Airline CEOs: the increasingly important quest to find the ideal characteristics
A corporate leader of any organisation requires an unusual, sometimes extraordinary range of skills. Inevitably not every CEO has these; nor does having the skills necessarily always triumph over external forces. Timing is not everything but it is important. With time, those external forces change the skill sets needed, for example when an industry is undergoing major upheaval.
Arguably, given the complexity of the airline business, a leader in this industry has greater demands placed on him (rarely her; there are very few women CEOs). And today the world must seem a particularly hostile place for legacy airline managements and their workforces, under siege from all directions. Meanwhile the Gulf carriers and many new short-haul low-cost models are changing the demands made on competitors, as protectionism slips away and hiding places become scarce.
This CAPA report examines some of the features involved in making a great airline CEO – or not.
The severe challenge of standing out in a legacy driven, heavily regulated airline industry
Inertia and instinctive attempts to maintain the status quo, usually the most powerful forces, are not a long-term option in an industry being turned on its head, so decisions have to be made, not all of them pleasant. Change is not optional. Yet the big legacy tankers are slow to turn around; often little has changed fundamentally in their culture, or even in their management teams.
As competitive pressures on airlines have increased, growth slowed and restructuring and cost reduction became the norm, so the choice between confrontation or consensus seeking became more stark. One likely implication was that the successful airline CEO’s profile must in future be even more focused on human relationships within the company. But whether that means being cuddly or being cruel to be kind is not a template judgment.
For the Gulf carriers, for lower cost new entrants, and in the high-speed growth markets of Asia, the Middle East and Latin America, innovation is more conspicuous and easier to adopt. In these fast expanding markets, the challenges can be quite different.
But it is where change is hardest to take on board that it is most needed – and where the test of a CEO's mettle is the greatest.
There is another challenge, not unique to airlines, but of more pungent immediacy: coming to grips with IT-related change. As early-comers to computer technology, airlines dug themselves into what are now legacy systems. These are expensive, inertial and extremely costly and complex to upgrade. Moreover – and this is at the core of many larger airline problems – the management systems of most airlines are built around buying aircraft, flying them and then on marketing and selling product.
Airline systems readily handle purchases of a billion dollars of metal. After all that’s what the airline business is about, flying aeroplanes – or is it? But when it comes to solving intricate IT (and big data) needs, there is a row of silos to confront and a Board and treasury anxious to cut costs by shaving “IT” costs.
Faced with an array of inertial forces, great leaders in the airline business have been conspicuous by their absence. There are one or two standouts, but can their skills be replicated? – or, worryingly, do today's CEOs even want to change? Benchmarking airline companies against each other and often employed on short term contracts, there are forceful and counter-productive incentives to continue doing things pretty much the same way, but faster.
And can they really make a lasting difference in this heavily regulated business anyway?
The Steve Jobs phenomenon – how relevant an example for an airline leader?
“Today we lost one of the most influential thinkers, creators and entrepreneurs of all time. Steve Jobs was simply the greatest CEO of his time.” – Rupert Murdoch, Oct-2011.
Few would disagree with Rupert Murdoch's assessment of the former leader of Apple. But does that mean they were right? After all this is a highly subjective judgment.
Steve Jobs was certainly one of a kind. He could see around corners. He eschewed traditional market research – there was no focus group 15 years ago being asked if they would like an iPod, with all the accompanying issues of access to copyright music. He – instinctively – changed the way the world used computers, listened to music and viewed media. He was not always first to the point, but his result was always markedly better and his marketing flawless.
With Mr Jobs went epithets such as relentless, visionary, creative genius, inspirational, revolutionary – along with perseverance and stamina. But also, egomaniac.
In a changing world, Steve Jobs touched billions of people’s lives. He actually played a significant role in changing the world. Technologically he was a great, yet his biggest strengths were promotion and product delivery. Together these comprised an unbeatable combination.
But he could only achieve what he did with near-unfettered power to implement what he fiercely believed was right. And he was relentless in pursuing his goals. As Bloomberg Business Week put it, “Steve Jobs was as famous for his volatility with Apple subordinates as he was for the clarity of his insights about customers. He fired employees in the elevator and screamed at underperforming executives.”
These are perhaps characteristics of successful IT leaders; Jeff Bezos of Amazon, Bill Gates in his youth, Steve Ballmer his successor… These and others were all renowned for their tantrums. The implication, as one observer noted, a lack of empathy, so that employees are regarded as expendable resources – is that a sign of a good or bad (or effective) leader?
By contrast with the airline business too, these IT impresarios all played their games on fields where “level” did not even rank consideration.
Certainly under Mr Jobs' leadership Apple’s share price soared. Do these attributes together qualify him to be considered “the greatest CEO of all time”?
He had undoubted brushes with morality in some of his dealings; he was frequently brutal in his relations, with competitors, partners and staff alike.
Perhaps Mr Jobs' autocratic behaviour was acceptable because of his obvious genius – although, in an earlier life with Apple, when that had not translated into profits, he had in 1985 been unceremoniously dumped.
So, in his second time around with Apple did he become a “great” CEO simply when (1) he got it right; and (2) he made a lot of people rich? He didn't temporarily cease being a genius during his Apple exile either, meanwhile establishing NEXT, a platform that became the basis for the Mac OS X, along with Pixar that was later sold to Disney. Nor did he, by all accounts, become a less abrasive personality when he returned.
Finally, he was considered irreplaceable. Because he was one of a kind, this sort of "perfect" CEO can leave a massive hole when he leaves. Ideally he would not. In Apple’s case, institutional preparations were in place. Tim Cook had been groomed for some time to take over the role; Mr Jobs’ awareness of his health problems no doubt added some edge to this succession planning.
Apple University had been established in 2008 "to teach Apple employees how to think like Steve Jobs and make decisions he would make." The University was sometimes called “the solution to Apple after Steve Jobs”.
At Apple, Mr Cook has by most accounts performed well, not an easy achievement in the shadow of the Great Man. He has a very different, more consensual style; he is not renowned for his tantrums. And under Mr Cook’s leadership, Apple shares rose steeply to new heights on the New York stock exchange, eclipsing the increases while Mr Jobs was in the top seat – a point that is rarely noted. It could be argued he was merely surfing the wave that Mr Jobs created, but that would not only stretch credibility but also be severely unfair to Mr Cook.
Profits matter – even to the point of being the ultimate determinant?
Two fairly obvious – but less esoteric – conclusions can reasonably be drawn from these examples:
(1) if the company is not making solid profits under a CEO, there is a good prospect he or she won't be CEO for long, influential thinker, great leader or not; and
(2) if the company is profitable his/her tenure is probably safe and, only then, is eligible to enter the perfection competition.
So, to have any chance of becoming the perfect CEO, profitability is a primary pre-condition. That takes a lot of the sting out of any debate about perfection. There will be a minority, even a large minority, who will suggest that the greater the profitability, the greater the CEO.
Consequently, if he is to stay with Apple, presumably Mr Cook must be able to help push the share price up again in the next year. Meanwhile, if the now-maturing company falls behind in market share (almost a given as the market catches up), how useful will his consensual style be then in securing his own future, let alone Apple's?
In other words if he has all the best attributes of a leader of people and shaper of a committed team, but does not meet financial "success", can he be a successful leader?
The paths to greatness all seem to point relentlessly back to the bottom line. And that's not the triple bottom line either.
A quick look at the behaviour of the major commercial banks and their leaders over the past decade is enough to suggest that the overriding – or even sole – criterion is profit. Certainly there are usually token noises made about social responsibility and environmental sensitivity, but they really occupy a tiny part of the thinking (or expenditure) in most companies. While financial institutions make billions of dollars in profit, expenditures on non-revenue areas amount only to millions, at most.
Yet surely there has to be more to it than relatively short term share price, even in a perfect capitalist system.
Notably, the aviation leader for example has little choice but to be much more sensitive to environmental concerns, even where there are real costs and while profits are lean.
A recent report by the Harvard Business Review[i] on “The 100 best-performing CEOs in the world” used an “objective” selection methodology. The scorecard was based on leaders who had “created long term value for their companies”. That said, the initial judgment in this study of over 3,000 CEOs mostly turned around company profitability over a short period since 2010. The “long term performance” related to the leader’s performance over the entire time of his/her tenure.
Yet Jack Welch, management guru extraordinaire, presided over a more than 400% share price increase during his 20 year tenure (a number often noted, but which translates to 8.4% CAGR); in the three years after he left the price halved.
(One saying of his that would however appeal to many of the new breed of airline entrants: “Run the company like a family grocery store”.)
Hardly surprisingly, Steve Jobs and Jeff Bezos emerged as numbers one and two in the HBR top 100 ranking. There was one airline CEO in the top 100 who filled the criterion – but he was from government owned Air China, which had reported good profits. He is in fact one of China’s most notable CEOs, but that was not the reason for his ranking, even if he may have had sufficient influence to stand out under the direction of Air China’s main owner.
What characteristics must go into making a great airline CEO?
But, anyway, could Steve Jobs have been a great airline CEO? Unlikely.
This is an industry not noted for its profitability. Unlike Apple, a new light in a new business, many of the airline industry's main participants are decades old, heavily saddled with the baggage of age, heavily unionised, regulated almost to death and, thanks to the proliferation of intermediaries, largely commoditised. At the same time there are relatively low barriers to entry (and for most older airlines, remarkably high barriers to exit).
In light of the nature of these challenges, are there special personal relationship aspects within an airline that increase the importance of the human factor?
The quest for the secret of what characteristics go into making a great airline CEO is a well-trodden path. But specific features confront an airline leader over and above the common elements of corporate leadership. This was never truer than it is today, as an entire industry experiences upheaval. It is an industry in transition.
Two features force themselves to centre stage when talking about airline companies: They,
(1) own the most recognisable – and often best – brands both in their home markets and, for some, like Singapore Airlines, coming from a small country of four million people, globally; and
(2) are fierce under-performers financially, theoretically at least offering considerable upside for the creative leader.
Yet, despite boasting many more high profile brands globally than any other area of commercial activity, very few CEOs force themselves forward as outstanding leaders. Some of the reasons for this may emerge below.
A handful of standout airline leaders among hundreds of companies
One current leader who has undoubtedly been successful in generating profitability is Michael O’Leary, CEO of the European LCC, Ryanair. In many ways he shares some of Steve Jobs' innovative creativity, albeit within the shackles of often-ludicrous regulatory constraints. Yet he is abrasive publicly, has had a relatively high turnover of management (although junior staff tend to have greater longevity) and can hardly be said to have sympathetic people skills.
Even though he is recently suggesting he may have a fuzzy side to him, Mr O’Leary could not be further removed from the progenitors of the low-cost model his airline emulates – Southwest Airlines.
Southwest founder Herb Kelleher would be most people’s pick as the best airline CEO of all time (at first with Lamar Muse and later supported by Colleen Barrett). A tough lawyer and businessman, he was inspirational, innovative, constantly generated profits and, above all, established a remarkable culture in what became the granddaddy of all LCCs. Like Mr Jobs, he changed an industry. Moreover, the Southwest culture was institutionalised, so that it has survived into the next generation of leadership.
The one a tank battalion commander, the other a skilled conductor of a complex human machine, who created company styles that are the stuff of numerous adulatory management books.
In each case shareholders experienced enormous capital gains and rapid airline growth, but other outcomes could not have been much more at odds, one with a human face, the other a machine to make money (albeit helping change society through enabling pricing).
Ryanair's arch-rival LCC in Europe, easyJet, has also performed spectacularly over the past two years. Under Carolyn McCall, one of the airline business' rare woman CEOs, easyJet has adapted brilliantly into a new market niche and its share price has nearly tripled in the space of 12 months. Ms McCall has adopted a low profile as leader and if anything is seen as inclusive and a team player.
Enormously successful LCC, Norwegian Air Shuttle CEO Bjorn Kjos too has presided over a near-trebling of share price in the past year, while also embarking onto a long-haul operation that could provide a new Euro-Asian model. And Vueling's Alex Cruz has navigated the LCC through a complex evolution while remaining one of the lowest cost operators in the region.
In the US, evolving LCC JetBlue, founded in the dying months of the 20th century, has also been an industry leader under CEO Dave Barger, profitable in a market dominated by the world's largest network airlines, but imparting a renewed sense of customer service and a human face to a market where dissatisfaction with the nation's airlines is widespread. Perhaps of all today’s major airline CEOs, Mr Barger is renowned for his compassionate nature and inclusive management.
Among full service airlines, several CEOs have also shone out from the generally undistinguished pack
It is hard making a difference in an established, legacy airline. Substantial change – often needed now – is difficult and usually involves confrontation, loss making and an unhealthy dose of politics. More than one Air France leader has been put to the sword by a government unwilling to bite the commercial bullet. Political cowardice was a much stronger motivator than profitability.
In growth markets standing out can be a little easier. LAN Chile's Enrique Cueto has been an inclusive leader, while transforming the face of South American aviation, spearheading a series of cross border mergers which look likely to stand the test of time and launching a combined LAN as a world force.
Africa's Tewolde GebreMariam has long presided over that continent's most financially successful airline, Ethiopian, and established a range of effective partnerships to help protect that position. Temel Kotil in Turkey has led Turkish Airlines on a remarkable expansion programme while remaining highly profitable and maintaining a healthy staff culture in a difficult environment.
Amid a very different climate in Europe, British Airways CEO Willie Walsh (now CEO of parent IAG) restored that fast-sinking airline into an unlikely world force through a combination of coercion, communication and cooperation. Lufthansa's relatively successful turnaround has been achieved by a much more collegiate approach with now-departing CEO Christoph Franz guiding the team (while ruffling many senior management feathers). Both are now profitable.
Smaller airlines tend to slip under the radar, but recently-resigned Air New Zealand CEO Rob Fyfe was also one out of the box, with remarkable people skills and the strategic direction to put the once-shaky airline back on track. Across the water, in Australia, Qantas CEO Alan Joyce is more controversial, but sits atop an admirable and trend setting two-brand model (with LCC subsidiary Jetstar); he was the founding CEO of the LCC and migrated to the Qantas role at a time when staff relations were declining fast. A milestone deal he struck with Emirates will reshape the airline's international presence.
Historically too, from the same era as Herb Kelleher, American Airlines' longstanding CEO/Chairman Bob Crandall must go down as one of the industry's more farsighted leaders, whose insights of 30 years ago are still considered outstanding. Larger than life, he was admired more than loved by his staff, but was responsible for innovative directions, especially in the area of distribution, that reshaped the industry. His frequently pungent views still do.
Some 21st century LCC leaders have had the space to display a little of Steve Jobs' flair and innovation. They were all LCC start-ups
Then there are the CEOs/founders of some 21st century LCCs, notably in the new growth markets and mostly independent. They did not inherit sclerotic legacy frameworks and cultural backwardness. Theirs was the culture to establish and the world to be changed.
The airline world has changed greatly since 2000 and the LCC leaders have often played a large role in that. In just over a decade AirAsia's Tony Fernandes has transformed a tiny, unprofitable Malaysian airline into one of Asia's biggest airlines – and the world's lowest cost short-haul – almost entirely through the force of character.
With great people skills, he has led from the front, innovating and inspiring, manoeuvring complex government regulation on international routes, establishing a new cross-border model for the region.
In the Middle East, Adel Ali, a quite different character from the ebullient and outgoing Mr Fernandes, founder and CEO of UAE-based LCC Air Arabia, has built the airline into one of the world's most profitable, largely against the odds, carefully managing risk among the difficult waters of the Middle East.
A couple of years ago, Brazil's LCC Gol would have been regarded as a model, transformational airline, but has since run into financial headwinds, causing the far-sighted founder and CEO, Constantino de Oliveira Jr., to step aside. The airline dramatically changed Brazil's domestic market, but shortage of financial success makes standing out more difficult.
Under founder and CEO Rusdi Kirana, privately owned Indonesia's Lion Air, born as the new century began, has become the 22nd largest airline in the world (by seats) in taking 34% of a domestic market that expanded more than fivefold since 2000; the airline operates 93 aircraft and has some 550 on order. That does not necessarily qualify for CEO leadership but, despite some operational qualifications, requires remarkable skills. A parallel leasing operation provides a useful risk management tool.
Another rapid expander, India's six year old LCC IndiGo has, in taking 30% of the domestic market under skilful CEO Aditya Ghosh (backed by some very adroit founders), by comparison with a mere 72 aircraft and nearly 200 on order.
All are seriously entrepreneurial, unlike the usually more institutionalised leaders of older full service airlines.
And there are the remarkable Gulf airlines....
Managing a large airline through rapid expansion is a feat that requires enormous skill. The nature of commercial and safety regulation create enormous barriers to fast growth, not to mention achieving profitability at the same time. To have simultaneously overhauled the world's long-haul market adds context to the remarkable feats that Emirates Airline has achieved. The Dubai-based carrier is today the world's fourth largest international airline by seats and the largest by available seat kilometres (testimony to the nature of its long-haul flying).
With a fleet of over 200 all-widebody aircraft and nearly as many on order, Emirates is receiving about two new aircraft every month (one every 15 days!) for the remainder of the decade. Support – not subsidy, as many of its competitors like to maintain – from a far-sighted government has been a help, but the vision and ability to implement it must go largely down to low key president/CEO Tim Clark (and to his predecessor and colleague, Sir Maurice Flanagan).
Apart from the obvious operational challenges and the constant need to wear down foreign government protectionism in order to gain market access, managing a staff that consists of 135 different nationalities, while adding a new widebody aircraft to the fleet every 15 days, undoubtedly requires unique skills.
Meanwhile, just 100km down the road from Dubai in Abu Dhabi, Etihad has actually become the fastest-ever growth airline. Founded in 2003, nearly 20 years later than Emirates, it has over 80 aircraft in service and a similar number on order. But where CEO James Hogan has made an indelible mark is in establishing a new order in airline partnering. Born of a recognition that matching the size of its near-neighbour was impossible, yet needing to attain critical mass necessary for an effective hub operation, Mr Hogan turned to codeshares and then progressively to equity ownership to entrench a new Etihad "equity alliance".
In an industry where cross border equity holdings are very much the exception, Etihad has, in short order, acquired holdings in no less than six airlines, along with nearly 50 codeshare agreements and mutual FFP links.
Among this company, Qatar Airways' CEO Akbar al Baker should also be recognised. The airline is smaller than Emirates, but is still the 16th largest international carrier in the world by available seat kilometres. Like Etihad it has a mix of short and long-haul aircraft; with 130 in operation and 170 on order the carrier is also on a rapid expansion trajectory. Qatar distinguished itself from the UAE carriers in 2012 by being accepted into the oneworld alliance, and joining on 30-Oct-2013, the only Gulf carrier to join a global grouping.
Airlines demand different skills. And different airlines require different skills
With this diversity of model and scale, the ideal CEO is not going to be easy to find – and many features conspire to make the airline business – and many of the airlines in it – unique. Clearly there are different and special characteristics involved in leadership.
The assertion of industry uniqueness will offend some management experts (and most economists); certainly every business is different. But airlines are more different!
There are many layers to the airline onion. Just pricing the perishable airline product involves a complex combination of science, technology and the dark arts.
One anecdote, a useful test of the complexity of any business: experienced corporate litigation counsel are generally extremely quick to pick up the complexities of any business they confront, often several in the course of a single day. Asked to act in an anti-competitive airline pricing matter, the counsel concerned arrived at a Monday briefing armed with two hours to learn the niceties of airline costing and pricing. By the end of a week, they had begun to feel they understood the basics of the process.
Airlines are (too) many businesses under one roof and personal relationships are vital
An airline is many businesses under a single roof – and, for international airlines, many roofs around the world with mandatory presence in all markets (and jurisdictions) served.
The day-to-day issues involved in aircraft maintenance, catering, running a frequent flyer programme, distributing product through multiple channels, handling bags and freight, training, managing and retaining skilled staff such as pilots, making risky multi-billion dollar investments in future aircraft, hedging currencies and fuel prices, with costs and revenues (and staff) spread through perhaps 60 countries could hardly bring with them a wider range of challenges.
That is even before navigating the mountainous daily log of regulatory matters, in an industry where safety is the often unspoken fixed reference point and arcane economic constraints apply. Government is ever-present in an airline CEO’s vision.
There is yet another distinguishing feature: age. The airline industry is a very old business, which boasts vastly more sexagenarian companies than any other. Several well known brands are well into their 80s and beyond. KLM, Avianca and Qantas are all well into their 10th decade and Mexicana just fell short, at the age of 89, when it finally collapsed in 2010. Aeroflot recently turned 90.
That this longevity is a child of regulation is no secret. But, as with the fragile human body, age frequently brings with it sclerosis. In industry terms these are known as legacy issues. They embrace pension funds, older, more costly employees and, above all, numerous highly organised and often globally coordinated unions.
With usually at least a dozen or so unions to negotiate with in two or three year cycles, personnel issues are never far from front of mind for a legacy airline CEO, for better or for worse.
Being constantly half pregnant is a serious burden, which doesn’t impact evenly
Then there is the half-pregnant nature of the industry, part economically regulated, part not.
It is fiercely competitive, yet nationalistic hangovers preclude international mergers. The result: the global industry almost never returns its cost of capital. It is consistently the worst performing industry, bar none.
It only exists because its constituent airlines tend to pay their debts. Equity is not the foundation. No intelligent investor sees airlines generally as a long-term place to park funds. There are odd exceptions, but generally they are simply too complicated. Stock prices rarely even cover the asset value of an airline.
This has given rise to the occasional attempt to privatise an airline company in order to expose and sell down the profitable parts, such as frequent flyer programmes, the rentable value of the fleet and various other discrete functions such as catering and maintenance.
In this way, the thinking goes, the simplified company structure allows better value assessments by analysts – and each company with its own CEO. Where it has happened however, with Air Canada for example, the residual airline struggles to make a living, because it is intrinsically such a poor business, at least in the shape of returns on investment.
Thus airlines essentially seem to exist to support a host of suppliers and financiers – as well as to perform a remarkable socio-economic function. The industry drives world tourism – and business – and in doing so ensures it is always in the spotlight, among consumers and politicians alike. If a politician wants to get some quick media coverage, attacking the airlines is guaranteed to get front-page column space.
Who then in their right senses would want to run an airline? The airline CEO’s remuneration is rarely at similarly high levels to heads of simpler, much less competitively-threatened and inconspicuous businesses.
A popular answer many airline CEOs will give is that it is the buzz, the profile it attracts – “there is never a dull moment” – like moths to the flame.
The three Ps of leadership: of People (first), Processes and Profits
The relative importance of these leadership ingredients is largely a matter of opinion (and timing) and as we have noted one clear prerequisite is to remain in business – to be profitable. Despite the lingering doubt about even this being essential in an industry where market exit is so infrequent, profits at least offer relief for the airline CEO.
It is important also to recognise the importance of each will vary dependent on timing, the airline involved and its competitive environment.
Thus there is no common formula. For legacy airlines innovation (rare and difficult though it may be) is not enough. Like it or not, their people must be a major priority – not just because they will often have to accept poorer salary and conditions than they would like, but also because in such a consumer facing business they can make such a difference to the brand.
It is perhaps no coincidence that most airline CEOs today are at such pains to stress that it is their people who are their main assets; they, not metal, are the sine qua non of the airline.
An old industry undergoing change, clanking like a rusty engine being run too fast
This old industry is in transition. The process has been accelerating over the past two decades, but the reality of a new world is now unavoidable, as global economic conditions decline and growth in mature markets is no longer there to paper over the cracks that appear. Short-haul routes are under attack by low-cost competition; long-haul is becoming more competitive as regulatory controls are lifted and new entry from Middle Eastern and Asian airlines is introduced.
In these conditions, a common pattern of heavy bargaining is evolving. Legacy airline managements are being forced to make big strategic adjustments, and to do so in short order. Their primary action is inevitably to reduce costs. Yet most costs are external and allow only limited management options; fuel, now more than a third of cost, capital expenses and other overheads are inflexible, at least in a timeframe that allows suitable responses to new competitive challenges.
Manpower reductions and productivity enhancements therefore become almost the only levers to pull. But despite often-inefficient work practices and relatively highly paid staff, the unionised segments are understandably often unwilling to concede to change.
Pilots and flight attendants in particular still mostly work under outdated concepts of seniority (rather than skills) and seek “job security” which paradoxically reduces their mobility to shift between airlines, effectively reducing their overall opportunities. It means that a senior pilot in one airline would have to start again near the bottom if he or she wants to move to another company. In those circumstances, dealing tough with the existing management can be seen as the only option.
Indeed, where the airlines have become profitable – partly due to cutbacks on pay and headcount – wage increase demands are becoming more frequent. Southwest Airlines for example, the longstanding model of the LCC, now has pilots who are paid well above the industry average but who are arguing for increases while the airline is making profits.
Often, even where employees recognise the pressures on the airline, taking action in the common good becomes unacceptable at an individual level.
Getting to 'the People Priority', creating a culture
Here is where the push-back occurs – and where management skills need to focus more on the People Priority. It is worth focusing on because it is one area where the persona of the CEO is a vital ingredient.
One notorious industry figure who adopted a special approach in this area was the US’ Frank Lorenzo. Time magazine once labelled him one of the “10 worst bosses of the (20th) century”. He was a corporate raider, highly confrontational towards organised labour. He took Continental Airlines into Chapter 11 bankruptcy in 1983, revoking union agreements, reducing staff by a third and halving pilots’ salaries. When a profitable “New Continental” emerged from bankruptcy in 1986 Mr Lorenzo’s Texas Air Group comprised a fifth of the entire US airline industry. He is not fondly remembered – except by some of his shareholders. Yet he arguably saved at least one airline from shutting down; and today, Continental’s culture was a positive in the merger with United Airlines.
For those who would use it, the People Priority is not a switch that can simply be turned on or off. Where it exists, it is a core part of a management’s culture and generally takes time to develop – and it must be nurtured. One right move can sway opposition, just as one wrong step can unravel years of hard work.
So, not only must several people-oriented courses of action be committed to, there must also be the management capability to apply them consistently.
In some – very rare – cases, a leader can create a strong culture over a short period of time by his (or her) actions and through genuine leadership. It is that character who is arguably most in demand in today’s elevated industrial conditions. And even where an individual can wreak that change, paradoxically, it will not be achieved in isolation; this will be the one who is able to carry the board and staff along on the weight of strategic commonsense and an ability to communicate on a multilateral scale.
This valuable leader must be able to formulate and articulate corporate goals that all staff can recognise. Especially in a highly unionised environment, managing staff expectations is key to this process, ensuring they believe in it and feel some ownership. At the same time, customers too need to be able to relate to the innovations being made.
For airlines a 'Peer People Priority' is also increasingly important
The People Priority is also important in external dealings with airline peers, in partnerships, which demand a special ability to deal with a host of different airlines and to maintain sound relationships. Thanks to the arcane regulatory system within which international airlines have to work, any thought of, for example, a hostile multinational takeover of, or merger with, a competitor never crosses the airline leader’s mind.
Instead, partnerships can be the make-or-break of an airline’s prospects. In ownership terms a minority equity share is the best that can be hoped for. So the ability to secure and nurture partnerships with other carriers is increasingly important as the industry liberalises, while having its feet still anchored in the cement of national ownership requirements.
The “poor man’s merger”, or alliance, therefore assumes ever-higher priority. Today these are not optional relationships – they are an essential extension of market reach.
Whether it is in a global alliance or in a series of bilateral links (often both), the CEO is focal. In bilateral relationships especially, good personal chemistry, as well as the necessary strategic synchrony, is a precondition to successful partnerships.
Consequently, more than in any other industry, airlines rely on personal relations between senior executives of other large companies to seal the inevitable partnerships they must engage in.
It is not just the global alliances, but literally thousands of bilateral arrangements between airlines mean that whole divisions of management must preoccupy themselves with making those deals work, seeking a balance of rewards and, at the same time ensuring that new opportunities are grasped.
Meanwhile, beware the danger of getting distracted from the main game…
The implied hands-on nature of this person-to-person ideal does however involve walking the fine line between leading from the front and being so engaged that the high level goal-making becomes blurred. The complexities in drawing together numerous different sub-businesses can easily force the CEO into becoming predominantly an operating officer rather than an executive – a chief operating officer, not a CEO.
The airline CEO can all too readily become much more operationally focused than his equivalent in any other company. That has some positives – it ensures a full grasp of all the interactions within the airline, for example, and it allows a good personal-touch CEO who is seen to be managing difficult problems, entrenching hero-relationships in the process.
But it can also mean that everything that goes wrong is directly personally sheeted back to the CEO, regardless of actual accountability. He or she must be where the buck stops; however, being able to rely on the central message being relayed effectively without direct intervention is not an easy task as the foundations of the industry shift.
Managing risk is not a strong point for most airlines; 'silo' capture remains the Achilles heel
Airlines are typically institutionally weak in risk management. This may seem odd for an industry that is so risk prone. Despite – or perhaps because of – the wide array of uncontrollable external hazards in particular, risk minimisation and management is typically distributed across a variety of corporate areas, so that coherent strategies are hard to find.
The constant ones, such as fuel prices and currency management, will typically be the responsibility of the corporate treasury, whereas management of “unanticipated” events such as terrorist attacks, volcanoes and ash clouds, pandemics, accidents, government tax impositions, union actions and any one of numerous events with a potentially serious impact on the bottom line, are dealt with across a number of “silos”.
Each shock may be extraordinary, but they share a common theme that one or other occurs with almost clockwork regularity – a phenomenon that CAPA branded “the Constant Shock Syndrome” at a time when SARS almost grounded several major Asian airlines in 2003. And that came shortly after several terrorist attacks, including those on New York’s Twin Towers in 2001. Oil prices and the 2008 financial meltdown hurt airlines more than most.
This institutional incoherence therefore means that the airline CEO must become involved in almost every aspect of managing the fallout from each event. So the constant diversions into managing risk undermine the ability to manage creatively; he/she is massively distracted from seeing the big picture.
It is ironic though that the rapidly escalating impact of social media on airlines is finally forcing a linear discipline on management. The constant and growing need to respond quickly to anything from the most ludicrous consumer complaint to Qantas' near fatal A380 engine explosion in 2011 has wrought massive improvement in most managements' readiness to respond quickly to crisis, real or surreal.
Innovation has not been a characteristic uppermost in airline profiles
The other side of hands-on risk management is innovation – or often, lack of it, in most airline managers of recent years. Steve Jobs was always striving to innovate. He was a master of technology and had the luxury of being hands-on in developing new models in an area where rapid advances made innovation de rigeur. His was a young industry, overthrowing the longstanding powers of music distribution and communications. Without innovation, Apple was dead.
The same is hardly the case for network airlines. Here the status quo can be charmingly – and deceptively – attractive.
In this situation the airline CEO is typically hemmed in by such an array of unfriendly external events and myriad suppliers (including airports, employee unions, government regulators, debt providers and lessors, even apart from the host of other service and equipment providers) that conservatism rules. Taking a low-risk approach is so attractive that it becomes almost irresistible.
Like the Sirens in Homer’s Odyssey, the beautiful voices of the regulatory status quo can unfailingly lure management onto the rocks in today’s new world. Throughout the modern history of aviation, economic regulation (born of protectionism) has distorted the nature of the airline business, so it is perhaps only normal that reliance on government intervention becomes the refuge of last resort.
But to use it actively to stifle innovation by others or as an excuse for inaction cannot be a sustainable strategy. It is simply instead a means of delaying – and encouraging – the inevitable. At the same time it delays internal adaptation and endangers the airline’s future.
Yearnings for the status quo – or for someone else to rearrange the regulatory furniture – re precisely the places where airline management should avoid being in today's tumultuous world.
Change should provide opportunities for innovation – and beware seeking refuge in protectionism
As the late Peter Drucker, widely considered the father of modern management, observed: change provides the opportunity for innovation. He also urged that the process be systematised.
Unless there are systems in place, the default position too easily becomes resistance to change, not innovation.
Few industries are undergoing more change than airlines, yet the opportunities to innovate are seemingly going begging, notably among the longer established incumbents, where incremental change is happily mistaken for revolution. The result can be that any thought of systematising innovation is excluded by a fear of change in the first place.
The new entrant airline, by contrast, has all to gain and nothing of the status quo to lose. Innovation is a prerequisite, even if it means slavishly following the basic principles of an LCC.
This invariably requires people skills, such as those so well illustrated by Tony Fernandes, AirAsia’s founder and CEO, whose people skills extended well beyond internal inspiration, through to being able to establish new forms of cross-border partnerships, allowing the company to establish a pan-Asian airline in a bilaterally controlled international market; shifted the regulatory equilibrium of a region to accommodate his airline model.
The skilled leader, however, will also probably be forced to guide his company through a process of evolution, as external conditions change. Recent, apparently successful, examples of this transition from earlier life forms include: Virgin Australia’s adaptation to a full service airline through various phases, Aer Lingus’ metamorphosis in the face of fierce competition from Ryanair and others and Air New Zealand’s re-creation as a full service airline but with many of the personal attributes of an LCC.
Even the European majors – or two of them – have embarked on courses that, while not revolutionary, are certainly more than incremental. The turnaround of British Airways and IAG under Willie Walsh, using a combination of confrontation and realism is one success story, as may be the unfolding strategy of Lufthansa's team. Meanwhile the third major, Air France, remains bogged down in incrementalism.
The elusive quest for 'purposeful abandonment'
And here, to return to the heavy burden on the airline CEO-cum-COO, Peter Drucker emphasises that the top manager cannot afford to be bogged down in day-to-day operations: that “purposeful abandonment” is a precursor to innovation.
Too often today, the CEO must be involved not only in the thought processes but also the execution of too many functions. Innovation can get out of reach.
While European legacies have been leveraging ownership structures and driving alliances, US full service airline CEOs have typically ranked among the low-risk takers. That is not necessarily a criticism, although it can scarcely be a compliment, given the overall performance of the sector over the past 20 years.
During that time the US majors have been characterised by a largely indistinguishable chorus of bankruptcy (almost as a strategy), consolidation and partnerships.
Outside the US’ LCCs, domestic capacity growth since 2000 has been negligible and all of the service and operating initiatives, even including such simple but vital revenue earners as charging for bags, have been borrowed from new entrants.
Innovation for these airlines has mostly been conspicuous by its absence. That's not to say selective imitation is unwise, but it can't be called innovation.
Major US airline leaders may feel miffed at this assessment, especially as they are currently banking record profits. Yet, other than achieving bulk on the back of repeated bankruptcies, the big three American full service airlines (now with an American-US Airways combination) remain very much the same overweight companies heading for Chapter 11 again by the end of the decade, as the old cycle continues.
That they are bigger and more powerful is certainly a temporary help in generating domestic profitability. But it is important not to confuse innovation and market dominance. The innovation may come as dreaded "ultra-low-cost airlines" re-emerge, or as innovative hybrids like JetBlue expand. As hinted at above, even Southwest may be endangered now.
Like JetBlue and Virgin America, and even a renewed Alaska Airlines, or the likes of easyJet, Vueling and Norwegian in Europe, it has been the new entrants that were mostly responsible for delivering improved service quality, along with numerous initiatives around reservations and distribution and passenger facilitation.
Not all of the new faces survived, but they certainly had the advantage of starting with a blank page, a good place to start when innovating; but there is no reason it should have been left to them to show legacy airlines the way in such areas as baggage charges.
Southwest's record remains in an ineffable class alone
In a class alone of course has been Southwest Airlines. Herb Kelleher guided the US industry’s black sheep superbly through literally decades of profitability – arguably retiring at a very propitious time. By the first decade of this century, LCCs were overlapping significantly and Southwest was inevitably showing some signs of legacy weakness.
But, although buffeted by new forces and the increasing effects of age, the airline is still distinguished by the positive inheritance he and former executive vice president Colleen Barrett left, with a culture that is preserved institutionally.
When, back in the '80s and early '90s, Herb Kelleher invited other airlines to come along to "Corporate Days", his staff would worry about giving away all the company's secrets. The CEO's response was "don't worry, it's so simple they just don't get it...it's ineffable."
Herb Kelleher was undoubtedly hands-on, as were the small, new, passionate entrepreneur-led airline CEOs. He was always in touch; his comfort zone was everywhere.
His deceptively simple formula may be impossible to replicate; and it is tempting to dismiss that as being of another era.
But some elements are surely timeless. This outstanding brand of leader sees things first hand, feels the wind in the hair. The established airline’s CEO is meanwhile easily installed in a comfort zone of boardrooms, big business colleagues, a corner office on the 42nd floor, chauffeured cars, lunches in the executive dining room, first class travel and surrounded by minders.
No different from many other CEOs in other industries. For big bankers that might work, but the successful airline leaders realise they need to be in touch.
Peter Drucker again: the comfort zone-CEO consequently sees the outside world through distorted lenses, with little first hand knowledge of what is happening. Everything is seen through an “organisational filter”. This is a dangerous place to be when the world around is changing so fast.
It is possible – if not inevitable – that a division between CEO skill profiles will exist in different parts of the world.
For example, in the more hierarchically oriented cultures of Japan and Korea, the approachable CEO may be valued less. Leadership is still highly valued, but takes different forms. Yet even this stereotypical leader is fast disappearing as generational power shifts occur.
Asian full service airlines are outsourcing innovation to their low-cost subsidiaries
This is, for example, particularly evident in new low-cost start-ups, which tend to target the younger, increasingly affluent singles market. Korean Air’s low-cost subsidiary is called Jin Air. Its flight attendants wear t-shirts and jeans (“jins”) expressly to appeal to a different segment. That the small subsidiary constantly runs up against a traditional management does not make life easy, but that sort of change still comes slowly in Northeast Asia.
Asia and the other high-speed economies of the Middle East, Latin America and Eastern Europe (as well as Africa) are today typically home to vibrant, expansive airline markets. They can be intensely competitive, but they are redolent with opportunity. Innovation does not come automatically in these circumstances.
The Asian flag carriers mostly derive from a recent history of government ownership and protection, so taking potentially risky – for the CEO – new moves is far from instinctive.
Yet the fast expanding Asian markets are spawning new entrant LCCs that in turn provoke responses from the various flag carriers. As the LCCs establish across national borders using an original Asia Pacific/Middle East joint venture formula – so that no less than 14 full service airlines across these zones now have their own low-cost subsidiary of one kind or another, in several cases, more than one – complex management skills become more valuable.
Managing potentially conflicting goals of the different airline subsidiaries was something the US and European companies found too hard in the late 1990s; today the formulae are different, supported perhaps by less rigid work practices and the potential for growth (as opposed to substitution) that encourages successful solutions.
The European majors are now re-exploring that territory – but the conservative Americans aren't. For now they don’t have to, as consolidation promises to bring competition under control. But it could just prove to be a false promise.
Why don’t women run airlines? Could they do it better?
Before concluding this discussion, there must be at least a few moments dedicated to the question that pervades most industries – but most particularly aviation. CAPA raised this issue in a series of reports in our Airline Leader journal in 2010. It addressed the roles of the other half of the community who typically do not occupy leadership roles in airlines. In the context of this current review, asking about the role of women and their potential for achieving distinction at the top of airlines is clearly a valid question.
The airline industry is notorious for its “boysy” silhouette. It is a business which revolves around big boys’ toys, engineering and industry regulation. The only areas where women have a large role is at check-in and serving in-flight meals. At least that is the perception, and one which was pretty much accurate until well into the 1990s. Whether it is in fact all that different from other sectors in its gender mix is another issue.
But this industry is a different place from where it was just 10 years ago. The big boys’ toys have given way to a customer facing, consumer-driven business where humanity skills are gaining ascendancy over engineering.
Amid massive attitudinal and structural change in a turbulent decade, the industry’s accelerated evolution has done much to open doors for women. The result should presumably be that women play a much greater role in the newer, usually low-cost, airlines – and this is often the case. The difference may well be that LCCs recognise more plainly that the business is more about selling dreams than buying metal. Legacy airlines meanwhile are apparently little changed over recent decades. These generalisations are broadly correct.
But, when we reviewed the profiles of over 200 airlines around the world in 2010, the contrast in leadership diversity was not as marked as might be expected, and certainly not at the highest management levels.
Supposedly, from a management point of view, the new entrant airlines’ self image was now about differentiating themselves from the conventional carriers by creating a fresh, friendly, fun product. New low fares were a given.
In the new world of the 21st century it was unthinkable that this image could be credibly portrayed by a homogenous, all male organisation – a syndrome which Simone Menne, then CFO of British Midland International and today CFO at Lufthansa and an Executive Board member, described as “white male managers, aged 45”, still largely typical of the European and North American legacy airlines.
As the Airline Leader report noted:
“any ‘policy’ that excludes more than 50% of the entire population from senior management roles should at least require robust justification at management and board level. This is most relevant as the airline industry profile changes in nature. A couple of years ago an article in The Atlantic succinctly observed, “A white-collar economy values raw intellectual horsepower, which men and women have in equal amounts. It also requires communication skills and social intelligence, areas in which women, according to many studies, have a slight edge.”
However, criticising leaders who don’t reflect this in their corporate philosophy implies the need for someone impartial to make that call – and to apply it. Where only about 3% of the Fortune 500 leaders are women, meaning that most other companies or third party arbiters have a similar male dominance, tolerance for the airline imbalance is understandable.”
Not much has changed; most of the women airline leaders we talked to back in 2010 have moved on.
But interestingly enough, although as mentioned earlier, only one airline CEO made the Harvard Business Review top 100, there was a somewhat different story in a Fortune magazine assessment of “The international power 50” women in business in Oct-2013. Of the 50, four were airline heads: Carolyn McCall of easyJet, who came in at 9th; Harriet Green (Group CEO of Thomas Cook, a tourism group with extensive airline operations); Claudia Sender, TAM Airlines CEO; and Olga Pleshakova, CEO of Transaero Airlines.
This does at least suggest that, despite the boysy nature of the business, women perhaps find it proportionately easier to gain prominence in airlines than in other companies! Nonetheless, on any measure there is still much too small a sample to offer any direction on whether women are better suited to run airlines than men.
Do they better fit the broad profile needed in adapting to the needs of a complex and changing industry, where IT and customer facing attributes are now so much more important? In the foreseeable future at least they are unlikely to be able to have the chance to prove it one way or the other. Yet it is worth asking the formula of the one or two iconic women who have made it.
A watershed has been reached in industry development – implying that incremental change cannot be enough
The airline industry has reached a watershed, as reduced international market entry barriers, new technology, new entrants (short- and long-haul) and increasing signs of legacy sclerosis emerge. Over the past year the surging new airlines from the UAE and Qatar have turned much of the long-haul market on its head too – in some parts by joining the old school teams, in others by beating them to the game.
For competitor airline CEOs, this means the leadership game has changed.
The Gulf carriers are innovative by definition, carving out new markets for themselves and creating new consumer options. That they are presented with an "uneven playing field" of supportive government policies and infrastructure leadership is testament only to the ability to formulate forward looking and sustainable models where the vision exists.
Here is a new dimension of cooperative management, spanning airline, airport and government – one which is readily open to be replicated. Yet, here too a special type of airline leadership is required.
Growth permits a different framework for leadership; contraction requires pain
For the growth markets and expanding airline models like those of Emirates, Etihad and Qatar Airways (and to an extent Turkish Airlines) the simple fact of market expansion provides an escape valve; keeping staff contented is a lot easier when the organisation is growing. Employee desperation does not exist in expansion environments. There also is where there is plenty of room for management innovation. That doesn’t make it easy to lead, especially where there is no road map, but it needs different skills.
Meanwhile, where markets are stagnating and new entrants are challenging the status quo, expansion is difficult and cost reductions become inevitable – ideal conditions for disharmony and union unrest. In some cases a belief emerges that there is nothing left to lose; there can be nothing more dangerous than a cornered beast with few options but to tough it out.
In those circumstances, if reducing staff costs is the only lever to pull, can the legacy airline have a sustainable future? Incremental change certainly cannot be the solution anyway.
Here is where the great CEO’s human talents are most appreciated. Innovation as a goal may appear a lot more remote, but keeping the workforce onside and informed of company goals is central. The human element takes on a priority like never before, because, without the corporate will to restructure and adjust, the other two Ps – profits and processes – simply cannot be achieved.
So, faced with today’s two-speed global growth pattern, defining the ingredients of CEO leadership must vary according to time and place. One CEO hat cannot fit all.
The very fact that there are so few examples of enlightened leadership in the airline industry suggests there is a preference for conservatism in management, rather than risk taking with new opportunities – and that in turn raises the question of which is the wise direction to take.
If everyone else does it, it becomes the safest option – or so this thinking rolls out. However, history does not offer a great deal of comfort; most airlines have performed poorly, essentially imitating their competitors and under-achieving.
This perhaps belongs to a way of management thinking that prefers benchmarking against other airlines – as opposed to measuring against other companies generally. The Kellehers and Fernandes of the business – and the O'Learys – never did that, breaching the conservative barriers that confined all others.
Not everyone can easily think outside the square of airline introspection, least of all CEOs of large incumbent flag carrier leaders.
But they are the ones who most need to do it.
[i] Harvard Business Review, January-February 2013. This quick summary scarcely does the report justice, but it does emphasise the apparent assumption that profits are core.