Crisis at Classic Airlines - Case Study Example

Crisis at Classic Airlines Classic Airlines is one of the world’s leading passenger carriers and has been in the competitive aviation industry for over 25 years. It has become an airline of repute with over 32,000 employees on the payroll and a fleet of more than 375 jets serving 240 cities worldwide. Aviation industry is faced with huge fixed costs and very high variable costs in the due course of its operations. Aviation industry offers huge potential but the business is very sensitive to external influences and is mainly driven by the performance of other industries. Airliners are faced with derived demand which is mainly driven by some leading industries of any economy. Major segment of air travelers comprise of business class passengers traveling for business or individuals on board on leisure trips. Both segments are promising and a good value for money can retain these passengers. The dependence of airline business on other industries is a leading contributor to the uncertainty in accurately forecasting the travelers for the future. Forecasting for airliners has been a phenomenon of major concern as their high investments are dependent of the reliable traffic projections by their forecasting experts. With the increasing economic pressures and the need to significantly reduce operational cost in various industries, airliners have been facing a sharp decrease in their customers. Alternate channels are being adopted in certain industries whereas use of teleconferencing and videoconferencing has increased in other industries to meet the objectives. Analyzing a particular airliner requires understanding the dynamics of the aviation business and its implications in local environmental conditions. Classic airlines has been through the crests and troughs of the business cycle and faced challenging positions. Stocks have been performing well over years but recently the fluctuations have been on the rise mainly due to the uncertain flying pattern of the travelers and reduction on travel in general. Airline industry has been critically analyzed by the financial market and it has been under the microscope, subject to scrutiny from all sectors. Uncertainty of business revenues and the highlighted financial matters of the industry’s performance has been a source of dissatisfaction for the workforce associated with the airline business. Employee morale has been on the lowest side ever. Besides the crisis in the aviation industry in general, Classic Airlines has been faced with issues which has further threatened their survival in the business. Rising fuel costs and labor expenses has reduced Classic’s ability to compete for valued frequent fliers. Classic Airlines has also been faced with the issues associated with the overly optimistic prediction of industry’s recovery from the downturn. Having predicted a sharp recovery from crisis, Classic expanded its setup and invested significantly in its infrastructure which has added further to the grievances they are currently facing. Unlike these big airlines, small airline setups and relatively new entrants in the trait are not faced with any major restrictive costs, providing them greater agility in their business and allowing them to sustain these downturns in a more efficient manner. Large setups also face inefficiencies over time and need to coup up with those issues in order to sustain their positions in the long run. Current Crisis at Classic Airlines Understanding of the situation faced with Classic Airlines requires defining the problem and identifying its causes to find a solution. Situation and Problem Definition Classic Airlines is faced with 19% decline in number of Classic rewards members and a 21% decrease in flights per remaining member by the start of 2005. Loyal customers were jumping ships and the remaining customers were flying less frequently, atleast with Classic Airlines. Problems at Classic Airline are multifold and are a result of lost customer focus. Rewards members have declined and the possibility of retained members using travel less frequently, atleast with Classic, is visible. Deeper look at the statistics and the shift in travel from one carrier to another may introduce a new dimension to this problem. Apparently the customers are switching to other Airlines based on the value they provide in comparison to Classic Airlines. Part of the issues at Classic Airlines, and its declining rewards members, can be attributed to ineffective customer relationship management through its existing CRM systems. Classis Airlines has been unable to gather relevant customer insights from the changing trends and use of airlines. Classic has been unable to follow the customer concerns and overall requirements that customers have from any airline carrier. Product differentiation in the industry is very low and the offerings of almost all carriers are the same. Customers do not find a discrete reason of choosing one airline among another, causing customer loyalty to be on the lower side and a declining retention rate. Classic Airlines in the recent years has focused on reduction in fares to increase air travel using them as a preferred option. What needs to be kept in consideration is the fact that prices in aviation play only a supporting role in customer’s decision making, particularly for business travelers and higher end leisure travelers. Simply reducing fares may not result in higher traffic unless the value offering is higher than the price being charged. Customers are more concerned with the quality of service. Another major concern of airline customers is the time of flights and delays for any airline which is also a contributing factor in selection of airline carrier. The airlines providing more suitable schedules for business travels will be preferred over those who do not as other associated costs are also considered besides just the fares. Other problems faced by Classic Airlines include redemption of rewards tickets with a restriction of 2 per flight. Labor union issues are being dealt fairly well, but they also result in some complications in certain cases. Management at Classic Airlines is concerned over the declining trend of its customers and the overall increasing costs in the business. Having a double impact on the bottom-line profits, the company is facing major issues that they need to address on priority. The Main Problem Out of the above problems, the major issue seems to be with the changing customer demands which are driving the entire set of problems for Classic Airlines. Having a greater degree of customer insights will allow them to look at other problems in detail. Customer demands and their dynamics may have completely changed from the time when Classic Airlines actually analyzed and researched them. Goals The goal of Classic Airlines is to address the root cause of their business problem of declining rewards members and reduced frequency of travel by the remaining members. This will lead to improved rewards members and increased frequency of travel by members belonging to business as well as leisure travelers. It will also improve Classic Airline’s status to preferred carrier for travel needs of customers. Alternatives, Evaluation and Benchmarking To achieve these goals, Classic Airlines need to rollout a customer insights program whereby they focus completely on understanding customer requirements and the actual need being fulfilled by air travel. They should look at the underlying need that customers are trying to fulfill through traveling by Classic Airlines. The research for customer motives will lead them to the actual benefits that the customers are looking for when they choose any airline to meet their local travel needs. The actual motives may be very different from what the management of Classic Airlines perceives when making strategies for customer satisfaction and value offering. Alternative goals are to improve profitability of the company and get higher returns on investments that Classic Airlines has made over years in anticipation of increasing air travel traffic at an increasing rate after the economic downturn. Their optimistically projected recovery from the economic downturn was far greater than the actual progress, but the investments have been made based on their estimates. Since there is no way to divest now, they must focus on increasing returns on their investment by offering more competitive offering than the competition and allowing the customer to become more profitable for them in the longer run and use their services more frequently than other players in the airline business there. Alternate strategies will be to analyze competition and customers who are not flying with Classic Airlines. Analysis of competition will provide complete details of their offerings and the benefits that they are offering which Classic Airlines does not provide. Similarly by analyzing customers flying other carriers, Classic Airlines will be able to derive a set of attributes that the customers deem important in choosing an airline carrier for their local or international travel needs. Other alternate strategies for Classic Airlines include product differentiation and cost-leadership and improved customer service. Using product differentiation strategy, Classic Airlines can focus on providing offering that is distinguished from the competitive offerings and that provides customers with a reason to buy them over others. Classic Airlines will have a focused market that they will be attracting by the differentiated product which may not appeal to all customers. By reducing costs by 15% in 18 months, Classic Airlines can also compete on Cost-Leadership position by offering the minimum fares resulting from reducing their operational costs to lower than the industry minimum. Another alternate is to strategize on improved customer services and charge premium for greater degree of customer support than others. Using the strategy of improved customer insights for better understanding of customer needs, Classic Airlines will target the following for the next 2 years. Regain loyal customers (lost 19%) and increase rewards members by 10% per year Increase traffic frequency of members by 15% Reduce operational costs by 15% in 18 months for improved profit margin Align flight timings with the customer traffic and requirements for maximizing customer preference Offer early bird discounts to customers pre-booking their tickets. This will allow Classic Airlines to capture customers who are price conscious Maintain similar terms with Unions and Associations Benchmark employee compensations with the top 5 industry players and retain the best employees by linking pay with performance and introducing variable pay plans to reward high performers Improve forecasting by understanding major driving forces (industries) behind aviation business and understanding their seasonality / life cycles Classic Airlines should also consider options of strategic partnering with other airlines which may provide connecting flights with Classic Airlines Risks Assessment Major risks associated with the above strategies include the risk of bankruptcy as Classic Airlines is already in financial crisis and can not afford to make any wrong move. Other risks include lost privilege that was associated with its frequent flier rewards program. The members are on the decline and the rewards program is not attracting them any more. This may be due to the changing requirements or the difficulty associated with rewards redemption procedure and limitaitons. Decision Classic Airlines will implement a robust customer relationship management initiative driving its strategy purely based on customer requirements in the current situation. Changing customer needs will be captured through this drive which will allow Classic Airlines to understand the customer requirements and mould its strategy in light of these customer requirements. Wit h a deep customer focused strategy, Classic Airlines will be a step ahead of competition in making a product that closely fits customer needs and customers will have a greater buy-in for their offerings. Development and Implementation of Solution Implementation of the solution requires employee buy-in before it is rolled out in the market. Customer orientation of employees at Classic Airlines is a must before proceeding any further with the initiative. Internal pressures and external pressures identified as causing the problem will be addressed before the Customer Relationship Management drive is kicked off. Labor unions and Associations will be taken in confidence for their support and front desk staff will be trained to be customer centric in their approach. Customer’s point of contact and all touch points will be synchronized for a similar interface with same information being provided across all interfaces to the customer. Customer support help desk will be made more useful by equipping it with greater information about the services and information that the customer may seek from time to time. Financial targets and KPIs will be established in consultation with the CFO to ensure that the profitability targets and cost reduction objectives are appropriately planned and followed along with the customer insights initiative. Customer insights initiative is a part of the customer understanding and trends-tapping exercise which helps in understanding the changes in the market. Results and Evaluation With the rollout of the program, customers and member are expected to increase over years. Travel frequency of registered members will also increase as Classic Airlines aim to become their preferred service provider. For those customers who have been using other airlines, Classic Airlines will try to bring them on board. Evaluation of these customer shifts will help in adjusting strategies by Classic Airlines. Evaluations will be done based on the KPIs laid down in consultation with finance head and the performance indicators established in the benchmarking phase. These indicators will be evaluated periodically and will provide direction for further initiatives. Despite the crisis faced by Classic Airlines, it still owns a good share of consumers’ mind and has a strong brand equity which it can leverage with simple yet effective strategic moves. Classic Airlines can re gain customer’s loyalty and trust by improving on its customer knowledge base and support initiatives. Classic Airlines also needs to be more realistic in its estimates and investments as the aviation industry relies on long term pay back on investments. Classic Airlines is a typical example of challenges faced by airliners and associated industries. It provides a case for organization where agility in strategy and operations is also of supreme importance despite the high investments which hamper agility. Kotler, P., & Keller, L. K. (2007). A framework for marketing management (Page 205-206). Prentice Hall Read More