A System View

The Strategic Value Of Operations

Operational groups perform the work to keep an airline’s fleet functioning and, as such, they perform extremely valuable services that allow a carrier to operate safely and efficiently. But operations must also be viewed strategically. And their strategic contribution to the bottom line — if fully understood and appreciated — can be quite significant.

Anyone who has been part of an operational group in the airline industry knows that an operating group’s sole fundamental duty is to run the specific activities within the group’s own operational purview right up to aircraft departure for its intended destination.

In fact, it can all be summed up fairly simply. Prof. David M. Upton of Oxford University Saïd Business School has defined operations as “all the activities a firm conducts in order to deliver value to its customers. It’s the set of processes that transforms either materials or information into a product or service.”

Typically, other groups such as network planning, sales, revenue management and marketing are perceived to be more glamorous — and more strategically focused — than their operational counterparts.

But there are concepts that can be applied to bring out a major opportunity to realize a considerable strategic value of operations within the airline industry. Some airlines understand these concepts much more clearly than their competitors — and those carriers tend to develop strategic advantages based on the real value their operations produce for them and, of course, for their customers, as well.

The Basics

In the operations field, there are two highly relevant topics for airlines: customer satisfaction and competitiveness. And customers have their own ways to assess the value provided by airlines (besides the act of simply transporting those customers from Point A to Point B).

One of the most important values that airlines provide (after, of course, the “given” of safety) is reliability or consistency in the product they deliver to their customers.

Reliability — or quality — covers aspects from punctuality and the number of cancellations an airline accumulates to whether passengers arrive at the destination with their bags.

On the competitive side, airlines are generally motivated by following different strategies. It is well known that airlines try to compete using different models — generally defined as the low-cost-carrier model, the ultra-low-cost-carrier model, the full-service model or a hybrid of these.

In an industry in which pricing is very competitive and the product is less-differentiated, operating efficiently can result in a competitive advantage if an airline can achieve lofty levels of customer service through a high level of reliability.

Many carriers today are laser focused on the passenger journey, or trying to be customer centric. However, every airline — by definition — should be customer centric, since all airlines provide a service. But customer centricity ends as soon as the airline does not provide an acceptable and constant level of reliability.

In addition, an airline that operates efficiently can provide a high level of customer service and lower the costs of that service. Airlines with high levels of punctuality, for example, will have lower costs — which, in turn, will increase their operating margins.

So in a nutshell, operations should be focused on increasing productivity and improving quality.

Driving Revenue Levels

Data indicates that on-time performance is correlated with higher operating margins. Having an efficient operation can help airlines reduce costs on several items such as customer-service recovery, misconnected/lost bags, staffing disruptions/overtime, maintenance schedule disruptions and flight interruption manifests (FIMs) to other airlines. Having an efficient operation can help airlines increase customer satisfaction and, therefore, increase or maintain its revenue levels.

The System View

Operations must be viewed as a system. And airlines without a good understanding of this system create suboptimal processes that drive low quality and low productivity.

Airlines — like any other organization — take inputs (airplanes, fuel, pilots, crews, cash, etc.) and transform them into outputs. In the case of the airline industry, the output is a set of services, such as transporting passengers and their bags from Point A to Point B safely and reliably.

So how can an airline come to a realistic understanding as to whether its operations system is good, not to say performing to a measurable degree of excellence? Answering this question requires analysis of how the planning process for an airline is configured.

In the case of an airline, the planning process is the proxy for the operations system (because operations takes inputs and transforms them into outputs) before the airline operates its schedule.

So if planning processes only consider some aspects and not others, it is likely that the airline will produce a low-quality product, meaning a product in which passengers are delayed and cancellations run at a higher number than the industry standard. It also means the airline will have to use more resources to overcome the low quality that the service is producing, which, in turn, increases costs and reduces productivity.

Things Gone Wrong

What are the aspects airlines are missing? And which drive low quality and low productivity?

The most common cause of low quality and low productivity is not considering all the constraints or operational needs to operate a particular schedule — driven by a belief that certain planning groups “own” the planning in a given time, and that other groups should not be enabled to have much influence.

Any person working in operations at an airline realizes that creating a schedule that is not operationally feasible will result in a degraded operation. This can happen, for example, when the network planning group plans a schedule only taking into consideration the airline’s heavy maintenance requirements and leaving out the assignment of weekly and daily checks to the maintenance planning group and the operations control center.

From a functional point of view, this makes total sense. But from a system-transformation point of view, it makes little or no sense.

The network planning team does not have all the information available — or perhaps the manpower — to properly perform this activity.

From a system-transformation point of view, this is not the right way to address the system. In other words, it may be optimal for one business unit or subsystem, but it is effectively creating a big problem for other divisions and/or subsystems.

In the operational-management world, this is called sub-optimization.

Since the planning horizon keeps shifting as the timeframe moves closer to departure, the planned transformation system is flawed from its very inception. So a very logical solution to this problem would be enhanced collaboration between the maintenance planning and network planning teams.

Since the network planning team manages and controls the entire schedule, other operational groups should be included and consulted to assure schedule validity. Airlines that are very collaborative between planning groups and operations groups will have a better transformation system in place, which will translate into a robust schedule.

A way to avoid the negative factors of sub-optimization is to establish a collaborative framework throughout all the planning phases.

Some airlines implement different models to encourage such collaboration, thus improving the transformation system. One North American airline, for example, has an operations planning group that works with the different operational groups as well as the network planning group. It functions in similar fashion to any other business-unit organization such as finance or human resources.

Other airlines have less-formal organizational structures, but may have well-defined timelines and feedback processes to significantly improve the planning. However, the only way to make this happen is in a circumstance in which the executive team understands these concepts and embraces collaboration.

Reliability Falls On Operations

An airline’s level of reliability, getting customers to their destinations on time, can set it apart from its competitors considering an environment where pricing is very competitive and product offerings are less-differentiated. Among many other responsibilities, an effective operations department is accountable for reliability.

The Beer Game

One way to demonstrate these concepts to a broad base of executives is through the Beer Game.

The primary objective of the Beer Game, which was originally conceived several decades ago by a professor at MIT, is to show the players the value of collaboration and information flow. Players tend to get excited because they believe beer will be involved, but “beer” itself is actually not part of the game, it’s simply a catchy name.

And despite being an inventory-focused exercise, the Beer Game’s concepts highlight the value of collaboration in the transformation system.

Typically, the Beer Game is executed in two rounds.

In the first session, all the players are directed to minimize the cost of their specific assigned business unit (in this case, a warehouse or factory). Players are notified that the unit with the lowest cost will win the game, and they are also instructed not to talk to any other group on the supply chain (they need to conjure up their own decisions).

Generally, all the players become engrossed in working diligently to fulfill the given objective. At the end, somebody wins (the lower-cost business unit). As part of the game, the total cost (the sum of all the subsystems) is also tallied and recorded.

On the second round, players are allowed to interact, and a new objective is defined. Now the objective is to minimize the total cost of the supply chain. Typically, when the game is over there is no winner, but the total cost is always significantly lower (sometimes by as much as 50 percent) than the previous run.

At the bottom line, the difference in cost is essentially the cost of lack of coordination or collaboration.

That’s a high price to pay simply due to a business unit being optimized locally instead of globally. This situation is not unique to the revenue-generation units — it could also be happening in the cost/operating units.

So the next logical point is to quantify how the executive team can establish the proper framework to embrace collaboration and track statistics showing that the organization is achieving a high level of efficiency that provides value to its customers (which, incidentally, leads into a whole different topic, beyond the realm of this article but one that will be covered in a future issue of Ascend).

Impact On The Transformation System And Environment

It’s extremely important to understand that every operations-transformation system works within an environment, such as competition, regulations and new technologies. And the transformation system has an impact on this environment. The environment, in turn, has an impact on the transformation system.

Managers typically argue that they cannot control the environment, and in the majority of cases this is true.

What’s important from an operations-management point of view is to define where this environment starts and ends. In other words, what is the boundary between the transformation system and the environment?

Understanding the environment will then allow the managers to define what they can or cannot control.

Some managers understand that they can influence the environment, as well as how they interact with their transformation system. Furthermore, they understand clearly that the current environment might not be the same in the future. And this is important because these managers can realign the transformation system to minimize the environment’s impact, or they may be able to reposition it for the future.

In addition, simulation provides value in analyzing and trying to understand whether an airline will have enough future airport capacity. And a strong argument can be made that not having enough gates, airspace or terminal space is out of the control of the manager. But it can also be quite logically argued that different alternatives can be analyzed to deal with the current issues, and strategies can be concurrently developed to avoid the impact in the transformation system in the future.

Can the airline, for example, influence the addition of gates or the construction of a new terminal? If not, should a new city be considered that might provide the much-needed capacity? Can the current facility be better exploited — in other words, is the current facility being used to its maximum capacity? Or are the right processes in place?

Can the schedule be altered to operate larger airplanes? Do “peak” or “de-peak” factors enter the equation?

Simply accepting a hypothesis that the environment can’t be changed could turn out to be a very bad assumption. And successful airline managers regularly analyze and basically understand all these factors.

So it’s misleading to assume that operations only involves boarding, checking in passengers, efficient flight-planning, dealing with irregular operations or having all the flights covered with legal crews.

Today, in fact, such a limited perspective actually represents a myopic and isolated view of operations.

In the airline industry — or any other industry for that matter — operations is a transformation system to provide value to customers and shareholders alike.

So having very collaborative integrated planning in place and understanding the environment can definitely help an airline provide significant value to its passengers, thus also helping the carrier gain a competitive advantage in the marketplace.

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