy endorsed by politicians and business leaders short on leadership skills or business acumen. And, it's pervasive. How confident are you flying with a pilot making minimum wage? Would you hire a cardiologist working for minimum wage? Would you work in a skyscraper if the engineering company designing it paid minimum wage? Maybe the airline CEOs should be making minimum wage.
The Delta-Northwest merger is another act of incompetence by leadership unable to manage these companies to profitability. And, if politicians allow this merger to go through without regard for anti-trust enforcement, we'll see more layoffs, more wage compression and more chronic issues with customer service. And more monopolies. Is it not ironic that deregulation of the airline industry has come full circle? Without fostering competition and enforcing anti-competitive practices we have once again returned to an environment where a handful of carriers now dominate the market. Of course, anyone who understands markets and the lack of enforcement of free market principals could have predicted this.
We shall see an emergence of greatness in the airline industry when we see greatness in its leadership. From that flows a culture that embraces the greatness of its most valued resources - its employees and customers. Maybe they'll even realize their greatest customers are their employees. Or that their greatest sales source is a satisfied employee.
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