Storm warnings

Storm warnings posted around a region are one thing, but when the red danger flags go up coast to coast, figure1_storm.jpgit’s time to be very careful about how much sail you have exposed to the gathering winds. So it is with the airlines of the US. As the price of fuel stays well above the $105 a barrel level, or about $3.50 a gallon, something’s got to change, warn three of the leaders of the largest airlines. Delta’s Richard Anderson at the end of the week warned of dramatic changes at the airline, and said details were on the way, promising “a comprehensive plan we’ll be rolling out in to the changes in the marketplace.” At the same time that Anderson issued his dire warning from Atlanta, Continental’s Larry Kellner in Houston was also multiple_tornadoes.jpg telling people to be ready for changes. “If these (oil) prices continue, we will have to make some tough decisions to make sure the size of our network is right for a world with fuel at such astronomical rates.” Their statements follow a warning by Doug Steenland of Northwest Airlines last week that oil at these levels was “a budget buster” for his and other airlines. None of the chiefs detailed the next step beyond suggesting network trims or fleet cutbacks, but Steenland repeated the widespread belief that consolidation is just a matter of time.
Some airlines will have executives speaking Tuesday at a New York investors conference; we’ll be listening carefully as we watch to see if the US majors’ latest fare increase sticks.

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8 Responses to Storm warnings

  1. R. Michael Baiada July 3, 2008 at 5:42 pm #

    As I have read and listened to the discussion of airline profitability and Air Traffic Control (ATC) problems, punctuated by bankruptcies, delays, congestion, meltdowns, etc., I have concluded that the problem, and therefore the solution, lies outside the current industry focus. Please allow me to explain.

    For over 30 years, in spite of their best efforts, the network airlines and the world’s ATC systems have continued to produce less than stellar results, both financially and operationally. Contrary to conventional wisdom, the fundamental problem pushing so many airlines towards the brink is not the hub schedule, weather, fuel costs, ATC, congestion, delays, lack of technology, nor even unit wage rates. For example, after diligently working on these problems for many years, airlines continue to produce a one sigma operation where they:

    * deliver upwards of 40% to 50% of their product late, even after adding block time year after year,
    * run costs up 10% to 20% higher than required,
    * burn 10% more fuel than needed, unnecessarily spewing additional CO2/NOX into the atmosphere,
    * strand passengers in their aircraft for hours on end,
    * leave revenue at the gate by departing early, waste fuel by flying faster than necessary, only to arrive and wait for a gate at the destination,
    * place a drag on the national and world economy,
    * degrade their brand, while under performing on revenue due to the poor quality and inconsistent product delivered.

    Sadly, all of the above represent just the visible symptoms of the real problem.

    The underlying cause of 80% of the airline industry’s financial problems, delays, congestion and the inability of the ATC system to meet demand is production variance created by the unmanaged complexity within the airline operation (see Network Airline Production Problem white paper at http://www.athgrp.com/Network_Airline_Problem.pdf).

    Production variance, driven by unmanaged complexity, within the airline’s daily operation, especially at the hub airports, represents the fundamental flaw within the current airline/ATC production process (over 40% of the customers delivered late) that, over time, will decimate airline after airline. Yet production variance, the inability to consistently deliver a quality product, is not measured, quantified, nor is it clearly understood.

    To solve this problem, one must first forget it’s an “airline” or “ATC” problem. Conversely, think production, think right part, right place, right time, right process (smiling pax, bag/cargo, destination curb, on time). Think lean. Think of this as a flow of materials problem. Think 1950s production process (current airline/ATC linear production process) versus Toyota Production System (required airline/ATC just-in-time, managed Supply Chain production process).

    For example, by adopting industrial engineering principles outside the mainstream thought process – concepts promoted by Deming during the post WW II era of the 1950s post-war Japanese reconstruction, Toyota embraced lean production. Based on Deming’s principal of “build the process that gives the right answer, first time, every time” (i.e., right part, right place, right time, right process), Toyota leapfrogged Detroit’s outdated production processes from the 1970s right up to the early 1990s, when the Big Three belatedly woke up and smelled the coffee.

    Yet, the initial auto industry reaction to such outside the box ideas was quite predictable. Those who approached the big three in the 1970s and suggested “just-in-time” as a manufacturing philosophy, were quickly shown the door. Even now, although close to Toyota, Detroit is still lags behind. Toyota continues to make a higher quality car less expensively.

    The unfortunate outcome is that in the first quarter of 2007 Toyota has overtaken GM’s 75 year dominance as the largest automobile manufacture in the world. And although GM has fought back to regain the lead, what would automobile manufacturers give to go back 40 years and say yes to such radical ideas as JIT, Supply Chain, etc.? Will the business press say the same about the airline industry 10 to 20 years from now?

    Further, above and beyond the airline’s operational/environmental/financial problems, the grossly inefficient and unstable aviation process has a large negative effect on the US GDP. First, let me say that the airline financial problems cannot be layed at the feet of the government or deregulation, and cannot be solved by the government. Yes, of course, the build up of aviation taxes, security measures and FAA’s less then stellar performance over the last 30 years adds to the problem, but FAA is not the problem. Unfortunately, while the government can’t fix the airlines operational/financial problems, the US economy is dragged downward by those problems.

    Yet, the effects on the US GDP of an unstable air transportation system, as large as they are, are not understood, nor are they even measured. Air transportation is a critical element that should smooth the flow of materials to “just the right place, at just the right time, using just the right process”. Sadly, given the huge amount of variance within the airline production process, it makes it very difficult for many US companies to minimize their inventories and costs. All of this cost, lost productivity and lower quality added to the US Economy to buffer an accepted, but unacceptable level of instability generated by airline transportation.

    It is clear that airlines need a new direction, or actually an old direction. I continue to go back to W. Edwards Deming, whose theory is that the only way to reduce costs is to improve quality. And one of the fastest ways to improve quality is to significantly reduce the large amount of production variance (i.e., defects) airlines and aviation authorities now incorrectly accept as “normal” within their operations (over 40% of your product delivered late is definitely not normal). As Jack Welch of GE is reported to have said, “Variation is evil”. We agree.

    Within 2 to 3 years airlines have the ability to improve on time arrival zero to greater than 75%, while decreasing block time 5 minutes per flight, with no change in the weather or ATC system. The bottom line benefit of this improvement is on the order of $350 million for an airline with 1500 flights/day.

    And while it is not hard to accomplish this, actually believing that it can be done and that the airlines already have all of the communication tools, data, internal control and capability to accomplish this task on their own is very hard.

    As a solution to the airline/ATC production problem, ATH Group has been working to bring the Lean Six Sigma philosophy to the airline industry through our patented Attila™ solution for over 15 years. Based on our analysis, within the airline curb to curb production process the:

    * process that adds the most to the customer’s value proposition and the primary reason customers buy tickets is the movement of the aircraft,
    * process that generates the lion’s share of the revenue for the airline is the movement of the aircraft,
    * airline’s highest cost item is the movement of the aircraft,
    * most unstable performer and the process that injects the most variance into the finished product is the movement of the aircraft,
    * process that is the curb to curb bottleneck to increasing system throughput is the movement of the aircraft,
    * process that creates the most service delivery defects is the movement of the aircraft, and;
    * process that, if improved, has the greatest potential for increasing airline service performance, perception, preference and profitability is the movement of the aircraft.

    In other words, if an airline is not tactically managing it’s aircraft 24/7 from a system perspective, it is losing money, lots of money. As the primary process within the airline’s curb to curb production process, airlines must, first and foremost, stabilize the movement of their aircraft. As Toyota learned decades ago, “One must standardize, and thus stabilize the process, before continuous improvements can be made”.

    Further, airlines must understand and verbalize that FAA is not relevant in the current discussion of delays and congestion. FAA’s solution is 10 years away at best. That said, even if FAA had funding and do what they say when they say, their solution is local in nature (400 to 500 NM from touchdown), controller centric (a communications and workload issue), requires airlines to purchase upwards of $500,000 worth of avionics per aircraft (a CAPEX non-starter) and, most importantly, still does not address an individual airline’s tactical business needs.

    Ultimately, the airlines must take responsibility for the success of their business operations. Waiting for FAA to “fix delays and congestion” is a long-term losing proposition.

    Just as Toyota embraced Deming and leapfrogged the remaining remnants of Henry Ford’s production process in the 1970s and 1980s, airlines must move beyond their current piecework managed processes to an interdependent, system managed, curb to curb supply chain which focuses on lower costs and higher quality. The airline operational model is stuck in the past, while their current suppliers diligently provide exactly what their customers request – tools to make the current operational model better. Unfortunately, the current airline operational model is so outdated and constrained by culture, history and the airline’s current locally optimized processes, trying to make it better will only succeed in putting more airlines out of business.

    In summary, it is not the network peaked schedule, the price of fuel, airport capacity, weather, lack of runways, the ATC system, labor, nor too little technology that is the primary driver of costs, decreased utilization and lower revenue through poor quality, but the network airline production process as currently operated, which represents a relatively simple, and solvable logistics problem.

    Additional information about ATH Group’s patented and award winning AirPlan enRoute™ (powered by Attila™), the solution to the airline’s production variance problem and currently operational for Delta Airlines in Atlanta, can be found at http://www.athgrp.com.

    R. Michael Baiada
    ATH Group, Inc.
    PO Box 794
    Evergreen, CO 80437
    Tel – (303) 674-0229
    Fax – (303) 674-8374
    Cell – (303) 521-6047
    michael.baiada@athgrp.com
    http://www.athgrp.com

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