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Over the past decade, as competition in the airline business has intensified, traditional carriers have pursued strategies to spur growth, trim costs, and improve profits. To counter the threat from low- cost competitors such as Southwest Airlines and Ryanair, some have created their own budget or regional carriers. The result: today the world's 20 largest aviation groups operate about 50 airlines. In pursuit of higher profits, large traditional airlines have also diversified into related businesses. In doing so, they broaden their customer base to provide services (such as aircraft maintenance and catering) to other airlines and to other kinds of operators (for instance, air cargo space to freight forwarders and maintenance services to the defense sector). To reduce costs, these airlines have repeatedly sought concessions from their workers. Such changes greatly increased the complexity of managing aviation groups, which have traditionally been organized along functional lines, with all operations from sales services to flight operations reporting directly to the CEO (Exhibit 1). As this complexity increased, decisionmaking bottlenecks at the top of some companies began to hinder their ability to respond rapidly to shifting competition. The focus of top executives on the core passenger airline often diverted attention from emerging opportunities in higher- margin businesses. Performance suffered as parts of companies lost sight of the bottom line, and a lack of information impaired both cooperation and oversight.
To avoid these difficulties, large, diversified aviation groups should contemplate a major overhaul to replace the functional organization with a number of business units that have more autonomy and accountability for their performance. Such fundamental change in the shape of a company is a big step that can take three years or more to complete, but the advantages of the business unit model can make the shift worth undertaking. This model helps companies respond more quickly to changing market conditions, focuses middle managers on profitability, enables business unit managers to negotiate more competitive labor terms, and promotes the development of talented young leaders. Indeed, the business unit approach has already been fully adopted by several aviat ion groups, including Luft hansa in t he 1990s and Air Canada, Qant as Airways, SAS, and Singapore Airlines more recently. Aviation groups switching to the business unit model must avoid several pitfalls that can erase the positive effects of the new organization. The challenge is to balance greater autonomy for business units with close collaboration among them when coordinated efforts are essential for maximizing the group's profit; poor coordination, for example, can hobble strategic functions such as planning for a company's flight network and aircraft fleet. But if coordination efforts go overboard, units will fail to embrace accountability for profits, duplicate roles will emerge, bureaucracy will proliferate, and costs will rise. Finally, the CEO and the corporate center may well maintain too much decision- making authority, thus undermining the agility and accountability of the business units.
http://www.mckinseyquarterly.com/article_print.aspx?L2=23&L3=81&ar=1700
25/05/06
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This type of organization has substantial advantages for diversified aviation groups. To begin with, business units with independent operating authority can tailor their strategies and respond more quickly to changes in the marketplace. After SAS created separate business units for Denmark, Norway, and Sweden in 2004, for example, each unit gained a better understanding of its unique competitive challenges. As a result, the Swedish unit moved swiftly to develop a tailored response to growing competition from local low- cost carriers: it simplified the service offering on dom est ic flight s, added 12 direct flight s from Stockholm to other European destinations, and adopted pricing based on one- way travel. Overall, the tailored business unit strategy, resulting from increased autonomy, shortened decision times, and entrepreneurial management, generated an eight- percentage- point increase in the utilization of available seats in the second quarter of 2005, to nearly 70 percent. Autonomy can also spur growth in neglected parts of a company. At Lufthansa, for instance, the share of group revenue from ancillary business units such as Technik (the maintenance division) and cargo increased by about ten percentage points, to 35 percent, from 1995 to 2004. Once an aviation group's top executives have less responsibility for day- to- day operations, they can focus on strategy. The CEO of a traditional network carrier that recently switched to business units, for example, freed up several hours a week by delegating to business unit leaders tactical
http://www.mckinseyquarterly.com/article_print.aspx?L2=23&L3=81&ar=1700
25/05/06
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Defining roles
For business units to function autonomously, they must play clearly defined roles within the group. Airlines constitute one type of business unit, with each airline typically targeting related customer segments that together are big enough to justify its own fleet of aircraft. These airlines are supported by services business units, such as maintenance and catering, which compete in distinct subindustries and are organized around their specialized assets for example, aircraft hangars and repair equipment. All of the back- office functions of these business units should be as decentralized as possible. Support activities (including accounting, budgeting, and performance evaluations of middle managers) should shift to business units. Where substantial economies of scale exist, in activities such as payroll and revenue accounting, operations should be centralized under a separate business unit that handles shared services. To ensure that the total number of back- office employees in the group decreases under the new model, the CEO's reorganization plan must include head count targets for business units, shared services, and the corporate center.
http://www.mckinseyquarterly.com/article_print.aspx?L2=23&L3=81&ar=1700
25/05/06
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http://www.mckinseyquarterly.com/article_print.aspx?L2=23&L3=81&ar=1700
25/05/06
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Experience shows that switching to a business unit structure benefits aviation groups with a number of airlines and well- developed services businesses: it helps these airlines to become more competitive in a market where the growing rivalry from low- cost carriers and high fuel prices are squeezing margins. To reap the benefits of the new organizational model, aviation groups must balance the autonomy of the business units with the need to coordinate their efforts. Meanwhile, the corporate center must relinquish most operating roles in order to focus on strategic activities and on oversight of the business units' performance.
About the Authors Yael Heynold is a principal in McKinsey's Sydney office, and Jerker Rosander is a principal in the Stockholm office.
http://www.mckinseyquarterly.com/article_print.aspx?L2=23&L3=81&ar=1700
25/05/06