BOOK REVIEW: “Up in the Air” by Greg J. Bamber, Jody Hoffer Gittell, Thomas A. Kochan & Andrew Von Nordenflycht

Airline travel used to be so glamorous, those days are gone. If you think you are having a hard time getting home on another delayed flight, the four authors of this book have a stark warning. The employees are even more fed up than the passengers. Far from the glamorous days of the 60s and 70s, epitomised by Leonardo Di Caprio in “Catch me if you can”. The industry has become known for a series of bankruptcies, low wages and increasingly harder working conditions.

Summary

October 24, 1978 : US President Jimmy Carter signed the Airline Deregulation Act

The focus of the book centres around Employer and employee relations. Given the biggest battles in the industry have taken place in a highly deregulated market in the US it is not surprising that the authors concentrate on this market in particular. The authors set out a six box model which defines how an airline company decides to deal with unions, should it avoid accommodate or partner and how it decides to define its relationship with employees, should it control or should it give them longer commitments? The book then goes on to demonstrate how different companies have chosen to work inside this paradigm and the effects it has had on them. The book demonstrates how the legacy airlines was totally shaken up after deregulation given that staff at the time were over paid and that markets had been protected. This all fell to pieces in the carter administration and from having over 20 major airlines in the 70’s the US is now down to 5 or 6 today, the restructuring of the industry was not done without pain. Wages were cut, sometimes by up to 30-50%. Thousands of jobs were axed and companies went into bankruptcies. In extreme cases such as the one of Frank Lorenzo, continental airlines were deliberately brought into bankruptcy in order to break the unions. Restabilising some sort of loyalty within the industry became an incredibly difficult task.

Within two years of this article, Continental Airlines was in bankruptcy and Texas Air dismantled.

“Within two years of this article, Continental Airlines was in bankruptcy and Texas Air dismantled”.

However if the Legacy airlines had many problems such as high wages, pensions etc there was no guarantee for success for low cost airlines. Many airlines tried to set up low cost companies but those quickly went bankrupt. In fact it was clear that they did not know how to run them on a different business model. Other airlines like Laker and people express very quickly went out of business. Two airlines shine out in this model, south west airlines created in 1971 and Ryanair created in 1985 and after a bad start has come to become the 7nd largest airline in the wold. It is probably South West airlines that are a model for the industry. It has maintained consistent growth over the past four decade despite the fact that it is the most heavily unionised airline in the industry. The CEO Herb Kelleher has consistently shown commitment and dedication to the workforce to the extent of lending employees money and has refused time and time again to lay off workers. The company has also developed a culture whereby everyone is considered responsible for the wellbeing safety of the passengers, whatever their role in the company may be. Despite attempts to copy this, many companies have found that copying corporate culture is an extremely difficult thing and takes a great deal of time and effort. Other companies such as Delta have shot themselves in the foot when they have announced pay cuts for employees and fired thousands of people while at the same time, guaranteeing salaries and bonuses for the executive team.

Canceled and delayed flights at American Airlines are costing the airline the key business customers that the bankrupt carrier needs.

Canceled and delayed flights at American Airlines are costing the airline the key business customers that the bankrupt carrier needs.

The book also brings out the fact that air transport system is incredibly interdependent. It is not just about running a good airline, but also perhaps how the parties work at airports. How the federal authorities work, how the air traffic controllers work etc. All of these parties are major stakeholders and have an impact on the long term profitability of the company. Running an airline may still be seen as a sexy business to some, but the book clearly lays out the difficulties within the industry and in particular how hard it is to deal with labour relations. Given that switching costs in the industry are practically zero (A passenger can very easily go from one Airline Company to another, and will do if they can save themselves 50-100 euros). it is very hard for companies to build company loyalty, their only choice is to run as efficient an operation as possible and this means pushing down wages and making people work as much as possible. So anyone thinking of setting up an airline should take this into consideration.

Richard Branson: billionaire part-owner of five airlines

Richard Branson: billionaire part-owner of five airlines

As Richard Branson once famously said upon being asked how to become a Billionaire, “it’s easy, you first earn a billion dollars and then you buy an airline company”.

Interesting Quotes

The U.S. airline industry is failing. In the first five years of the twenty-first century, U.S. airlines lost $30 billion.

In 2008, there were only a few airlines in the world other than those owned by governments whose debt ratings put them about junk bond status. These few included Southwest, Qantas and Lufthansa.

The annual number of miles flown by all passengers has grown by nearly 200 percent in the United States since deregulation, while the cost per mile has fallen by half, a growth rate and price performance that is not matched by any other relatively “mature” industry. 

Between 1980 and 2005, productivity grew by more than 70 percent while real compensation levels for nonmanagerial workers remained flat.

Most of the new entrants to the industry (e.g., Southwest, AirTran, JetBlue, Ryanair, easyJet, and Virgin Blue) were founded in anticipation of or after deregulation, and were designed to compete in a less regulated environment. For a number of reasons, new entrants tend to have significantly lower costs than legacies—hence, they may also be referred to as low-cost airlines.

The workplace is characterized by a fairly rigid hierarchy and narrowly defined jobs. Employees are expected to come to work and just do their job.

Between 2001 and 2005 U.S. airline firms lost over $30 billion and employees have endured $15 billion in wage and benefit reductions, as well as 100,000 lost jobs. Four large firms entered bankruptcy: United, US Airways (twice), Delta, and Northwest. Pension plans at all these firms were terminated and turned over to a government insurance agency.

One of the Airbus

One of the Emirates’s Airbus ordered  in 2007

In 2007 Emirates announced the biggest aircraft order in civil aviation history, with a commitment for up to 131 Airbus and 12 more Boeing aircraft.

Due to Dubai’s proximity to India and Pakistan, Emirates is also able to recruit cheap labor from there. Labor accounts for only 18 percent of Emirates’ operating budgets, compared to nearly 30 percent of Lufthansa’s operating budget.

One reason that service quality matters is that customers shy away from airlines that perform poorly on service quality rankings, though not as much as we might expect-indeed, some industry observers suggest that airline passengers appear to have very short memories and pay more attention to costs than quality when booking their travel. But there is a second reason for airlines to care about service quality that is equally if not more important in the current era: poor quality drives up costs.

1 Comment

Filed under Airlines, Book Review, Corporate culture, Corporate strategy, Leadership, Management, USA

One response to “BOOK REVIEW: “Up in the Air” by Greg J. Bamber, Jody Hoffer Gittell, Thomas A. Kochan & Andrew Von Nordenflycht

  1. Interesting read! I had a good chat to a Singapore Airlines staff member who had been with the airline for nearly 15 years. She said that personal and professional development opportunities had been reduced dramatically over the years so you had to work longer and harder before being promoted.
    Even though I value price, I hope legacy and budget airlines will continue find a compromise between budgets, loyalty programs and quality service…

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