Airlines can't predict the future, but they can prepare for all possible worlds. Charles Perrottet and James Foster explain the value of scenario-based longterm planning.

One UK politician, when asked what he feared most, replied: 'Events, my good man, events.' Airlines know the feeling; the airline business is predictable only in its unpredictability. Airline managers have typically dealt with this in one of two ways. They may continue on the same path, using a 'master plan', which is usually a rigid, long-range exercise based on a set of assumptions. Or they abandon their plan and concentrate on day-to-day problems - 'putting out fires'.

The problem is that both approaches ignore the obvious point - the future is unknowable. When managers plan at all, they make assumptions about the future by extrapolating from what they do know - the past. This assumes that businesses are governed by unchanging factors, and that variables do not really vary at all. It ignores the fact that reality tends not only to change the values of the variables, but also to transform the bases on which the variables - and the business - are organised.

In 1990, did anyone anticipate these events and trends?

* The Iraqi invasion of Kuwait, which led to the recession of 1991;

* Electronic ticket distribution, which is being heralded as the third revolution in airline history after the jet age and deregulation, forcing the expensively developed computer reservations systems (CRSs) to fight for continued relevance;

* The proposed alliance of British Airways and American Airlines, the potential divorce of BA and USAir, and the estrangement of KLM and Northwest;

* The traditional friend of travel agents, Delta Airlines, leading the way in capping travel agency commissions;

* The rapid expansion of the Internet, so that it has the potential to deliver the lucrative 'holy grail' of direct access to airline consumers;

* United Parcel Service planning to start charter passenger service; and

* Global positioning systems being used not only for aircraft navigation but also to help golfers.

You didn't? Well, it's not surprising; the last six years have seen enormous, mostly unpredictable, changes in the geopolitical and economic landscape. These include the triumph of market forces over centrally planned economies, the global wave of privatisation, downsizing and outsourcing, the expansion of the World Trade Organisation, civil or regional wars, and the rapid emergence of a global middle class. Add the advent of new technologies, the convergence of telecommunications and computing, the emergence of global corporate alliances, and the globalisation of financial services, and the scale of the planners' difficulties is obvious.

How can a company be sure its strategy will withstand future shocks? A growing number of aviation-related companies and institutions - including AMR Corp, IBM, Nasa and the US Air Force - are using scenario-based planning to develop resilient strategies for the future.

Most airlines have good day-to-day insight into their markets. Some believe they have a good sense of future changes. But it is rare for anyone to inquire seriously about whatever events and forces they feel may determine the future. The unasked question is: 'What emerging trends could be interrupted by unanticipated developments that could reshape our business?'

Forecasts may offer early warnings, but this is mostly just an exercise in extrapolating recent history. Simple projections of the present into 'pessimistic, optimistic and most likely' future tracks are often wide of the mark. Slow to respond to sudden reversals and threats or to take advantage of unexpected opportunities, the organisation reacts to change instead of exploiting it.

No approach can ensure that every shift can be adequately foreseen, but only a corporate strategy which recognises the potential for changes in the outside environment will even stand a chance. Scenario-based strategic planning, unlike other management tools, is an 'outside-in' approach, permitting airlines to manage uncertainty by identifying strategic elements that will be resilient to a number of possible futures.

In scenario-based planning, the scenarios demand an intense examination of the external business environment in which a company operates. By blending the uncontrollable elements of the changing world with the airline industry's unique drivers, both internal and external, a company begins to view its business potential in a totally different light.

Creative thinking by management is the most valuable benefit from this process because it helps decision-makers develop an outward-looking perspective. Lateral thinking, after all, is a learnable skill.

For all planning horizons bar the shortest and least complex, the effort to visualise only the most likely future rarely does justice to the range of possible outcomes. What is required is a process with a wider focus and a systematic consideration of the spectrum of uncertainties. Companies should scan the horizon for the 'discontinuities' that could transform dominant industry and market patterns. These could include technological advances like ticketless travel and the use of electronic smart cards, or the rapid erosion of a long-standing entry barrier, such as deregulation in Europe.

The goal of a scenario-based study is not to predict, but to give executives the tools to manage future uncertainty. There is a wide range of techniques to show how the future may differ from the past, such as quantitative economic modelling, or qualitative methods blending factors specific to the travel industry with macro forces such as economics, demographics, technology, environmental issues, politics and regulations.

None of them tell you how to run your business, but they aid understanding of those forces that will play a dominant role in affecting your future business strategies. This knowledge helps managers respond to change with greater confidence, and more quickly than their competitors. Uncertainty can become a competitive edge.

Scenarios start with the assumption that much of the future is unknowable, and that even elementary assumptions must be questioned. Rather than beginning with fixed principles and trying to evolve possible futures through accepted logic, scenario-based planning assumes the characteristics of a variety of 'end states'. This cuts through many of the hidden assumptions managers make about how the world works, and about what is possible.

Scenario planners begin by generating a range of business drivers, or factors over which they have little or no influence, but which are likely to affect the future of the airline industry. These usually include an array of macro-economic, social and political factors, but might also include, for example, global alliances, the varied pace of deregulation in Europe and Asia, rapidly changing information technologies, terrorism, airport slot constraints, unexpected effects of outsourcing, and the balance between destination demand and saturation at relevant airports.

Once a set of 100 or 150 drivers has been generated, they are condensed into several major themes, or 'dimensions'. For example, one could be 'Developing countries' economic strengths'. Within each dimension, drivers are pushed to extremes to define sharply different conditions. A developing country scenario might imagine the emergence of a largely democratic developing world, the creation of sweatshop labour nations, poverty leading to the over-exploitation of natural resources, natural disasters that produce famine and mass migration, political instability, and so on. This could be sharply contrasted with a different but equally plausible possible future.

When all dimensions are assembled, the result is a unique set of characteristics comprising a 'world'. Instead of single worlds, a set of worlds is selected to include the full range of threats and opportunities an airline could face. Finally, detailed scenarios are written to challenge expectations about what is good or bad for the airline, or indeed for the airline business.

In one real example, an airline asked: 'What could we do if the regulators were taken off our backs?' A scenario was written in which radical deregulation was carried out. The result was a 'world' of punishing competition in which margins were razor-thin and companies were engaged in a zero-sum game - not a 'best case' scenario at all. Once it had a good look at this world, the airline realised that it had acquired critical skills in operating in a regulated environment, and that the complete removal of regulation might put it in a dangerous and untenable position.

The scenarios are detailed, well considered narratives that provide a bridge from the concrete world of today to an agreed set of future circumstances which could comprise the 'future world' of 2000 or 2005. They are designed to create a solid picture of this possible future; to stimulate managers to make inferences as to how their airline might be affected by changed social, economic and political forces; and to plan how to compete in this world.

Four or five 'worlds' usually embrace the full range of threats and opportunities to be tested; any more may not provide enough differences to warrant the effort, while only three worlds may push the organisation towards regarding one of them as a 'most likely' scenario, which would undermine the entire philosophy.

Scenarios start from the premise that the only thing known for certain is that a single-point, one-scenario forecast is wrong. Their great strength is that they ignore the issue of probability entirely, and no attempt is made to assess the probability of any particular scenario. Adopting one scenario as a most likely case leads the organisation into the comfortable but misleading single-point forecasting trap.

The next stage is a workshop for managers to learn how to face the challenges of the scenario worlds, and to 'stress test' their corporate strategy. Planners read the scenarios, and any questions about their logic are answered. Clients are taught to prepare strategies to prosper in their sets of future worlds. Later the strategies are evaluated, and a final 'strategy merge' process takes place; the final step towards developing a core strategy.

A 'strategy merge' seeks first to evaluate the effectiveness of strategies for each different world. Strategy elements appropriate to each world are compiled in a master list and their effectiveness tested in the other worlds. Some strategies will be highly effective in their original worlds but not in others; others will be effective across all worlds. This latter group comprises the core strategy - the actions the airline must take to cope with all possible futures. The core strategy is not enough in itself to carry the company to its desired future. Further strategies will have to be deployed as events develop. But many of these contingencies will have been anticipated by the scenario process.

A final exercise is to identify leading indicators that might warn the company when a contingency issue might surface. If this occurs, the strategy developed for that issue should be re-examined and perhaps implemented. Continuous monitoring of the external environment will provide the kind of early warning intelligence an airline will need to respond to unforeseen shifts.

Scenario planning is designed to deliver concrete, practical results in the form of implementable strategic plans. Further benefits are:

* The encouragement and support of creative, flexible thinking within the organisation;

* The chance to stress-test current strategy against a variety of possible future conditions;

* The chance to rehearse responses to competitor actions before they occur;

* The management of future uncertainty in the travel industry by determining whether your operating strategies are appropriate for sharply different circumstances;

* Instilling a 'planning mind-set' in all participants;

* Building consensus on strategic solutions;

* Providing a training context within which young corporate leaders can be educated and developed;

* Effecting a fundamental cultural change; and

* Providing the basis for a flexible, contingent and continuing planning regime, that includes a robust core strategy, a flexible shell to promote readiness and a focused early-warning system.

Using scenarios invariably changes the way the future is viewed. Rather than a vaguely threatening collection of uncertainties, the unknown future is organised in a way that makes it more manageable. IBM's Large Scale Computing Division, criticised for missing broad market shifts, used scenarios to help establish a renewal strategy. A leading airline has used scenarios to help two key but disagreeing divisions to delineate areas of conflict and develop strategies to move ahead.

These companies were responding to major unknowns in their futures. One was responding from a position of strength and the other was trying to climb back from troubled times. They both found that scenario-based planning provided them with a fresh approach and fresh ideas.

Source: Airline Business