Effective airline leadership succession - exclusive analysis by Spencer Stuart

As difficult as it is to admit for airline executive recruiters, the best leadership transitions often come from within. Examples abound - Air Canada, American Airlines, Cathay Pacific Airways, Continental Airlines, Lufthansa, Emirates Airline, Qantas and Singapore Airlines to name a few - of major international airlines that have successfully pulled of internal CEO succession moves, often more than once.

An examination of each of these airlines tells us that, more than likely, each also stands to find its next CEO from within. Tom Horton could readily succeed Gerard Arpey at American. Jeff Smisek's recent promotion to President & Chief Operating Officer at Continental puts him in very good shape to succeed Larry Kellner. John Slosar's return from other Swire Group holdings to Cathay Pacific as COO surely puts him in the lead seat to step in behind Tony Tyler as CEO. Christoph Franz, a former Lufthansa executive who rejoined the Lufthansa Group and currently leads Swiss International Airlines, is a potential successor to Wolfgang Mayrhuber.

In truth, leadership stability can be found at the core of many of the world's best airlines. A careful look at some of the best managed airlines reveals common similarities in their leadership development and succession practices:

• Often, but not always, a "duo" at the top, with one person taking the externally-focused CEO role and the other the more internally-oriented President and/or COO position;
• A small cadre of highly qualified potential successors one level down, typically at the Executive Vice President level (or equivalent), in commercial, operations, and finance;
• A fairly clear indication of who is in line for the next one or two succession moves;
• A high degree of commitment on the part of the best-placed individuals to stay with the organization, despite the efforts of others to lure them away;
• Regular rotation of the top executives across functional areas so as to round them out in preparation for general management; and
• An effective management development and rotational program feeding the succession funnel from below.

Basic conditions for smooth transition

As well, successful airline CEO successions tend to occur when four other basic conditions are in place at the board-management interface:

• Succession planning is viewed as a fundamental and ongoing board responsibility closely tied to management development;
• There is clarity about the CEO's role versus that of the board in the succession process;
• There is a common understanding of the corporate strategy among the board and CEO; and
• There is an ongoing, logical and measurable role for the CEO in the succession process.

Well managed airlines have usually been working the CEO succession process for a prolonged period of time, using the passage of time to prepare would-be successor(s) as well as other key stakeholders such as the board, labor, and partners. Far too often, airlines are so focused on their near-term "survival" issues that they neglect this important task, leaving it far too late to yield a meaningful outcome. As the Japanese proverb goes, "When you're dying of thirst, it's too late to think about digging a well."

Carriers adopting such practices are usually among the best managed in the global airline industry and, not surprisingly, among the most consistently profitable. The benefits of leadership stability and internal succession are clear: (a) alignment and consistency of strategic direction, (b) consistent propagation of organizational culture, and (c) less distraction for the organizational overall given the disruptions that usually come with wholesale leadership change. Such airlines don't often run the risk of a botched CEO transition with all of its pitfalls and downstream ramifications.

Most of the examples cited above involved a time-phased, planned "logical succession" scenario, as is ideal. More often than not, such scenarios permit for active involvement of the incumbent CEO in the process, if not as "kingmaker" then at least as "strong recommender." Robert Milton hand-picked Montie Brewer and prepared him to be Air Canada's CEO. Wolfgang Mayrhuber was groomed for the job by his predecessor Jurgen Weber. Maurice Flanagan mentored Tim Clark for the CEO job at Emirates for over a decade. Jean-Cyril Spinetta has done likewise with Pierre-Henri Gourgeon, who is taking over as Group CEO of Air France/KLM as of January 2009.

In some occasions, the tremendous success of a long-tenured CEO can set up a challenging succession situation when the time finally comes to hand over the reigns. For example, Herb Kelleher's anointed successor at Southwest Airlines, Jim Parker, had huge shoes to fill and did not last long in them. It will be interesting to see how the successors to iconic Latin American airline CEOs such as Enrique Cueto at LAN and Pedro Heilbron at Copa Airlines will fare when given their shot.

Providing for different scenarios

That said, such "logical succession" scenarios aren't the only ones that airlines should be prepared to deal with. Well managed carriers often have plans in hand to handle the two other primary scenarios - "emergency succession" and "accelerated succession." The power of labor unions in the U.S. has contributed to the rapid departure of several major airline CEOs and the airlines were caught flat-footed.

Notable among these were Dave Siegel's departure from US Airways, John Edwardson's departure from the United Airlines' presidency when it became clear labor would not back him in the role, and Don Carty's hasty retreat from the American Airlines CEO job after labor upset over the airline's executive pension program. Only in the case of American Airlines did the rapid-fire succession job "stick", with Gerard Arpey still in the role today. In the other two cases, the "quick fix" solution lasted less than one year.

The powerful trade unions in Alitalia have effectively shortened the tenures of more than one CEO at the flag carrier.

Introducing an outsider

By choice or by force, airlines often do go outside for their CEOs. Introducing an outsider straight into the CEO ranks poses a number of challenges, including: (a) weak cultural fit, (b) credibility issues with the workforce, (c) ramp-up time to learn the industry and/or the company, particularly for industry outsiders. These risks become particularly active when the airline introducing the new CEO is under duress and in a fight for survival. Examples of less-than-successful external CEO introductions include Andre Dose at Gulf Air and Gary Toomey at Air New Zealand, and Philippe Vander Putten at Brussels Airlines, all of whom had short-lived tenures at the top.

Many airlines have borne witness to the destructive effects of a revolving door at the top - Aerolineas Argentinas, Air Jamaica, Gulf Air, and US Airways (before its merger with America West Airlines) to name a few. Not only did such carriers have to weather the changes in strategic direction that external CEO changes brought. They also have to bear the burden when some of those CEOs leave suddenly, often along with the other executives they brought along with them.

On the other hand, there are several examples wherein a company outsider has been "just what the doctor ordered" in terms of moving the carrier in the right direction. Richard Anderson's tenure at Delta Air Lines, while only a year old, is already paying dividends. The airline's merger with Northwest Airlines - Anderson's former carrier - has received Department of Justice approval and merger planning is well advanced. Despite his non-Delta like management style, Anderson has been well received and has given the airline newfound momentum. Anderson's charismatic yet hard-nosed approach would likely not have worked at more genteel Delta a decade ago but the airline has since been hardened by a Chapter 11 filing and other crises.

Fernando Pinto has provided strong leadership to TAP Air Portugal since his arrival in October 2000. Speaking the language and being sensitive to Portuguese cultural norms given his Brazilian heritage undoubtedly gave Pinto a leg up on others facing a similar transition. Despite some air turbulence along the way particularly around the T5 launch, Willie Walsh is making headway at British Airways and has the airline engaged in numerous potential landmark M&A discussions.

Introducing outsiders can bring many important benefits. Outsiders can usually bring about bolder and more substantial change than can their inside counterparts, largely because they are not shackled with corporate history and culture. Their arrival can also be used to create the "burning platform" sense of urgency that can be used as leverage to extract concessions from labor and suppliers. Their sheer newness and fresh ideas can often invigorate an airline and motivate staff to new levels of commitment and performance. Such was the case with the arrival of Coleman Andrews as chief executive of South African Airways in 1998. Stealing several pages out of the Continental Airlines airline turnaround playbook, Andrews did much to reinvigorate a once-proud airline franchise and its staff before running headlong into political challenges a few years later.

Internal appointments "safer", although not always best

So, while it's not clear that the internal solution is always best, evidence would suggest that it is likely the safer route to go. Of course, retaining a high caliber group of CEO-ready executives pending a succession move presents other risks, namely the GE syndrome. When it finally came time for Jack Welsh to retire from GE, he had developed three strong successors, each of whom was ready to assume the role. Of course, only one could and the other two quickly took flight to other organizations as CEOs.

This exact phenomenon is currently playing out at Qantas Group. When CFO Peter Gregg was passed over for the CEO spot in favor of Alan Joyce in August 2008, he promptly resigned.

The GE syndrome almost played out at Delta Air Lines when the two would-be successors to former CEO Jerry Grinstein - COO Jim Whitehurst and CFO Ed Bastian - were surprised that the new board formed emerging from bankruptcy wanted to test the external marketplace. In the end, Anderson's appointment led to Whitehurst's departure and it took appointing Bastian President to make it worth his while to stick around. Moreover, Anderson has had to heal internal divisions at Delta as various senior executives and groups lined up behind Whitehurst or Bastian at various times, thinking that either might get the nod.

Whilst such "horse races" are good for breeding thoroughbreds, and have led to exceptional CEOs at world class companies such as GE, Procter & Gamble, GlaxoSmithKline, and Abbott Laboratories, they're apparently not always the best for keeping those same thoroughbreds in the stable.

The difficulties confronting airline leadership succession

Ensuring effective leadership succession in airlines is much easier said than done for several important reasons:

• Poor economic returns in the airline industry often make it difficult to both attract and retain top talent;
• Airlines are notorious for raiding each other's top management ranks, often seeing airline industry experience as a must for their leadership solutions;
• Developing internal solutions requires hard work over years, if not decades;
• There often just isn't enough "room at the top" for a good CEO and a credible lieutenant, particularly at small and mid-sized carriers; and
• Airline organizational structures are devoid of profit-and-loss platforms.

The last point warrants elaboration. Most multi-billion dollar enterprises are effective portfolios of profit-and-loss units. In a retailer, virtually every store can be considered a profit-and-loss unit. Yet, given the network nature and functional operational nature of airlines, there is usually only one profit-and-loss statement in an airline and it comes together at the very top. As a result, only the CEO of a large airline gains experience managing a profit-and-loss. Of late, that platform has been shared with a President in the context of a duo managing the airline at the top.

Value in establishing a Group structure

Some carriers have taken steps to address this issue by creating large "group" structures - ACE Aviation Holdings (Air Canada), Air France Group, Emirates Group, Lufthansa Group, and Qantas Group being good examples. By segregating out businesses - such as maintenance, ground handling, catering, cargo, information systems, loyalty management - into arms-length units, such groups have created multiple profit-and-loss platforms, each with its own leadership team.

Other airlines have made very effective use of their subsidiaries as P&L development grounds for their futures CEOs. Alan Joyce's promotion to the CEO job at Qantas stunned many, largely because he hop-scotched over two strong internal candidates in the mainline carrier en route - John Borghetti and Peter Gregg. That said, Joyce not only proved that he could create and nurture a successful enterprise as a general manager at Jetstar but also used the opportunity to gain the low-cost carrier experience that is now so highly coveted.

Dave Siegel moved from Continental Airlines into the leadership of Continental Express, fundamentally transforming the airline while in the role. Whereas he did not move back into the mainline carrier, he went on to CEO roles at Avis, Budget, US Airways, Gate Gourmet, and now XOJet and clearly benefited from the general management experience at Express.

Succession becoming a key board agenda

Regardless of their current circumstances or their prior success, or lack thereof, in CEO succession planning, it is becoming imperative that airlines address the issue. Spencer Stuart research has shown that three factors are pushing CEO succession to the forefront and onto the top of the board's agenda:

• Corporate governance reforms have raised the level of accountability for executives and independent directors alike;
• Those same reforms have empowered shareholders to take a more active stance against management failings and board that do not rectify those failings; and
• The primary role of the CEO in the boardroom has been lessened by the emergence of the lead independent director and, in certain cases, by the appointment of a separate chairman to lead the board.

The latter point is especially coming true in the North America where multiple airlines have recently separated the Chair and CEO roles that were previously occupied by one person - Air Canada, Delta Air Lines, JetBlue Airways, and Northwest Airlines. More and more, we are witnessing the emergence of stronger Non-Executive Chairman at airlines and, with that, a willingness to put younger and, by definition, less experienced executives in the CEO slot, along the lines of Alan Joyce's appointment at Qantas.

More and more company boards are becoming activist in controlling the CEO succession process. Previously, many such boards were loathe or unable to stray into the territory for a variety of reasons (a) distractions by other factors, (b) sensitivity of the subject and wanting to avoid upsetting the incumbent, (c) a reluctant CEO, (d) complacency, and (e) lack of objectivity. Other boards didn't act on the issue because they either weren't aligned behind the ideal CEO profile or feared for lack of suitable talent within the enterprise.

Some airline boards have stepped in far too late to address CEO succession issues. Notable among these was Philippe Bruggisser's tenure as CEO of the failed SAir Group (Swissair and related companies).

Clearly, effective CEO succession is central to the long-term profitability, and viability of any airline. In an industry noted for cataclysmic change and constant volatility, the CEO suite is one place where stability and sanity should reign supreme.

Contact the Author:

Michael J. Bell
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Mbell@spencerstuart.com