If The Only Budget Airline in China Can Profit In This Global Economy …

… why are North American airlines up sh*t creek with only one paddle?

Every year, another North American airline is in financial trouble, and while a bail out may not be required, usually a bankruptcy and restructuring is, or at the very least a merger (or acquisition) to increase revenue and “balance the books”. I’m a little dumbfounded. Yes, the cost of fuel is rising, as is the cost of labour, but the amount of money flowing into air travel is still near an all time high and with the increasing globalization of our society, that’s not going to change. As a result, the doctor finds it hard to believe that every major airline isn’t as profitable as a well-run bank (and given that banks, more-or-less, “mint” money, it’s pretty hard to lose money as a bank — unless you’re run by people who are the reason us IT folks invented ID 10 T errors). In 2010, only 7 of the top 10 North American Airlines were profitable, and only 3 of these made a profit margin that was respectable. While the average profit for profitable airlines was 3.46%, the average profit for the bottom 4 profitable airlines was a mere 2.06%. To put this in perspective, that was the average net profit of Grocery Stores (NAICS 4451) in Canada in 2008. Or, in other words, you’d see the same return in the lowest margin retail business on the planet as you saw in these airlines. (See the summary in the following table.)

 

Airline Passengers Revenue (2010) Net Income (2010) Profit Margin
Delta 163 M 31.78 B 593 M 1.87%
United 141 M 16.34 B -651 M -3.98%
Southwest 135 M 15.7 B 178 M 1.1%
American 106 M 22.17 B -471 M -2.12%
US Airways 60 M 11.9 B 502 M 4.22%
Air Canada 32 M 10.79 B 361 M 3.35%
Republic 31 M 2.65B -14 M -0.5%
JetBlue 26 M 4.5 B 86 M 1.91%
Alaska 25 M 3.8 B 251 M 6.6%
WestJet 20 M 2.6 B 137 M 5.2%

 

That’s why every CEO and COO of every major airline should definitely read this recent piece over on the Knowledge @ Wharton China site which provides a transcript with “Wang Zhenghua of Spring Airlines: Making a Low-Cost Strategy Fly High”. While the best North American Airline made 6.6% profit, Spring Airlines made 14.7% profit! And he made this profit in a local market dominated by state-owned heavyweights while being the only airline in China that doesn’t use the TravelSky booking service, the state-owned monopoly, to sell tickets. In the article, Wang gives away some great wisdom in the article, which is relevant not just for airlines, but transportation providers in general.

The following are some of the key points Wang makes about Spring Airlines.

Quote Wisdom
Spring Airlines has aimed to offer low fares by operating efficiently and making flying more affordable for the average Chinese traveler. Specifically Spring Airlines has a a cost that is, on average, 30% less than its peer group. Spring Airlines has recognized that the biggest market is in the middle — not the upper class or premium business traveller, as both of these are in decline, or the poor, who can’t afford to fly — and that’s where a smart, budget, enterprise focusses, especially when no one else is doing it well. (It focusses on leisure travellers and price-conscious business travellers, which are the growing markets.)
Low-cost travel is a global trend. A smart company aligns itself to mega-trends, and, when possible, adjusts for current mini-trends (which, in Spring Airlines’ case, is no extras or frills, like meals, that only add to the total cost).
[Low-cost flying] comprises 70% of the short-haul market. That’s why only 4 of Spring Airlines’ 54 flights are (long-haul) international. Don’t invest where the business is not.
Cost-conscious business travellers [are our target customers]. It’s 70% of their business and the logical focus. That’s why they launched a business economy service focussed on this customer segment that offers them food, a special shuttle for boarding, and a seat at the front of the aircraft, which they want and will pay a slightly higher price for.
The nature of this industry is that the relationship between supply and demand is changing constantly and quickly. Demand fluctuates between high and low seasons, weekdays and weekends, and even morning and evening travel. So unlike with other goods and services, consumers’ demand for air tickets fluctuates greatly. Thus, the airline industry needs a more flexible, open market approach to operate.
Some companies actually consider delaying payments — having a so-called “no interest loan” — to be an operating strength. But we never do that because we believe our credibility is our life. Credibility is all you have when times get tough, and can be the difference between life and death.
Be cautious in boom times; face the challenges in the bear times. … It’s just focus and down-to-earth, hard-core efforts that have made us what we are today. Growth doesn’t last for ever, and those that don’t realize this fact are doomed to crash with the market.
Rather than spending heavily on ads, we focus on internal management, and carrying out strict evaluations of our suppliers and running internal training programs. A focus on Talent and Transition, and not Buzz and PR. And just when I thought all trace of good business fundamentals had disappeared! Wang Zhenghua is brilliant. I wonder, could he be China’s Peter Drucker?

Supply Chain Disaster Management

Earlier this year, EBN Online ran a good article on “Managing the Variables in a Supply Chain Disaster” that outlined the basic steps a global company can use to get started on planning for a disaster.

It’s obvious, with all of the recent natural disasters, political disasters, and economic disasters, that a supply chain natural disaster is coming your way. It’s just a question of what, when, and how it is going to impact your supply chain. That’s why you need to plan. So where do you start?

According to the author, start by getting all of the departments together — IT, operations, sales, warehousing, administration, and management — to help map out the entire upstream and downstream supply network and determine where the different risk points are and what risks are most likely to materialize. And, as Jim Lawton points out in this Industry Week article on “Country Risk — What You’re Overlooking”, you have to not only focus on your suppliers and the countries they are located in (whch contribute to the political, economic, and commercial risks that are faced by your organization), but your suppliers’ suppliers and the countries they are located in.

Then run a variety of “what if” scenarios to see how the company could recover if supply is interrupted, a warehouse goes up in smoke, a supplier becomes unavailable, freight rates or tarrifs rise substantially, preferred raw materials or components get banned for regulatory reasons, or something else possible, but not predictable, happens. If there is no way to recover, something has to be done now before it’s too late for your supply chain, and maybe your entire organization. For example, if all of the company’s supply for a certain component is from South Korea, and supply from South Korea gets cut off, there would be no recovery. The company either has to find a secondary source of supply from another country, or a way to use a slightly different component to accomplish the same task.

If a moderate increase in freight rates or tarrifs would prevent the company from being able to source a raw material at a price that would allow the company to turn a profit on the finished product, then the company has to identify alternate, cheaper, transportation methods, a way to further save on raw material costs, or a way to increase the value, and thus the selling price, on the finished product. If a raw material gets banned from usage in the product the organization plans on importing into Europe, then the organization has to have a way to produce the component using a different raw material, which could require a different design or manufacturing method, which could add cost as well.

The short of the story is that disaster planning is more than just identifying the upstream supply network and more than just identifying what could go wrong, but also identifying how a recovery could be initiated if necessary.

Storytelling in Data

Today’s guest post is from Doug Hudgeon, Director of PitchMap, and a long-time Procurement blogger. Back in the day, he authored a vendor relations blog on WordPress (at hudgeon.wordpres.com) and more recently he authored the Operating Efficiency blog (at OperatingEffieciency.org), which has now been ported to the PitchMap Blog. It originally appeared on the PitchMap blog yesterday (Storytelling in Data), and is being reprinted with kind permission.

Now that we’ve introduced Pitchmap, I’m returning to topics on business operation efficiency. Today’s topic is Telling stories in data: Using data to support your arguments

Yesterday, I attended the first Australian IACCM meeting of the year. The two presenters spoke on very different topics, “Clean energy laws and carbon trading” and “Utilities Benchmarking” but both presenters were equally adept at using data to underpin their arguments. Today, data is everywhere and an effective business person must be an expert in presenting their arguments using data. In my view, there’s nothing like a story to make your audience feel that change can happen and a vision can be achieved.

Storytelling in Data

Let’s look at some Pitchmap data to show how data can be used to tell a story. This data compares the procurement processes of three companies (Salamander Logistics, Melbourne Transport and Queensland Trucking) with each other and with an optimised process. The columns in the chart show the cost per transaction: the higher the column the greater the cost per transaction. The type of transaction is shown by the label above the columns.

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The first story in the above data is indicated by the red arrow. It shows that Melbourne Transport is spending about the right amount on Vendor Creation processes whereas the other two companies, Salamander and Queensland, appear to be under-investing. This does not say that Melbourne Transport is doing it right, just that they are spending about the right amount on it.

The second story is indicated by the yellow arrow. The story within the data is that Melbourne is better than its peers but higher priced than optimal. Interestingly, the purple section of the column (transaction costs relating to invoice processing) is the same as the optimised process but the green section of the column (transaction costs relating to placing orders) is significantly more expensive. This indicates that Melbourne Transport should be focusing its process improvement initiatives on order placement rather than invoice processing.

The last story is highlighted by the blue arrow. Melbourne Transport and its peers are significantly more expensive than the optimised process. This should serve as a red flag in any attempt to re-engineer this process given that no one is doing it particularly well. It may well be that there is some aspect of expense processing such as regulatory requirements in this industry or geography that adds to the cost of the process and further investigation should be undertaken to ascertain whether this is so.

The keys to successful storytelling

The keys to being able to tell stories with data are four-fold:

  1. The data must be clearly displayed – preferably on one page,
  2. The data must show where you are now and where you could be (either by reference to an optimal state or comparison against your peers or benchmarks or all three),
  3. The data must be sufficiently detailed to make the story interesting, and
  4. You need to be able to dive into the details underlying the data when your assumptions are questioned.

Doing so will enable you to present a compelling picture (as in the chart above) of what needs to be changed, how it needs to be changed, and what further inquiries need to be undertaken to resolve outstanding questions.

In my next post, I’ll discuss how to collect and present variable data in a compelling manner.

Thanks, Doug!

Is Your Dumpster Full of Dollars?

And I’m not just talking about the significant savings opportunities that can come from optimizing your trash pick up with a good spend analysis, as discussed in SI’s recent post that asked [IF] You Know How Much Your Trash Costs You? An average retail chain will write of a lot of damaged inventory and discard it in the dumpster when, in fact, that inventory, if repaired, or, typically, returned in a timely manner, could result in significant dollars back in the retail chain’s pocket.

As pointed out in a recent post over on the Supply Chain View from the Field on “Reverse Logistics: What happens to all of those product returns you’ve been making, anyway?”, what typically happens with a return that could result in a credit to the retailer is that it ends up in many cases going into the dumpster even though, in many cases, the product is still good. This happens for a variety of reasons. The store manager doesn’t know that a return to the manufacturer will result in a credit. The store manager believes it will cost more to process the return than discard the item (or, if the store manager is lucky enough, sell it to a flea market). The store manager knows that there is money that is probably worth going after in the return, but has to use a new returns management / liquidation system that they don’t know how to use and can’t figure out on their own because it’s clumsy or ill-defined (like the SARS system that has been pushed down to individual stores by Home Depot and that could spell the beginning of the end). Or maybe they can figure out how to record the damage, get a pending credit, but lose the credit because they don’t process, and (bar)code the return properly.

Returns, which can often be refurbished, repaired, re-sold, or in the case of a NPI (New Product Introduction), returned to the producer/manufacturer within a certain timeframe for a full refund as per the contract, may not have the profit potential of a product that is not returned, but they still have profit potential and, most importantly, when properly managed, do not result in expense and loss. Proper reverse logistics and returns management, which is standardized, near real-time, and provides multi-channel visibility (as discussed in this post which brought you Reverse Logistics Tips from World Trade Magazine, significantly improves the bottom line and should be performed by every retailer and reseller.

For a few more tips, check out Rob Handfield’s tips from his post on “Reverse Logistics: What happens to all of those product returns you’ve been making, anyway?”.

If Your Supply Management Vendor Gets Acquired, Is It A Good Thing?

Over on Software and Services Safari, Brian Sommer recently asked about Cloud Software Consolidation — Is It All Good? It’s a fair question, as there has been a lot of consolidation in this space, between SaaS/Cloud and non-SaaS/Cloud vendors alike, and a lot more is still rumoured.

The companies will always spin it as a good thing, and if the acquisition happens, chances are that the investors (that control the Board of Directors), think it is a good thing, but that doesn’t necessarily mean it is a good thing from an existing customer point of view. As Brian notes, investors are looking for deal synergies, up-sell or cross-sell opportunities, cost reductions/efficiencies, etc. and customers want to know if the product will be around several more years, whether the product will get enhanced over time and what happens to customer support. And the problem is that these two sets of goals are often incompatible.

What usually happens is:

1. Existing Customers Get the Short End of the Stick.
For example, they will be promised new, different, technical architectures that may make some of their prior integration efforts no longer valid.

2. The Acquired Product Often Gets Slated to be Decommissioned.
And the customer has to migrate or lose access to functionality entirely. (And if the innovative start up was bought by the lumbering gorilla, functionality will typically be lost.)

3. The Acquired Product Is Frozen in Time.
It may be supported for the length of time in the newest customer’s original contract, but forget about improvements. The existing customers will be lucky to get bug fixes.

4. Prices Increase
After all, the new company, which probably has a higher overhead, has to make a profit after spending all that dough on the acquisition!

5. But Vendors Still Create Incredible Works of Fiction to Explain How the Products Will Be Rationalized Into Their Product Line.
Which are too amazing to explain in a few short words!

And, most importantly, no one ever discusses the real economics of the transaction and why it was driven in the first place. And Brian does a great job of summarizing what typically drives these deals in Cloud Software Consolidation — Is It All Good? the doctor strongly recommends that you give this post a read. It is worth your time!