RESEARCH ASSIGNMENT: HUMAN RESOURSE MANAGEMENT

1. How did the attitudes of both Lorenzo and the unions affect the operations of
Eastern Airlines?

Lorenzo represented the tough task master approach from the management side because of the his
success with the then continental Airlines management experience. In1983, his uncompromising style
had brought about an apparently miraculous turnaround at Continental and set him up as a shining
example of a business leader willing to fight labour to create a lean and successful company. Wall Street
celebrated the renewal of a dying breed of tough managers This was in line with the Get Tough
Management attitude of the then President of United stated of America Ronal Regan who fired the
striking air traffic controllers in 1981.

At that time there was also a trend that many huge US airlines companies trying to with the experiment
Japanese-inspired labour-management cooperation techniques, as a way of restoring America to global
competitiveness. Lorenzo went in the completely opposite direction. Although his brilliant financial
manipulations enabled him to build an empire out of nothing, Lorenzo was unable to eastern airline on a
day to day basis. Instead of fixing the operational problems of the airlines he bought, Lorenzo let them
flounder as he focused on making new deals. Lorenzo also failed because he alienated the people who
worked for him. Lorenzo's giant debt load led him to turn to labour as a way of reducing overhead. His
efforts to get more for less by intimidating employees into working harder and taking unprecedented
wage and benefit cuts proved to be disaster, particularly in a highly service-oriented business like air
travel
When Lorenzo applied similar tactics at Eastern, he soon found that he had stepped into a hornets' nest.
Instead of trying to make peace with the carrier's employees, Lorenzo struck out harder and harder,
until finally Eastern’s workers were willing to sacrifice their jobs to get rid of him.

Frank Lorenzo glorifies the failure of the traditional antagonistic methods of dealing with employees. He
never understood that an airline's success depends on motivated workers providing quality service. The
story of Lorenzo's struggle to bend Eastern employees to his will is a case study in why the
confrontational approach is destined to fail. Lorenzo brought a corporate raider's ruthlessness to bear
on the running of a company. His determination to get his way with employees led him to dismember
the very company he wanted to build. Lorenzo fought a no-holds-bar war against labour that ended with
the destruction of both sides: tens of thousands of employees lost their jobs, and the United States lost
one of its oldest major carriers

From the Union perspective they were also hell bend on not accepting any of the proposal which can
revive the airlines and make it profitable. They we willing to sacrifice their jobs, rather than accept some
of the proposals from Lorenzo. As one last-ditch effort to keep the airline flying, Lorenzo offered the
pilots union a new labour contract in which they were guaranteed jobs and pay raises. However this deal
also attached provisions that if Eastern were declared bankrupt or merged into Continental, its sister
airline, the contract would be void. Lorenzo had found just the thing to push the pilots over the edge .
On the morning of Saturday, March 4, 1989, the machinists struck Eastern and both the flight attendants
and pilots unions called sympathy strikes. Eastern had been virtually grounded .

Conclusion: The High handedness in handling the crisis by Lorenzo and not trusting the labour unions
together with very stubborn union looking at mischievous clauses which might have been introduced by
Lorenzo lead to the failure of the airlines

Reference

1. Ferrante, J. G. (2000). Death of Eastern: How One Man Destroyed an Airline. Journal of
Aviation/Aerospace Education & Research, 9(3). Retrieved from
https://commons.erau.edu/jaaer/vol9/iss3/
2. Clark, K. (2017, December 25). Frank Lorenzo Might Have Been The Real World Airline Grinch.
Retrieved from https://www.avgeekery.com/frank-lorenzo-might-real-world-airline-grinch/
3.

2. If you were hired as an HR consultant and as an arbitrator to handle the

dispute at Eastern Airlines, what recommendations would you provide to
solve the problem amicably?

 Analyse the Airlines performance complete end to end and come out with the possible change
in organizational development process
a. Identify each segment of the airlines their value add to the operations of the eastern
airlines. This is key if management has to spin off or outsource which segments can be
outsources at the competitive rate and also break the stubborn trade union
b. I would have conducted a deep down war room meetings at all levels to understand the
core issues of the organization and split to major goals for the leaders to come out with
action plan for improvement
c. Will initiate organization restructure and bring somebody who understands that the
primary element of the airline business is that it is a people business. . . . To have a
safety system, to have operations go smoothly as well as customer contact and good
service, you have to have reasonably content people.
d. Given the Eastern Airlines split and turbulent Trade unions relations would have clear
instruction not to use divide and rule method but consensus method of approach to the
problem
e. Similar to other large companies i would have formed a work group to explore the
JAPANESE WAY OF MANAGMENT ) LOBOUR RELATIONSHIP based on three golden rule -
Life time employment, Seniority based wage system and enterprise unions- Three
Golden rules of Japanese Labour Management relationship principle
f. Change the operation style with TRUST OPEN COMMUNICATION for managing disputes
References
1. Foreman, F. (1989, April 16). VIEWPOINTS : CAN EASTERN AIRLINES BE SAVED? : The
Strikebound Carrier Probably Has a Future, but Who Will Lead It--and in What Form--Is Anyone's
Guess. Retrieved May 6, 2019, from https://www.latimes.com/archives/la-xpm-1989-04-16-fi-
2190-story.html
2. http://www.jil.go.jp/english/JLR/documents/2014/JLR43_ebisuno.pdf Labour Management
Relationship during high economic growth – Japanese style Labour Management Relationship
by SUBIKO IBISUNO RISSHO University

3. How is the airline/aviation industry different from any other industry?

Primary element of business of Airlines industry is PEOPLES BUSINESS and following are the unique
differentiations with other industries. Let us see what is unique about the Airlines industry

1) A capital intensive industry with high fixed costs: A business is considered capital intensive
depending on the ratio of capital required to the amount of labour. The airline industry is considered
among the top of the high capital intensive industries. Airline industry also has high fixed costs as
compared to revenues. This puts the industry to higher risk because in case it is not able to attain an
economy of scale or if there is a downturn in sales, the high fixed cost can’t be covered and the business
becomes unprofitable. Such a condition to some extent is also prevalent in automobile industry, but for
an airline it becomes very critical. This is why there has been much higher frequency of bankruptcies in
the airline industry and also a compelling mergers and acquisition route to gain competitive advantage.
This factor makes it a unique industry.

2) Low profitability: As an industry, airlines have seen low profitability. It is said that in the US, the
airline industry has made cumulative losses in the last 120 years. Even Warren Buffet is said to have
acknowledged his mistake in buying shares in US Air, blaming the industry which loses money.

Every time fuel costs rise, or a new tax is imposed, or a staff strike happens; or there is an inability to
raise the fare proportional to the rising input costs, their profitability is hit hard. Such an unexpected hit
hurts the expansion plans and the whole fiscal planning goes haywire. But some companies have been
able to make above industry-average profits using their unique business models. For example, when
low-cost no-frills airlines emerged towards the end of the last century, it posed a serious threat to the
legacy airlines.

3) High vulnerability to the state of the economy: global slowdown or recession: Airline industry is too
much dependent on the global economic scenario. Every time an economic slowdown or recession
happens, flyers go for cheaper options like trains or road; there are few tourists travelling; fewer
business travels planned; and airlines have to run with empty seats. As a result, they face severe
liquidity crisis.

Fuel makes 35-40% of costs of an airline, higher than this for low-cost-airlines, and any global crisis
impacts the fuel prices too.
Also, domestic airlines depend heavily on the state of the national economy. If there is
good GDP growth and the country is witnessing rising prosperity, it will see a very bullish growth for the
airlines. The current surge in air passengers in India is because of this very reason. But if economic
growth falters, people would choose other modes of travel and airlines would come in the red.

4) Nationalization of Airlines: Many countries have national airlines. Governments own and operate
these airlines. At times they have nationalized private airlines to be able to have a national carrier. For
example in India, the airline industry was pioneered by Tata Airlines in 1932 as a division of Tata Sons.
But after independence, the government of India acquired majority stakes in Air India. Air transportation
industry was nationalized in 1953, with domestic operations transferred to Indian Airlines.

5) Frequent bailouts: It is interesting to see how the US airlines fared in the aftermath of 9/11 terrorist
attacks. Between 2000 and 2005 US airlines lost USD 30 Bn with wage cuts of over USD 15 Bn and
100,000 employees laid off. The US federal government provided USD 4.6 Bn in one-time subject-to-
income-tax cash payments to 427 US airlines, with no provision for repayment. In addition, they also
approved loan guarantees to six airlines totaling approximately USD 1.6 Bn. A similar situation prevails in
India where government supports the national carrier Air India, no matter how much loss it makes.
Analysts have been critical of this practice of “dumping” tax-payers money into the airline industry just
for the sake of preventing bankruptcy. But so far, governments have always come to the rescue of the
industry. This is a unique thing with the airline industry.

In India too Current turbulence of Aviation industry especially through JET AIRWAYS makes politicians to
merge the airlines with AIR INDIA an already loss making airlines

6) High barrier to entry and regulations in the markets: Typically airlines are highly regulated due to
political, economic and safety concerns. In such regulated markets, new airlines find it difficult to come
up and establish them. Also, due to restrictive practices new airlines find it difficult to obtain slots at
airports.

7) Low switching costs for customers: It is very hard for airlines to develop a loyal customer base,
particularly in markets like India. This is why all major airlines have been enthusiastically running
Frequent Flyer Programs and other customer loyalty schemes. For a flyer, it is just a click of a button to
go book on a competitor’s flight. And airline customers are often very sensitive about service. Once the
flight is delayed or service is unsatisfactory, they can make a resolve of not flying by that airline again.
This is because the high competition in the airline market has given the flyers too many options and
almost no switching costs. The customers also gain because of the prevailing price wars.

8) Being central to ‘globalization’: Due to its central role, the airline industry has grown with and can be
identified with globalization. It facilitates global trade, international business, tourism, and hence helps
economic growth of all nations. It is hard to imagine if today’s world would be as much globalised, or
localized, without fast, efficient and convenient airlines.

9) Unprecedented safety concerns: Because of the nature of air travel, the risks are high and in case of
accidents the human casualty mounts. So the airline industry has to maintain strict safety standards and
can’t be relaxed even for a moment. In many accidents the reason is found to be human error, which
makes the case for stringent norms very strong.

Apart from accidents and terror threats, the air route has also been used by criminals, smugglers and
traffickers for their activities and hence safety and security is always a concern for airlines.

10) Alliances and optimization: A new phenomenon came into being which is hardly seen in many
other industries. It is ‘alliances’.

Star Alliance was world’s first largest airlines alliance to come up in 1997, though smaller alliances were
conceived in as early as 1930s. Star Alliance was founded by five of the world’s big airlines Lufthansa,
Scandinavian Airlines, Thai Airways International, Air Canada, and United Airlines. Currently there are 27
member airlines in the alliance with 4023 aircrafts, 21000 daily departures, covering 1160 airports in
181 countries. All together, Star Alliance carriers handle 603.8 million passengers and amount to USD
150.7 Bn. (Source: http://www.staralliance.com/en/about/airlines/ Accessed on March 11, 2011).

These are the unique aspects which are particular to Global Airlines industry

Reference
a. Tiwary, K. R. (2011, March 11). 10 Reasons Why Airline Industry is Unique ? | Business
Article. Retrieved May 6, 2019, from https://www.mbaskool.com/business-
articles/marketing/207-ten-reasons-why-airline-industry-is-unique.html
b. https://jennifergrantinternational.com/blog/airlines-today
c. Pande, S. (2019, April 2). Why leading an airline in India requires unique management
capabilities. Retrieved May 6, 2019, from https://www.cnbctv18.com/aviation/why-
leading-an-airline-in-india-requires-unique-management-capabilities-2800951.htm

4. What are the unique competencies that a CEO of an Airline company possess
in order to be successful? What challenges is he likely to face?

Role of the CEO of Airline Sector

From 44 million domestic passengers in 2008 to 121 million domestic passengers in 2018,
Indian aviation has come a long way. This growth is forecast to continue with India becoming
the 3rd largest aviation market by 2030. Heading any Aviation Sector is an humongous job for
any CEO. Let us understand some of the key unique competencies he should have

1. Financial acumen-ship: Towards predictable cash outflows by managing the largest

expense item — fuel

The largest operational expense item for any airline is aviation turbine fuel (ATF). For Indian
carriers, ATF constitutes 35-40 percent of an airline cost base. Unfortunately, the pricing of ATF
in India is based on import parity rather than on the basis of actual cost (including refining and
marketing). Hedging via financial instruments is not an option as that requires expertise and
carries additional risk. However, there are other aspects of hedging that can be initiated.
Specifically, volume discounts from the oil marketing companies; pre-payment commitments
towards an even higher discount;

2. Working with All Stake holders: Collaborating with stakeholders to drive airport
efficiency

All airlines have to work collaboratively with stakeholders including airports, air traffic control
and government to see how more capacity can be delivered from the existing resources. These
decisions require courage, conviction and intense collaboration

3. Technical Knowledge and infrastructure creation Working around the MRO taxation
environment which is not aligned to the market

The next Major expense for any aviation secor is MRO ( Maintanence and Repair) . Ability to
create or collaborate with the aircraft producers to ensure MRO is effective and safety of the
aircraft is ensured

4. Good Marketing acumen-ship Shoring up liquidity in a severely constrained lending

environment

Though theoretically you don’t need working capital for running airlines business as the tickets
are sold in advance. So selling the tickets at optimum price to ensure viability and profitability is
necessary skill of the CEO.

5. Good People Management skills: Most of the Airlines india and abroad has strong
trade unions which are tough to manage. While the CEO has to manage the unions but
also ensure all the staffs are working with utmost interest in their work and understand
the constrains of the management

References:

a. Pande, S. (2019, April 2). Why leading an airline in India requires unique management
capabilities. Retrieved May 6, 2019, from https://www.cnbctv18.com/aviation/why-
leading-an-airline-in-india-requires-unique-management-capabilities-2800951.htm
b. Capa. (2014, January 10). What makes the ideal airline CEO? Do CAPA's World Aviation
Summit delegates agree with the experts? Retrieved May 6, 2019, from
https://centreforaviation.com/analysis/reports/what-makes-the-ideal-airline-ceo-do-
capas-world-aviation-summit-delegates-agree-with-the-experts-146745
5. The case study is based on a real-life crisis that occurred in the aviation
sector. Conduct a systematic research on the issue and pen down your views
on the same, particularly from the HR perspective.

Systematic research on the issue and pen down your views on the same,
particularly from the HR perspective

In the case study given

Francisco Anthony Lorenzo is a Harvard business school graduate who served as the head of several
domestic airlines including Eastern, Continental, New York Air, Frontier and People Express during the
’80s and ’90s. During his career, Lorenzo became known as a kind of white collar thug, infamous for
union busting and heavy-handed treatment of employees. He remains banned from holding any position
in the airline industry to this day.

 He has necessary skills on the sector and an able manager. He virtually acted like dictator and
enforcing his opinion and views because he was successful with his tactics in continental
Airways. He wanted to apply same methodology to all his future acquisition which is
fundamentally wrong. As a able CEO or Chairman you need to go into the details of the each
industry he acquires and ensure there is a comprehensive solution to address all the issues
 Lorenzo was more of individual manager rather than able administrator. He always looks at
political way of handling issues rather than systematic way of addressing issue. Relationship
with Trade unions were so pathetic after people knew his way of handling Continental airlines.
Ever since he took over eastern Airlines.
 His philosophy of Bankruptcy is the only Legal way to bust trade union is a wrong approach.
 Poor Company Management : Lorenzo was so heavy-handed with subordinates at Eastern that,
in the end, the airline’s employees basically put their own jobs on the line to get rid of him.
When he first arrived, he tried to turn the company around by incessantly hammering the
unions to make concessions. He enlisted the help of Eastern Airlines’ managers who were
‘company men’ and enforced what some call abusive policies against employees.
Workers were required to adhere to very strict rules and were written up for lying about
nonexistent medical conditions if they called in sick to work. So many machinists were accused
of theft and/or drug use that in one year alone, 262 unionized machinists lost their jobs.
Psychological warfare was even waged on flight attendants who were forced to collect garbage
on flights (a violation of their contract). What if a flight attendant refused to act as garbage
collector? They were fired on the spot for insubordination. More and more employees were laid
off and those who remained on the job were forced to work longer hours with less time off.
Pilot exhaustion became a real threat to passenger safety. Disgruntled flight crews’ discontent
was glaringly obvious to passengers and customer satisfaction scores hit rock bottom. In a
service oriented industry people are the core asset and keeping them happy is key for any
airlines to survive
  His quest for acquiring more airlines was high compared to his management of day to day affairs
of each airlines. He also had not ensured right people are at right place there by not performing
his assigned duty well

6. Discuss a real case from the aviation sector. Critically evaluate it from a business
and management standpoint.

Introduction:

Indian Civil Aviation market is one of the fastest growing segment and with introduction of multiple
carriers which offer low cost service it is expected to grow much stronger. But many companin that
there is no money in the business as the cost of doing Aviation business in general and aviation in India
is very difficult. In the recent times we have two major airlines are at bankrupt state and there were
three mergers where in large airlines acquired low cost carriers. Let us evaluate the following points
with reference to the Jet Airlines and Kingfisher Airways

Current Market size and Challenges

India’s passenger traffic grew at 16.52 per cent year on year to reach 308.75 million (12.72 per cent).
Domestic passenger traffic grew around 18.28 per cent to reach 243 million in 2018-19 and is expected
to become 293 million in 2020. When it comes to International passengers, it grew by 10.43 per cent to
reach 65 million in 2018 and traffic is expected to become 76 million in 2020. In 2018-19, domestic
freight traffic stood at 1,213.06 million tonnes, while international freight traffic was at 2,143.97 million
tonnes. India’s domestic and international aircraft movements grew 14.40 per cent and 9.40 per cent to
1,886.63 thousand and 437.93 thousand during 2017-18. Number of commercial aircraft in India is
around 550.

What are the perennial problems?

Increase in fuel prices

Aviation turbine fuel (ATF) is one of the important sections of the industry. Indian government didn’t not
reduce the jet fuel prices in proportion to the fall in international crude oil prices. But, when there is a
rise in crude prices, it increases in the fuel cost would eventually increase the operation of the airline.
Besides, it could compel airlines to go for an upward fare revision to offset the increased cost of
operations. Why, the jet fuel accounts for 45 percent of an airline's cost of operation
This is one of the prime reason for Jet Airways to be less viable

Higher airport cost

High Airport (aeronautical) Charges levied by Airport Authority of India are higher. These charges
payable at the International airports are higher than those payable at the airports designated as
Domestic airports. As a result, the domestic airlines in India are incurring additional costs at the
international designated airports without deriving any extra facilities. According to a latest survey, the
airport charges levied by the Indian airports (Domestic and International Terminal) are amongst the
highest in the Asian and the Gulf countries. This adds more burden to aviation companies.
Severe competition
Jet airways to maintain its standard as premium private airlines kept asking premium slots at the
airports like Mumbai which increased its operation costs.

Marketing and falling prices of Air tickets:

There is a cut throat competition faced by the top airline due to ticket pricing. Established Airlines are
threatened by low cost carriers, which are eating up their market share. In order to consolidate their
market share, top premium airlines were forced to reduce their ticket fares to around 15- 20 per cent.
Such a slash down in price will lead to a price war in the long run amongst the airlines with the only goal
of increasing their market share.

Jet Airways acquisition at a high price the SAHARA Air added more problems to its already low operating
profit cost structure. The acquisition put lot more pressure on the Jet Airways and funally landed up
with huge debt

Foreign Investments
Foreign Direct Investment (FDI) inflows in air transport between 2000-17 was around US$ 1,608.51
million. The government has announced around 100 per cent FDI under automatic route in scheduled air
transport service, regional air transport service and domestic scheduled passenger airline. Currently, the
Indian aviation industry is expected to witness Rs 1 lakh crore (US$ 15.52 billion) worth of investments
in a few years.

In the case of JET they had taken ETHIHAD as a partner and infused money into the system. But the
investment were not sufficient to keep up with the development resulting in heavy borrowing and
resultant bankruptcy

Reckless acquisition by the promoters to increase the customer base

Jet acquired Sahara Airlines and Kingfisher bought outright Deccan Airways at a huge price and that
resulted in the huge debt burden for the parent company. The Sheer ego and quest of the promoters to
increase the customer base and buy the low cost airlines and there by kill the competition failed

Management Side: The promoter of the Jet Airways Shri Naresh Goyal is a seasoned business person
who came from grass route level of a simple start up. His hold over the aviation ministry officials and
ministers and manupaulating the policy to favor worked for some time to help his airlines. But could not
sustain as manipulation alone will not help without adjustments on the business model

Conclusion
India’s aviation industry has a huge potential and offers huge growth opportunities. One of the key
factors which favours such a expectation is that 40 per cent is the upwardly mobile middle class are
starting to prefer air travel as the prefect mode of transport. So government must engage and
collaborate with industry stakeholders to implement efficient and rational decisions that would enable
the growth of India’s civil aviation industry. With the right kind of infrastructure and policies with
thorough focus on quality, cost and passenger interest, India would surely achieve the third-largest
aviation market by 2025.
There will always be failures like Jet Airways or Kingfisher Airways at regular period for many reasons
including lack of quality leadership and promoters quest to grow faster through high acquisitions. There
is all round revamping needed in the industry with
a. Aviation Policy which promotes much free FDIs
b. Professional Management
c. Low Fuel cost . Air fuel should come under GST at % which will substantially reduce the
operating cost
d. Correct Lob sided Salary structure for the top officials to ensure fairness in the service industry

References

a. C. (n.d.). Problems in Civil Aviation industry. Retrieved May 6, 2019, from

https://www.civilserviceindia.com/current-affairs/articles/problems-in-indian-aviation-
industry.html
b. Arora, N., Bishnoi, K. K., & Astray, S. (2010, April 19). Indian Aviation industry issues and challenges.
Retrieved May 6, 2019, from http://www.indianmba.com/Faculty_Column/FC1149/fc1149.html
c. https://m.economictimes.com/news/et-explains/explained-what-exactly-is-happening-at-jet-
airways/articleshow/65273088.cms
d. http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy1/BSTR022.htm