Thirty years ago, many would have considered working for an airline the best job available. A young pilot or flight attendant had the opportunity both to earn great pay and to see the world. And flight benefits allowed free travel in leisure time. Management was supportive and focused on the customer, while customers viewed flying as a special experience and treated airline people accordingly. The best airlines grew rapidly, creating even more opportunities for employees.
The airline industry has since lost some of that glamour. The near-continuous restructuring of the last 10 to 20 years has made it a higher risk business. Increased industry load factors have made flight benefits more difficult to exercise and declining industry service standards and rising customer demands have made the customer service role less enjoyable.
Like other service companies, airlines are finding it increasingly difficult to attract, retain, and afford quality frontline people. The supply of quality service sector people is decreasing as a result of the end of the 'baby boom', a lessening service ethic among young people, and a shrinking supply of pilots as countries downsize their air forces. At the same time demand is increasing as the service sector grows to an increasing percentage of the world economy (from 54 per cent in 1970 to 68 per cent in 1995) and more companies realise the potential higher returns from improved service.
Labour will respond to this squeeze by increasing its wage expectations considerably. The perception of most unions is that they have suffered from companies restructuring to survive. Now, as airlines earn record profits, labour wants its share. The increasing differentials between CEO and frontline pay and other apparent union successes, by groups like the American Airlines pilots, have reinforced this expectation.
Labour is coming to the party with more aggressiveness and frontline support. Without a thoughtful labour strategy 'business as usual' will result in increased labour costs, the loss of quality service people to other industries, or industrial action.
In the face of similar pressure, non-airline service companies are developing innovative ways to attract and keep good people, including aggressive recruitment programmes, job redesigns, and the targeting of niche segments. Marriott has built an aggressive frontline labour strategy around nonpay programmes that focus on forging stronger relationships, driving down job turnover, and equipping workers to deliver high service levels. With streamlined jobs these help Marriott access broader labour pools, avoid supracompetitive wages, and maintain service leadership.
Airlines must tackle labour as a core strategic issue and address it as thoughtfully and analytically as their wider business strategies. They must understand the needs of their front line, potential employees and unions, as well as they understand their customers. And they need to target each of these groups explicitly with distinctive value propositions that are communicated as clearly and often as the unions' message.
Aligning these pieces positions labour to bring full force to a business strategy. A number of different levers can be used to build an effective labour strategy (see chart). Each of the seven can be used individually or in combination. None are new. However, none of the airlines analysed by McKinsey are leveraging these strategies sufficiently. Worse, they frequently use combinations that are mismatched internally or go against their wider business strategies.
THE ALIGNMEMT STRATEGY
One powerful strategy is to align general frontline interests with those of the company. The company can align economic interests through employee stock ownership programmes or profit-sharing. Alternatively, it can align the front line with the customer - the Continental/ TWA incentives for on-time performance are one example - which creates a positive feedback loop driven by customer satisfaction.
Other alignment ideas include: the creation of high-involvement teams focused on the customer; the articulation of a compelling vision; 'purposeful selection' or the rigorous sourcing of people who are more likely to share management's interest in customers and shareholders; payment of reservations agents on a per-call and per-sale basis; and aggressive exposure of the front line to customer perspectives - one airline video drew parallels between the customers of defunct airlines and their own dissatisfied customers.
Successful alignment reduces labour/management conflict, by giving both the same objective, and attracts employees who share the company's values. Staff are less likely to demand work rules not valued by customers or shareholders if all share common objectives. 'The key is to make your people truly understand what customers want; then they'll want to do the right thing for your customers,' says one airline executive.
However alignment seldom works well as a stand-alone strategy. To make it work, employee return must be congruous with the company's return. Otherwise employee bonuses in lean years or lack of payouts in successful years undermine its credibility. Even so poor performance can create a downward spiral. Alignment must fit the business imperative - more difficult during times of restructuring - and be well communicated.
SIMPLIFICATION
Another strategy for overcoming the labour squeeze is to reduce the total skilled labour requirement radically, either by lowering the number of people needed or de-skilling positions.
Companies can completely automate certain functions (Continental's and ValuJet's self-service ticketing kiosks) or reduce the complexity of individual jobs, either with or without automation. Examples include simplified user interfaces for gate and reservations agents, streamlined express check-in, or local baggage-only teams between plane and belt.
Airlines can also decouple lower-skill components from otherwise complex jobs, for instance by creating junior mechanics, at-home reservations, or full-time ticket pullers. They can also rationalise complex processes and computer systems, such as boarding processes, or increase the self-service component of other functions (automated voice response or baggage check).
Simplification allows airlines to tap into large pools of previously unqualified lower-wage workers. It also lessens the cost of turnover (short ramp-up time, minimal training cost); reduces wage pressure; and eases the task of finding replacement workers. However airlines incorporating simplification into their strategies should prepare for union resistance, and increased management complexity, and guard against simplification at the expense of customer service.
To balance the weaknesses of their new labour force, airlines simplifying jobs will need to maintain a large and continuing applicant pool to prevent shortages due to turnover. They will also need to create roles that are narrow enough to require minimal ramp-up and supplement skills gaps with easy-to-use processes and support systems. They should also build a separate management hiring track.
Strategies that rely on total reductions are spared some of these requirements but usually demand a thoughtful IT strategy. Both strategies require a clear understanding of customer perceptions and service requirements.
DIFFERENTIATION
Airlines can compete more effectively for broad groups of desirable workers by differentiating the attractiveness of their jobs versus others.
To date differentiation has been the primary airline labour strategy and has largely centred on flight benefits. But a number of other benefits can be offered. The peaks and troughs of hubbing allow for more flexible scheduling, which is particularly attractive to a heavily female workforce such as reservations agents and flight attendants. And the size and scale of many airline operations allows for varied career paths, greater choices of international assignments, or non-cash benefits such as choosing work groups within seniority constraints.
A company can also differentiate its atmosphere by showing respect for new people, creating a 'fun' environment, recognising performers, and consistently creating opportunities.
Successful differentiation gives airlines an advantage in tapping the highest-quality people and decreases the risk of wage pressure by reducing the attractiveness of turnover for employees. But differentiation is difficult to execute and, if designed or communicated poorly, can lead to a bidding war or value drain.
To make it work airlines need a realistic understanding of their value proposition. A differentiation strategy collapses when airlines are too bullish about the true value of the benefits they offer or insufficiently aware of the alternatives in the local marketplace. They also need in-depth knowledge of the needs of the applicant pool and a marketing-focused human resources team that develops and targets the right programmes at the right cost.
INDIVIDUALISATION
Airlines also have a powerful opportunity to tailor pay and job content to individuals or classes of workers. By meeting the individual needs of frontline workers better, they can increase labour satisfaction and decrease the likelihood of wage demands or staff turnover. This kind of individualisation limits the strength of unions, whose power rests on negotiating for employees as a class.
One type of individualisation is targeting niche segments. By hiring its entire cabin cleaning staff from one neighbourhood and providing a company bus to bring them to work, one US airline has created the lowest-cost, lowest-turnover, highest-performing cabin cleaning force of any comparable airport.
Airlines could also develop part-time programmes for female workforces; work-at-home options for certain groups of reservations agents; perpetual jobs for off-season work groups such as teachers; and a host of other segment-specific programmes for individual job functions (baggage handlers or cabin cleaners).
Another type of individualisation focuses on the individual per se. Many airlines invest significantly in standard frontline benefit packages. Yet employees value elements differently depending on their personal situations - their ability to access life insurance and health insurance elsewhere, individual need for a pension, travel benefits, vacation, sick days, leaves. Individualised 'cafeteria plans', where employees can pick the benefits they want, increase individual satisfaction without raising costs. Other ideas include pay for performance as well as individualised work rules, career paths and so forth.
But making multiple individualised strategies work in a large airline is complex. Airlines will have to develop skills to build targeted local programmes, proactively recruit high-potential groups, build the infrastructure to manage a complex mix of human resource policies, and communicate well with the front line to avoid confusion and perceptions of unfairness in tailoring to individuals. Where unions exist, individualisation must be carefully thought through and communicated, as these groups are likely to resist worker fragmentation.
STRUCTURAL DISTINICTION
Airlines can also reduce labour costs by creating distinct segments at different pay levels within a previously unified job category. Unlike simplification, the content of the job does not change. Instead, structural distinctions are created within a single work group.
Historically, the airline industry's approach to structural distinction has been B-scales, largely abandoned when airlines returned to profitability. But airlines are now branching out by creating more distinct operations - such as Delta Express and United Shuttle - and making full use of connection carriers or separate subsidiaries for peripheral businesses.
Additional options include increasing the scope of subsidiaries, such as maintenance or business units, or subcontracting functions to lower-wage, low-overhead contractors.
This approach is of obvious economic value. However, new structures can create mistrust and offer a platform for unions. To prevent this airlines should invest heavily in building boundaries between the segments, preserving them even in good times, communicating the justification for wage disparities, and explaining the service changes to customers. Productivity incentives
Productivity incentives - finding and sharing with frontline employees the value of 'win-win' opportunities - satisfy wage demands while also increasing trust in management at no extra cost.
Productivity opportunities exist in every airline due to the inefficient design of most airline jobs and work rules. For example, the average crew flies only 50 to 60 per cent of hours paid, while career development creates more training events than necessary. Correcting these mismatches generates value that can be shared. Take Southwest's pilot contract, which rewards pilots with high salaries for above-industry-average flying hours.
Recent contract negotiations have highlighted the value of growth as a 'win-win.' The recall of furloughed employees and creation of career advancement opportunities have convinced some unions to make valuable concessions in exchange for commitments to growth. Another 'win-win' might be funding customer service investments through work rule changes (improving the frontline work environment).
A different opportunity might come from the seniority-based structure of the reservations and in-flight functions. While people gain in experience, and therefore value, over their first several years, their value often plateaus (or even decreases) after that. Yet pay continues to rise with tenure. Since many in these work groups would be open to flexible career tracks, airlines should consider creative ways within their country's legal parameters to restructure the career path and share the gain. Options include voluntary severance packages, long-term leaves of absence, explicit short-term hiring, alternate careers within the airline, and paying for graduate education.
Making productivity incentives work requires clarity on the true cost of various work rules; a collaborative environment with major labour groups; clear communication of both the financial benefits and rationales for work-rule adjustments to the front line; and investment in technology, such as scheduling software, to capture the projected benefits.
However, productivity incentives only work as part of an overall labour strategy. Alone they run the risk of becoming a trap once all the 'win-wins' are exhausted.
COMMUNICATION
Finally, communication in itself can be a sound labour strategy. It is surprising how often companies let unions outcommunicate them with their own employees. When management can build an open, trust-based relationship with the front line it can lessen the risk of job action and heavy demands.
Historically, Delta Air Lines was a prime example of a company that had built such relationships with its front line and it remains largely non-union. More recently, Southwest has found a way to communicate so clearly and effectively with its frontline staff that they have worked with the company in focusing their efforts on customers and competitors, rather than on wages and work rules.
Airlines often underuse their best communication resource: the frontline supervisor. Surveys show employees trust their frontline manager most, yet many managers do not understand the company's direction or are ineffective communicators who lack credibility. Putting the right people in these jobs and training them in effective communications; communicating the company's direction clearly and regularly, for instance through weekly open conference calls to answer any questions; and following up on performance are powerful measures. Management face time, through informal forums or walk-arounds, is also underused in bridging the trust gap with the front line.
Finding a way to communicate to the largely itinerant pilot and flight attendant groups presents another opportunity. Airlines should emulate the unions and make use of technology and local cells, like pilot spouse coffee meetings, to do this.
An effective communications strategy must be consistent and send out a credible message to the customer and the competition. The management must show it understands what is happening 'at the coal face' and offer sensible ways to address the issues. It must also take care not to overpromise and destroy its credibility.
Labour as a powerful strategic lever is generally underused by airlines. No single labour strategy fits all airlines - instead it must be built around the unique business strategy and labour and political situation. Several strategies are likely to be needed in combination.
An airline must first choose internally consistent strategies to achieve maximum results. Job simplification must be supported by a separate management hiring track, to fill the pipeline at all levels, while differentiation must be supported by strong marketing-focused recruitment and resources for programme design.
Second, strategies should be complementary in tone and general direction (eg differentiation and alignment). Certain other combinations - such as simplification and differentiation - are much less productive and may create resistance to management's message.
Third, labour strategies must align with the overall business strategy. Structural distinction and simplification support a low-cost strategy more than a high-service approach; differentiation and individualisation support the latter at a higher cost.
The combination of these strategies constitutes more of an art than a science. Each airline must choose the right strategies to create the right tone and results for unions, labour, and shareholders. Those airlines that manage labour effectively will be best positioned to win.
Source: Airline Business
